Category: TaxJusticeBlog

It’s a basic matter of fairness that state sales taxes should be applied to things we buy, regardless of whether a purchase is made online or in a brick-and-mortar store.  Back in 1992, however, before online shopping even existed, the Supreme Court handed down a ruling that made this a lot more difficult by telling out-of-state retailers (mostly catalogues back then) they didn’t have to collect sales tax – at least until the federal government says otherwise.  In recent years, the explosion in online shopping has made the issue more urgent, and we expect that in 2012 the push for a more rational online sales tax policy could reach critical mass as more states seek to restore lost revenues.

Federal legislation. Sales taxes owed on Internet purchases can’t be collected comprehensively until the federal government empowers states to require that online retailers collect the tax.  Until then, the best states can do is make use of the partial fixes discussed below.  Fortunately, a federal solution might not be as far off as it once seemed.  Multiple bills have been introduced in Congress that would allow for a comprehensive solution, and an increasingly influential coalition of state lawmakers and traditional retailers are pushing for a national law.

State legislation.  Even though federal legislation is needed to fix the online sales tax problem in its entirety, states do have tools at their disposal for chipping away at it right now.  Specifically, states can require that out-of-state online retailers collect sales taxes if they are partnered with in-state affiliate businesses, or if they have in-state subsidiaries or sister companies.  Discussion of enacting a law of this type is currently underway in Arizona, Florida, Indiana, Maryland, and Virginia, and we expect that other states will join this list soon.

State-level deals with Amazon.com.  Amazon.com has a long history of shirking its responsibility to collect sales taxes, but to its credit the company seems to have realized that it won’t be able to continue this dodge forever.  In just the last year, Amazon has struck deals with South Carolina, California, Tennessee, and Indiana to begin collecting sales taxes at a specific future date.  Recent reports say that Florida might join this list soon, as Amazon is eyeing building a distribution center in the Sunshine State – if it can convince lawmakers to let it off the tax-collecting hook for just a few more years.  We’re sympathetic to traditional retailers who point out that Amazon can and should begin collecting sales taxes sooner rather than later, and hope that this unwieldy patchwork of agreements helps build the case for a national solution.

Oklahoma’s Governor Mary Fallin finally unveiled her plan for eliminating the state income tax.  Full elimination would take a number of years, but low-income families are likely to be hit hard right away when various refundable credits are repealed.  The Institute on Taxation and Economic Policy (ITEP) plans to conduct a full analysis as soon as sufficient details are made available.

One Michigan lawmaker wants to take money away from Medicaid, education, and other programs to cover the cost of maintaining the state’s roads – costs that the state’s long stagnant gas tax can’t keep up with.  This is not the only such proposal to redirect money to cover up for lawmakers who lack the political courage to raise their state’s gas tax. Nebraska, Utah, Wisconsin, Virginia, and Oklahoma have proposed or enacted similar raids that ITEP warned of in its recent report, Building a Better Gas Tax.

The Colorado legislature is debating a boondoggle of a bill which would create a sales tax holiday the first weekend in August.  The facts are getting out that these events are expensive and don’t benefit the people who need them most.

The Virginia-Pilot has an excellent editorial on the efforts of some lawmakers to ramp up the level of scrutiny applied to billions of dollars in special interest tax breaks.  As the Pilot points out, Richmond is increasingly forcing cities and counties to pick up costs the state can’t cover, yet lawmakers threw away $12.5 billion in corporate tax breaks without any evidence they are helping Virginians.

Two tax increase initiatives appear headed for California’s November ballot that Governor Jerry Brown fears will undermine support for his own initiative to temporarily raise the sales tax and income taxes on wealthier Californians.  The competing measures are both permanent and superior in terms of fairness: a “millionaire’s tax” backed by labor groups who say it will raise $6 to $10 billion for education; and a $10 billion personal income tax hike on all Californians except for low-income families, backed by a wealthy civil rights attorney. But with three tax increasing options on the ballot, there’s a good chance the measures will cancel each other out, leaving California still in a fiscal wreck.

