Category: TaxJusticeBlog

Much of the spending that Americans see in their daily lives is the work of state and local governments, which build the roads, bridges and schools, and hire and train the teachers and police officers. In many ways, the most overlooked aspect of the debate over federal tax reform is the ways in which Congress might help — or seriously hinder — state and local governments from raising the revenue needed to pay for these public investments.

In response to a hearing held on this topic by the Senate Finance Committee, ITEP’s executive director Matthew Gardner submitted written testimony exploring this point. The testimony explains, for example, that the federal income tax deduction for state and local taxes has many justifications that do not apply to other tax expenditures. It also explains that President Obama’s Build America Bonds program would improve upon an existing federal subsidy (for state and local governments that borrow to finance capital investments) so that it will no longer provide a windfall to high-income individuals and corporations.

The testimony also addresses proposals to regulate state and local taxing power. Some of these proposals would facilitate efficient and fair tax collection (like the Marketplace Fairness Act, which is geared towards solving the internet sales tax problem). Others would simply restrict taxes and make taxes more complicated at the behest of corporate lobbyists (like the so-called “Business Activity Tax Simplification Act”).

While these proposals and details might sound awfully arcane, they ultimately will influence issues that are very central in our daily lives — like the class size in your neighborhood school or the length of your commute on local roads and highways.

In a span of less than two weeks, commissions in two very different states – Massachusetts and Oklahoma – have issued remarkably similar recommendations on how to deal with the slews of special tax breaks that evade scrutiny and accountability year after year, budget after budget. As CTJ has pointed out, state budget processes are essentially rigged in favor of tax breaks (loopholes, subsidies) and as a result it’s become far too easy for lawmakers to enact (and extend) tax giveaways for virtually any purpose imaginable.

In Massachusetts, the Tax Expenditure Commission just released eight recommendations designed to deal with this very problem.  According to the Commission, lawmakers should clearly specify the purpose of all tax breaks (or “tax expenditures”) so that analysts can begin evaluating their effectiveness on an ongoing basis and providing realistic policy recommendations to lawmakers.  The Commission further urged that those evaluations be carefully timed to coincide with the state’s normal budget process, and even suggested that some tax expenditures be scheduled to sunset (or expire) so that lawmakers are forced to debate those breaks after the evaluations are complete and the facts are out.

In Oklahoma, the Incentive Review Committee recently released its set of recommendations dealing with one category of tax expenditures in particular: those ostensibly aimed at spurring economic development.  As in Massachusetts, the Oklahoma Committee said that lawmakers need to more clearly articulate the purpose of tax breaks, and that evaluations of those breaks should be done in a rigorous and ongoing fashion. One of the Oklahoma Committee’s more important recommendations might sound obvious at first, but it’s actually often overlooked: good evaluations take time and resources, and the state should adequately fund whichever department is charged with completing the evaluations.

Jon Stewart hilariously skewered the phrase “spending reductions in the tax code” as another way of saying taxes need to be raised. These tax commissions (as well those in Minnesota, Missouri, and Virginia), tasked with realistically assessing state budgets, are forcing Americans to recognize that spending through the tax code exists and that it requires the same level of scrutiny as spending through government programs, as previously outlined by CTJ.

The history of states subsidizing professional sports stadiums with taxpayer dollars is long and, increasingly, controversial. Maryland provided nearly one hundred percent of the financing for the Orioles’ and Ravens’ shiny new facilities in the 1990s. In 2006, the District of Columbia subsidized the Washington Nationals’ new stadium at a cost to taxpayers of about $700 million.  And even though most stadiums are, in the long run, economic washes at best, losers at worst, there are still politicians willing to throw money at them.

Minnesota legislators, for example, are currently grappling with how to fund a new stadium for the Vikings in response to threats that the franchise may leave the state.  But before the legislature gives away nearly a billion dollars, State Senator John Marty raises some excellent points about the math, and morals, behind the proposed taxpayer subsidies for the stadium:

“The legislation would provide public money in an amount equivalent to a $77.30 per ticket subsidy for each of the 65,000 seats at every Vikings home game. That’s $77 in taxpayer funds for each ticket, at every game, including preseason ones, for the next 30 years.… Public funds can create construction jobs, but those projects should serve a public purpose, constructing public facilities, not subsidizing private business investors. The need to employ construction workers is not an excuse to subsidize wealthy business owners, especially when there is such great need for public infrastructure work.” 

In  Louisiana, the House of Representatives has gone ahead and approved a ten-year, $36 million tax subsidy  to keep the state’s NBA team, the Hornets, in New Orleans until 2024. Some are asking if the state can really afford it given a $211 million budget gap.  Representative Sam Jones noted that while the state has cut health and education spending, it still found a way to come up with millions of dollars to help out the ”wealthiest man in the state.” That would be Tom Benson, owner of not only the Hornets but the legendary New Orleans Saints football team, whose net worth is $1.1 billion dollars.

