Category: TaxJusticeBlog

For those concerned with the fate of our corporate tax code, perhaps the most important organization to watch right now is the Financial Accounting Standards Board (FASB). While not well-known to those outside the accounting profession, FASB plays a critical role as the organization that sets the standards for what appears in corporate financial statements. What makes this role so important to the corporate tax debate is that FASB can require corporations to disclose information about the tax rates they pay in the U.S. and abroad—and is currently reevaluating its tax disclosure requirements.

One of the fundamental problems with the debate around our country’s corporate tax code is the lack of transparency on exactly how much companies are paying in taxes and how they structure their offshore operations. To the extent that this data is available, it comes in the form of companies’ publicly disclosed financial statements. For their part, Citizens for Tax Justice (CTJ) and the Institute on Taxation and Economic Policy (ITEP) rely heavily for these reports to estimate the effective tax rates of different companies or estimate how much companies may owe in taxes on their offshore income. While these reports provide critical insights into our corporate tax code, they are only as good as the data that financial statements provide and unfortunately this data is lacking in a number of important ways.

As an example, one of the biggest information gaps in current financial statements is that the overwhelming majority of companies with offshore earnings fail to report how much they would owe in taxes if they were to repatriate these earnings back to the United States. In fact, out of the 298 Fortune 500 companies that report offshore earnings, only 58 companies disclose how much in taxes they would owe on this money on repatriation. This incomplete disclosure makes it difficult for lawmakers and the public to assess the extent to which companies are holding these earnings in tax havens to avoid U.S. taxes.

For the past few years, FASB has undertaken a wholesale overhaul of its disclosure requirements in order to make them more effective. Recognizing many of the problems with income tax disclosures, FASB recently proposed draft rules expanding the disclosure of income tax information and related information. While the changes FASB is proposing are helpful, in a comment letter to FASB sent today, ITEP called on the board to use this disclosure review process to bring complete transparency to company filing by requiring them to publicly disclose basic tax and financial data on a country-by-country basis.

If FASB required companies to disclose their income, revenues, assets and income tax paid on a country-by-country basis, this information would reset the corporate tax debate by providing a more complete picture of the operations and tax status of our nation’s corporations. The public would be able to see more clearly the extent to which the nation’s largest companies are engaging in tax avoidance. With this information in hand, the public and their representatives could make a better informed decision about the ways in which our corporate tax code needs to be reformed.

Even minor expansions to the current disclosure rules could prove important to the corporate tax debate. For example, FASB proposes to require companies to report their income taxes paid both in the United States and abroad. This information would better inform the debate on the corporate tax code by allowing the public access to a second measure of companies’ domestic effective tax rate.

While the work of FASB is often unappreciated, its decisions over the next few months will have important implications for our understanding of the corporate tax code and the reforms that it needs. Hopefully, FASB’s work will add greater transparency to the murky corporate tax debate.

Tax policy has figured prominently in this presidential election cycle, with both major party candidates releasing tax proposals and, on the campaign trail, frequently discussing how their tax policy changes would affect Americans.

Hillary Clinton has released a tax plan that would increase taxes on wealthy Americans and increase federal revenue by more than a trillion dollars over the next decade. Donald Trump proposes a tax cut that will cost an estimated $4.8 trillion over a decade and would largely benefit the wealthy.

During Monday night’s debate, both candidates seized on the tax issue. Below are some clarifications of the political spin.

Large Tax Cuts and Debt Reduction Don’t Go Together

Throughout the debate, Mr. Trump several times pointed to the nation’s $20 trillion national debt as a reason to change course on fiscal policy. At the same time, he proposes an-across-the-board tax cut of at least $4.8 trillion of which the lion’s share, 44 percent, would go to the richest 1 percent of households. Reducing annual deficits and cutting taxes on this scale are incongruous policy ideas, particularly if there are no plans to slash spending on the same scale.  According to an analysis by the Committee for Responsible Budget (CFRB), Mr. Trump has only proposed about $1.2 trillion in net spending cuts over the next 10 years, which does not come close to making Trump’s tax cut plan budget neutral.