Photo of Jerry Brown via Randy Bayne  and Creative Commons Attribution License 2.0

A new Washington Post-ABC News poll shows that only nine percent of Americans believe the tax system works for the middle class, with 68 percent saying it actually favors the wealthy. The survey shows a public overwhelmingly convinced that our tax system is unfair and that taxes should be raised on wealthy Americans.

The belief that the tax system is unfair has surely been fueled by the recent revelation of presidential candidate Mitt Romney’s super low 14% tax rate on his $21 million income. In fact, the same poll found that 66 percent of the public generally – and even a near majority of Republicans! – believe that Romney is not paying his fair share in taxes.

Not surprisingly, then, Americans overwhelmingly support increasing taxes on the wealthy, according to this poll, with 72 percent saying that taxes should be increased on millionaires. Of course, time and time again polls have shown the public’s robust support for progressive taxation.

A Growing Gap Between Small and Big Business

In related news, a nationwide survey released by the American Sustainable Business Council, Main Street Alliance and Small Business Majority shows that small business owners are fed up with how our corporate tax system favors big corporations at the expense of small businesses.

Indeed, 9 out of 10 small business owners said that big corporations use loopholes to avoid taxes that small businesses have to pay, with three quarters of the small business owners noting that their business is harmed by such loopholes. The same survey found that 67 percent of small business owners believe big corporations pay less than their fair share.

Even when small and large busineses agree that they want more tax handouts from Congress, they’re talking about very different things, according to a new Bloomberg (subscription only) poll.  Asked what tax changes would help them most, advisors to smaller businesses prioritize things like reducing payroll taxes on employers and making permanent the deduction for self-employment. Big business priorities included 100 percent expensing (a.k.a. bonus depreciation) of equipment and complete overhaul of the corporate tax code – including a reduced tax rate.

These studies are more reason corporate lobbyists and their patrons in Congress should stop pretending they’re all about small business. They’re not.

New Jersey Governor Chris Christie made a bold and reckless promise in his January State of the State address: a personal income tax cut for all.  His plan is to gradually reduce income tax rates by 10 percent across the board, at a cost of $1 billion a year once fully implemented.

Democratic lawmakers and public interest advocates were quick to point out one very big problem with Christie’s plan: the state simply cannot afford it.  The Governor has yet to say how he would pay for it, yet the likely scenario is more cuts to education spending and local aid which would, in turn, force local governments to increase property taxes to make up the difference.  As Senate President Stephen Sweeny said, “it’s taking money out of one pocket and putting it in another.”

And, now thanks to an analysis by the nonpartisan NJ Office of Legislative Services (OLS), we know exactly which pockets will be fuller as a result of Christie’s grand plan.  It’s no surprise given Christie’s past allegiance to millionaires that the wealthiest New Jerseyans stand to gain the most from a billion dollar cut in one tax (personal income) that will likely force an increase in another (property). 

Even if property taxes are not increased as a result of Christie’s proposals, New Jersey families are already paying more in property taxes in recent years thanks to Christie’s reductions in property tax credits and rebates (all of which could be restored for a smaller price tag than the proposed personal income tax cut).

OLS’s findings are consistent with the Institute on Taxation and Economic Policy’s (ITEP) research on the share of income New Jerseyans pay in state and local taxes.  Both OLS and ITEP agree – low and middle-income families spend a greater share of their income on property taxes than on income taxes.  The reverse is true for New Jersey’s wealthiest families, which is why a cut in income taxes, accompanied by an increase in property taxes, will make an unfair situation even worse.

Rather than a “tax cut,” Christie’s plan is more accurately characterized as a “tax swap.”  New Jersey Policy Perspective’s Deborah Howlett called the plan “a gimmick.”  Indeed. The plan is based on projected revenues which may or may not materialize. The Governor said that if they do, however, this tax cut will be at the top of his list of ways to spend whatever extra money trickles in. There are more important things at the top of a lot of his constituents’ lists, however, including restoring those property tax credits.

