Author: tarek

TABOR stands for Taxpayer Bill of Rights, but it’s really a destructive law that restricts tax and spending growth with the goal of starving government. Colorado has the most restrictive version of this kind of law and serves as a cautionary tale. The Colorado TABOR and its implications are described in a new policy brief from the Institute on Taxation and Economic Policy (ITEP).  In a nutshell, TABOR’s arbitrary limit on the size of government prevents states from meeting their evolving responsibilities as populations change, services become more expensive, and voters demand new public investments.

Texas Governor Rick Perry is headed to Missouri to stump for a regressive income tax cut that some legislators are trying to enact over Governor Nixon’s recent veto.  If Show Me State residents ignore Perry’s advice, who could blame them? The former presidential candidate’s own state’s tax system is one of the least fair in the country.  Only five states require their poorest residents to pay more in taxes than Texas.

Indiana’s property tax caps, which we’ve long criticized, are causing headaches for local lawmakers in Indianapolis who are facing pleas from law enforcement and other agencies for more funds. Coupled with the revenue slump brought on by the recent recession, officials are grappling with three choices: close their current budget gap by raising the city’s income tax; risk the city’s AAA credit rating by tapping its reserves; or enact even deeper cuts in public services on top of those already in effect.

It looks like taxes will be a hot issue in the 2014 Arkansas gubernatorial election.  Arkansas’ leading republican candidate, Asa Hutchinson, recently said he supported phasing out the state’s personal income tax, but offered no specifics for how he would replace the lost revenue.  Mike Ross, the leading Democratic candidate, took Hutchinson to task, reminding Arkansans that tax cuts come with a price: “So when you start talking about cutting taxes, unless you’re talking about shifting the burden to other taxes, you’re talking about laying off teachers, you’re talking about kicking seniors out of the nursing home…. It’s pretty simple math.”

Michael McIntyre, an international tax professor at Wayne State University, former consultant to the United Nations, OECD, and several governments, and the brother of CTJ director Robert McIntyre, passed away on August 14 at the age of 71.

An obituary published in Tax Notes allows Michael McIntyre’s colleagues, among them his brother, to share their thoughts:

“My older brother, Mike, was my mentor and best friend,” said Citizens for Tax Justice Director Robert McIntyre. “He’s the reason that I’ve spent my career in tax policy.”

“Over the past four decades, we collaborated on tax reform proposals that ran the gamut from international, to federal, to state and local, to American Indians. We were soul mates both in tax policy and in life,” Robert McIntyre said. “He made the world a better place, not just for me, the rest of his large extended family, and his many friends, but also for the countless people here in the U.S. and around the world who benefited from the tax policies he promoted.”

Michael McIntyre published a multitude of books and articles on a variety of tax topics. He served as a senior adviser to the Tax Justice Network (TJN) and was the editor of a Web page dedicated to taxation and policy issues for developing countries.

“Mike played a major role in shaping TJN’s research and advocacy programs,” said TJN Director John Christensen.

“He has been a trenchant critic of the OECD’s dismal lack of progress over umpteen decades, while setting out a cogent case for more radical reform, especially in the direction of combined reporting,” said Christensen. “Mike gave his time and expertise generously, and he’ll be remembered fondly for his permanent smile and constant good humor.”

Read the Tax Notes obituary in full.

The news that Jeff Bezos, the founder and CEO of Amazon.com, is going to buy the Washington Post for $250 million is shining the light on Bezos’ politics and Amazon’s corporate behavior for obvious reasons. The Washington Post is the paper of record in the nation’s capital and exerts extraordinary influence over political debates.  As an organization that follows tax policy, we went looking for the track record on taxes and, as it turns out, Bezos and his company have consistently demonstrated a contempt for taxes and an aggressive interest in avoiding them. Here’s what you need to know:

1. Bezos personally donated $100,000 to an anti-income tax initiative group in Washington state.
In 2010, Initiative 1098 would have created a five percent tax on income exceeding 200,000 and a nine percent rate on income exceeding $500,000 for individuals in Washington State. It was designed to pay for a cut in the property and business taxes as well as an increase in education spending, but it was defeated with the help of a $100,000 donation from Bezos to the group Defeat I-1098. Passing I-1098 would have not only helped Washington state get on a more sustainable fiscal footing, but it would have gone a long way to improving the fairness of the nation’s most regressive (PDF) state tax system.

