Category: TaxJusticeBlog

This Tuesday, the front page of Mississippi’s capital city newspaper, the Clarion-Ledger, featured a three-word plea to state lawmakers: “STOP THE MADNESS.” The accompanying editorial re-capped a legislative session in which legislators, largely as a result of having cut taxes by $350 million in recent years, have made painful funding cuts to most state agencies yet are inexplicably debating  another round of tax cuts.

Unfortunately, Mississippi legislators could not be swayed. Rather than heeding the clarion call to “stop the madness,” the legislature opted to drag it out over the course of the next 12 years. The slow onset of these tax cuts will begin with phasing in a 50 percent deduction for federal self-employment taxes from 2017 to 2019, then accelerate with cuts to the bottom personal and corporate income tax rates from 2018 to 2022, and then conclude with the phase-out of the corporate franchise tax from 2019 to 2028. The bill delays the worst of these effects until several years down the road (see graph), but ultimately the cuts will reduce revenues by $415 million per year that fund services that legislators have already cut this year. The insanity was exquisitely captured in a political cartoon in which policymakers sit in an already-sinking boat labeled “state budget,” while the lieutenant governor suggests they “shoot holes in the bottom so it’ll drain faster.”

The political dynamics leading to this result were interesting as well. The session started with a legislative race decided by an official straw-drawing ceremony, which was later negated, giving Republicans a supermajority in the Mississippi House that some thought would lead to a tax cut package like the one just enacted. But in the end, some Republicans voted against the bill and several Democrats supported it as a tradeoff for ensuring bipartisan support for $249 million in bond-financing for construction projects throughout the state. That bill and some of the specific projects it funds are  high enough priorities for certain legislators that they agreed to support the tax cuts to ensure the bond bill passed.

In other words, Mississippi legislators kicked two cans down the road at once: they simultaneously borrowed money for needed infrastructure improvements and enacted tax cuts that will undermine the state’s ability to repay those debts in the future. Sanity cannot return to the Mississippi Legislature soon enough.

Tax cuts in Maryland seemed inevitable at times this year, as lawmakers in the House and Senate seemed to be in agreement on some key issues. Both chambers sought to improve the Earned Income Tax Credit (EITC) for childless low- and middle-income working Marylanders while also cutting tax rates for those higher up the income scale. But lawmakers were unable to agree on whether the bulk of the benefit should be distributed broadly, or whether it should be reserved primarily for the wealthiest Marylanders. In the end, all of the personal income tax changes under consideration were left on the cutting-room floor, though it’s worth noting that lawmakers were able to agree on a $37.5 million credit for aerospace company Northrop Grumman.

The central difference between the two tax plans was that the Senate’s version was heavily skewed toward the highest-income Marylanders while the House’s version was tailored to be more consistent in its impact across different income groups (see Figure 1). The Senate plan (PDF) would have cut the state’s top four income tax rates, which affect people with incomes of at least $100,000 or $150,000 depending on filing status, and increased the personal exemption by $200 per person. The House plan (PDF) omitted the personal exemption increase and focused its rate cut on a middle income tax bracket that affects all Marylanders with taxable income of at least $3,000. 

Looking back on the session, Senate President Thomas Miller made the peculiar claim that his chamber’s plan “did tax cuts across the board,” while the House “wanted simply to help the people on the lower end of the economic spectrum.” That difference, said Miller, was the reason that lawmakers failed to reach agreement.

But ITEP’s analysis makes clear that of the two, the House’s plan was actually closer to being an “across the board” cut. The Senate’s plan would have provided roughly $1,700 in tax cuts each year to members of the state’s top 1 percent of earners (a group that averages $1.6 million in income). The House’s version, by contrast, would have given that group a reduction more in line with what lower- and middle-income households could expect to receive: approximately $140 on average versus about $60 for low-income families and $40 for middle-income families. Overall, the Senate’s version gave more than a quarter (27 percent) of the total benefit to the top 1 percent of earners and almost half (48 percent) to the top 20 percent of Marylanders—a far cry from an “across the board” benefit.

While Maryland will be no worse off for its failure to cut income tax rates, these disagreements did have the unfortunate side effect of blocking an expansion to the state’s EITC that was widely agreed upon by lawmakers in both the House and Senate. Similar to a recent innovative change in neighboring Washington, D.C., the expansion would have significantly improved the value and reach of the credit for childless adults, a group largely overlooked by the federal EITC on which the Maryland credit is based.

