Author: tarek

Burger King’s recent decision to pursue a corporate inversion to Canada is the culmination of years of maneuvering to dodge paying its fair share in corporate taxes. In fact, Burger King was able to cut its average worldwide effective tax rate by more than 60 percent over the past few years likely through complex accounting maneuvers.

How did Burger King accomplish such a substantial tax cut? The first key point to know is that Burger King only owns a small percentage of its thousands of restaurants worldwide, with the overwhelming majority of its restaurants owned by franchisees who pay Burger King for use of its intellectual property. From the beginning of 2010 (when private equity firm 3G Capital purchased the company) through the end of 2013, Burger King went from owning about 12 percent of its worldwide restaurants (1,422), to owning less than half a single percent of its worldwide restaurants (52).

Unlike physical properties such as restaurants, stores or even factories, it’s relatively easy to shift the location of income-generating intellectual property from one jurisdiction to a different low- or no-tax jurisdiction. This may explain why, after its purchase by 3G Capital, Burger King reorganized its business structure by shedding ownership of nearly all the individual restaurants that it owned.

Because a substantial portion of Burger King’s income is generated through rents and fees that it charges these franchisees for use of its intellectual property, much of its business structure is akin to infamous tax-dodging companies like Apple and Google.

A 2012 investigation by Tom Bergin confirmed that Burger King had been following in Apple and Google’s footsteps by shifting the income it generates across Europe to a low-tax subsidiary (in this case in Switzerland), instead of allowing it to flow back to the United States where its income-generating intellectual property was created in the first place. While the rest of its international tax structure has not been publicly disclosed, the company does admit to having subsidiaries not only in the infamous tax haven of Switzerland, but also in Singapore, Luxembourg, Hong Kong and the Netherlands.

Burger King’s strategy of profit-shifting and relying more heavily on intellectual property came to fruition in 2013, when it was able to lower its worldwide effective tax rate to a mere 11 percent. For purpose of comparison, the company’s average worldwide effective tax in the three years before it embarked on its aggressive tax dodging maneuvers was nearly 28 percent, meaning that company was able to lower its tax rate by 60 percent over just a few years.

The company’s decision to merge with Canadian coffee and donut chain Tim Hortons would allow the company to continue its tax avoidance strategy by never having to pay U.S. taxes on income that it has shifted to its offshore tax haven subsidiaries and providing it even more opportunities for profit shifting in the future because Canada has a territorial tax system, which does not require companies to pay taxes on their foreign earnings.

Burger King is one of several U.S.-based companies that is under scrutiny for announcing plans to undergo a corporate inversion. These plans have stoked public outrage and even prompted legislative fixes that so far have gone no where.

At a minimum, Congress needs to enact legislation proposed by Sen. Carl Levin and Rep. Sander Levin to stop Burger King and more than a dozen other companies with plans this year to take advantage of the corporate inversion loophole. In addition to the Levin legislation, several other proposals described in a recent CTJ report would ensure the tax code does not reward companies like Burger King for inverting. 

With the 2014 election season in full swing, the Republican National Committee (RNC) has found its new fundraising campaign: calling for outright abolishment of the Internal Revenue Service (IRS). While the RNC’s new fundraising campaign is not surprising given the IRS’s unpopularity and recent controversies, it does promote the deeply irresponsible idea that the IRS is not a critical component of a properly functioning government.

The RNC’s campaign depends on its potential donors who will embrace their anger at the IRS and contribute to a campaign that claims it will abolish it, but ignores the fact that there is no viable way to have a functioning federal government without the IRS or some agency performing its exact function. Needless to say, the IRS collects nearly all the money that pays for the federal government, so those calling for its abolition would still need a way to collect the trillions of dollars necessary to fund Social Security, Medicare, the military, highways and the myriad of other crucial services that they support.

Even accepting the fact that this fundraising campaign is just overblown rhetoric, the underlying point that the IRS should be punished through “abolishment” or even just significant spending cuts is destructive. In fact, recent cuts in the IRS’s budget have already hamstrung the organization’s ability to respond to taxpayers’ needs and directly contributed to poor training and procedures that fueled the agency’s recent controversies in the first place. In addition, cutting the IRS’s budget actually increases the national deficit because every dollar spent on tax enforcement generates at least $10 in return.

