Author: tarek

Last year, Texas lawmakers refused to use the state’s emergency “rainy day” fund to save education from deep spending cuts.  But now that the state’s transportation system is facing the budget axe, those same lawmakers appear to have changed their tune.  By the end of this week, the legislature is expected to approve a resolution asking voters to permanently divert some of the state’s rainy day funds to supplement the state’s woefully inadequate transportation revenues.

Texas has been playing a dizzying fiscal shell game, moving money back and forth between education and transportation for years, all because its regressive tax system simply brings in too few revenues to cover services its growing population needs (especially schools). The reason for Texas’ current transportation funding deficit, however, has less to do with this shell game than it does with its transportation funding sources.

Like most states, Texas relies heavily on a “fixed-rate” gasoline tax whose revenues fall further behind each year as infrastructure costs grow and vehicles become more fuel-efficient.  When we analyzed Texas’ gas and diesel taxes in 2011, we found the state could raise more than $2.1 billion in revenue per year just by updating the tax rates to catch up with the last two decades of inflation in construction costs.

This latest scheme to find money for transportation will raise less than half that much ($800 million), though, and it will do so by first transferring money away from the rainy day fund into the education fund, and then taking it from education to pay for roads.  Given that Texas needs at least $4 billion in additional revenue just to maintain its current transportation network, this proposal can hardly be considered a real “solution.”

Just as importantly, this shuffling of revenues does nothing to improve the unsustainable trajectory of Texas’ transportation finances.  The above chart shows that Texas’ gas tax rate has been in constant decline, as a result of inflation, since it was last raised in 1991.  In fact, adjusted for inflation, Texas’ gas tax rate is at its lowest point since 1983—a full thirty years ago.

Not even a month after cutting personal income taxes and raising the state’s sales tax, Ohio Governor John Kasich is pledging to further lower the state’s top income tax rate to below 5 percent (the top rate was 5.925% before being dropped to 5.3% this year).  Speaking at a plastics plant last week, the Governor said, “we have momentum” with tax cuts, and expressed his belief that low taxes will draw more business to the Buckeye State.

Proponents of the $800 million regressive income tax cut package that was vetoed by Governor Jay Nixon last month are spending millions of dollars to convince lawmakers to override the veto. Missouri’s Chamber of Commerce is airing TV ads in support of the cuts and conservative political activist Rex Sinquefield (who has been a long-time funder of the anti-tax agenda in Missouri) has given more than $2 million to efforts to overturn the veto.  For his part, Governor Nixon is spending the summer trying to convince lawmakers and others that the veto should be sustained, particularly if they care about quality education.  At a St. Louis Chamber event Governor Nixon said, “members of the General Assembly can either support (the tax cut) or they can support education. They cannot do both.”

The Salt Lake Tribune reports on the growing chorus of support for raising taxes in Utah in order to pay for improvements to the state’s transportation infrastructure.  According to the Tribune, everybody from the state Chamber of Commerce to local governments and non-partisan think tanks has been “working to build a case that transportation tax hikes are overdue.”

A story in Kentucky’s Courier-Journal highlights some of the problems with paying for roads and bridges with tolls.  Drivers who happen to live or work close to a tolled bridge end up paying far more for infrastructure than those drivers who are lucky enough to have un-tolled routes available to them.  Moreover, low-income drivers are always affected most by tolls — a fact that’s led some local lawmakers to begin discussing ideas like exempting drivers from tolls if their incomes are low enough to qualify for the Earned Income Tax Credit (EITC).

Congress Should End the Most Regressive Ones, Maintain the Progressive Ones, and Reform the Rest to Be More Progressive and Better Achieve Policy Goals

A new report from Citizens for Tax Justice explains how Senators responding to the “blank slate” approach to tax reform should prioritize which “tax expenditures” to preserve, repeal or reform.

Read the report.

Senators Max Baucus and Orrin Hatch, chairman and ranking member of the tax-writing committee in the Senate, have asked their colleagues to assume tax reform starts from a “blank slate,” meaning a tax code with no tax expenditures (special breaks and subsidies provided through the tax code). Senators are asked to provide letters to Baucus and Hatch by this Friday explaining which tax expenditures they would like to see retained in a new tax code.