Figure 2 shows how meaningful the expansion would have been for childless adults at different income levels. For example:

• Currently, a single working Marylander with no children and an income of $11,000 (just below the federal poverty guideline of $11,880) is eligible for a Maryland EITC of only about $77. Increasing Maryland’s EITC from 26 percent of the federal credit to 28 percent (as is already scheduled to occur next year) would only improve this by about $6. But under the expansion proposed in SB 840, that person would have received a total Maryland EITC of $506, which, combined with the federal EITC of $297, would go much further toward lifting this worker out of poverty.
• A single working Marylander with no children and an income of $5,940 – only half the federal poverty guideline – receives a Maryland EITC of just $127 even when the credit increases to 28 percent of the federal credit as scheduled. But this person’s credit would have been $454 under SB 840, a $327 increase that would be very meaningful for someone in such severe poverty.
• A single working Marylander with no children and a full-time $9-per-hour job ($18,720 annually) is currently not eligible for any federal or Maryland EITC because the credit is heavily weighted toward working families with children and very-low-income childless adults. But under the expansion proposed in SB 840, such an individual would have received a state credit of $366, enough to pay for a community college class that could improve their job skills.

The debate in Maryland this year exemplifies the difficult political realities associated with crafting tax policies that are geared toward those most in need. With continued work, hopefully the negotiations this year paved the way for some of the EITC improvements in SB 840 to become law in the future.

Two years ago, the Koch-brothers-backed group Americans for Tax Reform and anti-tax advocate Grover Norquist launched an aggressive effort in Tennessee to eliminate the Hall Tax, a modest tax on capital gains and dividends that primarily falls on the very wealthiest Tennesseans.

That effort failed to produce results at the time, but like Kudzu, “the vine that ate the South,” the invasive idea proved difficult to stop once it took root in the Tennessee Legislature. With continued urging from outside groups and the state running a budget surplus this year, lawmakers again considered various proposals to outright eliminate the tax or phase it out over a number of years. Still, some remained concerned about giving life to a process that would be difficult to reverse and would choke off funding needed for state and local services.

But in a compromise that advanced unanimously through the Senate Finance, Ways, and Means Committee on Monday and continues to gain co-sponsors, Tennessee legislators are hoping they can introduce just a little bit of this Koch Kudzu this year and manage its spread in future years.

Can’t See the Forest for the Kudzu

While passing a measure to eliminate a tax that raises millions each year may be politically expedient during a year with a budget surplus, it is shortsighted.

The compromise reduces the Hall Tax rate from 6 percent to 5 percent in 2016 and declares the General Assembly’s intent to continue reducing the tax by 1 percentage point per year until it is extinct in 2021. This would reduce state and local revenues by about $57 million in the first year and $341 million per year if full repeal happens.

Revenue from the Hall Tax funds many vital state services and are also shared with Tennessee counties and municipalities. Ultimately these local governments could lose all of their Hall Tax revenue, which is currently about $119 million annually and used to pay for city streets, local police officers, county roads, etc. Once that revenue disappears, Tennesseans will either face cuts to those services or increases in their local property taxes.

Moreover, an Institute on Taxation and Economic Policy analysis finds that only those in the upper reaches of the Tennessee economy would see any significant benefit from the tax cuts. In just the first year, the wealthiest 1 percent of Tennesseans (with an average income of $1.2 million) would receive tax cuts averaging $870, while a majority of Tennesseans would see no benefit at all (see graph). 

More specifically, as we have detailed in our full report on Hall Tax repeal, only 14 percent of the total tax cut would flow to households among the bottom 95 percent of earners, while the top 5 percent of households would receive 61 percent of the benefit, and the federal government would collect the remaining 25 percent due to higher federal income tax payments by Tennesseans who would not be able to deduct as much in state taxes from their federal income taxes.

It should be noted that the Tennessee tax system is more regressive (meaning it captures a greater share of income from the lowest-income residents than the wealthiest) than all but six other states. In fact, the average tax rate for the bottom 20 percent of taxpayers is 10.9 percent compared to just 3 percent for the top 1 percent. Reducing or repealing the Hall Tax would make this imbalance even worse.

“State and local governments alone take in $11.6 billion from taxpayers without papers. They’d net more if more immigrants had legal status.

It may come as a surprise to some that just like almost everyone else, undocumented immigrants pay taxes. They pay property taxes and sales taxes, and many also pay taxes on their incomes. In fact, on average, they pay a higher share of their incomes in state and local taxes than taxpayers in the top 1%.”

Read the Full Article in USA Today

In the Tax Justice Digest we recap the latest reports, posts, and analyses from Citizens for Tax Justice and the Institute on Taxation and Economic Policy.

