Congress, Take Note: More States Are Reforming Antiquated Fuel Taxes This Summer

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Transportation funding in the United States is in trouble. With the Highway Trust Fund set to go broke by late August, Congress has forgone any increase in the grossly inadequate federal gas tax (unchanged at 18.4 cents per gallon since 1993) in favor of plugging recurring funding gaps with general revenues. Currently, Senators Chris Murphy (D-Connecticut) and Bob Corker (R-Tennessee) are floating a proposal to hike the federal tax by 12 cents, but the new revenues would be offset by new tax cuts and its chances of passage are at any rate tenuous before a full legislature that habitually shies away from increasing taxes.

Fortunately, states need not wait for Congress to take action. With an eye toward long-term sustainability, several states will increase their own fuel taxes on Tuesday, July 1.

According to an analysis by the Institute on Taxation and Economic Policy (ITEP), four states will hike their gasoline or diesel taxes next week. The changes generally take two forms – automatic inflationary increases designed to keep pace with the rising cost of building and maintaining transportation infrastructure and hikes resulting from recent legislation.

 

Four states will see gasoline tax increases on Tuesday. Increases in Maryland and Kentucky are the result of 2013 legislation requiring an annual adjustment to reflect growth in the Consumer Price Index and a quarterly adjustment reflecting an increase in wholesale gas prices, respectively. New Hampshire deserves special kudos after the state legislature passed its first gas tax increase – and the largest of any state this year – since 1991. An additional levy of 4.2 cents per gallon – a decade’s worth of inflationary value – will be added at the pump on Tuesday to support needed transportation projects. Unfortunately, the tax is essentially a fixed rate increase rather than a variable-rate design which could have kept pace with annual increases in infrastructure costs, and it will be repealed in roughly 20 years when bonds for the I-93 project are paid off. Vermont will see a second structural tweak in its tax formula as a result of 2013 legislation overhauling the state’s gasoline and diesel taxes. The imposition of a higher motor fuel percent assessment combined with a decrease in the per gallon tax will result in an overall net increase next Tuesday of 0.6 cents per gallon.

 

On the diesel tax front, four states will see hikes next week ranging from 0.4 to 4.2 cents per gallon. Changes in Maryland and Kentucky again reflect annual or quarterly price growth. New Hampshire’s diesel tax increase matches that for gasoline (4.2 cents per gallon). Vermont will raise its diesel tax by an additional 1 cent on top of last year’s 2 cent hike as the state’s 2013 tax structure overhaul is fully phased in.

Two more states should have made the list this year, but officials there have actually blocked scheduled fuel tax increases. Georgia Governor Nathan Deal suspended an automatic 15% increase in his state’s variable-rate gas tax by way of executive order earlier this month, citing concerns over the cost burden for families and businesses. North Carolina lawmakers passed legislation during the 2013 session freezing the state’s variable-rate gas tax at 37.5 cents per gallon, effective through June 30, 2015. Officials in these states will likely take credit for enacting “tax cuts” this year as infrastructure projects go underfunded.

Two other states will see their fuel taxes decrease on Tuesday. California will cut its gasoline excise tax from 39.5 to 36 cents per gallon, reflecting a decrease in gas prices. Connecticut’s diesel tax rate is revised each July 1 to reflect changes in the average wholesale price over the past year, and will see a decrease this year of 0.4 cents per gallon.

Fortunately, gasoline tax reform is already on the horizon in Rhode Island, where lawmakers agreed as part of this year’s budget plan to index the tax to inflation, which will mean a roughly 1 cent increase effective July 1, 2015. Michigan’s legislature was expected to come to an agreement this session on a fuel tax increase after voters there expressed a willingness to pay for repairs on badly deteriorating roads and bridges, but proposals to increase the tax by 25 cents per gallon over four years or to index it to keep pace with construction costs stalled. With lawmakers promising to take up the issue again in the fall, another summer construction season is now lost in the state.

Including the budget agreement passed by Rhode Island earlier this month, the total number of states with variable-rate fuel taxes designed to rise alongside the price of gas, overall inflation, or both increases to 19 (plus DC). In the past year, Massachusetts, Pennsylvania, and DC have all switched from fixed-rate fuel tax structures to variable-rate structures.

Given the level of debate and the major changes in states’ fuel tax structures that have taken place in 2013 and 2014, it seems that more states are recognizing the need for a sustainable fuel tax capable of keeping pace with the inevitable increases in transportation infrastructure costs.