In fact, CFRB estimates that the added interest payments from the cost of deficit-financing his tax cuts would wipe out more than half the spending cuts he is proposing. In other words, Trump’s plan would dig the country trillions deeper into debt, not help the country get out of it.

Secretary Clinton’s tax plan would enact a series of tax increases on the wealthiest Americans, including the so-called Buffett Rule, a separate surcharge on income over $5 million and ending the stepped-up basis loophole on capital gains income. The plan also includes a series of tax breaks to incentivize corporate profit sharing and for caregiving and excess out-of-pocket healthcare costs, among other ideas. From a deficit perspective, Secretary Clinton has ensured that all of her new spending and tax break proposals are matched up with revenue increasing proposals that ensure that they do not add to the deficit. Unfortunately, with the country facing a deficit of more than $9 trillion during the next decade, substantially more revenue than Secretary Clinton is proposing is needed just to keep up with the existing revenue gap.

Corporations’ Offshore Cash Could Provide an Influx of Revenue, But …

During the debate, Mr. Trump alluded to multinational corporations’ $2.4 trillion in earnings stashed offshore and his plan to enact a deemed repatriation rate of 10 percent on these earnings. He seemed to be supporting the ideologically driven argument that corporations are stashing money offshore because the U.S. corporate tax rate is too high and if the U.S. lowered its rate or provided a discounted rate upon repatriation, as some lawmakers have advocated, the U.S. could tap into this tax revenue.

Secretary Clinton said during the debate that she supports the “bringing back of money that’s stranded overseas” and that she does not believe Mr. Trump’s proposals would accomplish the repatriation of funds he’s betting on. Unfortunately, Sec. Clinton did not elaborate during the debate on her specific objections to Mr. Trump’s repatriation proposals, and her campaign has not laid out a specific plan on business tax reform. However, her campaign has specified that it would raise $275 billion from business tax reform, which tracks closely with the amount that would be raised through President Barack Obama’s 14 percent deemed repatriation proposal, a rate that is not substantially higher than Mr. Trump 10 percent proposal.

On the corporate tax argument, it is important not to buy into political rhetoric that says our U.S. businesses are faltering. U.S. corporations are competitive and profitable. The average effective tax rate for profitable Fortune 500 corporations is just 19.4 percent, just over half the statutory rate of 35 percent. In fact, far too many profitable, large corporations pay nothing in taxes in many years. From a comparative perspective, the U.S. corporate tax level is below average compared to other for developed countries.

The real issue with regard to corporations holding trillions in profits offshore to avoid U.S. taxes is that our federal tax system allows companies to defer paying taxes on foreign profits until they are repatriated, which creates an incentive for companies to engage in accounting tricks and book U.S.-earned profits in offshore tax havens. Rather than give companies huge tax breaks, the better solution would be to simply close the loopholes that allow companies to move offshore and to require companies to immediately pay U.S. taxes on their offshore earnings.

What Can We Learn From Candidates’ Tax Returns?

Mr. Trump reiterated during the debate that he does not plan to release his tax returns because they are under audit and went on to argue that not much information can be deemed from tax returns in any case. Both points get wrong important facts about tax return information.

First, the IRS has already stated that Mr. Trump can release his tax returns, even those under audit. More importantly and to state the obvious, tax returns provide critical information about whether a candidate is paying taxes, their effective tax rate, their charitable contributions, and in the case of Mr. Trump, information about his business dealings. Finally, tax returns provide a great deal of information on a person’s business and financial relationships and can reveal private conflicts of interest. In 2012, we learned that Mitt Romney, despite great wealth, paid a lower effective rate than many middle-class families. We also know, for example, information about how and from whom Secretary Clinton and former President Clinton earned their money, and we also know how much they have contributed to their charitable foundation and what their effective tax rate is. Furthermore, although not required by law, every Republican and Democratic presidential candidate since Richard Nixon (Gerald Ford released a summary) has released their tax returns.

