Author: tarek

We still don’t know what the U.S. House of Representatives is going to do about immigration reform. The Senate passed a bill with a solid majority, and that legislation enjoys support from the Chamber of Commerce and the labor movement, from George W. Bush and Barack Obama.  What we do know, though, is that members of the House leadership had a nice long talk about it this week because they know the pressure is on them to do something. 

Also this week, the Institute on Taxation and Economic Policy (ITEP) released a study with a bland title, Undocumented Immigrants’ State and Local Tax Contributions, that held some interesting numbers. What it shows is that once unauthorized immigrants are legalized and participating fully in the tax system, state tax revenues will go up, just as the CBO showed they would at the federal level. In fact, the report shows that state tax payments from this population are already at $10.6 billion a year, and that will rise by $2 billion under reform. The report (with a clickable map on the landing page!) shows how those tax dollars are distributed state by state.

According to reports, the following Representatives are now the key players on whatever immigration bill comes from the House. So, in hopes of informing the debate, we are sharing the total amount of estimated annual revenue each of their respective states would get in the form of tax payments from legalized immigrants following reform.

Rep. Mario Diaz-Balart, Florida: $747 million a year, up $41 million
Rep. Raul Labrador, Idaho: $32 million a year, up $5.5 million
Rep. John Boehner, Ohio:  $95 million, up $22 million
Reps Michael McCaul, John Carter and Sam Johnson, Texas: $1.7 billion, up $92 million
Rep. Jason Chaffetz, Utah: $133 million, up $31 million
Reps Eric Cantor and Bob Goodlatte, Virginia: $260 million, up $77 million
Rep. Paul Ryan, Wisconsin: $131 million, up $33 million

As the battle over immigration reform shifts to the U.S. House of Representatives, some opponents of reform continue to focus on the alleged costs of reform. Yet, as a recent Congressional Budget Office (CBO) report reminds us, immigration reform involves both costs (in the form of health, education and other services provided to legalized immigrants) and benefits (in the form of federal taxes paid by newly legal immigrants)—and in the long run, the benefits to the US Treasury from immigration reform are likely to exceed the costs. Put another way, immigration reform will make our federal budget situation better, not worse.

A new report from the Institute on Taxation and Economic Policy (ITEP) shows that state and local budgets will also receive a new jolt of needed tax revenues as a result of immigration reform—and that undocumented taxpayers are already paying a substantial amount of state and local taxes across the nation. The report estimates that these families pay $10.6 billion a year in state and local sales, excise, income and property taxes right now, and would pay an additional $2 billion if these families were, as part of immigration reform, allowed to fully participate in state tax systems.

How are undocumented taxpayers contributing such a large amount right now? The main reason is that the sales and excise taxes that fall most heavily (PDF) on low-income taxpayers don’t depend on your citizenship status. Anytime you buy a cup of coffee, a pair of jeans or fill up your tank up with gas, you’re paying state and local sales and excise taxes. Property taxes are similarly unavoidable– especially for renters, who pay them indirectly because landlords generally pass some of their property tax bills on to their tenants in the form of higher rents. And many undocumented taxpayers have state income taxes withheld from their paychecks each year.

The $2 billion in new tax revenues ITEP estimates will be paid by currently-undocumented families as a result of legalization is the product of two factors. Most importantly, legalization will bring all undocumented workers into the income tax system. The best estimates are that about half of undocumented workers are currently “off the books.” But legalization will also likely bring a substantial wage boost for these currently-undocumented workers—further boosting state and local income tax collections as well.

There are, of course, costs associated with immigration reform. Newly-legalized families will (eventually) be able to rely on the same important public services, from education to health care, that U.S. citizens can depend on. This is as it should be. But the scope of these costs will vary substantially depending on how future political battles play out, and are virtually impossible to calculate on a state by state basis at this time – one particular think tank’s lonely insistence that they can notwithstanding. However, the recent CBO report’s finding, that at the federal level these costs would be outweighed by the benefits from new tax revenues, suggest that a similarly positive outcome is likely at the state and local level.  