NOTE: Differences among states in the direction and magnitude of gas price changes evident in rate revisions reflect states’ use of state-specific price data as the basis for rate changes. In particular, California experienced the largest gasoline price drop of any state over the past year and will, therefore, see a large negative change in their rate.

State News Quick Hits: Regressive Tax Cuts Taking Toll on State Budgets

In an astonishing shift, Kansas Gov. Sam Brownback has moved beyond calling his tax cuts a great “real live experiment” and is instead likening the state to a medical patient, saying, “It’s like going through surgery. It takes a while to heal and get growing afterwards.” Clearly the Governor is feeling the heat of passing two years of regressive and expensive tax cuts. Here’s a great piece from the Wichita Eagle highlighting the state’s fiscal drama.

File this under absurd. Ohio Gov. John Kasich signed his most recent tax cut bill at a food bank touting tax cuts to low-income taxpayers included in the legislation, but in reality the bill actually doesn’t do much to help low income taxpayers. In fact, the poorest 20 percent of Ohioans will see an average tax cut of a measly $4, hardly enough to buy a box of cereal, while the wealthy will be showered with big tax breaks.

Faced with a giant budgetary hole, New Jersey lawmakers are being offered two very different solutions: State Sen. Stephen Sweeney’s proposed “millionaire tax” and Gov. Chris Christie’s plan to renege on earlier promises to adequately fund the state’s beleaguered pension system. Critics of the governor’s plan argue that Christie is failing to honor the state’s promise to make bigger payments to the pension fund as part of a 2010 agreement, which also required beneficiaries to contribute more in an effort to shore up the fund. Sweeney would instead impose higher tax rates on those earning more than $500,000 to bridge the gap – a proposal which Christie has vetoed several times in the past but which is supported by a majority of voters.

The three Republican candidates running to replace Arizona Gov. Jan Brewer (she is not running due to term limits) are campaigning on promises to eliminate the state’s income tax.  But, Gov. Brewer has made it clear she does not support such extreme ideas.  From the Arizona Daily Star:  “I think that you need a balance,” she said in an interview with Capitol Media Services.  Beyond that, Brewer said it’s an illusion to sell the idea that eliminating the state income tax somehow would mean overall lower taxes. She said the needs remain: “It’s going to come from all of us, one way or the other.”

For Education Tax Breaks, Progressivity = Effectiveness

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On Tuesday, when the Senate Finance Committee contemplates the patchwork of tax breaks that are supposed to subsidize postsecondary education, they will likely consider ways to streamline these breaks and make them less confusing. That’s a good idea, but it’s not enough. The bigger problem is that too much of these tax subsidies are going to families who are well-off and would send their kids to college no matter what, and too few are going to lower-income families who are likely to send their kids to college only if they can find sufficient assistance.

The current collection of tax breaks can be confusing. A 2012 report from the Government Accountability Office found that more than a fourth of taxpayers eligible for postsecondary education tax breaks don’t take advantage of them, and those who do use them often don’t use the most advantageous tax break for their situation.

But Congress also needs to make these tax benefits more targeted to those households that actually need them to access postsecondary education. That could mean scaling back or eliminating some poorly targeted breaks and beefing up the American Opportunity Tax Credit, which is the best targeted of the bunch.  

It’s not clear that lawmakers will take up this cause, especially given that they are likely to move in the opposite direction by extending the most regressive of these tax breaks, the deduction for tuition and related fees. The deduction for tuition and related fees is among the temporary tax provisions that would be extended for two years under the “tax extenders” legislation approved by the Finance Committee on April 3, with the support of committee chairman Ron Wyden and ranking Republican Orrin Hatch.

Tax Breaks for Postsecondary Education Are Poorly Targeted, and Deduction for Tuition and Fees Is the Worst

A report from the Center for Law and Social Policy explains that unlike the direct federal spending provided through Pell Grants, the tax breaks for postsecondary education overall favor relatively well-off households, as illustrated in the graph below.

The graph below shows that the most regressive of the tax breaks is the deduction for tuition and related fees, followed by the Lifetime Learning Credit (LLC) and the deduction for interest payments on student loans.

One option would be to simply end the practice of providing these subsidies through the tax code and instead increase spending on Pell Grants or other similar assistance. While this would be logical, Congress may be too politically committed to the concept of tax breaks for education to seriously consider this.