While many GOP candidates have shied away from the irresponsible rhetoric of the RNC, Iowa senatorial candidate Joni Ernst has embraced the RNC’s messaging saying that “closing the door” at the IRS would be a wonderful start to fixing the federal government. Similarly, anti-tax conservatives like Sens. Rand Paul and Ted Cruz have long established their conservative bonafides by calling for the abolishment of the IRS. Perhaps more disconcerting than all this rhetoric is the fact that the House GOP has voted to exacerbate problems at the agency by using the IRS’s recent unpopularity to push deep cuts to the agency’s budget, including a particularly short-sighted cut of a quarter of the IRS’s enforcement budget.

Rather than demagoguing about abolishing the IRS, national political parties and their members in Congress should call for a substantial increase in the agency’s budget and consider the multitude of thoughtful reforms proposed by groups like the non-partisan National Taxpayer Advocate.

Add Mississippi to the list of states adopting shortsighted and impractical sales tax holidays. This week marks the state’s first tax-free weekend for sportsmen, also touted as the “Second Amendment Sales Tax Holiday.” Individual sales of ammunition, firearms, archery equipment and rifle scopes, among other hunting gear, will be exempt from the state sales tax, presumably to help working hunters afford basic necessities. In what is surely no coincidence, Mississippi’s tax-free weekend is the same week as that of neighboring state Louisiana. The two states have long used fiscal policy to compete for jobs and economic development.

In an unsurprising development, Wisconsin’s state tax collections fell short of projections by $281 million last year after Gov. Scott Walker and the state legislature enacted irresponsible tax cuts. Walker and Republican legislators enacted a $320 million tax cut in July 2013, another $100 million property tax reduction last October, and yet another $500 million tax cut in March of this year. Also unsurprising is that the majority of the tax cuts went to the state’s wealthiest residents. According to Wisconsin Budget Project, Wisconsin workers making $14,000 or less got an average tax cut of $48, while those making above $1.1 million got an average tax cut of $2,518. 

In Kansas, another state run into the ground with ruinous tax cuts, Democrats and Republicans are fighting over the definition of what a tax increase is. Republicans claim that gubernatorial candidate Paul Davis (D) wants to raise taxes on low-income families because Davis has proposed freezing income tax rates at current levels to increase school funding, rather than letting the rates fall lower under a plan pushed by Gov. Sam Brownback. The accusation by Republicans is bold, particularly since Brownback actually raised taxes on low-income families when he raised the state sales tax rate, cut the standard deduction, and eliminated several low-income credits (the sales tax rebate was reinstated as non-refundable credit in 2013).

Washington state’s Supreme Court heard arguments from lawyers representing the state’s legislature this week in the ongoing saga over the McCleary school funding case. In 2012, the court ruled in McCleary v. State of Washington that state lawmakers are violating the constitutional rights of schoolchildren by failing to provide them a basic education, as required by the state constitution. The court called for the hearing this past April after legislators failed to craft a funding plan by the end of the legislative session. If the court finds the legislature in contempt, lawmakers could face fines, defunding of non-educational programs, or even the sale of state property. According to ITEP’s Who Pays report, Washington has the most regressive tax structure in the nation, and the need for education funding is severe.

Voters in 36 states will be choosing governors this November. Over the next several months, the Tax Justice Blog will be highlighting 2014 gubernatorial races where taxes are proving to be a key issue. Today’s post is about the race for Governor in Florida.

It’s back to the future in the Sunshine State, where voters have the choice of keeping current Gov. Rick Scott (R) or reelecting former Gov. Charlie Crist (D). Crist, who left the Republican Party in 2010 and became a Democrat in 2012, is attempting to pull a Grover Cleveland and become only the second Florida governor to serve two non-consecutive terms.