The undocumented population is notoriously hard to measure —but under any reasonable assumptions about the size and income levels of this population, they are already paying billions of dollars a year to support the state and local services from which they benefit, and will likely pay billions more on legalization.

Front Page Photo via SEIU International Creative Commons Attribution License 2.0

Some lawmakers and advocates like to complain when gasoline tax revenues are used to fund public transit, but new research by Berkeley economist Michael L. Anderson shows that drivers benefit hugely from the existence of transit. Anderson’s paper shows that “average highway delay increases 47 percent when transit service ceases” because would-be transit riders are forced to take to the roads.  He concludes that “the net benefits of transit systems appear to be much larger than previously believed.”

Arizona Governor Jan Brewer got one out of two right with a pair of vetoes she recently handed down.  The Governor had good reason to be skeptical of the state’s research tax credit since the federal version doesn’t have a particularly glowing record of actually encouraging worthwhile research.  But her refusal to allow Arizona’s tax brackets to rise alongside inflation will eventually hit the state’s lower- and middle-income families hardest, as the Institute on Taxation and Economic Policy (ITEP) explains (PDF).

ITEP has written in detail (PDF) on how both the Federal and State Earned Income Tax Credits (EITC) alleviate poverty while helping low-wage workers meet their basic needs – but did you know that two localities (New York City and Montgomery County, Maryland) administer their own EITC to supplement the state and federal credits? This week, Montgomery County held public hearings on Bill 8-13 (PDF), a proposal to increase the County’s existing EITC (known as the Working Family Income Supplement) to 80 percent of the Maryland credit beginning in FY 2014, 90 percent in FY 2015, and 100 percent in FY 2016 and beyond.

For most states, July 1st marked the start of a new fiscal year and thus lawmakers across the country agreed to spending plans for their states in advance of that date.  But, not so in North Carolina, where differences in opinion about how best to overhaul the state’s tax structure have held up the budget and kept observers guessing about the outcome of months of tax cutting talk.  On Monday, Governor Pat McCrory urged House and Senate members to reach a deal as soon as possible or abandon tax reform this year.  The truth is, walking away from the plans passed in the House and Senate would be a win for the state, retaining hundreds of millions of dollars for vital public investments and stopping a massive tax cut for wealthy households and corporations and at the expense of low- and middle-income families.  

While President Barack Obama presented a myriad of new proposals to combat climate change in his new Climate Action Plan (PDF), one of the most striking aspects of the plan is that it does not contain any proposal for a carbon tax, which many experts consider the “missing link” in the president’s new plan. 

The basic idea behind putting a tax on carbon is that it would create a market incentive to develop low or zero carbon emission energy sources and simultaneously create a market disincentive to using carbon emitting energy sources. The market-based approach of the carbon tax explains why so many economists, from Joesph Stigliz on the left to Gregory Mankiw on the right, believe the carbon tax is the most efficient and least intrusive mechanism for dealing with emissions.

Reinforcing the case for the carbon tax just days before the release of Obama’s climate plan, a new exhaustive study by the National Research Council (NRC) found that a carbon tax “will be both necessary” and a “more efficient” way to substantially reduce greenhouse gas emissions, especially compared to current energy tax policies. This conclusion is based on the NRC’s economic analysis of how each provision of the tax code affects carbon emissions, which found that overall the $48 billion in energy-sector tax expenditures by the federal government between 2011 and 2012 do not necessarily decrease emissions at all. Compounding this, the report found that even the most effective tax expenditures in terms of reducing carbon emissions, resulted in “very little if any” reductions and came at a “substantial cost.”

In contrast with tax expenditures which lose revenue, a carbon tax has the major advantage of generating revenue. For example, a recent Congressional Budget Office (CBO) report notes that a carbon tax that starts off at $20 per ton and then rises by 5.6 percent annually could raise as much as $1.2 trillion over ten years, while at the same time reducing carbon emissions by 8 percent over the same ten years. Such revenue could be extremely beneficial if it was used to reduce the deficit, fund critical public investments, and/or to provide financial relief to middle- and low-income families. This revenue should not however be plowed into tax breaks for corporations and the wealthy, while leaving everyone else worse off, as some groups are proposing.