 Just in time for Tax Day, CTJ and ITEP have prepared a variety of materials that answer common Tax Day questions.

 Who Pays Taxes?
Short answer: Everyone.
CTJ is the only think tank that collectively analyzes all taxes (federal, state, local, excise, etc.) to calculate total effective tax rates. In this April 2016 update, CTJ finds that each income group’s share of total taxes is more or less on par with their share of all income.

Profitable Corporations Still Managing to Pay $0 in Federal Income Tax
Eight U.S. corporations, including some common household names like Netflix, paid effective federal tax rates of zero in 2015, a new CTJ report finds. For most of them, last year wasn’t an aberration. Over a five-year period, these companies managed to pay little or nothing in federal income taxes. Read more.

Say What? GE and Verizon Defend Tax Record
This week CEOs of General Electric and Verizon wrote op-eds claiming that their companies actually do pay their “fair share” of taxes. CTJ analysts took a close look at both companies’ tax records over the last 15 years and set the record straight in this new post.

Five Things You Should Know on Monday
Myths about taxes and Tax Day abound. This new brief from CTJ outlines five facts you should know on Tax Day. For example, the U.S. statutory corporate income tax rate is 35 percent, but many companies pay at a much lower rate. Click here to learn four other Tax Day facts.

Think U.S. Taxes Are High Compared to Other Developed Nations?
Check out this informative video, Taxes and the U.S. Economy. Compared to other developed nations, tax collections as a share of the U.S. economy are substantially below average. The data from the video comes from this recent CTJ report.

What about State Taxes?
ITEP analyzes state and local taxes in all fifty states. Regrettably, all 50 states have regressive tax systems that tax the poor far more than the rich. Click here to see how taxpayers at different income levels are impacted by your state’s tax structure.

Where are US Companies Stashing Profits?
CTJ finds that American corporations are using tax gimmicks to shift profits earned in the U.S. to subsidiaries located in tax haven countries to avoid paying corporate taxes. In some of these countries the U.S. profits actually exceed the tax haven country’s Gross Domestic Product.

Shareable Tax Analysis:

ICYMI: The Earned Income Tax Credit (EITC) is an especially important tax credit designed to help low-wage workers move out of poverty and achieve economic security. Here’s ITEP’s latest brief on the EITC’s effectiveness as an anti-poverty tool.

If you have any feedback on the Digest, please email me here: kelly@itep.org

To sign up to receive the Tax Justice Digest in your inbox click here.

For frequent updates find us on Twitter (CTJ/ITEP), Facebook (CTJ/ITEP), and at the Tax Justice blog.

Alaska is grappling with one of the most serious budget shortfalls in the nation. The state currently faces a budget gap exceeding $4 billion and current revenues are expected to cover just 25 percent of the state’s costs, despite major spending cuts enacted in recent years.

With a revenue system highly dependent on oil tax and royalty revenue, Alaska has been forced to reevaluate its revenue structure in the face of plummeting oil production and prices. For years Alaska was able to use oil revenue proceeds to fund state government, and even repeal their income tax and cut sizable annual checks to Alaskans. Faced now with a new fiscal reality, the state is considering ways in which to diversify its revenue stream.

In a new report, “Distributional Analyses of Revenue Options for Alaska,” ITEP analyzes Gov. Walker’s New Sustainable Alaska Plan and other revenue strategies to fill the gap. The report presents information on how a range of policy options would impact Alaskans at different income levels.

The New Sustainable Alaska Plan, the most ambitious proposal on the table, would institute a personal income tax in the state for the first time in 35 years, reduce the Permanent Fund dividend (a cash payment that most Alaskans receive each year) and increase taxes on a variety of industries and on purchases of alcohol, tobacco and motor fuel.

The personal income tax in the plan was specifically proposed to offset the disproportionate impact that many of these changes would have on moderate-income families. Alaska is one of just nine states that lack a broad-based personal income tax – the most equitable revenue option available to states.

According to ITEP’s research director, Carl Davis:

“The governor’s decision to include an income tax in his fiscal plan was a step forward for Alaska’s budget debate. It is simply not possible to craft an equitable solution to Alaska’s budget shortfall that does not include some level of income tax.”

While a step in the right direction, the report finds that the modest income tax structure proposed in the New Sustainable Alaska Plan is not enough to fully offset the regressive nature of other components included in the package. Low-income families could expect to see their incomes reduced by between 5.5 and 9.6 percent, while higher-income families would face declines equal to just 1.2 to 2.0 percent of their incomes. Middle income families would see declines in the range of 2.4 to 3.9 percent.