2. Amazon bullies states to avoid its responsibility to collect state sales taxes.
In late June, Amazon decided to cut ties with all its affiliates in Minnesota to dodge a new law that would have forced it to begin collecting sales tax in the state. This move made Minnesota just the latest casualty among a whole slew (PDF) of states to feel Amazon’s wrath in its relentless pursuit of preserve its tax advantage over local retailers. Fortunately, the federal Marketplace Fairness Act, which would eliminate this tax advantage by allowing states to require Amazon and other websites collect sales taxes, has passed the Senate and could realistically be enacted in the not-too-distant future.

3. Amazon is a notorious international tax dodger.
Amazon has become infamous for its international tax dodging over the last year since the United Kingdom discovered that it “immorally” paid almost no taxes on over £4.2 billion in sales by routing its operations through Luxembourg (a well-known tax haven country). The happy irony is that Amazon’s audacity helped prompt the recent unprecedented international effort to crack down on this sort of international tax dodging.

4. Bezos could reap substantial tax benefits from the purchase of the Washington Post.
Although it is unclear how much time Bezos plans to spend working at the Washington Post, a report by Reuters notes that if he spends about 10 hours each week on it he could realize substantial tax benefits from the purchase of the newspaper. The reason is that business owners like Bezos are able to deduct any losses (of which the Post has tens of millions) from operating the business they own, thus reducing their overall tax bill.

5. Bezos wanted to start Amazon.com on an Indian reservation to avoid taxes.
Illustrating a particularly brash anti-tax philosophy, in an interview almost 17 years ago, Bezos said that he “investigated whether we could set up Amazon.com on an Indian reservation near San Francisco.”  He explained the idea was to get “access to talent without all the tax consequences.”  Bezos went on to lament that this was not possible because, “[u]nfortunately, the government thought of that first.” In other words, Bezos wanted to fully exploit all the “talent” of  Silicon Valley without having to pay for the public investments that nurture that talent and draw the human and other capital that make businesses profitable and industries blossom. 

Front page photo via Dan Farber Creative Commons Attribution License 2.0 

Earlier this summer, we tracked New York Governor Andrew Cuomo’s state-wide promotional tour where he touted the benefits of his beloved “START-UP New York” (originally called “Tax Free NY”) – a plan to turn college campuses throughout the state into enterprise zones where new businesses would be exempt from all state taxes. The Governor claimed this would be an innovative way to revitalize the up-state economy while costing the state nothing. We, however, found these claims unwarranted at best, showing they were only a call for more of the same unproven corporate tax breaks that would cost the state millions while putting existing local businesses at an extreme disadvantage.

Nonetheless, Governor Cuomo ignored our warning (and the warnings of others) and rapidly pushed the plan through the legislature where it was introduced, approved, and subsequently signed by him, all in the course of a few weeks in June.

Now, less than two months after its passage, a new analysis shows just how poorly conceived START-UP NY really is. This time, however, the analysis comes directly from the Governor’s own budget office – and its findings are in stark contrast to what the Governor promised during his promotional tour.

While Cuomo campaigned on the notion that his tax-free campus scheme wouldn’t cost the state a nickel, the budget office’s projections (PDF) show the plan will cost $323 million in lost revenue over its first three years alone (projections only go through Fiscal Year 2017, and show costs rapidly ballooning over this period of time).

And in a cartoonesque twist, this lost revenue is not from businesses that will move to New York because the START-UP program incentivized them to do so. According to the report, the $323 million in lost revenue is the result of companies that would have come to New York and paid full taxes anyway, but are now exempt thanks to the Governor’s tax-free program.

With projected budget gaps of $1.74 billion in FY 2015 and $2.9 billion in both FY 2016 and FY 2017, START-UP NY has exacerbated the state’s poor fiscal health – making it even more difficult to invest in government services that are proven to grow the economy, like education and infrastructure. Calling START-UP NY an overpriced gimmick, one assemblyman has announced his plan to repeal the program altogether – a move we think should be taken as soon as possible.

