Category: TaxJusticeBlog

Note to Readers: Over the coming weeks, ITEP will highlight tax policy proposals that are gaining momentum in states across the country.  This article takes a look at efforts to roll back business taxes in states based on the shopworn, erroneous argument that tax cuts are good for the economy.

Robust corporate income taxes ensure that large and profitable corporations that benefit from publicly subsidized services (transit that delivers customers, education that trains workers, electricity that powers industry, etc.) pay their fair share towards the maintenance of those services. But, as ITEP’s recent report, Corporate Tax Dodging in the Fifty States, 2008-2010, found, 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, even as state budgets are stretched to the point of breaking.  

As a new legislative season gets underway, too many political leaders are bashing taxes in general and business taxes in particular.  Here are some states to watch for more bad business tax policy (followed by a few glimmers of hope).

South Carolina – South Carolina Governor Nikki Haley is following through on her misguided campaign promise and recently proposed eliminating the state’s corporate income tax over four years. This despite the fact that South Carolina’s corporate income taxes as a share of tax revenue are among the lowest in the country, at a mere 2.4 percent.

Kentucky – State Representative Bill Farmer has filed legislation that, instead of strengthening the tax, would repeal the state’s corporate income tax entirely. Farmer worked as a “tax consultant” and has been an anti-tax crusader in the Kentucky legislature since 2003.

Nebraska – Governor Dave Heineman recently unveiled his plan to reduce the top corporate income tax rate from 7.81 to 6.7 percent (and eliminate other key state revenue sources, too).

Florida – In his recent State of the State address, Governor Rick Scott said that taxes and regulations were “the great destroyers of capital and time for small businesses.”  And – no surprise here – he also called for lowering business taxes.

Idaho – Governor Butch Otter has called for $45 million in tax cuts but is leaving the details to the legislature.  Of course, when a lobbyist from the Idaho Chamber Alliance of businesses calls the governor’s position “manna from heaven,” there’s a good chance some of those cuts will be given to business.

A few signs of sanity. In Connecticut , the governor is looking to improve the return on tax-break investment for the Nutmeg state. Perhaps he’s learned from states like Ohio, where a recent report issued by the attorney general showed that fewer than half of all companies receiving tax subsidies actually fulfilled their commitments in terms of job creation or economic growth.   We also see combined reporting getting attention in a couple of states.  It’s smart policy that discourages companies from creating multi-state subsidiaries to shelter their profits from taxes. We will report on other positive developments as warranted – so watch this space.

Photo of Rick Scott via Gage Skidmore and Photo of Nikki Haley via Mary Austin Creative Commons Attribution License 2.0

During his State of the Union address, President Obama said that “no American company should be able to avoid paying its fair share of taxes by moving jobs and profits overseas.” We couldn’t agree more. However, a CTJ report explains that his proposed solutions fail to raise revenue, retain and expand the loopholes that allow corporations to avoid taxes, and mark a further retreat from earlier, stronger proposals.

Read the report.

In his recent State of the State speech, Nebraska Governor Dave Heineman unveiled his three-pronged tax reduction proposal:  income tax rate reductions and broadening of income tax brackets, a reduction in the corporate income tax rate, and complete elimination of the inheritance tax. He said that “Our highest priority should be tax relief for Nebraska’s hard-working, middle class taxpayer.”

But the Governor misses an opportunity to help those who feel the brunt of the state’s current tax structure the most and makes it harder for local governments to provide necessary – and often state-mandated – services.

Nebraska’s tax structure is already regressive and asks more of lower income families than better off families. In fact, the Institute on Taxation and Economic Policy (ITEP) found that the poorest 20 percent of Nebraskans pay an average of 11.1 percent of their income in state and local taxes compared to just 6.1 percent, on average, that the top one percent of Nebraskans – those with incomes averaging over $1.4 million – pay. This discrepancy is largely due to the state’s high reliance on property taxes (which are regressive) relative to personal income taxes (which are progressive). The Governor’s proposal does nothing to reduce property taxes, does little to assist the lowest income Nebraskans, and would actually make this disparity worse.