Though a carbon tax may be politically difficult on the federal level in the short-term, the tax is getting some attention at the state level. For example, the state of California already adopted a carbon tax of sorts in 2013, with the implementation of it’s cap-and-trade program, which raised $256 million in revenue so far this year. In addition, environmentalists are pushing for a ballot measure in Massachusetts that would create a small statewide carbon tax.

Although they do not like to admit it, even opponents of the carbon tax acknowledge that it may become politically viable as climate and budgetary pressures continue to mount and policymakers are faced with an increasingly unpopular set of alternatives. 

Legislative sessions are ending, new fiscal years are beginning and Governors in both Ohio and Wisconsin signed budgets into law this weekend.

Despite a series of Institute on Taxation and Economic Policy (ITEP) analyses published by Policy Matters Ohio (PMO) which showed that the wealthiest Ohioans would receive an outsized tax cut of ($6,000 on average) from a plan proposed by House and Senate Republicans, Ohio Governor John Kasich signed into law the tax cut legislation on Sunday. The new law include an across-the-board, 10 percent income-tax rate cut (which reduces taxes for high earners more than low), a deduction for pass-through business income (a giveaway to the wealthy), an increase in the state sales tax from 5.5 to 5.75 percent (a larger burden on low income families) and the introduction of a 5 percent, nonrefundable Earned Income Tax Credit. But that modest credit for working families was not enough to redeem the overall distribution of the bill: ITEP found that the only income group to see a tax increase from the legislation would be the bottom twenty percent. Governor Kasich may be “proud of the tax cuts” but he’s wrong to call them “another installment in Ohio’s comeback.”

Wisconsin Governor Scott Walker also signed into law a budget Sunday that included income tax cuts totalling more than $650 million. The tax plan reduced income tax rates from 4.6 percent, 6.15 percent, 6.5 percent, 6.75 percent, and 7.75 percent to 4.4 percent, 5.84 percent, 6.27 percent, and 7.65 percent. The legislation also reduced the number of tax brackets from five to four. ITEP analyzed both the Governor’s initial proposal and another from Representative Dale Kooyenga. We found both plans were regressive and benefited wealthy Wisconsinites more than low and middle-income families. According to the Legislative Fiscal Bureau (PDF), the permanent tax cuts signed by Governor Walker will cost the state $632.5 million over two years and the distribution is, like Ohio’s new law, skewed to benefit the wealthiest Wisconsinites. Even worse? The budget Governor Walker just signed also  created a structural deficit of $505 million in the next biennium.

The Philadelphia Inquirer reports on a poll showing that most Pennsylvanians care more about the quality of their schools than about keeping their tax bills low: “The poll found that in order to restore $1 billion in state aid [that was] cut two years ago, more than half the respondents – 55 percent – would be willing to support increasing the state sales tax from 6 percent to 6.25 percent and postponing corporate tax breaks as long as the money went into a dedicated trust for schools… Fifty-four percent said they would favor boosting the state income tax rate from 3.07 percent to 3.30 percent to help the schools.”

In other Pennsylvania news, a proposal by state Senate Majority Leader Dominic Pileggi to uncap that state’s film tax credit failed to garner support during this legislative session. Yesterday, Governor Tom Corbett signed the 2013-14 Executive Budget, maintaining the credit’s $60 million annual cap. Lawmakers must have read our discussion of why film tax credits are a poor economic development tool – hopefully next year the proposal will be to eliminate them entirely.

The Michigan League for Public Policy (MLPP) uses new data to make the case for reversing the 70 percent cut in the state’s Earned Income Tax Credit (EITC) that lawmakers enacted in 2011 to pay for a big cut in businesses’ tax bills.  As the MLPP points out, “One in every four children (25%) in Michigan lived in poverty in 2011, up from one in five (19%) in 2005. Only nine states had bigger jumps in the child poverty rates … The state and federal credits literally lift children in low-income families out of poverty. Studies show a strong correlation between income boosts and good outcomes for kids.”