There are certainly ways to make these tax breaks work better. The more regressive tax breaks could be scaled back, and the savings could be put toward expanding the American Opportunity Tax Credit (AOTC). The figures illustrate that the AOTC, first signed into law by President Obama in 2009, is the most progressive of the postsecondary education tax breaks (or perhaps it’s better described as the least regressive of the education tax breaks).

The biggest reason why the AOTC is better targeted to low-income families than the other breaks is the fact that the AOTC is a partially refundable credit. The working families who pay payroll taxes and other types of taxes but earn too little to owe federal income taxes will benefit from an income tax credit only if it is refundable, such as the Earned Income Tax Credit.

Unfortunately, the AOTC is currently scheduled to expire at the end of 2017, when it will revert to a less generous credit that existed before 2009. If lawmakers were serious about making tax breaks for postsecondary education more effective, they would at very least make the AOTC permanent and allow the deduction for tuition and fees to expire as scheduled.

Good and Bad Proposals to Address the Highway Trust Fund Shortfall

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As a result of Congress’s reluctance to raise the gas tax for the past 20 years, the Highway Trust Fund will run out of money in August. That could bring transportation construction and repairs all across the country to a stop and cost 600,000 jobs, according to one estimate. Experts project a nearly $170 billion shortfall over the next decade. Several proposals have been offered to address this, some of them better than others.

Nonsensical “Repatriation Holiday” Proposal

Last week we described a nonsensical proposal from Democratic Senate Majority Leader Harry Reid and Republican Sen. Rand Paul that supposedly would pay for transportation with a “repatriation holiday,” even though this measure would raise almost no revenue even according to their own description of it. The term “repatriation holiday” is essentially a euphemism for temporarily calling off most of the U.S. tax that is normally due on corporations’ offshore profits when they are officially brought to the United States. One of many problems with such proposals is they encourage corporations to shift even more profits offshore.

Increase the Gas Tax… But Give All the Revenue Away with New Tax Cuts?

This week, Democratic Sen. Chris Murphy and Republican Sen. Bob Corker proposed to finally fix the 18.4 cent gas tax and 24.4 cent diesel tax, which are not indexed for inflation and have not been increased since 1993, but unfortunately they also propose to give an equal amount of revenue away with new tax cuts.

Their proposal would raise both taxes by 12 cents over two years and index them to inflation thereafter. ITEP has long called for this type of reform. Of course, attaching tax cuts of equal value to this proposal turns it entirely into a budget gimmick because no revenue would actually be raised overall. The two proponents suggested that the tax-cutting could take the form of making permanent six of the “tax extenders,” the tax cuts that mostly benefit corporations and that Congress extends every couple of years with little debate, without offsetting the costs. 

Close Offshore Corporate Tax Loopholes

If lawmakers cannot bring themselves to fix the gas tax without giving the revenue away with new tax cuts, perhaps they should consider closing corporate tax loopholes. Given that American corporations would be unable to profit without the infrastructure that makes commerce possible, it seems entirely reasonable that they pay their share in taxes to support it, and that Congress close the loopholes corporations use to avoid paying.

Sen. John Walsh of Montana introduced a bill this week to do exactly that with two provisions that close offshore tax loopholes used by American corporations.

The first provision is President Obama’s proposal, which was incorporated into Sen. Carl Levin’s Stop Tax Haven Abuse Act, to bar corporations from taking deductions for their U.S. taxes for interest expenses related to offshore investments until the profits from those offshore investments are subject to U.S. taxes.

American corporations are allowed to defer paying U.S. corporate income tax on their offshore profits until those profits are officially brought to the U.S. (which may never happen). But the current rules allow them to borrow to invest in that offshore business and deduct the interest expenses right away from their U.S. income when they calculate their U.S. taxes. That means that the tax code is essentially subsidizing companies for investing offshore (at least on paper) rather than in the United States. Sen. Walsh (and Obama and Levin) sensibly propose that if the U.S. tax on offshore profits is deferred, then the interest deduction associated with those offshore profits should also be deferred.