The Value-Added Tax (VAT)

Mr. Trump raised Mexico’s VAT during a discussion of NAFTA and trade. In so many words, he said Mexico’s VAT puts U.S. exporters at a disadvantage because it places a “16 percent, approximately” tax on U.S. products. It’s important to note that Mexico’s VAT is not a tariff. The consumption tax also applies to domestically made products, meaning that the VAT gives no tax advantage in Mexico to buying Mexican over American products. Moreover, Mexican products also face a similar tax in the U.S. in the form of the state and local sales taxes levied by most states. And of course, Mexico is far from the only nation to levy a VAT. If Mr. Trump is pure in the idea that VATs put U.S. exporters at an economic disadvantage, then he would have to shut down trade with France, Germany, Great Britain and a host of countries across the globe.  

A New York Times investigation of the extensive tax breaks that Republican presidential nominee Donald J. Trump’s business enterprises received over the past several decades is helping to bring scrutiny to the practice of local property tax abatements and other local economic incentives. Local officials consistently afforded Trump deals which allowed him to pay very little in taxes on the properties he has built and in some cases totally recoup building costs through tax forgiveness.

The article focuses on the nine construction projects Mr. Trump has overseen in New York City since his solo developer debut in 1980. According to the article, Trump’s real estate development projects have “reaped at least $885 million in tax breaks, grants, and other subsidies” in New York City alone. The largest and most detailed example the article discusses is how Trump’s Grand Hyatt Hotel, which cost an estimated $120 million to build in 1980, has received $359.3 million in forgiven or uncollected taxes to date due to a 40-year deal he struck with the city.

The New York Times’ case study on Trump’s tax treatment is just one example of bad economic development policies that state and local governments adopt all too often. A Good Jobs First study of more than 4,200 economic incentive awards in 14 states (including New York) found that 80 to 96 percent of funds went to large corporate interests. These interests, while promising to bring a plethora of well-paying jobs to communities, often do not deliver on their promises, or do so but only at a very high cost to the community.

This cost comes in the form of decreased tax revenues for the local government. Large firms have little incentive to invest in a community compared to small businesses because the success of the overall corporation depends very little on any single community. Meanwhile, the “business friendly” tax deals afforded to the companies deplete local funds for infrastructure and education, deteriorating the long-term human capital necessary to build a sustainable economy by attracting businesses that require skilled workers for high-paying jobs.

Trump is just one of many developers who use tax incentive programs intended to revitalize economic growth. Sadly, Trump’s business dealings are being reported on only because he is running for President. These developers often fall very short of their economic promises while profiting hugely from taxpayer money. Local and state governments should stop using tax incentives and other subsidies to attract businesses and encourage economic development. Instead, they should expand education opportunities and infrastructure spending to directly invest in their communities and cultivate the skills that top-ranking firms need.

This week we are bringing you news of proposed new (or increased) taxes in Missouri, Illinois, Louisiana, California and Oregon and the spread of ‘dark store’ tax avoidance practices across the states.  Thanks for reading the Rundown!

— Meg Wiehe, ITEP State Policy Director, @megwiehe

• Missouri voters will officially be considering two proposals to increase state tobacco taxes, either by 60 cents per pack over four years or 6 cents over six years. A helpful breakdown of the two proposals and how revenues would be distributed is available here.
• In Illinois, Cook County Board President is considering adopting a tax on sugary beverages to close a $174 million budget gap.
• Members of the Governor’s Task Force for Transportation Infrastructure Investment are considering a gas tax increase as a viable way to meet Louisiana‘s infrastructure needs. The last time the state raised its gas tax was in 1984.
• Cities across California may start taxing online video streaming services, following the lead of Pennsylvania, Minnesota, and Chicago.
• Among the parties weighing in on Oregon‘s gross receipts tax on large businesses (Measure 97) are former Oregon governors and the unlikely tax policy adviser Kansas governor Sam Brownback.
• The “dark store” tactic – by which big-box retailers like Lowe’s are challenging their property tax valuations and undermining funding streams for schools and other local services – is spreading across the country and now hitting Alabama in a big way. Meanwhile, new Northern Michigan University-produced documentary “Boxed In” chronicles that state’s fight over the issue.

