Author: tarek

With help from ITEP’s number crunchers, the North Carolina Budget and Tax Center is busy setting the record straight about who wins and who loses under a myriad of tax reform proposals moving quickly through North Carolina’s legislature (and causing no small amount of drama!).  On the heels of the House approving its version of tax reform earlier this week, the Senate is expected to pass its plan (check out this great infographic about it! and read full analysis here) early next week (June 17-21).  It met approval on the Senate floor today, but bills require three votes to officially pass. 

What do the House-approved and soon to be Senate-approved plans have in common?  Both are unaffordable tax cuts that will results in massive spending reductions and give significant windfalls to the Tarheel State’s wealthiest residents and to profitable, out-of-state, multinational corporations.  Sound like a good idea? No, we don’t think so either.

During the 2013 legislative session, our state policy team has been observing the tenor of the Kansas tax cut debate with some concern. Too many media accounts have focused primarily on the sales tax and whether the temporary hike to 6.3 percent would be extended. (Ultimately the legislature decided to increase the sales tax rate to 6.15 percent.)

But attention is beginning to turn, albeit too late, to some incredibly important provisions of the legislation that was just signed into law by Governor Brownback. As highlighted in this Kansas City Star editorial and this Associated Press analysis, the tax debate was about a lot more than the sales tax.

The Kansas City Star explains the consequences in a sobering editorial: “The two-year spending plan, which Gov. Sam Brownback is expected to approve, places income tax cuts ahead of schools, universities and public safety. Giving tax breaks to wealthy Kansans matters more to state leaders than investing in the state and its citizens.”

The Associated Press reports: “Important but relatively little-noticed provisions in the tax plan approved by Kansas legislators this year embody conservative Republicans’ vision for long-term constraints on government spending.” Indeed, the bill that passed the legislature includes arbitrary spending controls and could mandate the eventual repeal of the state’s personal income tax.

Of course all of this is what ITEP argued in a paper (one of many) last April: “Lawmakers and the public should be aware of the devastating impact either the House or the Senate bill would have, regardless of the compromise reached about the current sales tax rate, on the state’s ability to balance its budget and on tax fairness.”

For some combination of political and ideological reasons, lawmakers in Kansas, for two years running, have been falling all over themselves to pass tax cuts of disastrous proportions, despite red flags from experts, editorial boards and their colleagues in other states.  When good policy is not even on the priority list, it seems no amount of evidence can stop elected officials from pursuing their short-term political agendas.

On Thursday morning, a hearing was held on “Tax Havens, Base Erosion and Profit-Shifting,” by the House Ways and Means Committee, whose chairman, Dave Camp (R-MI), has proposed several types of “territorial” tax systems that CTJ has long argued would make these problems worse.

One of the witnesses, Paul Oosterhuis of Skadden Arps, explained that adoption of one of Camp’s proposals would move the U.S. towards taxing only those profits that come from sales generated in the U.S., which is essentially what Apple accomplished through the complicated tax planning revealed by the Senate Permanent Subcommittee on Investigations (PSI) last month. Oosterhuis argued that this would be a good result. He said that the taxes it avoided were really taxes on profits from foreign sales, and therefore of no importance to the U.S.

While Chairman Camp seemed to be in full agreement with Oosterhuis, some of the other committee members and another of the witnesses, Ed Kleinbard, pointed out the problems with his approach. Apple’s profits are generated by its research and development, and 95 percent of that activity takes place in the U.S. (Apple outsources the actual manufacture of its products to other companies.) Rep. Danny Davis of Illinois pointed out that this research and development, which seems to be the source of Apple’s profits, would not be possible without the public investments funded by U.S. taxpayers, like our patent protection and other legal protections, our educated workforce and infrastructure.

Kleinbard also pointed out that the U.S. must prevent our corporations from avoiding foreign taxes as well as U.S. taxes. Partly this is because much of the profits that are characterized as “foreign” are really U.S. profits that our corporations have dressed up as “foreign” using the type of practices Apple engages in. Another reason is that lax rules facilitating avoidance of foreign taxes makes foreign investment more attractive than investment here in the U.S.