The governor did no favors for local governments either. The state’s inheritance tax generates about $40 million in revenue annually that goes to the state’s 93 counties. The governor’s proposal eliminates this revenue source entirely and doesn’t offer any replacement funds. To make matters worse, his last budget already completely eliminated state aid to local governments. Concern is spreading in county seats across the state, and in Omaha, the Douglas County Board has actually passed a resolution opposing the governor’s plan to kill the inheritance tax because it will “force” them to raise property taxes.

We have documented, however, that this governor is not alone in his campaign to eliminate the state inheritance tax and give the biggest tax breaks to his richest constituents.  

During his State of the Union address, President Obama proposed that Congress enact his “Buffett Rule,” inspired by billionaire Warren Buffett’s complaint that he has a lower effective tax rate than his secretary.

President Obama said, “Tax reform should follow the Buffett rule: If you make more than $1 million a year, you should not pay less than 30 percent in taxes.”

This might mean that Congress would enact a new minimum tax of 30 percent for those with incomes over $1 million. But a simpler way to implement the Buffett Rule would be to simply end the tax preference for capital gains and stock dividends, which is the reason people like Mitt Romney and Warren Buffett can pay such low tax rates.

CTJ Report Explains Why Romney and Buffett Pay Such Low Tax Rates

A report from Citizens for Tax Justice explains how multi-millionaires like Romney and Buffett who live on investment income can pay a lower effective tax rate than working class people.

As the report explains, there are two reasons for this. First, the personal income tax has lower rates for two key types of investment income, capital gains and stock dividends. Second, investment income is exempt from payroll taxes (which will change to a small degree when the health care reform law takes effect).

The report compares two groups of taxpayers, those with income in the $60,000 to $65,000 range (around what Buffett’s famous secretary makes), and those with income exceeding $10 million.

For the first group, about 90 percent have very little investment income (less than a tenth of their income is from investments) and consequently have an average effective tax rate of 21.3 percent. For the second group (the Buffett and Romney group) about a third get the majority of their income from investments and consequently have an average effective tax rate of 15.2 percent.

This problem could be largely solved by doing what President Reagan did with the Tax Reform Act of 1986, which taxed all income at the same rates.

The Washington Posts’s Greg Sargent cites figures from CTJ and concludes

If Romney, whose wealth is estimated at as much as $250 million, is elected president and gets his way on tax policy, he would pay barely more than half as much in taxes than he would if Obama is reelected and gets his way — and the Bush tax cuts on the wealthy expire and an additional Medicare tax as part of the Affordable Care Act kicks in.

Read the article.

Here we go again: another governor who thinks it’s okay to cut taxes for the rich and raise them on everyone else.  Kansas Governor Sam Brownback last week unveiled his long anticipated tax plan. Sweeping changes to reduce the state’s reliance on a progressive, personal income tax are at the core of the proposal, but the question of whose taxes will be cut is dogging the governor.  His plan, already dubbed “Robin Hood in reverse,” may cut income tax rates across the board, but because it also eliminates a variety of income tax deductions and credits, and permanently raises the sales tax, in the end, it’s actually a tax hike on the majority of Kansans – especially the poorest.

Here is how that works. For most middle- and low-income Kansans, the tax break from the income tax rate cuts would be completely offset by the loss of income tax credits and itemized deductions, as well as a higher sales tax rate. A new analysis from the Institute on Taxation and Economic Policy (ITEP) found that the bottom 80 percent of the state’s income distribution would collectively see a tax hike under the Brownback plan, while the best off 20 percent of Kansans would see substantial tax cuts.

In fact, ITEP found that under Governor Brownback’s proposal, the poorest 20 percent of Kansas taxpayers would pay 2.2 percent more of their income in taxes each year, or an average increase of $242.  Upper-income families, by contrast, reap the greatest benefit with the richest one percent of Kansans, those with an average income of over a million dollars, saving an average of $16,933 a year. Read ITEP’s two-page analysis here.