CTJ’s report evaluates the ten costliest tax expenditures for individuals based on progressivity and effectiveness in achieving their stated non-tax policy goals — which include subsidizing home ownership and encouraging charitable giving, increasing investment, encouraging work, and many other stated goals.

CTJ’s report concludes that:

1. Tax expenditures that take the form of breaks for investment income (capital gains and stock dividends) are the most regressive and least effective in achieving their stated policy goals, and therefore should be repealed.

2. Tax expenditures that take the form of refundable credits based on earnings, like the Earned Income Tax Credit (EITC) and the Child Tax Credit, are progressive and achieve their other main policy goal (encouraging work) and therefore should be preserved.

3. Tax expenditures that take the form of itemized deductions are regressive and have mixed results in achieving their policy goals, and therefore should be reformed.

4. Tax expenditures that take the form of exclusions for some forms of compensation from taxable income (like the exclusion of employer-provided health insurance and pension contributions) are not particularly regressive and have some success in achieving their policy goals, and therefore should be generally preserved.

Read the report.

In response to public outcry in several nations that multinational corporations are using tax havens to effectively avoid paying taxes in the countries where they do business, the Organization for Economic Co-operation and Development (OECD) has released an “Action Plan on Base Erosion and Profit Shifting.” While the plan does offer strategies that will block some of the corporate tax avoidance that is sapping governments of the funds they need to make public investments, the plan fails to call for the sort of fundamental change that would result in a simplified, workable international tax system.

Most importantly, the OECD does not call on governments to fundamentally abandon the tax systems that have caused these problems — the “deferral” system in the U.S. and the “territorial” system that many other countries have — but only suggests modest changes around the edges. Both of these tax systems require tax enforcement authorities to accept the pretense that a web of “subsidiary corporations” in different countries are truly different companies, even when they are all completely controlled by a CEO in, say New York or Connecticut or London. This leaves tax enforcement authorities with the impossible task of divining which profits are “earned” by a subsidiary company that is nothing more than a post office box in Bermuda, and which profits are earned by the American or European corporation that controls that Bermuda subsidiary.

The OECD’s action plan does make several suggestions that would make it harder for corporations to pretend their profits are all earned in Bermuda, the Cayman Islands or other tax havens, many of which echo proposals offered by President Obama and Senator Carl Levin. For example, the plan clearly targets rules allowing corporations to immediately take deductions for expenses of doing business offshore, when they will not pay taxes on their offshore profits for years or ever. The plan seems to target rules like the U.S.’s “check-the-box,” which allow corporations to give different governments conflicting information about the nature of offshore entities so that their profits are not taxed by any government anywhere.

But we will never really end the ability of corporations to pretend their profits are all “earned” in offshore tax havens so long as developed countries continue to rely on “territorial” tax systems or a “deferral” tax system like the U.S. has.

In his comment on the OECD action plan, Professor Sol Picciotto, a Senior Adviser to the Tax Justice Network, sums it up well:

“The Action Plan contains some ambitious measures, which would produce some benefits if implemented. But its approach is like trying to plug holes in a sieve. The OECD has chosen a road that is strewn with obstacles, and leads in the wrong direction. The OECD has missed this big opportunity to crack open the door to the big reform that the world’s citizens need…”

Rhode Island is about to put seventeen of its “economic development” tax breaks under the microscope, thanks to a new law (PDF) signed by Governor Chafee last week.  This reform is a welcome step forward in a national landscape where states often do nothing at all to figure out whether narrow tax breaks are really helping their economies.

Under Rhode Island’s new reform, state analysts must estimate how many new jobs were actually created as a “direct result” of the $45 million worth of tax breaks within the new law’s scope.  Those analysts must also make a bottom-line recommendation on whether each tax break should be allowed to continue, based on how cost-effective it’s been in achieving its intended goals.

Of course, it remains to be seen how rigorous Rhode Island’s analysts will be in conducting these evaluations, and whether their work will actually be used by lawmakers to inform policy.  After all, as the Pew Charitable Trusts has shown, not all tax break evaluations are of equal quality or influence.