Our partner organization, the Institute on Taxation and Economic Policy (ITEP), has shown in detail how rolling back business and corporate taxes is not an effective economic development tool and that public investment in schools, transportation systems, public safety, etc. are the real keys to development. Even in practice, enterprise-zone programs like START-UP NY have demonstrably failed to create jobs while costing states billions.

Thus far, Governor Cuomo has demonstrated an unwillingness to listen to experts or look at the evidence. Will he also ignore his own budget team’s assessment and move forward with his plan? If so, it would be hard to conclude that his governing agenda is anything but reckless and self-serving.

Front page Photo via  Governor Andrew Cuomo Creative Commons Attribution License 2.0

In its latest attack on the Foreign Account Tax Compliance Act (FATCA), the Wall Street Journal describes in ominous tones the “record” number of individuals who renounced their U.S. citizenship in the last quarter, supposedly driven by FATCA’s reporting requirements, which are designed to prevent tax evasion.

What scary headlines about a “surge” in expatriations leave out, however, is what a miniscule number it really is. Even the six-fold increase this quarter compared to the second quarter of last year meant that only 1,130 people renounced their citizenship in the second quarter of this year. To give some context, this number represents less than 0.02 percent of the estimated six million Americans that live abroad.

“Surge in Expatriations to Avoid Taxes!” “US expatriates renounce citizenships at record rate!” Pretty alarming headlines. News coverage of what complying with FATCA actually entails has been misleading and would make you think that the rise in renunciations is driven by the “overly burdensome” rules that are financially crippling US citizens living abroad. The fact is, the primary component of FATCA affecting individuals is the requirement that U.S. citizens with $50,000 or more in foreign financial assets (which does not include housing or other basic non-financial assets) simply have to attach a disclosure statement about their accounts in their yearly tax return.

Whatever inconvenience is caused by these requirements is far outweighed by the benefits to the U.S. and its law abiding taxpayers. According to the Congressional Joint Committee on Taxation (JCT), FATCA’s anti-tax evasion measures are estimated to raise $8.7 billion (PDF) over their first decade of implementation (and JCT has a history of  underestimating such tax enforcement measures, too.) Considering that the U.S. loses an estimated $100 billion (PDF) annually due to offshore tax abuses, rather than seeking to curtail FATCA, Congress should expand on these efforts through legislation like the Stop Tax Haven Abuse Act in the House or the CUT Unjustified Loopholes Act (PDF) in the Senate.

While the emigration of every single wealthy person abroad is makes big news (see, for example, coverage of Facebook billionaire Eduardo Saverin or singer Tina Turner), the reality is that the number of renunciations is negligible – especially compared to the number of new citizen naturalizations each year. In fact, 503,104 people have been naturalized in the US since the start of Fiscal Year 2013, which means well over 250 people embracing US citizenship for every one person renouncing it over the past several months.

Asking the few and largely wealthy Americans with substantial offshore financial assets to do a little extra paperwork is not unreasonable when we know that cracking down on offshore tax evaders will bring in revenues to invest in things like roads, schools, healthcare and a quality of life that make the US so attractive to aspiring U.S. citizens.

Some of the country’s most influential state tax-writers heard this week from the Institute on Taxation and Economic Policy (ITEP), about why they should reject the conventional wisdom about special business tax breaks being economy-boosters. Best known for its work promoting the collection of sales taxes on purchases made over the Internet, the NCSL Task Force on State and Local Taxation asked ITEP to speak at its meeting in Atlanta on the effectiveness of so-called “tax incentives.”

Among the reasons ITEP urged lawmakers to be skeptical of these special breaks:

• Tax incentives often reward companies for hiring decisions or investments they would have made anyway. These “windfall” benefits significantly reduce the cost-effectiveness of every tax incentive.
• State economies are closely interconnected, so the taxpayer dollars given to companies through incentive programs never remain in-state for very long.
• Tax incentives require picking winners and losers. Incentive-fueled growth at one business usually comes at the expense of losses at other businesses – including businesses located in the same state.
• Tax incentives must be paid for somehow, and state economies are likely to suffer if that means skimping on public services like education and infrastructure that are fundamental to a strong economy.

To address these problems, ITEP recommended a three-pronged approach to the Task Force: cut back on tax incentives (both unilaterally and through cooperation with other states); reform tax incentives to limit their most obvious flaws; and closely scrutinize incentives on an ongoing basis to weed out the least effective programs.