Photo of Governor Chris Christie via Bob Jagendorf Creative Commons Attribution License 2.0

Citizens for Tax Justice Director, Bob McIntyre, writes in The the Hill’s Congress Blog today:

….Just as Ronald Reagan and a bipartisan Congress did in the Tax Reform Act of 1986, we should crack down on wasteful, often harmful corporate tax subsidies. The 1986 reforms curbed useless tax breaks for oil companies, public utilities, defense contractors and a wide array of corporate special interests. It rewrote the way we tax multinational corporations to make it harder for them to avoid their U.S. tax responsibilities by moving their U.S. profits to foreign tax havens. And by doing so, it made our economy more productive and increased corporate tax payments by more than a third.

Indeed, if just the 280 corporations that CTJ analyzed in our 2011 study had paid the full 35 percent corporate tax rate on their U.S. profits over the 2008-10 period (instead of only half that much), they would have paid an additional $223 billion in corporate income taxes.

Read the full essay here.

• Kudos first to Washington State Representative Marko Liias who introduced a bill that requires the wealthiest Washingtonians to pay a two percent income tax to help fund education. This is big news because Washington doesn’t currently levy ANY income tax.
• Washington Post Columnist Robert McCartney rightly applauds Maryland Governor O’Malley’s “courage on taxes.” McCartney is right when he says that in terms of tax hikes, “What’s scary in the short term might pay off down the road — not only for politicians, but also for the state.”
• This week, Jeff McLynch from the New Hampshire Fiscal Policy Institute presented testimony to the Commission to Study Business Taxes.  His group opposes the Commission’s draft recommendations first and foremost on the grounds that it would cut state revenues dramatically, leading to program cuts.  He also points out that the Commission’s proposed change to a “Single Sales Factor” corporate income tax apportionment formula could well have the unintended consequence of deterring many types of companies from making the Granite State their home.
• Interested in an inspiring, principled op-ed about what real tax reform means? Read this, from Kentucky.

(See CTJ director’s full explanation of Facebook’s use of the stock option deduction here.)

Facebook, Inc.’s upcoming initial public stock offering (IPO) paperwork reveals that it plans to wipe out all of the company’s federal and state income tax obligations for 2012 and actually generate a half billion dollar tax refund. As part of the plan, Facebook co-founder and controlling stockholder, Mark Zuckerberg can expect a $2.8 billion after tax cash windfall.

According to Facebook’s SEC filing, the company has issued stock options to favored employees, including Zuckerberg, that will allow them to purchase 187 million Facebook shares for little or nothing in 2012. Options for 120 million shares (worth $4.8 billion) are owned by Zuckerberg. The company indicates that it expects all of the 187 million in stock options to be exercised in 2012.

The tax law says that if a corporation issues options for employees to buy the company’s stock in the future for its price when the option issued, then if the stock has gone up in value when employees exercise the options, the company gets to deduct the difference between what the employee bought it for and its market price.

When, as Facebook expects, the 187 million stock options are cashed in this year, Facebook will get $7.5 billion in tax deductions (which will reduce the company’s federal and state taxes by $3 billion). According to Facebook, these tax deductions should exceed the company’s U.S. taxable 2012 income and result in a net operating loss (NOL) that can then be carried back to the preceding two years to offset its past taxes, resulting in a refund of up to $500 million.

Senator Carl Levin, who has proposed to limit the stock option loophole, told the New York Times, “Facebook may not pay any corporate income taxes on its profits for a generation. When profitable corporations can use the stock option tax deduction to pay zero corporate income taxes for years on end, average taxpayers are forced to pick up the tax burden. It isn’t right, and we can’t afford it.”

To be sure, Zuckerberg will have to pay federal and state income taxes (at ordinary tax rates) when he exercises his $4.8 billion worth of stock options in 2012. That’s only fair, since that $4.8 billion obviously represents income to him. But even after paying taxes, he’ll still end up with $2.8 billion.

The problem isn’t Zuckerberg’s personal taxes but Facebook’s. Why should companies get a tax deduction for something that cost them nothing?  If an airline allows its workers to fly free or at a discounted price on flights that aren’t full (for vacations, etc.) airlines don’t get a tax deduction (beyond actual cost) for that, even though the workers get taxed on the benefit, because it costs the airline nothing.