But there are reasons to think that Rhode Island’s evaluations will make a difference.  For starters, the new law requires a much more systematic and rigorous evaluation than what most other states require.  Rhode Island’s evaluations, for example, must investigate whether the benefits of the tax break are flowing largely to businesses or investors outside of the state, and whether changes in data collection laws could allow for even better evaluations in the future.  Rhode Island’s reform also requires the Governor to provide their own recommendation on each newly evaluated tax break when she or he submits budget recommendations to the state legislature each year.

But Rhode Island’s new reform isn’t perfect.  Requiring the Governor’s budget to include recommendations is a good way to get lawmakers to acknowledge the evaluations, but a more effective check is attaching a “sunset” provision (or expiration date) to each break; that’s the best way to ensure these tax breaks come up for a vote after new evidence on their effectiveness is released.

Moreover, the Economic Progress Institute points out that Rhode Island offers a total of 235 different tax breaks, at an annual cost to the state of $1.7 billion.  Evaluating just seventeen tax breaks that cost $45 million leaves the vast majority of the state’s tax law unexamined.  Still, if these initial evaluations prove worthwhile, lawmakers and advocates will have a strong case for expanding this new reform to cover a much larger portion of Rhode Island’s tax code

In a July 16 letter, 30 national organizations asked members of Congress to reject a proposal by Congressman John Delaney of Maryland because it rewards the most aggressive corporate tax dodgers with tax breaks and even gives them control of a new bank that would be created to fund American infrastructure. The plan is one in a history of Congressional schemes to hand corporations a massive tax break under the pretense that it will help the U.S. economy.

Delaney’s proposal would allow a “repatriation holiday,” meaning American multinational corporations could bring their offshore profits to the U.S. without paying the U.S. taxes that would normally be due, on the condition that they purchase bonds to finance a new bank that would be set up to fund infrastructure projects.

A CTJ report released in June explains that much (and perhaps most) of the profits that American corporations claim to hold “offshore” are actually already invested somehow in the American economy.  So, these profits are not truly “offshore,” and the argument that the U.S. economy is somehow deprived of these dollars doesn’t really hold up. 

As the CTJ report explains, the corporations most likely to benefit from Delaney’s proposed “holiday” are not those with actual business activities offshore, because those companies have their offshore assets tied up in things like factories and equipment. The benefits are much more likely to go to those American corporations that have made their U.S. profits appear to be foreign profits by artificially shifting them to subsidiary companies in offshore tax havens. These subsidiaries are often nothing more than a post office box, and the profits they claim to generate are easy to shift around using accounting gimmicks. 

Incredibly, Rep. Delaney’s proposal would allow those corporations repatriating the most offshore profits — that is, those corporations that are most aggressive and successful at tax dodging — the right to nominate the majority of the members of the board controlling the infrastructure bank.

As the report and letter point out, the last tax amnesty for offshore corporate profits, enacted in 2004, did nothing to create jobs and actually benefitted many corporations that cut their American workforces. The Joint Committee on Taxation found that a repeat of this type of measure would lose revenue partly because it would encourage American companies to shift (on paper, using accounting gimmicks) even more profits into offshore tax havens where they are not subject to U.S. taxes.

Months after the complete failure of Nebraska Governor Dave Heineman’s efforts to radically reform his state’s tax code, Nebraska’s Tax Modernization Committee had its first meeting.  Why a committee? Because rather than following their governor into a massive, regressive overhaul of their state’s tax code, lawmakers instead decided in May to form this deliberative committee, which will study the state’s tax structure and issue recommendations for reform by December.

Just as the Institute on Taxation and Economic Policy (ITEP) was highly engaged in Nebraska, generating numbers to explain the impact of the governor’s proposals earlier this year, ITEP’s experts will be monitoring the work of the Committee and contributing to the debate with information on how proposed changes will impact taxpayers across the income spectrum.

The Lincoln Journal Star is keeping close tabs and covering the Committee’s meetings. The Committee’s own web page is here, including a schedule of public meetings in the capital and around the state.