The distributional impact of the New Sustainable Alaska Plan and other proposals currently being discussed by the legislature could be improved if they were rebalanced to derive more revenue from the personal income tax and less from reductions in the dividend. ITEP’s findings show that it is not possible to close Alaska’s budget gap in an equitable way unless a robust personal income tax is enacted as part of the package.

Read the report

In his 2013 book, The Great Escape: Health, Wealth and the Origins of Inequality, Nobel Prize winning economist Angus Deaton wrote, “The very wealthy have little need for state-provided education or health care; they have every reason … to fight any increase in taxes.”

Deaton was making a case for democracy and against the superrich having outsize influence in our nation’s political process. Two recent campaigns in Missouri to abolish a local tax that funds a variety of programs from public park maintenance to human services are a case study in why everyone needs a voice.

Rex Sinquefield, a Missouri billionaire, is on a relentless quest to quash local and state taxes in Missouri. A 2015 St. Louis Post Dispatch profile  quoted him touting his philosophy on taxes: “Get rid of your personal tax, get rid of your corporate taxes, don’t punish work, don’t punish profits, don’t punish productivity. Those taxes punish the things you need the most of … You end up hurting people at the bottom if you try to overtax the people at the top. You don’t want to punish the investing class.”

He is also on record lauding the disastrous 2012 tax cuts in Kansas as “unbelievably brilliant.”

In other words, Sinquefield is a zealous devotee of the oft-repeated but thoroughly debunked economics of Arthur Laffer. And unfortunately for Missouri, Sinquefield puts his money where his zealotry is.

This year, Sinquefield spent millions of his own money on a campaign to persuade St. Louis and Kansas City residents to vote to end their cities’ earning taxes. The 1 percent levy on wages and salaries funds about 40 percent of Kansas City’s budget and 33 percent of St. Louis’s operating budget for services such as local parks, street and sidewalk maintenance, police and fire protection, lead poisoning prevention, and human services including those for veterans, youth, and families in need. Sinquefield’s St. Louis campaign argued in a slew of ads that the city should let the tax expire and instead cut a third of its budget for city services. Sinquefield’s actions indicate he doesn’t value the services the tax supports, and he is spending millions to convince other Missourians the tax is not necessary.

But Show Me State voters reject his misguided ideology-driven campaign. Residents of both cities overwhelmingly (77 percent in Kansas City and 72 percent in St. Louis) voted to uphold the taxes in spite of Sinquefield’s well-financed efforts. After Kansas City tallied its votes, mayor Sly James, speaking about Sinquefield said, “We do not need outside interference, we do not need your guidance, we certainly don’t need your negativity,” and added, “Voters are sophisticated and intelligent enough about this tax to understand what it does for this city.”

Sinquefield, perhaps, is betting that long-term persistence will pay off. His spring campaign to abolish the earnings tax is far from an outlier.  In 2010, he put more than $10 million into the initial effort to require a vote on the earnings taxes every five years, and he has poured money into many other efforts at the local and state levels to elect anti-tax candidates and slash Missouri’s state income tax.

So while Sinquefield may want to opt out of local taxes and the services they support, Kansas City and St. Louis voters have made their preferences clear, choosing to continue to pay a 1 percent earnings tax to invest in their local communities and fund the services they value. 

Righteous indignation can be very effective, but sometimes it’s not all that righteous. Such is the case with recent op-eds penned by the CEOs of General Electric and Verizon, each of whom argue that contrary to the stump statements of presidential candidates, their companies do pay their “fair share” of taxes.

Verizon

Verizon CEO Lowell McAdam claims, in a recent op-ed and fact sheet, that it’s “just plain wrong” to assert that Verizon doesn’t pay its fair share of taxes and that the company paid a 35 percent tax rate in 2015. While McAdam doesn’t elaborate, he likely is tallying the company’s global taxes to make this claim. However, the annual taxes that the company pays to the federal government in recent years has been a lot lower than 35 percent and, thus, McAdam’s indignation is rather artificial.

In fact, over the past 15 years, Verizon has paid a federal tax rate averaging just 12.4 percent on $121 billion in U.S. profits, meaning that the company has found a way to shelter about two-thirds of its U.S. profits from federal taxes over this period. In five of the last 15 years, the company paid zero in federal taxes. While there is no indication that this spectacular feat of tax avoidance is anything but legal (the company’s consistently low tax rates are most likely due to overly generous accelerated depreciation tax provisions that Congress has expanded over the last decade), few Americans would describe the company avoiding tax on $78 billion of profits as “fair”.