Goodbye and Congratulations! The Institute on Taxation and Economic Policy (ITEP) often works with the Iowa Policy Project (IPP) on tax and budget issues in the Hawkeye State. The organization’s founding director David Osterberg  announced that he will be stepping away from his director duties to focus on environment and energy policy. Taking over as director will be Mike Owen, IPP’s current assistant director. We wish David all the best and congratulate Mike in his new role.

Our friends at ITEP are busy crunching the numbers for yet another version of tax “reform” in North Carolina. The Senate is expected to approve a revamped bill this week which is more in line with the concepts the House and Governor support.  But, with a more than $1 billion annual price tag and most of the benefits going to wealthy North Carolinians and profitable corporations, the effort still falls far short of being real reform.  Be sure to check out www.ncjustice.org this week for the latest information about the ongoing debate and to see ITEP’s numbers in action.

Senators Max Baucus and Orrin Hatch, the Democratic chairman and the ranking Republican of the Senate Finance Committee, have invited all members of the Senate to begin the debate over tax reform without any basic agreement on how much revenue is needed.

Under their “blank slate” approach, they ask their Senate colleagues to start with the assumption that the tax code has no “tax expenditures” (exceptions to the overall rules in the form of tax breaks for specific activities or situations). They ask Senators to tell them which tax expenditures they think are warranted and should be preserved in a newly overhauled tax system.

But the entire point of this exercise, and the entire point of reducing or eliminating tax expenditures, is still not settled. In their letter to colleagues, Baucus and Hatch explain:

While Members of the Senate have different views on whether the revenue raised from eliminating tax expenditures or other reforms should be used to lower tax rates, reduce the deficit, or some combination of the two, we believe that everyone should understand the trade-offs involved when adding tax expenditures back to the tax code.

We will have more to say about how lawmakers should determine which tax expenditures to repeal, preserve or reform. But for now it’s worth noting that the Senate’s top tax-writers believe that lawmakers can and should engage in a detailed discussion of tax provisions before they come to any agreement on something as basic as how much revenue is needed to fund public services and public investments. It’s almost as if they forgot that the whole point of the tax system is to raise revenue.

As we have explained before, our current tax laws will collect revenue equal to 19.1 percent of the economy a decade from now. We know this is unsustainable because even during the Reagan years, government spending equaled between 21.3 percent to 23.5 percent of the economy.

Congressional Democrats seem to be vaguely aware of this but have been far too timid in their tax proposals. Most recently, the budget resolution approved by the Democratic majority in the Senate (with no Republican votes) would raise revenue equal to just 19.8 percent of the economy in a decade, and offers no specifics whatsoever on how to do that.

Meanwhile, the budget resolution approved by the Republican majority in the House of Representatives would raise the same revenue level as current law (19.1 percent of the economy), but would overhaul the tax rules so that the very rich pay a smaller share of the total.

Chairman Baucus has attempted for a long time to move the tax reform conversation forward despite this utter lack of consensus on the basic question of revenue. As we have argued before, “This would be like holding bipartisan talks on immigration reform – if one party supported a path to citizenship while the other party pledged to round up all undocumented immigrants and deport them without exceptions.”

To their credit, Baucus and Hatch, in their letter to colleagues, do mention “maintaining the current level of progressivity.” But we have already shown that America’s tax system overall is just barely progressive as it stands. Putting a great deal of time and energy into an overhaul of the tax code that does not make our tax system more progressive or raise more revenue than the current rules would be a waste of time and certainly would not be “reform.”

The Supreme Court’s decisions striking down the law banning federal recognition of gay marriages, as well as the Court’s decision to not rule on the California ban on gay marriage that the state government has decided not to enforce, make our nation’s tax system fairer and are expected to reduce the federal deficit.