In California, however, a different scenario is unfolding. Sacramento Mayor Kevin Johnson just abandoned negotiations with owners of the city’s NBA team, the Kings.  The Kings organization was unwilling to put up any collateral, share any pre-development costs, or commit to a more than a 15 year contract; this would have left the city shouldering all the costs – and all the risks – for developing the $391 million downtown facility.  Mayor Johnson said he’d offered everything he could to the team and it still wasn’t enough, so he pulled the plug. 

Given the high cost and low return (including in terms of jobs) that sports facilities generate, more leaders should follow Minnesota’s Marty and Sacramento’s Johnson and stand up for the taxpayers who pay their salaries.

(Thanks to Field of Schemes and Good Jobs First for keeping tabs on these subsidies!)

Remember the Tea Party? Well, freshman Kentucky Senator Rand Paul is living up to his reputation as the darling of the Taxed Enough Already movement that shook the 2010 elections. 

Rand Paul, son of Libertarian firebrand and GOP presidential candidate Ron Paul, is currently blocking the Senate’s ratification of an amendment to the US-Swiss tax treaty, apparently worried about the right of tax evaders to financial privacy. He says the language is too “sweeping” and might jeopardize US constitutional protections against unreasonable search and seizure. But as one former Treasury Department official said, Paul’s move “smacks of protecting financial secrecy for those who may have committed criminal tax fraud in the US.”

The US and Swiss governments renegotiated their bilateral tax treaty as part of the 2009 settlement of the UBS case. That case charged the Swiss mega-bank UBS with facilitating tax evasion by US customers. Under the settlement agreement, UBS paid $780 million in criminal penalties and agreed to provide the IRS with names of 4,450 US account holders.

Before it could supply those names, however, UBS needed to be shielded from Swiss penalties for violating that country’s legendary bank-secrecy laws. The renegotiation of the US-Swiss tax treaty addressed that problem by providing, as most other recent tax treaties do, that a nation’s bank-secrecy laws cannot be a barrier to exchange of tax information.

Many tax haven countries were hiding behind their bank secrecy laws to deflect requests for account holder information, and the IRS and Justice Department have been investigating 11 Swiss financial institutions on criminal charges of facilitating tax evasion.

The Senate must ratify the treaty changes – which is normally a routine procedure.

By blocking the ratification, Senator Paul is holding up the exchange of information in the UBS case (and others) and hampering IRS efforts to crack down on tax evasion by Americans.

Tax evasion by individual taxpayers is estimated to deprive the US Treasury of as much as $70 billion per year (corporate offshore tax avoidance is estimated to cost the Treasury an additional $90 billion per year).

Given Senator Paul’s obvious concern about the deficit, he might have a hard time explaining to honest American taxpayers how he justifies protecting tax evaders with Swiss bank accounts as the deficit grows ever larger.

Photo of Rand Paul via Gage Skidmore Creative Commons Attribution License 2.0

• Kansas Governor Brownback’s insistence on steep tax cuts has met more resistance.  A group called Traditional Republicans for Common Sense has come out against  even a watered down version of Brownback’s vision in the legislature. One of the group’s members (a former chair of the state’s GOP) said, “Now is not the time for more government intervention. Topeka needs to stay out of the way and make sure proven economic development tools – like good schools and safe roads – remain strong so that the private sector can thrive.” 

• Stateline writes about the problems with “the spending that isn’t counted” – meaning special breaks that lawmakers have buried in state tax codes.  The article highlights efforts in Oregon and Vermont to develop more rational budget processes where tax breaks can’t simply fly under the radar year after year.  CTJ’s recommendations for reform are in this report.

• In this thoughtful column, South Carolina Senator Phil Leventis writes, “I have been guided by the principle that government should invest in meeting the needs and aspirations of its citizens. This principle has been undermined by an ideology claiming that government is the cause of our problems and, accordingly, must be starved.” He praises tax study commissions and says being “business friendly” cannot be the only measure of state policy.

• An op-ed from the Pennsylvania Budget and Policy Center (PBPC) calls on lawmakers to address the issue of rampant corporate tax avoidance, and to do so responsibly. It raises concerns that legislation currently under consideration to close corporate loopholes could be a “cure worse than the disease.”  The legislation takes some good steps but is paired with business tax cuts that could cost as much as $1 billion over the next several years.  PBPC argues for a stronger and more effective approach to making corporations pay their fair share such as combined reporting, which makes it harder for companies to move profits around among subsidiaries in different states.

• Just four days after Amazon agreed to begin collecting sales taxes in Nevada in 2014, the company announced a similar agreement with Texas that will take effect much sooner – on July 1st.  As The Wall Street Journal reports, “With the deal, the Seattle-based company is on track to collect sales taxes in 12 states, which make up about 40% of the U.S. population, by 2016.”