In the case of stock options, there is also a zero cost to the employer. So it’s more reasonable to conclude that while employees should be taxed on stock option benefits (“all income from whatever source derived” as the tax code states), employers should only be able to deduct their cost of providing those benefits, which, in the case of Facebook and Zuckerberg, is zero.

The bottom line is that there’s something obviously wrong with a tax loophole that lets highly profitable companies like Facebook make more money after tax than before tax. What’s about to happen at Facebook is a perfect illustration of why non-cash “expenses” for stock options should not be tax deductible.

See page 12 of our Corporate Taxpayers and Corporate Tax Dodgers report for more about the 185 other companies we found exploiting the stock option loophole.

Photo of Facebook Logo via Dull Hunk and photo Mark Zuckerberg via KK+ Creative Commons Attribution License 2.0

Note to Readers: Over the coming weeks, the Institute on Taxation and Economic Policy will highlight tax policy proposals that are gaining momentum in states across the country.  This week, we’re taking a closer look at proposals which would increase state revenues to pay for important public investments. 

Given the number of Governors calling for major tax cuts in their states, you’d think that states are suddenly awash in cash and well on the road to economic recovery.  But the reality is that very few states are back to where they were before the recession hit in terms of tax collections and public spending.  Many were limping along with federal stimulus funds, but now that’s dried up, too. Recognizing the need to begin restoring investments in education, transportation, and health care or prevent even more devastating cuts to these services, a handful of Governors have put tax increases on the table.  The proposals range from across-the-board rate increases to tax hikes only on the wealthiest, permanent to temporary changes, and plans that require only legislative approval to ballot initiatives for the public to decide.

California Governor Jerry Brown is taking his proposed tax increase to the voters in November.  In an effort to prevent damaging cuts to public education, Brown is asking wealthy Californians to pay more income taxes and everyone to chip in with a higher sales tax for the next five years.  A recent poll shows Californians are overwhelmingly on his side- more than 2/3rds of those surveyed support the Governor especially when the tax increases are linked to investments in education.

Maryland Governor Martin O’Malley included several revenue raising measures in his recent budget proposal to help close a $940 million gap.  Most notable is a plan to raise taxes on upper-income Marylanders through limiting the amount of itemized deductions and personal exemptions they are able to claim – a recommendation ITEP made last year.

O’Malley also proposed taxing internet transactions, digital downloads and increasing taxes on tobacco products and the state’s “flush tax.”  He recently announced a plan to apply the sales tax to gasoline rather than an increase in the designated gas tax to address transportation needs in the state.

Washington lawmakers are facing off on how best to address a $1 billion budget gap this year.  Governor Christine Gregoire is pushing for a temporary half-cent sales tax increase that would raise roughly $500 million, and to close the remaining gap with spending cuts.  At least two competing proposals, however, have emerged that would raise needed revenue and improve the fairness of the state’s tax structure.  The first is a one percent tax on corporate and personal income that would raise $500 million and allow for a reduction in the state’s sales and business-occupations taxes. Another plan would tax realized capital gains at five percent, raising between $215 million and $650 million a year. 

Given Washington’s restrictive rules on revenue-raising (a two thirds legislative supermajority is required to enact increases), any proposed tax increase will likely end up on a ballot (which a legislative simple majority can implement) for the voters to decide this Spring or Fall.

North Carolina Governor Beverly Perdue recently proposed reinstating most of a temporary sales tax increase that expired last year.  She wants to invest the $800 million the tax would raise in the state’s public schools, community colleges and universities, all of which suffered massive cuts over the past four years.

Massachusetts Governor Deval Patrick is promoting some revenue raising ideas he says are supported by the public.  His $230 million revenue package includes a 50 cent per pack increase in the cigarette tax (bringing the total to $3.01), increases on other tobacco products, expanding the bottle bill so that a wider range of beverages require a redeemable nickel deposit, and taxing candy and soda at the state’s 6.25 percent rate (both are currently exempt from taxation).