The PSI hearing on Apple revealed the tricks used by the company to make its profits appear to be generated abroad so that it can take advantage of the rule allowing U.S. corporations to “defer” paying U.S. taxes on their offshore profits. As CTJ has explained before, a territorial system would expand deferral into an exemption for offshore profits, which would increase the incentives to engage in these practices.

While Citizens for Tax Justice has been taking a deep dive into offshore-tax sheltering and why the corporate tax is indispensable, some friends and allies have put out a series of reports over the past week on the economic impact (or not) of corporate taxes, the enduring dominance of corporate lobbyists and the need to revisit our fiscal policy debate in light of new evidence. Below we highlight the most crucial findings of these must-read reports.

Economic Policy Institute: Corporate Tax Rates and Economic Growth Since 1947

The Economic Policy Institute’s (EPI) most recent report on corporate taxes by Thomas Hungerford (author of that high profile Congressional Research Service report showing income tax cuts create more inequality than jobs) debunks the pervasive myth that the US’s corporate tax rate is harmful to the economy. For one, Hungerford notes that although the US has a high on-paper marginal rate compared to other countries, its effective corporate tax rate is just about average compared to other rich, developed countries. In addition, Hungerford notes that despite all the claims about corporate taxes preventing growth, corporate profits in the US are actually at an historic high.

Backing up these points (for our stats-minded readers), Hungerford performed a multivariate analysis comparing GDP growth and corporate tax rates and found that corporate tax rates (including the effective and statutory rate) have no correlation with economic growth. This conclusion even held true when controlling for other economic factors and for a lag effect on growth. In other words, the idea that cutting corporate taxes will increase growth in the US has no basis in the historic evidence.

Public Citizen: Lax Taxes

In it’s report Lax Taxes, Public Citizen makes case studies of the lobbying around three pieces of progressive tax legislation to demonstrate the disproportionate firepower of corporate lobbyists versus public interest groups. Appallingly (though not surprisingly), Public Citizen found that 86 percent of the lobbyists who reported lobbying on the Stop Tax Haven Abuse Act (STHA), the CUT Loopholes Act, and the Wall Street Trading and Speculators Tax Act represented corporate clients. Looking at the STHA specifically, the group found that for every one pro-tax reform lobbyist there were 20 lobbyists representing industry interests.

Perhaps even more disturbing, Public Citizen found that of those lobbyists with previous government experience working on these bills, 96 percent of them represented corporate clients rather than ordinary Americans. This dynamic not only means that industry advocates have deeper connections to Congress, but also that current lawmakers and Congressional staffers have an incentive to appease corporate interests if they themselves want to get a job a lobbying gig after they leave Capitol Hill.

Further, Public Citizen also notes that groups opposing these pieces of legislation donated about four times as much in campaign contributions to lawmakers that those supporting them, which may explain why these common sense reforms have failed to move despite overwhelming public support for closing corporate tax loopholes.

Center for American Progress: It’s Time to Hit the Reset Button on the Fiscal Debate

The prevailing ethos in Washington over the past few years is that budget deficits are out of control and that austerity measures must be taken in order to prevent economic catastrophe. A new report from the Center for American Progress (CAP) shows that this conventional wisdom is all wrong given recent policy actions and mounting evidence.

Most importantly, CAP points out in their report that Congress and the President have already enacted $2.5 trillion worth of deficit reduction (three-quarters of which took the form of spending cuts) since the start of fiscal year 2011. While many lawmakers and pundits are still warning that without additional and immediate deficit reduction the debt will spin out of control, the reality is that the current level of deficit reduction is already enough to stabilize the debt as a percentage of GDP through 2023.

CAP also notes that a research paper often cited by debt alarmists to argue for immediate deficit reduction has been pretty thoroughly debunked. Specifically, the claim by Carmen Reinhart and Kenneth Rogoff that a debt level over 90 percent of GDP jeopardizes economic growth is based on a calculation error (oops!) and does not take into account that causation can work both ways. 