Up until the Supreme Court’s ruling, the Defense of Marriage Act (DOMA) prevented the recognition of same-sex marriage for the purposes of more than 1,100 different federal laws, including many tax provisions that consider marriage status when determining an individual’s rights and responsibilities. For example, the original petitioner in the Supreme Court case challenging DOMA, United States v. Windsor, Edith Windsor was forced to pay an additional $363,053 more in federal estate taxes because her same-sex marriage was not recognized for the “surviving spouse” estate tax exemption. Because of the Supreme Court ruling in her favor, however, the IRS will have to pay Windsor back the $363,053 taxes she paid originally, plus interest.

Windsor’s windfall notwithstanding, the overall effect of recognizing gay marriage is likely to reduce the federal deficit. A 2004 report from the Congressional Budget Office (CBO) concluded that if the federal government recognized gay marriages performed in all the states, revenues would increase by around $400 million a year and outlays would decrease by $100 million to $200 million a year. These are relatively small numbers in the context of the federal budget, and the effect of this week’s rulings will be smaller because the Court ruled that the federal government must recognize gay marriages only in the minority of jurisdictions that have legalized it. (Currently, only 31 percent of the US population lives in a state that allows the freedom to marry or honors out-of-state marriages between same-sex couples.)

Nonetheless, CBO’s findings provide an answer to critics like the chairman of the Alabama Republican Party, who complained on Wednesday that Alabama taxpayers would “be on the hook” for funding federal benefits for same-sex spouses.

The reason for the revenue increase is that same-sex spouses will now generally file jointly, whereas previously they were barred from doing so. While the effect of this will increase revenues overall, some same-sex spouses would actually see their tax rates go down, depending on how much each spouse makes.

On the state level, studies have similarly found that allowing same-sex marriage would increase revenue slightly. One think tank found, for instance, that allowing same-sex couples to marry will generate $7.9 million benefits to state coffers in Maine and $1.2 million in Rhode Island.

In the debate over offshore tax avoidance by multinational corporations, one proposal that should not be controversial is country-by-country reporting. The U.S. government does collect information on what profits corporations claim to earn and what taxes they pay in each country, but this information is not available to lawmakers or the public. Some developing countries that suffer the most from outflows of capital into offshore tax havens do not seem to have country-by-country reporting even for the purposes of tax administration.

And so, the declaration issued by the G-8 governments in Northern Ireland last week included a plea that “Countries should change rules that let companies shift their profits across borders to avoid taxes, and multinationals should report to tax authorities what tax they pay where.”

Note that this does not even call for such information to be made public but only available to tax authorities. Given that tax authorities in the U.S. already have this information and corporations like Apple are still able to artificially shift their profits into tax havens, this seems like an awfully small step towards reform. Perhaps if this information was collected and actually made public, then ordinary citizens would find out how many other corporations engage in the same type of offshore tax avoidance and demand reform.

But even a small step in this direction seems to be too much for officials at the U.S. Treasury Department to contemplate, as they rushed this week to assure multinational corporations that their interests would take priority over stopping tax avoidance.

An article appearing Wednesday in Tax Notes Today (subscription required) tells us, “With both the G-8 and the OECD’s base erosion and profit shifting (BEPS) project examining expanded country-by-country reporting by multinationals, Treasury officials say the tax information should not be made available to the public.”

The article quotes Brian Jenn, an attorney-adviser with the Treasury Office of International Tax Counsel, saying “For us it is important that that information be restricted to tax administrations and not be publicly available.”

“Jenn said,” the article informs us, “that in addition to addressing concerns about uncoordinated legislative actions, the BEPS project is meant to ward off aggressive positions by tax administrations that could be ‘disruptive to multinationals.’”

This is an alarming statement because anything that stops offshore corporate tax avoidance would be considered “disruptive” to the companies involved in it. It’s a sure bet that Apple’s CEO Tim Cook would find it “disruptive” if the company had to pay taxes on the profits that it claims are generated by a zero-employee subsidiary that allegedly has no country of residence for tax purposes. This seems to confirm the suspicion that the OECD’s latest talk of working to stop corporate tax avoidance is really an effort to throw a few symbolic bones to the principles of tax fairness in order to prevent any real reform from developing.