The second revenue provision in Sen. Walsh’s bill is the anti-inversion proposal that Sen. Levin and Rep. Sander Levin, the ranking Democrat on the Ways and Means Committee, introduced in May. A corporate inversion happens when a company takes steps to declare itself  “foreign” for tax purposes, even though little or nothing has changed about where its business is really conducted or managed. Given that several corporations have announced plans (or attempts) to do this in recent months, this is a reform Congress should want to enact even in the absence of any immediate revenue need.

Medtronic’s History of Shirking Its Tax Responsibilities

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Defenders of widespread corporate tax avoidance often say the real responsibility lies with Congress for allowing tax loopholes to exist. While partly true, corporate lobbying and political contributions are a significant reason why our corporate tax code is a mess. Some companies pursue tax avoidance schemes so aggressively that it’s clear the people running them lack even a minimal sense of responsibility to the country that makes their companies’ profits and their executives’ huge salaries possible. Medtronic is such a company.

Medical Device Tax

As Congress was debating health care reform at the start of Obama’s presidency, Medtronic had plenty of problems with scandals relating to some of its products and faced diminishing returns from its research. So its leaders decided to make a big deal out of a rather small tax item, the medical device tax, that lawmakers wanted to include in health reform law.

The principle behind the medical device tax was simple enough. All parts of the health care industry, including hospitals, pharmaceutical companies, health insurers, clinical laboratories and others, would benefit from expanded health care coverage provided by health insurance reform. Therefore, such companies should help pay for reform through various types of taxes and cuts in Medicare spending.

After Congress proposed the medical device tax, Medtronic and AdvaMed (the trade association for medical device companies) managed to persuade members to chop it in half before enacting the Affordable Care Act. Medtronic publicly celebrated this victory and lavished praise on lawmakers from both parties who made this happen.

But that wasn’t enough for Medtronic and AdvaMed, which have since demanded full repeal of the tax. The ensuing campaign has included claims by AdvaMed about its potential harmful impacts on the industry, claims that are easily disproven.

Medtronic’s leadership could have joined the honest medical device executives who stated publicly that the 2.3 percent excise tax is not going to hurt their business. As a report from the Center on Budget and Policy Priorities explains:

…Martin Rothenberg, head of a device manufacturer in upstate New York, calls claims that the tax would cause layoffs and outsourcing “nonsense.” The tax, he writes, will add little to the price of a new device that his firm is developing. “If our new device proves effective and we market it effectively, this small increase in cost will have zero effect on sales. It would surely not lead us to lay off employees or shift to overseas production.” Michael Boyle, founder of a Massachusetts firm that makes diagnostic equipment, insists that the device tax is “not a job killer. It would never stop a responsible manager from hiring people when it’s time to grow the business.”

Offshore Tax Havens

Recently, it has become increasingly clear that this is not the only tax that Medtronic has tried hard to avoid. “Offshore Shell Games,” the recent report from Citizens for Tax Justice and US PIRG Education Fund, found that Medtronic has disclosed 37 subsidiaries in countries that the Government Accountability Office has characterized as tax havens. (Companies may have subsidiaries that are not disclosed.) For example, Medtronic has five subsidiaries in the Cayman Islands and one in the British Virgin Islands.

Based on the data available, it’s impossible to know how much of the company’s profits are officially earned in these countries for tax purposes. But it’s clear that little if any of its profits are earned there in any real sense. In the aggregate, the profits that American corporations report to the IRS that they earn in Bermuda are 16 times the size of Bermuda’s economy, and the profits they report to earn in the British Virgin Islands are 11 times the size of that country’s economy. Obviously, corporations use a lot of accounting fictions when they claim to earn profits in these countries, and Medtronic is apparently one such company.

Demonstrating a lot of chutzpah even for a Fortune 500 corporation, Medtronic responded to questions about its offshore schemes by complaining that it would have to pay U.S. taxes on its tax-haven profits if it decided to officially bring them into the U.S.

Corporate Inversion

This week, Medtronic’s leadership went even further to show its distain for the country that makes its profits possible. It announced that it would attempt a corporate “inversion,” which is a euphemism for the practice of American corporations pretending to be foreign companies to avoid U.S. taxes.

The tax laws in this area used to be so weak that American corporations could simply fill out some papers to reincorporate in a country like Bermuda and then declare themselves “foreign” corporations. This had huge benefits. As American corporations, their profits outside the U.S. could, at least in theory, be subject to some U.S. taxes if they were ever officially brought to the U.S. But as “foreign” corporations, their offshore profits would never be subject to U.S. taxes.