Taxes have been front and center in this election, which has grown increasingly negative. Scott, who delivered on his promise to cut $500 million in taxes this year, is pledging another $1 billion tax cut if reelected. The 2014 cuts were mostly comprised of a repealed motorist fee increase approved by Crist and the state legislature in 2009, saving motorists an average of $25 per vehicle and costing the state $395 million in revenue. The other $105 million in cuts came from a so-called “patchwork of awesomeness,” and features three sales tax holidays, the elimination of taxes on college meal plans, therapeutic pet food, cement mixers, child car seats and a hodgepodge of other giveaways. Sales tax holidays are notoriously gimmicky, as reported many times on this very blog; it should also be noted that Florida already had two of the holidays in place, so those cuts were not exactly new.

Scott’s proposed $1 billion tax cut is far more ambitious. He wants a constitutional amendment to keep property taxes from rising if the value of a home stays steady or declines. The state constitution already prevents annual property tax increases over 3 percent, hampering the ability of local governments to fund schools and pay for infrastructure projects. Scott would also seek a permanent tax cut for manufacturing machinery, additional sales tax holidays, cuts on vehicle registration fees and cellphones, and would phase out the sales tax on commercial leases. His goal is to contrast his enthusiasm for tax cuts with Crist’s record of raising taxes (mostly on cigarettes and car registrations) during the economic downturn. Recent budget forecasts bring into question whether Scott’s plans are even financially feasible. 

Crist, meanwhile, charges Scott with advocating tax policies that help special interests and lobbyists at the expense of small-business owners and Florida families. He’s running on his record of tax cuts from his previous term, arguing that he cut property taxes for seniors and the middle class when he approved an increase in the homestead exemption in 2008. Republicans counter that Crist increased taxes by $2.2 billion the very next year to address budget shortfalls during the recession (like almost every other governor in the country). Crist has alleged that Gov. Scott raised property taxes, but his claims have been thoroughly debunked. 

Voters in 36 states will be choosing governors this November. Over the next several months, the Tax Justice Blog will be highlighting 2014 gubernatorial races where taxes are proving to be a key issue. Today’s post is about the race for Governor in Arizona.

The dust has temporarily settled in Arizona where a Republican gubernatorial candidate emerged last week out of a crowded field of six people vying for the top job in the Grand Canyon State.  Doug Ducey, currently Arizona’s state treasurer and the former CEO of Cold Stone Creamery, will be facing Fred DuVal(D) in November’s election. 

Tax policy was a key issue in the run-up to the primary with four of the six candidates promising significant tax cuts if elected and will continue to play a central role in the months leading to November.  The state budget will likely end the year $300 million short of needed revenues and a court-ruling issued last month on K-12 school financing means lawmakers will need to come up with $316 million in additional education funding next year and more than $1.6 billion over the next five years. It goes without saying that Arizona’s fiscal situation is not very pretty and whoever is elected will have his hands full from the start.

Despite this backdrop of spending and revenue pressures, Ducey wants to gradually eliminate Arizona’s personal and corporate income taxes, but has yet to say how or if he would replace the more than $4 billion the state would lose if his plan is enacted or how he would raise the needed revenues for the education court mandate. Duval says the idea of repealing the state’s income taxes is not realistic given the needs in the state and intends to make Ducey divulge more details about his tax cutting plan. 

If Ducey wins in November, he will likely lead Arizona in the direction of Kansas and North Carolina where significant tax cuts are coming up short.  In fact, revenue in both states has come in far under projections and bond rating agencies think Kansas’ poor recent fiscal management makes the state less credit-worthy. Standard and Poor’s downgraded the state’s credit rating last month, meaning that every time the state chooses to borrow money to fund long-term capital investments such as roads and bridges, it will cost the state more to do so. 

Oil companies won big in Alaska with a narrow defeat of Ballot Measure 1, which would have repealed the generous regime of tax breaks the legislature gave to oil companies last year. The measure’s defeat was narrow even though those who oppose the measure outspent its proponents by 25 to 1, with BP alone contributing more than $3.5 million to defeat the measure. While the effort to repeal the tax was largely spearheaded by state Democrats, Ballot Measure 1 earned the strong endorsement of former Alaska Gov. Sarah Palin (R), who advocated returning to the oil tax regime that was set in place while she was governor.