Photo of Sam Brownback via KDOTHQ Creative Commons Attribution License 2.0

Note to Readers: Over the coming weeks, ITEP 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 reduce or eliminate state inheritance and estate taxes.  If you haven’t already, be sure to read our inaugural article in the series on proposals in some states to roll back or eliminate income taxes, which are the uniquely progressive feature of our tax system.

Whether state or federal, inheritance and estate taxes play an important role in limiting concentrated wealth in America. Warren Buffett views the estate tax as key to preserving our meritocracy, and the great Justice Louis Brandeis famously warned that we could have concentrated wealth or we could have democracy, but not both.  While the federal estate tax is often the source of passionate debate, these taxes are particularly important at the state level because they help offset some of the stark regressivity built into most state tax systems.  Unfortunately, lawmakers in some states have bought into the bogus claims of the American Family Business Institute (a.k.a. nodeathtax.org), Arthur Laffer, and others in the anti-tax, anti-government movement that repealing estate and inheritance taxes will usher in an economic boom.

Nebraska – Governor Dave Heineman has proposed repealing Nebraska’s inheritance tax entirely, determined, it seems, to pile on to the tax cuts already enacted earlier in his term.  (Inheritance taxes are very similar to estate taxes, except that inheritance taxes are technically paid by the heir to the estate, rather than by the estate itself.)  Unfortunately, in addition to worsening the unfairness of the state’s tax system, the Governor’s proposal would also kick struggling localities while they’re down, since revenue from Nebraska’s inheritance tax flows to county governments.

Indiana – Senate Appropriations Chairman Luke Kenley recently made the same proposal as Nebraska’s governor: outright repeal of the inheritance tax.  Kenley has floated the idea of using sales taxes on online shopping to pay for the repeal, but while Internet sales taxes are good policy on their own, this change would amount to an extremely regressive tax swap overall.  Indiana’s inheritance tax is already limited, however, and exempts spouses of the deceased entirely, as well as the first $100,000 given to each child, stepchild, grandchild, parent, or grandparent.

Tennessee – Governor Bill Haslam’s inheritance tax proposal may be less radical than those receiving attention in Nebraska and Indiana, but not by much.  Rather than repealing the tax entirely, Haslam would like to increase the state’s already generous $1 million exemption to a whopping $5 million.  It’s surprising, to say the least, that one of Haslam’s top tax policy priorities should be slashing taxes for lucky heirs inheriting over $1 million.

North Carolina – Efforts to gut the estate tax in North Carolina haven’t gained backers as visible as those in Nebraska, Indiana, and Tennessee.  But there are rumblings that repeal could be on the agenda of some legislators, as evidenced by the vehemently anti-estate tax testimony that a joint House-Senate committee heard from the American Family Business Institute this month.

President Obama’s jobs council has released a report full of recommendations, including somewhat misguided points on the federal corporate income tax. The report rightly points out that the corporate income tax is full of loopholes that should be closed, but fails to call for a reform that actually raises revenue to support under-funded public services and investments. The report also perpetuates some misunderstandings about the effects of the U.S. corporate income tax on our economy and on working people.

Read CTJ’s response.

Photo of Council on Jobs and Competitiveness via NCSU Web Creative Commons Attribution License 2.0

Three months ago, CTJ’s Bob McIntyre told TIME that GOP candidate Mitt Romney likely has an effective federal tax rate of around 14 percent because of the tax break for investment income that Romney enjoys. Today, the candidate said, “What’s the effective rate I’ve been paying? It’s probably closer to the 15 percent rate than anything.”

Romney went on to say, “Because my last 10 years, I’ve … my income comes overwhelmingly from investments made in the past, rather than ordinary income or rather than earned annual.”

In other words, a wealthy person like Romney can receive most of his income in the form of capital gains and stock dividends, which are subject to a top rate of just 15 percent under the personal income tax and not subject to payroll taxes.