A bipartisan law enacted in 2004 tried to crack down on corporate inversions, but a loophole in the law makes it possible for an American corporation to invert if it acquires a relatively small foreign company. The resulting merged company can be considered a “foreign” company even if it is 80 percent owned by the people who owned the American corporation, and even if its business is still mostly conducted and managed in the U.S.

This is exactly what Medtronic aims to do with its bid to acquire Covidien, another device maker, and then reincorporate in Ireland. (Covidien itself is an inverted company, incorporated in Ireland but run out of Massachusetts.)   

Medtronic’s CEO has ludicrously claimed that “this is not about lowering tax rates.” But this is entirely contradicted by the terms of the takeover agreement, which allow Medtronic to call off the deal if Congress changes the tax laws in a way that would treat the merged company as an American corporation for tax purposes.

In fact, legislation to curb inversions has been introduced. Congress should waste no time in enacting it. Otherwise, plenty of other corporations will feel pressure from their shareholders to invert if Medtronic gets away with pretending to be “foreign.”

The Koch Brothers’ Ugly Vision for Tax Deform

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The billionaire brothers Charles and David Koch are in the news once again as they step up their efforts to influence elections and the political process with a new super PAC called Freedom Partners Action Fund. It’s worth thinking about how tax policy could be affected if they succeed.

Last year, the Koch-Brothers-funded Americans for Prosperity released a 37-page report laying out the group’s vision for what it calls “tax reform.”

Read CTJ’s quick take on what that vision would mean.

How Obama Could End the Romney Loophole Right Now

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For the last two decades, a regrettable IRS ruling called the “carried interest loophole” has allowed wealthy private equity and venture capital managers to pay a lower tax rate on their income than the rest of us. Fair tax advocates have long called on Congress to close this loophole as a step toward tax fairness. While the prospects for legislation improving tax fairness in Congress have languished this year, the Obama Administration could bypass Congress and take immediate action to close the loophole.

The carried interest loophole has gained even more notoriety in recent years because former Republican presidential nominee Mitt Romney during his time at Bain Capital, resulting in the loophole being nicknamed the “Romney loophole.”

The way the carried interest loophole (PDF) works is that managers of investment partnerships such as private equity and venture capital funds are often compensated with a percentage of the profits earned by assets under their management. Because of an unfortunate 1993 IRS ruling, this income is incorrectly treated as capital gains, which means the managers of these partnerships receive the special preferential rate of 20 percent rather than paying the 39.6 percent rate applied to ordinary income. Given the extraordinarily high compensation that many of these fund managers earn, its unconscionable that the tax system allows them to pay a lower tax rate on their income than their receptionists pay.

As tax professor Victor Fleischer noted in the New York Times, to end this preferential treatment of fund managers, all the administration has to do is direct the IRS to reclassify them as service providers, which would require that their income be taxed as ordinary income. Ironically, even some private fund managers have admitted (PDF) in the past that they the work they do should be characterized as “income earned in exchange for the provision of services,” rather than as a capital gain.

While there is not an official estimate on the revenue impact that such an executive action would have, the Obama administration’s most recent budget proposals include a provision substantially restricting the carried interest loophole and projected to raise almost $14 billion over 10 years.

Over the long term, it would be preferable to end preferential treatment of capital gains, but closing the carried interest loophole would represent a significant step the Obama administration could take now, without congressional approval, to improve fairness in the tax code. 

Much of What You’ve Heard about Corporate “Inversions” Is Wrong

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With yet another big U.S. corporation (this time it’s the medical device maker Medtronic) announcing its intentions to “invert” and officially become a “foreign” company for tax purposes, it’s time to correct a few misunderstandings.

1. What is a corporate inversion?

Incorrect answer: A corporate inversion happens when a company moves its headquarters offshore.

Correct answer: A corporate inversion happens when a company takes steps to declare itself a “foreign” corporation for tax purposes, even though little or nothing has changed about where its business is really conducted or managed.

The law used to be so weak that an American corporation could simply reincorporate in Bermuda and declare itself a foreign company for tax purposes. In 2004, Congress enacted a bipartisan law to prevent inversions, but a gaping loophole allows corporations to skirt this law by acquiring a smaller foreign company. The loophole in the current law allows the company resulting from a U.S.-foreign merger to be considered a “foreign” corporation even if it is 80 percent owned by shareholders of the American corporation, and even if most of the business activity and headquarters of the resulting entity are in the U.S. (A proposal from the Obama administration to change these rules has been introduced in Congress by Carl Levin in the Senate and his brother Sander Levin in the House.)