Lawmakers in California have brokered a deal that would more than triple the state’s film tax credits from $100 million to $330 million annually, thus providing a massive windfall to the state film industry. The move comes in spite of warnings from the state’s non-partisan Legislative Analyst Office that it would only further aggravate the race to bottom among states vying for film production and recent studies showing that the economic and fiscal benefit of film production credits have been substantially overstated.  Rather than expanding the state’s film tax credit, California should follow the lead of states such as North Carolina, Florida, New Mexico and others that have been backing off their credits. 

Policy Matters Ohio released a report last week that calls the state’s recent expansion of the EITC inadequate and “out of step with nearly all other state EITCs.” Only 3 percent of Ohio’s poorest workers will benefit from the expansion, which raises the state’s capped EITC from 5 percent to 10 percent of the federal EITC, and average additional saving is just $5. Ohio’s EITC credit is also non-refundable, meaning that it can only reduce tax liability, not be put toward a tax refund. Meanwhile, Ohio Governor John Kasich (R) has pledged to use the state’s budget surplus to enact more income tax cuts, rather than increasing support for working families.

In Iowa, gubernatorial candidate Jack Hatch continues to push for an increase in the gas tax to address funding shortfalls for improvements and repairs on the state’s roads and bridges. Under Hatch’s plan, the state gas tax would increase by 2 cents a year for five years. According to an ITEP report, the purchasing power of Iowa’s gas tax (adjusted for inflation) hit an all-time low this year. 

Finally, a new report from 12billion.org reveals that “airlines get state tax breaks on more than 12 billion gallons of jet fuel through obscure tax codes,” costing states over $1 billion in revenues every year. Thanks to the tax breaks, airlines pay effective fuel tax rates that are far lower than those paid by motorists; in California, car drivers pay an average of 50 cents in taxes per gallon of fuel, while airlines pay about 27 cents. 

Every now and then something happens — a Senate investigation into Apple’s tax dodging, Burger King’s plan to become Canadian — that demonstrates that our corporate income tax is very ill. Every time, pundits debate how to cure this disease, offering various tax reform proposals. And every time, a few suggest we shoot the patient, that is, repeal the corporate income tax, which is expected to raise $4.6 trillion over the coming decade.

The idea of repealing the corporate tax seems to have just one virtue, which is that it’s simplistic enough to fit into a blog post or op-ed. In every other way this idea is terrible.

The argument made is usually some variation of the idea that corporate profits are eventually paid out as stock dividends to shareholders who pay personal income taxes on them, so there is no need to also subject these profits to a corporate income tax. But in real life that’s not how things usually work.

CTJ published a fact sheet last summer that explained three very important reasons why we need the federal corporate income tax.

First, a corporation can hold onto its profits for years before paying them to shareholders. This means that if the personal income tax is the only tax on these profits, tax could be deferred indefinitely. It also means that people with large salaries could probably create shell corporations that would sell their services. Their income would then be transformed into corporate income and any tax would be deferred until they decide to spend the money, which could be decades later, if ever.

Second, even when corporate profits are paid out as stock dividends to shareholders, under our current system about two-thirds of those stock dividends are paid to tax-exempt entitles, such as pensions and university endowments which are not subject to the personal income tax. In other words, a lot of corporate profits would never be taxed if there was no corporate income tax.

Third, our tax system overall is just barely progressive and it would be a lot less progressive if the corporate income tax were repealed. The corporate income tax is a progressive tax because it is mostly paid by the owners of capital — people who own corporate stocks (which pay smaller dividends because of the tax) and other business assets.

Some have tried to argue that the corporate tax is mostly borne by labor because it chases investment out of the United States, leaving working people with fewer jobs and/or lower wages. But corporate investment is not perfectly mobile and, as a result, the Treasury Department has concluded that 82 percent of the corporate income tax is paid by owners of capital, and consequently, 58 percent of the tax is paid by the richest 5 percent of Americans and 43 percent is paid by the richest one percent of Americans. Congress’s Joint Committee on Taxation has reached similar conclusions.