ITEP staff also participated in a follow-up panel on best practices for “tax expenditure reporting”—the main tool states use to keep tabs on the slew of special tax breaks they offer to businesses and individuals. For that panel, ITEP recommended expanding state tax expenditure reports to include more tax breaks, and to include more information, like the purpose of each tax break and a description of its beneficiaries.  ITEP also explained why lawmakers shouldn’t gut state tax expenditure reports by excluding large tax breaks from their scope; every tax break has supporters and a constituency who insist it’s justified, but every tax expenditure requires equal scrutiny.

Read ITEP’s written remarks on the folly of business tax incentives.

Read ITEP’s written remarks on best practices for tax expenditure reporting.

Last week, the Texas Legislature voted on a transportation funding bill that would raise an estimated $1.2 billion annually to help pay for highway improvements. Technically, it doesn’t raise new revenues but rather diverts half of oil and gas severance tax revenues from the state’s Rainy Day Fund to the highway department. Contingent on voter approval and scheduled for the November 2014 ballot, this bill hardly meets the $4 billion annual shortfall the highway department currently faces. The Institute on Taxation and Economic Policy (ITEP) has shown that an equitable and sustainable way to pay for transportation is to modernize the state gas tax by increasing rates to meet current demand and then peg them to rise with transportation construction costs.

Between 2003 and 2012 the average Hollywood movie earned a 452 (!) percent return on investment. Still, 40-some states offer generous film tax credits in a misguided effort to invite productions. While we have shown these subsidies are mostly false promises, last week the Los Angeles Times illustrated another way in which they are wasteful – this time with the All-American Jackie Robinson story “42.” Collecting millions of dollars in tax subsidies from several states including Georgia, Alabama, and Tennessee, “42’s” producers proudly touted their patriotism and dedication to promoting the communities in which they filmed… only to turn around and conduct a significant component of their post-production work abroad, including recording the musical score in London. While some conclude this means the tax credit should be expanded to include post-production, all that would do is hasten the race-to-the bottom of tax incentives.

Last week, New York Governor Andrew Cuomo announced an unusual plan that would allow the state to suspend the driver’s license of about 16,000 taxpayers who owe more than $10,000 in state taxes. While overdue tax bills amount to $1.1 billion, the program is expected to bring in just $26 million in uncollected income taxes this fiscal year and $6 million in following years. Delinquent taxpayers are defined as individuals who have unpaid income taxes and businesses with unpaid sales tax bills.

A recent court ruling allowing the use of the “manufacturing” tax deduction by a company that places candy bars and bottled wine in gift baskets illustrates a truth that politicians hate to admit: The tax code is a lousy tool for encouraging domestic manufacturing.

In a recent column, gadfly journalist David Cay Johnston berated the federal district judge in the case for his interpretation of section 199 of the tax code, which allows a company to deduct 9 percent of its income that is generated from domestic manufacturing. This law was passed by Congress after the World Trade Organization (WTO) found in 2002 that a U.S. tax break meant to encourage exports violated trade treaties and the European Union began to impose sanctions against the U.S. in 2004. Congress decided to replace the illegal tax break with a new one, which became section 199.

By the time it was enacted, this provision had been hijacked by lawmakers who stretched the term “manufacturing” to include things like drilling for oil, constructing buildings, and the architectural services to design those buildings. A footnote in the conference report in the legislation made clear that a company like Starbucks could claim the deduction for roasting coffee beans used in its beverages.

In fact, the definition of manufacturing seems so unclear that we should not be surprised by the recent court ruling regarding gift baskets. Johnston notes that Greg Mankiw, who was President Bush’s chairman of the Council of Economic Advisers, questioned the whole concept in 2004 when he wrote, “When a fast-food restaurant sells a hamburger, for example, is it providing a ‘service’ or is it combining inputs to ‘manufacture’ a product?”

More Tax Breaks for Companies that Already Avoid Taxes?

President Obama has proposed to increase such tax incentives. His “framework” for corporate tax reform, the vague plan for lowering the corporate tax rate to 28 percent that he made public in February of 2012 and proposed again recently with slight changes, would expand the section 199 deduction.

In theory, the President’s proposal could improve things because it would “focus the deduction more on manufacturing activity,” which is a nice way of saying that oil companies and people who assemble gift baskets are on their own.