Photo credit, Lincoln Journal Star

Colorado Governor John Hickenlooper recently announced his support for converting the state’s flat rate income tax into a more progressive, graduated tax with a top rate of 5.9 percent.  This reform would raise $950 million per year for public schools and would make the state’s regressive tax system (PDF) somewhat less unfair.

Georgia is shaping up to be a major tax policy battleground in 2014, and lawmakers appear to be setting their sights on the personal income tax (as state lawmakers are wont to do).  According to the Associated Press, officials are considering either cutting the personal income tax, amending the state constitution to ban any increase in the tax, or simply eliminating the tax entirely.  For some context on why these are all bad ideas, see the Institute on Taxation and Economic Policy’s (ITEP) primer on progressive income taxes (PDF).

Martin Sullivan at Tax Analysts asks whether Virginia drivers actually benefited from the gas tax cut that went into effect earlier this month.  On July 1, gasoline taxes fell in Virginia and rose in North Carolina, but gas prices actually increased in both states alongside crude oil prices.   Moreover, while North Carolina saw the larger price increase, the difference between the two states was just 1.8 cents – which raises the question of where the rest of Virginia’s 6.4 cent tax cut ended up going.  Sullivan concludes that “Virginia drivers [have] good reason to question whether gas tax cuts are primarily for their benefit.”

This week, California reported that tax revenues came in $2.1 billion over expectations during Fiscal Year 2013. The additional revenue – largely stemming from unexpectedly high income tax collections – will be directed to schools through the state’s education funding formula. While the extra revenues are a promising change of pace after years of multibillion-dollar deficits, state officials have warned that the surge might not represent a trend.

Some House Republicans are hitting the IRS when it’s down, using recent scandals (such as they are, anyway) to push through a dramatic 25 percent cut to the IRS budget. Such a devastating cut would not only substantially increase the deficit, but would make the IRS less effective and exacerbate the myriad of problems it already faces, most of which are due to inadequate resources.

Even as its responsibilities have grown dramatically over the past decade, the IRS has continued to get too few resources to do its job, with its budget actually declining 17 percent since 2002 (adjusted for inflation and population). The results of these cuts have not been pretty. Nina Olsen, the National Taxpayer Advocate, noted (PDF) recently that Americans need to “wake up to the consequences of shrinking the IRS budget” and pointed to the fact that the budget cuts had the effect of “virtually eliminating funding for training, reducing taxpayer service to laughable levels (if it weren’t so sad), and undertaking enforcement actions before any meaningful attempt to communicate with taxpayers.”

Also, cutting the IRS’s budget would actually increase the deficit and cost taxpayers more money than it would save. The primary reason – which is pretty obvious when you think about it – is that every dollar the IRS spends on activities like audits, liens, and seizing property brings in more than $10 in revenue. In addition, the IRS is currently making substantial long term investments in its enforcement, modernization and management systems, for which the federal government (i.e., us taxpayers) receives a $200 return for every dollar invested.

Some more hard-core anti-tax conservatives are going beyond the 25 percent cut, like Senators Rand Paul and Tex Cruz, and are calling for abolishing the IRS entirely, accompanied by enactment of a flat tax or some type of national consumption tax. While the mechanics of collecting these taxes without an agency resembling the IRS at the state or national level remain murky, it is clear that such proposals would have the effect of substantially increasing taxes on the poor and middle classes, while at the same time providing massive tax cuts to the wealthiest individuals.

Whatever gripes people may have about the IRS, the reality is that cutting its budget further will only make things worse. The best move for everyone (except maybe tax cheats) would be for lawmakers to significantly increase the IRS’s budget going forward, so that it can do its job better – including collecting more revenue.

After months and months of speculation and deliberation on numerous versions of “tax reform,” political leaders in the Tar Heel state reached an agreement this week on a tax package that will leave the state short of more than $700 million a year to spend on public education, health care, and other vital investments.  And, in the end, the wealthiest North Carolinians and profitable, multi-national corporations are the biggest winners under the agreement.  The new plan moved fast, easily passing out of the House and Senate with little opportunity for debate and Governor McCrory will likely sign the legislation this week. (Find its detailed provisions at the end of this post.)