Picture from Flickr Creative Commons.

Political leaders love to claim fealty to the idea of “loophole-closing” tax reform, but refuse to provide details on the specific tax breaks they would eliminate. As we’ve recently noted, House Budget Chair, Rep. Paul Ryan, is one of the worst offenders when it comes to punting on specific tax breaks he’d eliminate. President Obama has also avoided naming closeable loopholes in his outline for corporate tax reform. Yes, lawmakers are glad to pose convincingly as advocates of tax reform without assuming any of the political risks involved with real loophole-closing reforms.

Earlier this month, presidential candidate Mitt Romney took a welcome departure from this pattern, signaled by the headline, “Romney Specifies Deductions He’d Cut.”  The presumptive GOP nominee told a Florida audience that his plans for tax reform included eliminating the second home mortgage interest deduction for high earners.

This is a perfectly sensible reform, and is one that many tax reform advocates on both sides of the aisle (most recently, President Bush’s tax reform commission) have agreed on.  It also allows us to take Romney’s tax proposals a bit more seriously, since he has said he plans to cut income tax rates by 20 percent and pay for it with (as yet unspecified) loophole-closing reforms.

A few days later, however, Romney’s campaign backed away from this reform after Newt Gingrich accused him of surrenderring to “class warfare rhetoric of the Left.” This and other pushback from within his own party led one Romney surrogate to explain it this way: the candidate “was just discussing ideas that came up on the campaign trail” with some friendly donors.

This strategic retreat may make sense politically (think of all the second homes in battleground states), but it also puts Romney’s tax plan squarely in talk-is-cheap territory—asking all the easy questions but answering none of the hard ones.

Photo of Mitt Romney via Dave Lawrence Creative Commons Attribution License 2.0

• The Institute for Research on Poverty at the University of Wisconsin-Madison released a report showing that Wisconsin poverty rates actually dropped between 2009 and 2010 – from 11.1 to 10.3 percent – thanks to safety net programs that were effective in keeping people out of poverty during the recession. The Institute’s director praised the earned income tax credit and food stamp programs saying that they “have done a fantastic job in this recession.”

• Rhode Island’s House Committee on Finance considered five bills this week that would raise income taxes on the wealthiest Rhode Islanders.  Read ITEP’s testimony to learn how these proposals are the best option for Rhode Island policymakers who want to both raise revenue and improve tax fairness.

• Massachusetts Governor Deval Patrick created a special Tax Expenditure Commission last year to examine the more than $26 billion in tax breaks the state hands out each year (which amounts to more money than the state is expect to take in this year!).  After months of meeting, the members unanimously approved a report that the Commission Chair referred to as a “comprehensive roadmap” to reforming the system.  Many of the Commission’s recommendations mirror those in CTJ’s recommendations for cleaning up state tax codes – and the process by which they are modified. The 8 formal recommendations in Massachusetts include: reducing the number and cost of current tax expenditures; periodically reviewing expenditures and including an automatic sunset every five years; and identifying and publishing clear policy purposes and outcomes for each expenditure.

• And this article is about a sales tax holiday for meals that’s been proposed as an actual piece of legislation in Massachusetts.  A week long sales tax holiday on meals purchased at restaurants? Sounds like a boondoggle of a loophole to us. Thankfully, commonsense prevailed and the idea was solidly defeated.

Arthur Laffer recently teamed up with Stephen Moore, his friend on The Wall Street Journal’s editorial board, to pen yet another opinion piece on the benefits of shunning progressive personal income taxes.  Most of the article’s so-called “analysis” is ripped from Laffer reports that we’ve already written about, but there was one new claim that stands out.  According to Laffer and Moore, “Georgia, Kansas, Missouri and Oklahoma are now racing to become America’s 10th state without an income tax.”  If this is true, it’s news to us.  So let’s take a look at the most recent reporting on these states’ tax policy debates.

In Georgia, the state’s legislative session ended almost a month ago with the passage of a modest tax package.  Last year, Georgia lawmakers debated levying a flat-rate income tax, but that effort (which should have been easy compared to outright income tax repeal) failed and left lawmakers with little interest in returning to the issue.

The debate over the income tax debate in Kansas isn’t quite done yet, but the most recent news from The Kansas City Star is that “lawmakers say the tax reform package they’ll consider next week almost certainly will fall far short of the no-income-tax goal.”

In Missouri, a number of media outlets are reporting that the push to get income tax repeal on the November ballot is all but over because a judge ruled that the ballot initiative summary that proponents of repeal proposed to put before voters was “insufficient and unfair.”