But the bigger question is whether American manufacturers actually need tax breaks. In 2012, just before Obama announced his “framework,” he told a crowd at a Boeing plant in Washington State that companies that use tax breaks to shift operations and profits offshore ought to pay more U.S. taxes and the revenue “should go towards lowering taxes for companies like Boeing that choose to stay and hire here in the United States of America.” CTJ immediately released figures showing that Boeing’s effective tax rate over the previous decade was negative. In fact, there had only been two years during that decade when Boeing paid anything in federal income taxes.

Fix the Real Problems

A lot of people in the Obama Administration and in Congress (and, of course, K Street lobbyists) have the idea that our corporate tax is too burdensome on companies and that this pushes them to manufacture products offshore. However, CTJ’s major 2011 study of most of the profitable Fortune 500 corporations found that two-thirds of those with significant offshore profits actually paid higher taxes in the other countries where they did business than they paid in the U.S.

The real problem with our international corporate tax rules is the provision allowing American companies to “defer” paying U.S. taxes on the profits of their offshore subsidiaries until those profits are brought to the U.S. And to a large extent, deferral results in American companies disguising their U.S. profits as tax haven profits rather than moving actual operations. And that problem cannot be solved by any amount of tax breaks thrown at companies that claim to “manufacture” something in the U.S.

There is a strong consensus among scholars, think tanks and advocates around the country that there are concrete benefits to providing earned income tax credits (EITCs) – refundable credits (PDF) designed to offset income tax liability for low-income families and individuals. Not only has the EITC been shown to help alleviate poverty, but it has also succeeded in encouraging greater participation in the workforce, improving infant health, and boosting school achievement, among other things.

While most discussions are about the federal and state EITCs, there are two local EITCs that are often overlooked, including Montgomery County, Maryland’s Working Families Income Supplement (WFIS). Originally introduced in 2000 as a tool to help the county’s poorest residents cope with an extremely high cost of living, the WFIS is one of only two local EITCs in the country (the other is in New York City).

When originally implemented in 2000, the WFIS was set at 100 percent of the state EITC – that is, if a worker received $600 from the Maryland EITC, he or she would also receive $600 from the county. This supplement provided low-income Montgomery County families with the most generous combined EITC in the country. It also gave these households the ability to pay for basic day-to-day necessities like child care, school books, utility bills, and groceries – and most of all it helped reduce poverty and promote upward mobility. (Other reference materials on the WFIS can be found here.)

Through the mid-2000s, the number of people living in poverty declined even as unprecedented numbers of people moved into the county. When the Great Recession began to take hold in late 2007, however, these advances were reversed. As jobs were lost and incomes fell, Montgomery County experienced a spike in poverty even as the Washington, DC region as a whole weathered the recession better than most.

In a case of terrible timing, as county tax revenues began to fall, the Montgomery County Council decided to save a little money by scaling back the WFIS to 72.5 percent of the state EITC in FY 2011, 68.9 percent in FY 2012, and 72.5 percent in FY 2013. This decision only made things worse for low-income families: now, not only were they facing wide-spread layoffs prompted by a weak economy, but they were seeing a significant cut in a critical source of income.

Now, however, members of the Council have proposed a plan that would restore the 100 percent credit that was in place for nearly a decade.

Introduced in March and having undergone public hearings in July, Expedited Bill 8-13 (PDF) would gradually return the WFIS to 100 percent of the Maryland credit by Fiscal Year 2016. This expansion is estimated to help over 30,000 low-income households meet their basic day-to-day needs at a cost to the County of $3 million.  (For context, Montgomery County tax revenues are projected to grow by $30 million a year for the foreseeable future – even when factoring in the possible impact of the federal sequester).

With a committee hearing scheduled for early October, the Council members promoting the bill have just under two months to garner support and move its restoration forward. For over a decade, the Council has demonstrated its dedication to the needs of its low-income residents as it championed one of the most forward-looking income tax credits in the nation.  By restoring the Working Family Income Supplement to 100 percent of the state credit, the Council would be offering critical help to its most vulnerable residents, providing a ladder for upward mobility, and adding a boost to the local economy.