An analysis from the Institute on Taxation and Economic Policy (ITEP) shows:

• The final “tax reform” plan is a big giveaway to the richest taxpayers in North Carolina.  Those with average incomes of nearly $1 million will see their share of their income paid in state and local taxes drop by 1.2% for an average cut of more than $10,000.
• Furthermore, the top 5% of taxpayers are the beneficiaries of almost 90% of the net tax cut from the combined changes to the personal and corporate income taxes, sales taxes, and the change in tax treatment of electricity, natural gas, and entertainment.
• Contrary to lawmakers’ claims that everyone in the state wins under this plan, there are many losers, as the state’s own bean counters revealed just today. Losers include some low and middle income families who currently benefit from the $50,000 business income pass-through deduction, families with significant deductible medical expenses and other itemized deductions and some elderly families who lose retirement benefits, among others.
• And, when considering that many low-and moderate-income working families will lose the benefit of a refundable state EITC (set to expire after this year and not extended under this plan), the plan actually hikes taxes on the bottom 80 percent of taxpayers on average.
• North Carolina’s tax system will become even more upside down, with the bottom 20% of taxpayers paying on average 9.2 percent of their income in state and local taxes while the top 1% will be paying only 5.7%.  Under the current system (with a state EITC in place), the bottom 20% pay 8.9 percent and the top 1% pay 6.5%.

The final negotiated package is being hailed as “historic” and a “jobs plan” for North Carolina by proponents of the plan.  But, as the North Carolina Budget and Tax Center explains, it’s nothing of the sort and instead is going to be a bad deal for North Carolinians into the future:

“[The tax reform agreement] puts at risk the ability to educate our children, care for our elders, keep our communities safe and support businesses, while failing to fix the problems with the state’s tax code. And, it gets rid of policies that work such as the Earned Income Tax Credit.

This is not a historic day for North Carolina; tax reform hasn’t been achieved.  Instead, we’ve been handed a plan that will tarnish our state’s reputation as a leader in the South, a place where people want to live and businesses want to grow.

It is very likely that as a result of this failure to pursue real, comprehensive tax reform, state sales taxes and local property taxes will go up in the future.   That’s what happened in every other Southern state that has personal and corporate income taxes that can’t keep up with growing public needs.

Our state cannot be competitive nationally or internationally with this reckless approach. It undermines the education of our workforce and support for research and innovation.  The prospects of an ongoing race to the bottom for North Carolina now are all too real.”

Key components of the negotiated deal:

Personal Income Tax

• Flat 5.75% rate (fully phased-in)
• Eliminates the personal exemption, retirement benefit, business pass-through income deduction, and all credits other than the Child Tax Credit.  Notably, the plan does not restore the state’s Earned Income Tax Credit (EITC) set to expire after 2013.
• Increases the standard deduction to $15,000 (MFJ),$12,000 (HOH), and $7,500 (Single/MFS)
• Limits itemized deductions to mortgage interest plus property taxes capped at $20,000 (MFJ), $16,000 (HOH), and $10,000 (single) plus unlimited charitable contributions.  Taxpayers take the higher of the standard deduction or itemized deductions.
• Retains the child tax credit of $100 and increases it to $125 for taxpayers with AGI under $40,000 (MFJ) or $32,000 (HOH)

Corporate Income Tax (CIT)

• Reduces the rate from 6.9 to 6% in 2014, to 5% in 2015 and if revenue expectations are met, could be lowered to as low as 3% by 2017.

Estate Tax

• The state estate tax is eliminated

Sales/Privilege/Franchise Taxes

• Expands the sales tax base by eliminating a number of exemptions including newspapers, baked goods, some farm exemptions and food sold in dining halls and adds service contracts.
• Adjusts the tax rates on modular and manufactured homes.
• Eliminates the gross receipts franchise taxes on electricity and natural gas and in place includes these items in the sales tax base.
• Eliminates state and local privilege taxes on amusement/entertainment and in place includes these items in the sales tax base.
• Eliminates the state’s sales tax holiday and energy star appliance tax holiday.

Gas Tax

• Caps the gas tax at 37.5 cents/gallon for 2 years.