What We’re Reading…  

• A new report from the Rockefeller Institute of Government warns of “slow and highly uncertain” revenue growth for states in FY 2017, which could foreshadow budget cuts ahead.
• Pew Charitable Trusts reports that record money is being spent on state ballot campaigns across the nation in the leadup to November’s election.
• The Center for American Progress released a tax simplification plan that will “work for everyone.”
• California’s Legislative Analyst’s Office has released a report examining the impacts of Proposition 13—the landmark property tax limitations enacted back in 1978.

• A new report from the Council of Economic advisors examining progress made on income inequality under President Obama includes the impact of tax policy changes such as an expansion of the Earned Income Tax Credit and a rollback of the Bush era tax cuts for the wealthiest households.

If you like what you are seeing in the Rundown (or even if you don’t) please send any feedback or tips for future posts to Meg Wiehe at meg@itep.org. Click here to sign up to receive the Rundown via email.

On Thursday, Rep. Mark Pocan (WI-D) introduced the Corporate Transparency and Accountability Act, a bill which would require all publicly-traded multinational companies to disclose their revenues, profits, taxes, and certain other operations information on a country-by-country basis (CbCR) to the Securities and Exchange Commission (SEC). The measures in the bill are similar to the rules adopted by the Internal Revenue Service (IRS) earlier this year with the key difference being that this information would be available to the general public.

By requiring CbCR, passage of the bill would represent a major gain in the battle to end the practices of base erosion and profit-shifting in the corporate world. This information will help governments to identify the shady accounting practices companies use to minimize their tax obligations and combat those practices through responsible changes to the tax code.

Advocates have long been calling for the SEC to voluntarily adopt these rules, but there has been significant pushback from corporate and financial interests. That being said, there is evidence that even the largest financial interests are beginning to realize that they are fighting a losing battle. Earlier this year, Goldman Sachs sent a memo to investors telling them to “Buy stocks with high US sales and high effective tax rates and avoid firms with high foreign sales and low tax rates,” indicating at least one major firm believes that the lax financial regulations that have allowed multinationals to amass $2.4 trillion offshore are coming to an end.

The public and investors alike would benefit a great deal from the passage of Rep. Pocan’s bill because it would provide much needed transparency on the level of corporate taxes that companies are paying throughout the world. 

Aaron Mendelson, an ITEP intern, contributed to this report.

Mississippi’s proposal to move to a user-based tax system is a euphemism for increasing regressive sales and consumption taxes that will ultimately result in higher taxes for the poorest Mississippians and lower taxes on the wealthy.

Currently, Mississippi legislators are reviewing the state’s tax code with a goal, according to Lt. Gov. Reeves, to “move toward a user-based system rather than an income-based system.”

 And now that the study has begun, one outlet recapped the first day of study proceedings with the blunt headline “Mississippi Would Benefit from Consumption-Based Tax System” (paywall). With the Mississippi legislature’s recent history of cutting taxes and seeming desire by many to continue with more of the same, it is important to add data to this conversation showing who would benefit – or not – from the sort of tax shift the Mississippi Tax Policy Panel is considering.

As Hope Policy Institute succinctly pointed out last week, there is no reason to expect cutting taxes and shifting reliance away from income toward sales taxes will bring economic growth and benefit Mississippians. Additionally, a look at whose taxes would rise and fall if the state moves to a “user-based’ system is striking.