One final important point in CAP’s report is growing evidence from Europe that austerity has actually made the economic situation there worse rather than better. Why? Budget cuts create a downward spiral by increasing unemployment and reducing consumption, which then results in even lower revenues and higher deficits. Some proponents of austerity have tried to counter this evidence by arguing that it’s austerity in the form of tax increases that is driving lower growth, but this logic has also been debunked.

Some observers have asked why we need a corporate income tax in addition to a personal income tax. The argument often made is that corporate profits eventually make their way into the hands of individuals (in the form of stock dividends and capital gains on sales of stock) where they are subject to the personal income tax, so there is no reason to also subject these profits to the corporate income tax. Some even suggest that the $4.8 trillion  that the corporate income tax is projected to raise over the next decade could be replaced by simply raising personal income tax rates or enacting some other tax. This is a deceptively simple argument that ignores the massive windfalls that wealthy individuals would receive if there was no corporate income tax.

A new fact sheet from Citizens for Tax Justice explains three of the biggest problems with repealing the corporate income tax:

First, a business that is structured as a corporation can hold onto its profits for years before paying them out to its shareholders, who only then (if ever) will pay personal income tax on the income. With no corporate income tax, high-income people could create shell corporations to indefinitely defer paying individual income taxes on much of their income.

Second, even when corporate profits are paid out (as stock dividends), only a fraction are paid to individuals rather than to tax-exempt entities not subject to the personal income tax.

Third, the corporate income tax is ultimately borne by shareholders and therefore is a very progressive tax, which means any attempt to replace it with another tax would likely result in a less progressive tax system.

Read the fact sheet.

Congress hasn’t even granted states the power to collect sales taxes owed on online shopping, but already Tennessee lawmakers are discussing how they might squander the money.  On the heels of inheritance tax, gift tax, sales tax, and interest and dividend tax cuts, Governor Haslam says he’s open to the idea of cutting taxes even further if the state sees a bump in revenue from passage of the Marketplace Fairness Act.  So far the Governor has said he wants to proceed cautiously, but Tennessee lawmakers have guzzled their share of  tax cut snake oil lately.

Uh oh! Watch out for income tax cuts in Iowa in 2014. Already Governor Terry Branstad is looking to next year and potentially reducing income taxes. He recently said, “I think it’s very likely we’ll be looking at reducing the income tax further. When I became governor, the income tax rate in Iowa was 13 percent. We now have it down to 8.98 percent, plus we have full federal deductibility…Remember, the top federal tax is 38.5 percent, so the effective rate in Iowa is only about 5.5 percent. We’d like to see that go lower.”

In refreshing news, late last week Missouri Governor Jay Nixon vetoed a radical tax package passed by the legislature that included: a reduction in the corporate income tax rate, a 50 percent exclusion for pass-through business income, an additional $1,000 personal and spouse income exemption for individuals earning less than $20,000 in Missouri adjusted gross income, and a reduction in the top income tax rate from 6 to 5.5 percent. The Governor called the legislation an “ill-conceived, fiscally irresponsible experiment that would inject far-reaching uncertainty into our economy, undermine our state’s fiscal health and jeopardize basic funding for education and vital public services.” Stay tuned. The legislature is expected to come back in September for a veto session during which it’s likely legislators will try to override the Governor’s veto.  

Last week, the Nevada Legislature passed AB 1 (PDF), a bill that changes how the state will handle tax abatements for new or expanding businesses. Under current law, the state grants partial abatement of property taxes, business taxes, and sales and use taxes to a business that locates or expands in the State and has 75 employees, or invests $1 million in capital into the state (businesses in smaller counties can qualify with 15 employees or a $250,000 investment). The new bill would lower the employee requirements to 50 in larger counties and 10 in smaller counties. The Institute on Taxation and Economic Policy (ITEP) reminds us that these kinds of tax incentives are costly and their real impact hard to measure, to say the least.