Rhode Island After failing to gain legislative support last year for his reform-minded and sensible tax plan, Governor Lincoln Chafee has offered up a hodgepodge of tax changes this year he thinks lawmakers can stomach.  Chafee’s$88 million tax package includes some modest expansion of the sales tax to items such as taxi and limousine rides and pet services.

Photo of Christine Gregoire via Studio 8, photo of Deval Patrick via Green Massachusetts, and photo Jerry Brown via Steve Rhodes Creative Commons Attribution License 2.0

Grassroots groups throughout the country have used Citizens for Tax Justice’s report “Corporate Taxpayers & Tax Dodgers,” to pressure lawmakers to clean up the tax code. Here’s a sample of what some groups have done in California, Massachusetts, Minnesota, Texas, and Washington.

California: A coalition of activist groups, including SEIU, the Teamsters, Good Jobs LA, and Occupy LA, rallied in Hollywood to protest FedEx’s less than one percent corporate tax rate over the last three years. Good Jobs LA explained that the $552 million in tax subsidies that FedEx received in 2010 alone could have been used to create over “1,000 jobs, contributed tens of millions for Medicaid and food stamp benefits, and added more than $11 million for education programs.”

Massachusetts: MassUniting and Occupy Boston rallied at the Boston headquarters of General Electric (GE), perhaps the most infamous tax dodger due to its astounding negative 45.3 percent tax rate. Many of the protestors carried signs reading “I Paid More in Taxes than General Electric.”

Minnesota: Minnesotans for a Fair Economy marked the beginning of the state’s legislative session by demonstrating against Wells Fargo, which received a shocking $17.9 billion in federal tax breaks wiping out its taxes for the last three years. The protestors emphasized that Minnesota legislators have continuously prioritized corporate tax breaks over critical investments in education.

Texas: The community group Good Jobs Great Houston took to the streets (and brought a pig along with them) to protest the “Dirty Thirty,” a group of companies that spend hundreds of millions of dollars to lobby Congress, yet pay nothing taxes. The protest took place outside the headquarters of Centerpoint Energy, which earned its place in the “Dirty Thirty” for the $1 billion in tax breaks it received over the past three years.

Washington: The advocacy group Working Washington held a rally against Wells Fargo’s corporate tax dodging at the bank’s Seattle corporate offices. To demonstrate their opposition to corporate tax breaks, the protesters brought along a giant check depicting the $17.9 billion in tax subsidies that Wells Fargo has received over the last few years.

Photos via Good Jobs LA and Good Jobs Great Houston

• Institute on Taxation and Economic Policy’s (ITEP) Executive Director, Matthew Gardner, carried the torch for progressive corporate income tax reform in New York during his visit to Albany this week. He briefed legislative staff and the press on ITEP’s recent report, Corporate Tax Dodging in the Fifty States, 2008-2010, which found that twenty profitable Fortune 500 companies paid no state corporate income taxes over the last three years, and 68 paid none in at least one of those three years.
• The Michigan League for Health and Human Services reminds Michiganders about the upcoming $1.6 billion in tax cuts for businesses that will be made up by raising taxes on low- and middle-income families and retirees. The League (with some help from ITEP) found that the poorest Michigan families will be hurt substantially by the upcoming changes compared to better-off taxpayers.
• New Hampshire Governor John Lynch is urging the legislature to restore the cigarette tax to $1.78. The Governor said in his State of the State address, “The cut in the tobacco tax was nonsensical. That money would have been better spent in our community college and university systems, for example.” One legislator called the legislature’s ten cent cut in the tax last year a giveaway to out-of-state tobacco companies.
• Last year, Wisconsin Governor Scott Walker proposed, and the legislature approved, freezing the state’s homestead property tax exemption. The Wisconsin Budget Project released a report this week showing that because the tax credit will no longer keep up with inflation, “working families and the elderly will be hit with a $14 million property tax increase over the next two years, and see their taxes continue to rise in later years.”
• Republicans in the Minnesota Senate are pushing a plan that would completely eliminate the state’s business property taxes and leave a “more than $800 million dollar hole in the general fund.” Democrats are fighting back, saying the bill will boost Wal Mart’s bottom line but won’t create any jobs.