ITEP examined the impact of carrying the tax-shift goal to its logical extreme: completely replacing the state’s $1.9 billion of personal income tax revenues with higher sales taxes. Our analysis found that the lowest-income Mississippians (bottom 20 percent of taxpayers), who already pay nearly twice the effective tax rate paid by the highest-income 1 percent, would see an additional 3.3 percent of their incomes go toward taxes, while the highest-income 1 percent in the state would see tax cuts averaging 2.9 percent of their incomes – a tax cut of more than $21,000 on average for that group (See graph).  The change would result in a massive shift of the responsibility for paying state taxes away from the highest-income Mississippians and onto low- and middle-income families. Furthermore, to do this without broadening the sales tax base would require a state sales tax rate of about 10.78 percent, which would be easily the highest rate in the nation and an increase of more than 54 percent over the state’s current 7 percent rate.

While this type of wholesale elimination of the personal income tax has not been explicitly proposed this year, it was proposed in 2015 and is illustrative of what it means to “move toward a user-based system rather than an income-based system,” and it is crucial for the tax policy panel and Mississippians generally to understand that any significant shift from income taxes to sales taxes will take on these same highly regressive contours. When it is claimed that “Mississippi would benefit” from such a shift, it is important to ask which Mississippians.

It’s been about three weeks since the Rio Summer Olympics ended, but the finals for the political gymnastics around the mother of all sports competitions are just now beginning. The clear favorite in the competition is a bill proposed by Senators John Thune (R-SD) and Chuck Schumer’s (D-NY), the United States Appreciation for Olympics and Paralympians Act, which would designate the income athletes receive from their medals’ cash prizes tax-exempt. The bill made a strong showing in the qualifiers of the competition, passing by unanimous consent in the Senate on July 12, 2016.

This leaves the House to judge the bill’s performance, and the House Ways and Means Committee passed the bill out of committee with little debate. It looks like the bill is set to coast through the remainder of the legislative floor routine, as President Obama has already voiced his support of a failed, identical bill with similar bipartisan support which was the Congressional response to the Sochi Winter Olympics. Unlike the previous bills, Thune and Schumer’s bill is poised to bring home the gold—while politicians come in dead last on tax reform.

Spurred on by dubious claims that Olympians face onerous tax bills for their athletic success, the crux of the bill’s argument rests on the notion that we should not financially punish medal-winning athletes “for representing our country and reaching the pinnacle of their sport,” but this argument is a weak one at best. To start, the U.S. tax code does not financially punish athletes for pursuing their Olympic dreams, in fact it encourages them to strive to do better.

The IRS allows Olympic athletes to deduct their training as a business expense from their taxes, disproportionately helping the large number of athletes with Olympic ambitions that do not win medals, but train just as hard—often while also working a part- or full-time job in addition to their intense training. This tax proposal would only help the small percentage of Olympic athletes that win medals at the competition, and would disproportionately help the even smaller percentage of athletes who win multiple medals. The only reasonable measure of the bill is that, thanks to an amendment introduced by Rep. Pascrell (D-NJ), this tax break would not apply to medal winners with an annual income over $1 million, which means it avoids giving an exorbitant tax break to athletes who also have lucrative endorsements from sources ranging from sporting goods companies to cereal brands.

None of this is to say that Olympians do not deserve to profit from excelling in their fields of expertise or that Olympians do not do a great job at representing our country (though some do it better than others). The point made here is that the U.S. tax code must be impartial in terms of how individuals earn their income and that the hardest working Olympic athlete is no more deserving of a tax break than the hardest working nurse, teacher, or firefighter.

For almost a decade now, the mantra of tax reform has been to broaden the tax base by cleaning out the various special interest breaks that have made the tax code so complex. This bill moves in the exact opposite direction by providing an extremely small subset of people a new special tax break. If members of Congress are truly committed to reforming the tax code, the first thing they should do is to stop making the code more complicated with bills like this one. 