The Connecticut House of Representatives passed a bill, HB 6566 (PDF), which would require public disclosure of specific details about state economic assistance and tax credits for businesses. The bill would call for the creation of an online database that lists information such as the name and location of the recipient, the number of jobs created or retained, and the amount and detailed nature of the tax subsidy. This bill came only a few weeks after a report was released by Good Jobs First that documented how costly economic development subsidy programs often lack any kind of public transparency. “Despite its widespread practice, this use of taxpayer funds remains controversial,” the report said, “but the absence of good information makes it impossible for citizens to weigh the costs and benefits to their communities.” The bill now heads to the State Senate for consideration.

Washington State lawmakers are continuing to debate raising the state’s gasoline tax by 10 cents per gallon, as they have for much of this year, but with perhaps a renewed sense of urgency following the collapse of the Skagit River Bridge. But while a 10 cent increase would provide a needed boost in transportation revenues today, such an increase would do little to reform the state’s broken gas tax structure for the long-term.

Washington is like a majority of states in levying its gas tax as a flat number of cents per gallon—37.5 cents, to be specific.  But flat-rate gas taxes inevitably fall short when construction costs rise and gas tax rates don’t.  Because of this, states like Maryland and Virginia both redesigned their gas taxes this year to rise alongside gas prices, and Massachusetts and the District of Columbia are contemplating similar reforms.  Washington State would be wise to follow their lead.

According to a new analysis (see chart below) by the Institute on Taxation and Economic Policy (ITEP), Washington State’s gas tax rate (adjusted for inflation) would remain low relative to prior years even if it were increased by 10 cents per gallon.  More importantly, by retaining the state’s simplistic flat-rate gas tax structure, such a reform would leave the state unprepared to deal with increases in the cost of infrastructure construction in the future. 

By 2023, we project that the state’s inflation-adjusted gas tax rate will slip back down to the same, inadequate level it is today.  This unsatisfactory outcome could be avoided by tying the tax rate to rise with either inflation or gas prices after the 10 cent increase is implemented.

Thirty-five years ago today, California voters passed an initiative that would change the fiscal trajectory of their great state for decades: Proposition 13.

Championed by two citizen-activists with a politically popular message, but ill-conceived vision for California’s fiscal future, Proposition 13 cut and capped the state’s property tax at one percent and allowed for assessed property values to rise by no more than 2 percent per year. Stripping localities of their primary ability to raise revenues, the initiative changed how public services like K-12 education, police and fire protection, road and bridge upkeep, and water and sewers would be paid for.

Many proponents of Proposition 13 were individual homeowners who saw housing prices grow rapidly throughout the 1970s. Because California property taxes were assessed at market value, rapidly growing housing prices were causing property tax liabilities to grow in matching fashion. As Bruce Bartlett recently wrote in the New York Times, “Many Californians were literally being taxed out of their homes.” (Proposition 13 was a poorly targeted response to this problem because research has shown time and again that sensible options exist that wouldn’t involve capping property taxes). Additional supporters included those who believed the initiative would shrink the size of government – a mentality that went on to cause what commonly referred to as the “national tax revolt.”

Thirty-five years later, Proposition 13 is still in full effect. How has the 1978 ballot initiative fared? Well, after years of fiscal crises, several of the country’s largest municipal bankruptcies, deteriorated spending on public education (PDF) at both the state and local level, and increased reliance on the very regressive sales tax, Proposition 13 didn’t have exactly the impact its advocates had hoped for.

Proposition 13’s shortfalls are becoming increasingly clear, particularly in how it has shifted revenue collection (and spending power) from local governments to the state. Take K-12 education, for example. According to the California Budget Project (CBP)  (PDF), “Passage of Proposition 13 in 1978 fundamentally changed how schools receive their dollars,” by significantly shifting their revenue source from the local level to the state level. Alone, this shift shouldn’t have affected schools negatively, but state lawmakers engaged in poor fiscal stewardship throughout the 1990s and 2000s (primarily in the form of tax cuts, spending cuts, and a weak rainy day fund) and generally failed to fund schools as well as local governments previously did. CBP writes, “State cuts to education combined with California schools’ substantial reliance on state dollars explains the widening gap between the resources available to California schools and those of the rest of the US.”

William Fulton and Paul Shigley, experts on Proposition 13 and editors of the California Planning & Development Report, who summarize this dilemma by saying:

“In the old days, property taxes were high, but at least you could have a debate at your local city hall about how much they would be increased and what the money would be used for. No more.”