There are various ways Congress could conceivably repeal the corporate income tax and get around these problems but each presents so many complications and uncertainties that one wonders what could possibly be gained in the effort. One proposal that has received attention would partly offset the cost of repealing the corporate income tax by taxing dividends and capital gains as ordinary income (repealing the lower rates for those types of income) and taxing the gains on corporate stocks each year rather than only when they are realized when the stocks are sold. Those are all fine ideas in themselves, but they don’t make up the revenue loss from repealing the corporate income tax. The net effect of the proposal, as its proponents acknowledge, would be to lose about half the revenue raised by the corporate income tax.

Congress could make additional changes, for example, ending the tax-exempt status of those pensions and university endowments that receive so many stock dividends without paying any tax on them, but that seems politically unrealistic to say the least.

Moreover, repealing the corporate tax could create worrisome problems of tax compliance. For example, Jared Bernstein has noted that we do, of course, have many businesses structured as “pass-through” entities whose profits are subject only to the personal income tax and not the corporate income tax, but these businesses are linked to even greater tax compliance problems.

“One study found that the tax gap — the share of taxes owed but not collected — was 17 percent for corporations and 43 percent for business income reported by individuals. That research is over a decade old, but more recent tax gap research found that business income taxed at the individual level was the single largest source of the gap, and that sole proprietors report less than half of their income to the I.R.S.”

The bottom line is that repealing the corporate income tax is a seemingly simple answer that would create far more problems than it would solve and would almost surely result in less revenue, a more regressive tax system, and even more complexity and compliance problems than we have now.

Voters in 36 states will be choosing governors this November. Over the next several months, the Tax Justice Blog will be highlighting 2014 gubernatorial races where taxes are proving to be a key issue. Today’s post is about the race for Governor in Texas.

Texans will choose a new governor this November. State Attorney General Greg Abbott (R) will face state Senator Wendy Davis (D-Fort Worth). So far, taxes have played a minor role in the campaign, taking a back seat to social issues such as abortion, education funding, and veterans.

Abbott is widely seen as Perry’s heir apparent, and promises to maintain Texas’s low-tax, low-service model of government. In July, Abbott proposed an exemption from the business franchise tax and business registration fees for veteran-owned companies in their first five years of operation. The proposal is designed to encourage veteran entrepreneurship. Abbott also proposed an optional commercial property tax cut – to be applied by local jurisdictions – for businesses that hire veterans, where the business owner would receive a $15,000 reduction in the assessed taxable value of their property for every veteran hired.

At a recent campaign event, Abbott raised the idea of repealing the business franchise tax altogether, saying “Texas is known as having no income tax. Think how many more jobs we could attract to Texas if we also had no business franchise tax.” Texas lawmakers created the franchise tax in 2006 to help pay for a cut in property taxes, though there have been many efforts to reform or kill it since. Currently, the tax exempts all businesses with less than $1 million in revenue each year, and accounted for 4.8 percent of state revenues in 2013.

Davis has insisted that new taxes are not needed, and that the state can better spend the money it already collects; she says she would ask the state legislature to close some of the over $43 billion in tax loopholes to fund needed improvements in education and other areas. In an interview with the Texas Tribune last year, she vowed to veto any increase in sales or property taxes; Texas is one of nine states that does not levy a personal income tax. 

Texas voters will also decide on a proposed constitutional amendment this Fall that could change the way the state funds its roads. Proposition 1 would amend the state constitution to divert 37.5 percent of the severance tax on gas and oil extraction to the State Highway Fund. The move would add $1.7 billion in road funding in the first year alone. Both Davis and Abbott are on record as supporting the proposition. A better solution would be raising the state gas tax, something Texas has not done in over 22 years. 