For more information on the structure and benefits of Earned Income Tax Credits:

Rewarding Work Through Earned Income Tax Credits

Institute on Taxation and Economic Policy, September 2011

“Low-wage workers often face a dual challenge as they struggle to make ends meet. In many instances, the wages they earn are insufficient to encourage additional hours of work or long-term attachment to the labor force. At the same time, most state and local tax systems impose greater responsibilities on poor families than on wealthy ones, making it even harder for low-wage workers to move above the poverty line and achieve meaningful economic security. The Earned Income Tax Credit (EITC) is designed to help low-wage workers meet both those challenges. This policy brief explains how the credit works at the federal level and what policymakers can do to build upon it at the state level.”

Earned Income Tax Credit Promotes Work, Encourages Children’s Success at School

Center on Budget and Policy Priorities, April 9, 2013

“The Earned Income Tax Credit (EITC), which went to 27.5 million low- and moderate-income working families in 2010, provides work, income, educational, and health benefits to its recipients and their children, a substantial body of research shows. In addition, recent ground-breaking research suggests, the EITC’s benefits extend well beyond the limited time during which families typically claim the credit.”

Ten Years of the EITC Movement: Making Work Pay Then and Now

Brookings Institution, April 18, 2011

“The Earned Income Tax Credit (EITC) … has grown to be called the nation’s largest federal anti-poverty program. The EITC has had significantly beneficial effects for its recipients and their communities. These include encouragement of work, reduction of poverty, and boosting of local economic activity.”

Supply-side economist Arthur Laffer has been very busy the last few years trying to convince state lawmakers that cutting taxes and making them more regressive will lead to an economic boom.  At the same time, our partner organization, the Institute on Taxation and Economic Policy (ITEP), has done a lot of work pointing out the serious flaws in Laffer’s so-called research, and explaining why taxes and the public investments they pay for are key to healthy state economies.

Over at PBS, meantime, the fedora-donning business correspondent for the News Hour, Paul Solman, had gotten wind of ITEP’s critiques.  After reading ITEP’s “States with “High Rate” Income Taxes are Still Outperforming No-Tax States” and deeming it “a convincing piece of work,” Solman decided to sit down with Laffer and ask some questions.  Laffer’s response was predictable and anecdote-heavy.  Aside from recycling the same meaningless statistics ITEP has debunked before, he also included a data point that’s hard to rebut unless you live inside his brain, that he and his family moved to Tennessee “exclusively because of taxes.”  (Of course, a guy who’s made a living bashing taxes is not a particularly representative citizen.)

Happily, PBS’s Solman decided to do a little fact-checking and went looking for an expert, “impartial point of view” (his words, not ours) to help glean whether Laffer’s promise of sure-fire economic growth is all that – or all wet.  For his follow up piece, he turned to Joel Slemrod, noted public finance expert and chair of the Economics Department at the University of Michigan.

In one of many subtle but clear swipes at Laffer’s methods, Slemrod explained that while “economists have developed increasingly sophisticated statistical techniques to try to tease out the causal link between policies and performance … Laffer’s analysis is not sophisticated.”

Slemrod’s criticisms of Laffer closely parallel those made by ITEP in 2012 and early 2013.  For one thing, Laffer fails to control for non-tax factors that impact growth. For another, the economic measures he chooses (cherry picks, really) don’t capture “what’s happened to the … well-being of a typical resident.”  And, Laffer ignores how tax cuts require cuts in public investments that are hugely important to state economies.

On this last point, Slemrod notes that: “Laffer makes clear that … he believes more money does not provide better public services. This is a controversial statement that he backs with a few anecdotes, but it is not one that is widely held.”

In other words, Laffer and his supply-side compatriots have campaigned to frame most every government program as “wasteful” to make the idea (and their ideological obsession) of defunding government seem somehow justified.

Given all of this and his vast expertise, Slemrod concludes that ITEP’s study “make[s] arguably better methodological choices” than Laffer’s.  (We’ll take that as a compliment!) As Slemrod has pointed out in previous interviews, serious research has shown taxes to have little, if any, effect on economic growth; in fact, that “[r]aising taxes and using the money for education and certain infrastructure could certainly be beneficial to an economy.”  Laffer’s tax-phobic worldview notwithstanding, public services do matter to economic growth, and that means we will always need an adequate, fair, and sustainable tax system to pay for them.