In addition to this shift in responsibility, Proposition 13 has shifted the property tax burden away from commercial property owners and onto residential homeowners. This shift has taken place due to a loophole which allows companies to avoid reassessments when properties change hands, allowing them to pay taxes on assessed land values from years (and in some cases decades) ago. This practice is termed the “Dell Tax Maneuver,” after Michael Dell, who has avoided paying more than one million dollars a year in property taxes on a piece of commercial property he bought in 2006, but which is still taxed at its 1999 assessed value.

In May, Assemblyman Tom Ammiano (D-San Francisco) introduced AB 188, a bill that would keep residential homeowners under Proposition 13’s umbrella, but would force business owners to pay property tax based on a more realistic assessment of their property’s value. While the bill stalled in committee and most likely won’t be heard again until next year, it is a step in the right direction – and the public seems to agree.

According to a new survey (PDF) conducted by the non-partisan Public Policy Institute of California, a majority of voters – regardless of political affiliation – support splitting the property tax roll.

This movement is significant. It signals that after thirty-five years of wreaking fiscal havoc on the state, both the political climate and public opinion are such that change to Proposition 13 is possible.

The tax reform debate is heating up in North Carolina. Three competing plans have emerged from the House and Senate, and Governor McCrory has publicly endorsed what he considers to be the more “moderate” of the plans.  While there are certainly differences between the three plans, they all share in common the goal of moving away from reliance on the progressive personal income tax onto expanded, regressive consumption taxes.  This tax swap approach to tax reform has the inevitable and destructive impact of shifting tax responsibility away from the wealthiest households and onto low- and middle-income families.  ITEP analyses of the three plans has found that, on average, the bottom 80 percent of taxpayers will pay more as a share of income in taxes under all three approaches while the richest 5 percent will pay significantly less.  All three plans would also move the personal income tax away from a graduated rate structure to a flat rate, further eroding the progressivity of the state’s best tool for tax fairness.

Alexandra Sirota, the Director of the NC Budget and Tax Center, described the three plans this way when asked by the Raleigh News and Observer’s editors: “They all take different roads, but they get to the same place. We still have proposals that are more a tax shift than tax reform.”

Things are moving fast. This week, the House Finance Committee approved an amendment to the House tax plan (PDF) that would have added $500 million to the proposal’s cost as it provides a larger tax cut for wealthy households.  However, other House members refused to take up the proposal with the costly amendment and reached agreement to return to the original plan. On Thursday, the proposal was amended yet again (reinstating the cap on the mortgage interest deduction but now allowing taxpayers to claim unlimited amounts of charitable contributions) and sent to the House floor where it could be approved as early as tomorrow, setting up a showdown with the two Senate approaches.

The North Carolina Senate budget plan approved two weeks ago included significant revenue reductions (and corresponding spending cuts) to make room for tax reform which they agreed to take up through a separate process.  Senate President Phil Berger and Finance Chair Bob Rucho are championing the most extreme Senate plan, which would flatten the state’s income tax to 4.5 percent and make up part of the revenue loss with a comprehensive expansion of the sales tax, including adding food to the state sales tax base and taxing prescriptions drugs for the first time.  The other plan from the Senate is a so-called bipartisan effort to enact “revenue–neutral” tax reform, but as with the other two plans, the biggest winners under the bipartisan plan are profitable corporations and wealthy households. 

North Carolina is a state worth watching on the tax reform front.  Advocacy groups on the left and right (including Americans for Prosperity and Americans for Tax Reform) and special interest groups, like the real estate lobby, have spent hundreds of thousands of dollars to either promote, prevent or amend the three proposals.  And, for five straight weeks, a growing and diverse crowd of demonstrators have gathered at the General Assembly on “Moral Mondays” with calls to stop these tax giveaways to the rich as a major part of their message to lawmakers.