Arlene Fitzpatrick, attorney-adviser in the Treasury Office of International Tax Counsel, also commented on the OECD’s BEPS project, saying “We don’t want to have a situation where unilateral action is taken and you wind up with a situation where we have double tax rather than double nontax [profits not taxed in any country].” This statement defies belief, as the problem of double-non-taxation (that is, corporate profits being taxed in no country at all) is the defining feature of the current international corporate system and should be the number one focus of international efforts.

Jenn stressed that any solutions would be tailored as narrowly as possible and that solutions could be found in changing the OECD’s “transfer pricing” guidelines, which some countries have adopted for their rules.

But these “transfer pricing” rules are hopeless. They are an attempt to get different parts of a corporation spanning different countries to treat each other as unrelated parties engaging in transactions when they exchange, say, a patent or charge royalties for the use of a patent.

Tax authorities are supposed to apply an “arm’s length” standard, meaning the subsidiaries of a corporate group (the different parts of a multinational corporation) must charge market prices when they engage in these transfers with each other, otherwise (for example) a subsidiary in the U.S. will tell the IRS that it has no profits because it had to pay enormous royalties to its subsidiary in Bermuda (which is probably just a post office box). But what’s the market price for a patent for a brand new invention? Neither the tax authorities nor anyone else has any idea.

As we’ve argued before, the international tax system needs a more fundamental overhaul. But, sadly, the Obama Treasury Department resists fundamental change and resists even telling the public what corporations are claiming to earn and the taxes they pay in other countries so that we can determine how much profit-shifting is taking place.

The federal government has gone almost two decades without raising its gas tax, but that doesn’t mean the states have to stand idly by and watch their own transportation revenues dwindle.  On Monday July 1, eight states will increase their gasoline tax rates and another eight will raise their diesel taxes.  According to a comprehensive analysis by the Institute on Taxation and Economic Policy (ITEP), ten states will see either their gasoline or diesel tax rise next week.

These increases are split between states that recently voted for a gas tax hike, and states that reformed their gas taxes years or decades ago so that they gradually rise over time—just as the cost of building and maintaining infrastructure inevitably does.

Of the eight states raising their gasoline tax rates on July 1, Wyoming and Maryland passed legislation this year implementing those increases while Connecticut’s increase is due to legislation passed in 2005.  California, Kentucky, Georgia (PDF) and North Carolina, by contrast, are seeing their rates rise to keep pace with growth in gas prices—much like a typical sales tax (PDF).  Nebraska is a more unusual case since its tax rate is rising both due to an increase in gas prices and because the rate is automatically adjusted to cover the amount of transportation spending authorized by the legislature.

On the diesel tax front, Wyoming, Maryland, Virginia (PDF) and Vermont passed legislation this year to raise their diesel taxes while Connecticut, Kentucky and North Carolina are seeing their taxes rise to reflect recent diesel price growth.  Nebraska, again, is the unique state in this group.

There are, however, a few states where fuel tax rates will actually fall next week, with Virginia’s (PDF) ill-advised gasoline tax cut being the most notable example. Vermont (PDF) will see its gasoline tax fall by a fraction of a penny on Monday due to a drop in gas prices, though this follows an almost six cent hike that went into effect in May as a result of new legislation. Georgia (PDF) and California will also see their diesel tax rates fall by a penny or less due to a diesel price drop in Georgia and a reduction in the average state and local sales tax rate in California.

With new reforms enacted in Maryland and Virginia this year, there are now 16 states where gas taxes are designed to rise alongside either increases in the price of gas or the general inflation rate (two more than the 14 states ITEP found in 2011).  Depending on what happens during the ongoing gas tax debates in Massachusetts, Pennsylvania, and the District of Columbia, that number could rise as high as 19 in the very near future.

It seems that more states are finally recognizing that stagnant, fixed-rate gas taxes can’t possibly fund our infrastructure in the long-term and should be abandoned in favor of smarter gas taxes that can keep pace with the cost of transportation.

See ITEP’s infographic of July 1stgasoline tax increases.
See ITEP’s infographic of July 1stdiesel tax increases.