One statewide race where taxes have played a bigger role is the campaign for state comptroller, where a proposal to replace property taxes with sales taxes has drawn attention. State Senator Glenn Hegar (R) supports the proposal, while businessman Mike Collier has slammed the idea as a massive, regressive tax increase. If the proposal is passed, poor school districts may end up looking wealthier on paper because of their stronger sales tax bases, affecting the distribution of state and local education funding. 

Since 2004, Ohio lawmakers – from those living in the Governor’s mansion to those elected to the legislature – have pushed through numerous changes to the Buckeye state’s tax code. Since being elected in 2010, Gov. John Kasich has championed his own series of tax cuts including accelerating already scheduled income tax rate reductions and creating a special new tax break for “pass through” businesses, while providing much smaller tax breaks to low- and middle-income families.  Now that Governor Kasich is running for reelection, informed voters ought to be asking, “What’s the cumulative impact of these changes?” After all, voters should know the impact of the tax-cut path their elected leaders have led them down.

Thanks to a new report from Policy Matters Ohio (which includes analyses from ITEP) we know the answer.  The findings in the report are pretty staggering.

The tax changes combined are costing the state $3 billion and are currently reducing tax bills for the state’s most affluent 1 percent of taxpayers by more than $20,000 on average, while the bottom three-fifths of state taxpayers as a group are actually paying more taxes now, on average, than they would if these tax changes had not been enacted. It’s worth noting that the average benefit from these tax changes by the top 1 percent of Ohioans is actually greater than the income of the poorest twenty-percent of Ohioans.

In its editorial about the Policy Matters Ohio report, the Toledo Blade makes the case that “Ohioans needs a new tax policy that works for everyone, not just the wealthiest. It needs a tax system that is fairly based on ability to pay, not one that favors the already favored.” For more on the Ohio tax debate over the years, check out our Ohio page on the Tax Justice Blog. 

Burger King’s statement that its planned merger with the Canadian donut and coffee chain Tim Hortons is not about avoiding taxes might be one of the biggest whoppers we’ve heard about corporate inversions.

The merger will allow Burger King to claim for tax purposes that it is owned and controlled by a smaller Canada-based company. We’ve heard this song before — several times in the last three months (Medtronic, Mylan, Walgreen and Pfizer) and 13 so far this year. Corporate bosses and their lobbyists continue to claim that they are doing nothing wrong. Gaping loopholes in the law allow them to do this, and without action from Congress or the administration, there is no incentive for corporations to stop exploiting those loopholes. 

Corporate inversions have made so many headlines lately that even people outside the tax world know how big businesses are using the practice to game the system: Buy a smaller foreign corporation, maintain the same executives, continue managing the firm from an office in the United States, maintain most of the same shareholders, but file a bit of paperwork and claim the company is based in a foreign county. In the case of Burger King, that country is Canada. The most likely motivation for this sleight of hand is tax avoidance.

Inversions are confusing partly because corporations pursue them for different reasons. For example, some corporations invert to avoid paying U.S. taxes on the profits they have already earned (or claimed to have earned) offshore. After inverting, corporations can get this offshore cash to their shareholders without paying the U.S. tax that would normally be due. This may not be relevant for Burger King, which has little offshore cash compared to other corporations.

But another reason corporations invert is to avoid paying U.S. taxes on profits earned in America in the future, and this is relevant for a company like Walgreen’s (which was considering inversion until recently) or Burger King. This can be accomplished through earnings stripping, a practice that effectively shifts profits earned in the United States to another country where they will be taxed less. So for Burger King, this means it could continue to earn profits off the burgers and fries its sells to Americans yet use accounting tricks to shift those profits to Canada so they will not be subject to U.S. taxes.

Looking past the technical details, the bottom line is this: It’s insulting that the company intends to continue profiting by selling a quintessentially American product to U.S. consumers but then pretend to be Canadian when the time comes to pay taxes.

Of course, the real insult is that a majority of our elected members of Congress have so far not closed the loopholes in our tax laws that allow this nonsense to continue. Several proposals, which have been described by Citizens for Tax Justice, would accomplish this.

Sadly, our lawmakers’ motto regarding big, powerful corporations seems to be “Have it their way.”