2. How are the offshore profits of American corporations taxed?

Incorrect answer: When American corporations officially bring their offshore profits to the U.S., they must pay the 35 percent U.S. tax rate, and this is why they want to escape the U.S. tax system.

Correct answer: When American corporations officially bring their offshore profits to the U.S., they must pay the U.S. tax rate of 35 percent only if their profits have been shifted to tax havens.

When American corporations “repatriate” offshore profits (officially bring offshore profits to the U.S.) they are allowed to subtract whatever corporate taxes they paid to foreign governments from their U.S. corporate tax bill. (This break is called the foreign tax credit.) The only American corporations that would pay anything close to the full 35 percent U.S. corporate tax rate on offshore profits are those that claim their profits are in countries where they are not taxed — countries we know as tax havens.

American multinational corporations report to the IRS massive amounts of profits earned in countries that either have an extremely low (or zero) corporate tax rate or otherwise allow them to escape paying much in corporate taxes. It is obvious that these reported tax haven profits are not truly earned in these countries, and in fact that would be impossible. For example, the profits American corporations overall report to earn in Bermuda are 16 times the size of Bermuda’s economy. Obviously, these profits are truly earned in the U.S. or other countries with real consumer markets and real business opportunities, and then manipulated to appear to be earned in countries where they are not taxed.

The corporations that make the most use of these tax haven maneuvers — maneuvers that are probably legal, but which should be barred by Congress — are the corporations that would pay close to the full 35 percent tax rate if they repatriated their offshore profits.

3. What profits are corporations trying to shield from U.S. taxes when they invert?

Incorrect answer: When American corporations invert, they do it to escape the U.S. system of taxing offshore profits, which is something most other countries don’t do. After they become a foreign company, their U.S. profits would still be subject to U.S. taxes.

Correct answer: American corporations invert to avoid paying taxes in any way possible, and often that includes avoiding U.S. taxes on their U.S. profits. It’s true that, in theory, all corporate profits earned in the U.S. (even profits of a foreign-owned corporation) are subject to the U.S. corporate income tax. But corporate inversions are often followed by “earnings stripping” to make any remaining U.S. profits appear to be earned offshore where the U.S. cannot tax them.

Earnings stripping is the practice of multinational corporations reducing or eliminating their U.S. profits for tax purposes by making large interest payments to their foreign affiliates. Corporations load the American part of the company with debt owed to a foreign part of the company. The interest payments on the debt are tax deductible, reducing American taxable profits, which are shifted to the foreign part of the company and are not taxed.

If the American part of the company is the parent corporation shifting its profits to offshore subsidiaries, then the benefit is that U.S. tax will not be due on those profits until they are repatriated, which may never happen. But if the American part of the company can claim to be just a subsidiary of a foreign parent company — which would technically be the case after a corporate inversion — then the benefits of earnings stripping are even greater because the profits that are officially “offshore” are never subject to U.S. taxes.

This is part of what motivated the 2004 reform and a 2007 report from the Treasury Department that found that rules enacted earlier to address earnings stripping did not seem to prevent inverted companies from doing it.

Dear Congress: The Internet Never Was an Infant Industry That Needed Coddling

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1998 was a lifetime ago in the world of technology. E-commerce was in its infancy, Mark Zuckerberg was a 14-year-old and Napster hadn’t yet been invented. But even then, many people rightly scoffed at the notion that the Internet was an “infant industry” requiring special protection from state taxes.

Congress, however, agreed the Internet required exclusions and enacted the “Internet Tax Freedom Act” (ITFA), which placed a moratorium on state and local sales taxes on Internet access (the monthly fee consumers pay for home Internet access) and prohibited all “multiple or discriminatory” taxes on sales of items purchased over the Internet. Since the ITFA expired in fall of 2001, Congress has extended the ITFA moratorium several times, and it is now set to expire in November of 2014.

If the “infant industry” argument was highly questionable in 1998, it’s utterly absurd now. From books to airline tickets, virtually everything consumers purchased in “brick and mortar” stores in 1998 is now available online. Internet access, while not yet omnipresent is widely accessible. Many traditional retailers are going under due to competition from companies such as Amazon.com. Sixteen years later, the infant of 1998 now has the car keys to the American economy.