Poverty, income-inequality, and stagnant wages have been a major part of the political discourse this election cycle. And for good reason. Although new Census data reveal a substantial drop in poverty and a significant increase in income, median household income is still less than it was in real dollars 17 years ago, and 43 million (or nearly one in seven) people in this country live in poverty.

Fortunately, state lawmakers have a range of policy options to mitigate poverty and improve the quality of life of families across the country. ITEP today updated its annual report, State Tax Codes as Poverty Fighting Tools. The report, incorporates the U.S. Census Bureau’s ACS data and makes the case for four key anti-poverty tax policies: state Earned Income Tax Credits (EITCs), property tax circuit breaker programs, targeted low-income credits, and childcare related tax credits. These policies, when well-structured, can provide families with additional income, putting that money back in their pockets to help pay for food, housing, transportation, and other necessities.

Reforming state tax systems should be a priority for state lawmakers across the country. ITEP’s bi-annual report, Who Pays? reveals that when all taxes levied by state and local governments are taken into account, every state imposes higher effective tax rates on their poorest families than the richest 1 percent of taxpayers. Across the country the effective tax rate for the poorest 20 percent of taxpayers is 10.9 percent, more than double the 5.4 percent average effective tax rate for the top 1 percent.

For better or worse, our priorities are reflected in our tax codes. Reforming tax systems in a way that ensures the lowest-income families are not paying a greater share of their income to fund services on which we all rely should be a top priority for state lawmakers.

We recommend that states enact, or strengthen, one or more of four proven and effective tax strategies to reduce the share of taxes paid by low- and middle-income families and increase their ability to make ends meet.

Misha Hill contributed to this report

New national data on poverty and income released this week by the U.S. Census Bureau reveals that from 2014 to 2015, median household income increased by 5.2 percent and poverty declined by 1.2 percent — good news by any measure. But these statistics don’t tell the full story.

Despite positive growth in incomes from 2014-2015, low-income earners were worse off in 2015 than they were 15 years ago because income growth has not been sufficient to keep up with inflation. Once the impact of rising prices is taken into account, incomes among the bottom 20 percent of earners in 2015 were actually 8 percent lower than they were in 2001, and incomes among the next 20 percent of earners were 4 percent lower than they were in 2001.

While low- and moderate-income taxpayers have less buying power today than they did 15 years ago, many are paying more in state taxes because too many state tax codes do not take the nuances of inflation into consideration. This phenomenon, dubbed ‘bracket creep,’ is the subject of a recent ITEP policy brief, “Indexing Income Taxes for Inflation: Why It Matters.”

State tax systems have many features that are defined as fixed dollar amounts, including the income levels at which various tax rates start to apply. If these fixed income levels aren’t adjusted periodically, taxes can go up substantially simply because of inflation. For example, in 1969 Illinois enacted a personal exemption of $1,000. If this amount had been adjusted for inflation since its enactment, taxpayers could exempt $6,550 per filer and dependent instead of the current $2,175.

Consider a hypothetical state that taxes the first $20,000 of income at 2 percent and all income above $20,000 at 4 percent. A person who earns $19,500 will only pay tax at the 2 percent tax rate (Figure 1). But over time, if this person’s salary grows at the rate of inflation, she will find herself paying at a higher rate—even though, in terms of the cost of living and ability to pay, her income hasn’t gone up at all. In this example, suppose the rate of inflation is 5 percent per year and the person gets salary raises that are exactly enough to keep up with inflation. After four years, that means a raise to $23,702. Whereas before all of this person’s income was taxed at the 2 percent rate, part of this person’s income ($3,702) will now be taxed at the higher 4 percent rate because the tax brackets haven’t also increased with inflation.  

In this way, as the ITEP report Who Pays? notes, unfair state tax systems exacerbate widening income inequality. To learn more about “bracket creep” and the importance of indexing tax policy provisions, check out the brief!