GE

General Electric CEO Jeffrey Immelt takes a similar position in a recent op-ed. Immelt defends the company’s tax record simply by noting that the company “pay[s] billion in taxes.” This is true, but also meaningless for a company with earnings as gigantic as GE’s. In fact, over the past 10 years, GE paid an effective federal income tax rate of -1.6 percent on $58 billion in profits. Over 15 years, the company’s federal income tax rate was just 5.2 percent.

The company’s tax-avoiding ways extend to the state level, too. Over the past five years, the company paid an effective state income tax rate of just 1.6 percent. Immelt likely focuses on the dollar amount and not the company’s tax rate because there is simply no way of fudging the numbers to make the company appear to be paying income taxes at anything but a ridiculously low rate.

Congress Could End This

There is certainly room for righteous indignation in the ongoing debate over how to reform our corporate income tax. But the real source of such indignation should be the working families and small businesses that don’t have access to the congressionally sanctioned tax breaks used by Verizon, General Electric and other large multinational corporations.

The most recent data from the Organization for Economic Cooperation and Development (OECD) show that the United States is one of the least taxed developed nations. 

A tally of all taxes collected at the federal, state and local levels reveals based on 2014 U.S. Treasury data reveal that the United States had the fourth lowest level of total taxes — 25.7 percent of gross domestic product (GDP) — among the 34 OECD countries. Only Mexico, Chile and Korea collected less in taxes as a percent of GDP. The level of taxation in the United States is well below the 34.7 percent OECD weighted average. 

Read the full CTJ report here

Watch CTJ’s Taxes and the U.S. Economy video that sets the record straight on U.S. tax collections:

 This week CTJ and ITEP weighed in on the Panama Papers leak, new U.S. Treasury regulations to combat inversions and Pfizer’s subsequent decision to give up its effort to become Irish and avoid billions in U.S. taxes.  

Tax Dodging Madness
A new CTJ report finds that American corporations are using various tax gimmicks to shift profits earned in the U.S. to subsidiaries located in tax haven countries to avoid paying corporate taxes. In some of these countries the U.S. profits actually exceed the tax haven country’s Gross Domestic Product.

Panama Papers and How the Global Elite Play by a Different Set of Rules
In a CNN commentary, ITEP Director Matt Gardner weighs in on America’s problems with tax avoidance and anonymous shell companies. Read his full piece here. In a separate piece for Quartz, he argues that when heads of state use anonymous shell companies, it’s a “potent symbol of their elite privilege.”

Treasury Regs a Step Forward, But Congress Still Must Act
The Treasury Department’s new regulations strike at the core of one of the main reasons for corporate inversions—avoiding taxes on profit hoards stashed offshore. In a statement and U.S. News and World Report opEd, CTJ director Bob McIntyre lauds Treasury’s action but argues it’s up to Congress to close loopholes that enable rampant corporate tax avoidance. “Unfortunately, the current majority in Congress apparently doesn’t need an excuse to do nothing. It’s up to us voters to rectify that,” he wrote. 

Two New CTJ Reports: Comparing U.S. Taxes With Those of Other Developed Countries
This week CTJ released two new reports that compare how the U.S. ranks in terms of other developed countries when it comes to taxes. Spoiler alert: U.S. corporate taxes as a percentage of the economy are comparatively low, and total U.S. tax receipts as a share of the economy are less than the OECD average.  

The U.S. Is One of the Least Taxed Developed Countries

U.S. Corporate Taxes Are Below Developed Country Average

State News:
Tax justice advocates in Georgia are breathing a sigh of relief after dangerous tax cut proposals fell flat this legislative session. Read ITEP Senior Analyst Dylan Grundman’s full blog post.

State sales taxes are often the source of much contention. Policy analysts of all political stripes agree that a broad sales tax base is best. But the reality is often quite different. Here’s ITEP’s take on the shifting landscape of sales tax bases.

Shareable Tax Analysis:

ICYMI: Tax Day is right around the corner! CTJ is gearing up to release new Tax Day focused data and reports. Be sure to closely follow Citizens for Tax Justice on social media for the latest. (Facebook  and Twitter).

If you have any feedback on the Digest, please email me here: kelly@itep.org

To sign up to receive the Tax Justice Digest in your inbox click here.

For frequent updates find us on Twitter (CTJ/ITEP), Facebook (CTJ/ITEP), and at the Tax Justice blog.