Nonetheless, Sens. John Thune and Ron Wyden have cosponsored the “Internet Tax Freedom Forever” act, which would turn the moratorium into a permanent ban on Internet access taxes. A glowing Wyden press release claims the bill will “giv[e] online innovators and entrepreneurs the stability they need to grow their businesses.”

While other tax bills have deadlocked Congress, the Internet Tax Freedom Forever act has garnered 50 co-sponsors in the U.S. Senate. The most likely reason is Congress is playing with other people’s money. The fiscal impact of ITFA in 2014, as in 1998, falls entirely on state and local governments. So Wyden and Thune can breezily pre-empt an entire economic sector from tax without hurting the federal budget’s bottom line. But for state and local governments, the bill would represent a real hit on their ability to balance budgets in the long term.

Besides taking a bite out of state budgets, “Internet tax freedom” is simply bad policy. A sustainable sales tax should apply to personal consumption as universally as possible—and it’s especially vital that the tax apply to sectors that are growing most rapidly. By permanently exempting Internet access from sales taxes, the Thune-Wyden bill will make it more likely that state governments will have to hike the sales tax rate on all the other items subject to the tax to make up the revenue loss.

This year’s bill goes beyond simply turning a temporary bad idea into a permanent one. It would also eliminate a “grandfather clause” that allows nine states (Hawaii, New Hampshire, New Mexico, North Dakota, Ohio, South Dakota, Texas, Washington and Wisconsin), which had enacted taxes on Internet access before the original ITFA, to continue to levy these taxes.  So in addition to choking off future state revenues, the Thune-Wyden bill would also put an immediate hit on budgets in the nine states that have been sheltered by the grandfather clause to date.

To be sure, state sales taxes have their flaws. They’re regressive, falling most heavily on low-income families, and are littered with special-interest exemptions. As we have argued elsewhere, shifting away from sales taxes and toward the progressive personal income tax is a sensible reform strategy for states. But a federal ban on internet access taxes is not a way to move this debate forward.

Senate Democrats, Joined by Three Republicans, Come Up Short on Buffett Rule, Student Loan Bill

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Three Senate Republicans (two of whom have signed Grover Norquist’s infamous no-tax-increases pledge) joined their Democratic colleagues Wednesday to support a bill that would use the “Buffett Rule” to raise taxes on millionaires and offset the cost of easing student loan repayments.

Introduced by Sen. Elizabeth Warren (MA), the bill had the support of 57 senators, three short of the threshold for cloture in the Senate.

The three Republicans voting in favor were Susan Collins (ME), Bob Corker (TN) and Lisa Murkowski (AK). Corker and Murkowski have publicly said they do not feel bound by the Norquist pledge.

The “Buffett Rule” started out as the principle, proposed by President Barack Obama, that the tax code should be reformed in a way that ensures that millionaires don’t pay lower tax rates than middle-income people. It was inspired by the billionaire investor Warren Buffett, who famously argued that it was unfair that his effective tax rate was lower than his secretary’s rate.

As a CTJ report explains, some millionaires have lower effective tax rates than middle-income people mostly because investment income that mainly goes to the wealthiest Americans is subject to lower rates under the personal income tax and is not subject to the Social Security tax. The simplest remedy is to eliminate the special, low personal income tax rates that apply to two types of investment income, capital gains and stock dividends.

The tax provision in Sen. Warren’s bill, which was first introduced by Senate Democrats in 2012, takes the more roundabout approach of imposing on millionaires a minimum effective tax rate (including personal income taxes and health care taxes) of 30 percent. It is projected to raise $73 billion over a decade.

In 2012, CTJ called this measure “a small step in the direction of tax fairness” and explained it would raise much less revenue than simply taxing capital gains and dividends like other income under the personal income tax. One reason is that taxing capital gains and dividends like other income would subject them to a top personal income tax rate of 39.6, plus an additional 3.8 percent under the Obamacare tax, rather than 30 percent. Another reason is that there is a great deal of capital gains and dividend income that goes to taxpayers who are among the richest five percent or even one percent but who are not millionaires and therefore not affected by the Senate Democrats’ proposal.

Sen. Warren’s proposal is a good start that should be enacted and built upon one day with a more comprehensive reform.