A CTJ report from last year explains that about one third of people with income in excess of $10 million annually get the majority of their income from investments and, because of these tax preferences, pay a lower effective tax rate than many middle-income taxpayers, who typically get their income from work. Romney is a member of this lucky group of wealthy individuals.

Ending the tax preference for capital gains and stock dividends is therefore the primary way to implement President Obama’s Buffett Rule, the principle that tax reform should reduce or eliminate those situations in which millionaires pay lower effective tax rates than middle-income people.

In Romney’s case, there is actually a very specific loophole that probably allows his income to be taxed as capital gains (taxed at the 15 percent rate) even when it is actually compensation for work. We call this the Romney Loophole, which allows wealthy fund managers to treat their “carried interest” (profits that they receive as compensation for their work) as capital gains and thus subject to the low 15 percent tax rate.

President Obama’s budget plans all contain a proposal to close the Romney Loophole, which would at least end the very worst abuse of the tax preference for capital gains and stock dividends. But to truly implement the Buffett Rule, the tax preference for investment income must be eliminated entirely.

A new report from President Obama’s jobs council reflects a major dispute between corporate and labor leaders over tax reform. According to Reuters, the report “notes disagreement among council members over whether to shift to a ‘territorial’ system that exempts most or all foreign income from corporate taxes when it is repatriated.”

The report is from the President’s Council on Jobs and Competitiveness, which includes labor and business leaders and is chaired by Jeffrey Immelt, CEO of the notorious tax dodger, General Electric.

A “territorial” tax system is a euphemism for exempting the offshore profits of U.S. corporations from our corporate income tax. The bottom line is that our current system already provides a tax break that encourages U.S. corporations to shift investments offshore, and a “territorial” system would expand that tax break.

The existing tax break is the rule that allows U.S. corporations to “defer” U.S. taxes on their offshore profits until those profits are brought to the U.S. (until they are “repatriated”). Often these profits remain offshore for years and the U.S. corporation may have no plans to repatriate them ever.

This “deferral” of U.S. taxes on offshore profits provides an incentive for U.S. corporations to shift operations and jobs to a lower tax country, or just use accounting gimmicks to make their U.S. profits appear to be “foreign” profits generated in offshore tax havens.

These incentives for corporations to shift jobs and profits offshore would only increase if their offshore profits were entirely exempt from U.S. taxes, as would be the case under a territorial tax system.

Labor leaders know this, and labor unions have joined other organizations in opposing a territorial system. In October, when there were rumors that the Congressional “Super Committee” might propose a corporate tax reform, the big unions joined a letter to the committee members urging them to reject any proposal for a territorial tax system.

Corporate leaders, on the other hand, have been calling for a territorial system because of the benefits it would provide for corporations trying to lower their tax bills. The likely “disagreement” cited in the White House report probably was between the labor leaders and corporate leaders on the President’s jobs council.

As we explain in this fact sheet, the real answer is not to adopt a territorial tax system but to end “deferral.” Here’s a report making the same case in much more detail.

Ending Tax Breaks for Companies Moving Jobs Offshore

President Obama hosted an “Insourcing American Jobs Forum” last week with business leaders who are bringing jobs back to the United States. During the event, the President announced he’d soon “put forward new tax proposals that reward companies that choose to bring jobs home and invest in America.  And we’re going to eliminate tax breaks for companies that are moving jobs overseas.”

As already explained, the most straightforward way to do this would be to end deferral.

Another possibility is that the President could push some of the modest, but still helpful, proposals made early in his administration to limit the worst abuses of deferral. (Here’s a CTJ report explaining these proposals.) Unfortunately, the President immediately started backing away from these and dropped the most significant of these reforms (a change to the arcane-sounding “check-the-box” rules) by the time he made his second budget proposal.

Real tax reform depends on the administration being far more willing to stand up to the corporate CEOs — including those who sit on his jobs council.

Photo of Council on Jobs and Competitiveness via The White House Creative Commons Attribution License 2.0