More from the News and Observer editorial:: “Republicans talk about making the tax code fairer – the Republican Senate bill is called the N.C. Fair Tax Act – but they can’t let go of the idea that if the rich were just taxed less everyone would prosper. That hasn’t worked and it won’t work. What’s needed isn’t an unburdening of the rich and the well-off. What’s needed is a cleaned-up tax code that distributes the tax burden fairly and progressively without special exemptions and loopholes. That’s simple, fair and right. What’s soon to come out of the tax mash up at the General Assembly is unlikely to be any of the three.”

Last week we wrote about Governor Cuomo’s ill-conceived Tax-Free NY initiative.  We reserve judgment as to whether it’s politically motivated ( a New York Post column called him “Gov $uck-up”, for instance, and this column also questions the motivation) but we can be pretty sure it will cost more than it will benefit the people of New York, because this is what business tax credits do.

Still, since that post, the Governor has continued his promotional tour of New York campuses, so we spent some time digging into how actual businesses would fare under his plan. As it turns out, the Governor’s focus on rewarding new investment could end up arbitrarily discriminating against existing small businesses (and their employees) who are already doing the same things Cuomo’s plan will reward others to start doing.

Capraro Technologies, Inc. (CTI), for example, has been based in Utica (home to SUNY Institute of Technology) for almost two decades. The company shares the SUNY-IT mission of advancing the field of information technology through research and innovation, and appears to be a model of the kind of business the Governor hopes to attract. But CTI would be ineligible for any benefits under Tax-Free NY, and the company could find itself at a disadvantage relative to other firms who do qualify for the tax-free treatment.

To gain eligibility, CTI would need to “expand its New York operations while maintaining its existing jobs.” But such an expansion would need to take place within one mile from the SUNY-IT campus. Unless CTI were able to obtain a special waiver, this would mean having to open a new office about two miles down the road from its current location; hardly an example of economic efficiency.

CTI is only one of many existing companies throughout the state that could be placed at a disadvantage relative to new competitors. BlueRock Energy, a Syracuse-based company that helps customers lower their energy costs and environmental footprint and would be ineligible for Tax-Free NY benefits if it expanded at its current lots, is another case-in-point. Located about 2.5 miles away from the SUNY College of Environmental Science and Forestry, BlueRock Energy shares a common mission with SUNY-ESF.

And the list goes on. From mobile app creator miSoft Studios near SUNY Binghamton to software developer Wetstone Technologies near SUNY Cortland, existing local businesses across the state will all reap zero rewards for having already done exactly what the Governor will allegedly incentivize other businesses to do in the future.

And of course, you are not only out of luck if you started your business at the wrong time, but place matters, too. State tax expert David Brunori at Tax Analysts summed up one of Tax-Free NY’s absurdities by highlighting, “if you are in the community you don’t pay taxes. If you are outside, even by six inches, you do.”

Existing small businesses are not the only losers because the plan extends to employees, too. Professor John Yinger, an expert in fiscal policy from Syracuse University, says the Governor’s plan “means some businesses are getting lower taxes than others and in this case it means some people are getting much lower taxes than others, those are new sources of inequities.”

There are so many problems with Governor Cuomo’s idea for tax-free zones, it’s hard to know where to begin. But the Institute on Taxation and Economic Policy’s (ITEP) policy briefs library is a good place to look, and we invite the Governor to consider this guidance (all links are PDF’s).

Taxes and Economic Development 101: “Lawmakers are under intense pressure to create a healthy climate for investment. But the simplistic view that tax cuts are the best medicine can result in unintentionally making this climate worse. Unaffordable tax cuts shift the cost of funding public services onto every business that isn’t lucky enough to receive these tax breaks—and makes it harder to fund the public investments on which all businesses rely.”

Accountable Economic Development Strategies: “Some lawmakers are wising up to the idea that subsidies don’t work. But for policymakers who insist on offering incentives, there are some important, simple, and concrete steps that can be taken to ensure that subsidies aren’t allowed to go unchecked.”

Tax Principles: The principle of neutrality (sometimes called “efficiency”) tells us that a tax system should stay out of the way of economic decisions. Tax policies that systematically favor one kind of economic activity or another can lead to the misallocation of resources, or worse, to schemes whose sole aim is to exploit such preferential tax treatment.”