And in Oklahoma, what started as an enthusiastic push for big cuts or even outright repeal of the income tax has since been watered down into something less ambitious.  The most likely outcome is a cut in the top rate of no more than one percent, although lawmakers are still toying with the idea of tacking on a provision would repeal the income tax slowly over time (so the hard decisions about what services to cut won’t have to be made for a number of years).  But in any case, budget realities have left lawmakers in a position where they’re hardly “racing” to scrap this vital revenue source.

Photo of Art Laffer via  Republican Conference Creative Commons Attribution License 2.0

Representing a remarkable defeat for corporate tax dodgers, a spokesman for the so-called “Win America Campaign” confirmed this week that it has “temporarily suspended” its lobbying for a tax repatriation amnesty. The coalition of mostly high-tech companies pushed for months for a tax amnesty for repatriated offshore corporate profits. The campaign once seemed unstoppable because so many huge corporations, and veteran lobbyists with ties to lawmakers, were behind it. 

What supporters call a tax “repatriation holiday,” or more accurately, a tax amnesty, allows US corporations a window during which they can bring back (repatriate) foreign profits to the US at a hugely discounted tax rate. The holiday’s proponents argue this would encourage multi-national corporations to bring offshore profits back to the US.

CTJ has often pointed out that the only real solution is to end the tax break that encourages U.S. corporations to shift their profits offshore in the first place — the rule allowing corporations to defer (delay indefinitely) U.S. taxes on foreign profits. Deferral encourages corporations to shift their profits to offshore tax havens, and a repatriation amnesty would only encourage more of the same abuse.

The Win America Campaign and its long list of deep pocketed corporate backers (including Apple and Cisco) spared no expense in pushing the repatriation amnesty, spending some $760,000 over the last year. This sum allowed the coalition to hire a breathtaking 160 lobbyists (including at least 60 former staffers for current members of Congress) to promote their favored policy in Washington.

So what prevented Win America from winning its tax amnesty? It was the steady march of objective economic studies put out by groups from across the political spectrum demonstrating how the holiday would send more jobs and profits offshore and result in huge revenue losses.

One of the toughest blows the repatriation amnesty took came from the well-respected Congressional Research Service’s (CRS) report showing what happened last time: the benefits from the repatriation holiday in 2004 went primarily to dividend payments for corporate shareholders rather than to job creation as promised. In fact, the CRS found that many of the biggest corporate beneficiaries of the 2004 holiday had since actually reduced their US workforce.

On top of this, the bipartisan and official scorekeeper in Congress, the Joint Committee on Taxation (JCT), found that a new repatriation holiday would cost $80 billion, which is a lot of money for a policy that would not create any jobs. Advocates for the tax holiday responded with studies of their own claiming the measure would actually raise revenue, but Citizens for Tax Justice (CTJ) immediately debunked the bogus assumptions underlying these reports. 

On top of the solid research there was the incredible and rare consensus among policy think tanks across the political spectrum to oppose the measure. The groups opposing a repatriation holiday included CTJ, Tax Policy Center, Tax Foundation, the Center on Budget and Policy Priorities and Heritage Foundation, to name a few.

The suspension of lobbying for the repatriation amnesty is a victory for ordinary taxpayers. And while the Win America Campaign isn’t dead – one lobbyist promised that “if there was an opportunity to move it, the band would get back together and it would rev up again” – its setback validates our work here at CTJ on corporate tax avoidance in all its forms. 

This week brought news of a few more states tackling the challenge of taxing purchases made over the Internet in the same way as purchases made in “brick and mortar” stores.  Nevada and Tennessee got agreements from Amazon.com, the mother of all online retailers, to start doing its part to collect those taxes, and it looks like Massachusetts isn’t far behind.

• In Nevada, Amazon.com will begin collecting sales taxes in 2014 under a new agreement announced on Monday.  The company already has major warehouses and distribution centers in the state.  Amazon’s agreement with Nevada is similar to deals struck in California, Indiana, South Carolina, Tennessee, and Virginia.
• As in Nevada, Amazon’s deal to begin collecting sales taxes in Tennessee won’t take effect until 2014, but a lesser known part of that agreement has already taken effect.  Amazon is mailing notices to all its Tennessee customers from throughout the past year letting them know that they may owe sales tax on the items they bought from the company, even though Amazon didn’t collect those taxes for them.  Similar annual notices will be sent by February 1st in both 2013 and 2014.
• The Massachusetts Main Street Fairness Coalition is continuing its calls for the state to require that Amazon collect sales taxes, and The Boston Globe just chimed in to support the idea as well.  As the Globe explains, the company’s new offices in Massachusetts should be enough to bring the company within reach of the state’s sales tax collection laws.

Of course, these efforts are only partial solutions at best.  Amazon.com may be the world’s biggest online retailer, but they’re hardly the only one.  Nevertheless, until the federal government acts to allow all states to enforce their sales tax laws on all purchases, these piecemeal victories are the best news we can hope for.