Category: TaxJusticeBlog

A nine-month standoff between the Keystone State’s Republican legislature and Democratic governor will come to a close this Monday when a budget passed by the legislature lapses into law. Gov. Tom Wolf has said that he will neither sign nor veto the bill, so it will pass by default.

The passage of this 3-month budget does delay some potentially serious shutdowns, including the possibility that some schools would need to close their doors mid-year. But overall the package represents a missed opportunity. The legislature’s unwillingness to consider new revenues, reliance on accounting gimmicks, and heavy budget cuts will ultimately harm Pennsylvanians without offering a long-term solution to the state’s possible $2 billion structural budget gap.

Gov. Wolf recently explained that the state “cannot afford a budget that doesn’t provide the things Pennsylvanians need from their government.” He is now asking legislators to look ahead and begin making budget decisions for the impending arrival of fiscal year 2017, which starts on July 1.  

For the new fiscal year, Wolf has proposed $2.7 billion in tax and revenue modifications, including: an increase in the state’s flat rate personal income tax from 3.07 to 3.4; expanded tax credits for low-income families; a $1 per pack cigarette tax increase; a 40 percent tax on the wholesale price of other tobacco products; an expansion of the state’s sales tax base to include cable television services, movie theater tickets, and digital downloads; a 6.5 percent shale tax on natural gas reserves; a 0.5 percent surcharge on insurance premiums, now taxed at 2 percent; an 8 percent tax on promotional play at casinos; and an 11 percent tax increase on banks and other financial businesses.

The income tax components in particular could go a long way toward narrowing the state’s budget gap while also somewhat reducing the fundamental unfairness of a state tax system that asks far more of low- and moderate-income Pennsylvanians than of the wealthy.

In short, Pennsylvania lawmakers do have reasonable options, beyond quick-fix fiscal bandages, available for addressing the state’s long-term revenue challenges.

Even as more large companies announce plans to take advantage of the inversion loophole to avoid taxes, Congress has refused to move on commonsense legislation that would put an end to inversions. Fortunately, as outlined in a new letter signed by Citizens for Tax Justice and 54 other groups, there are a number of additional actions that the Treasury Department could take without Congressional approval to stem the tide of inversions.

Although Treasury issued new regulations in response to the surge in inversions in 2014 and 2015, Pfizer’s planned inversion with Allergan demonstrates that the regulations so far have been inadequate to prevent this and similar planned inversions by Johnson Controls and IHS. Perhaps the biggest motivation for Pfizer’s planned inversion is that it could allow the company to avoid an estimated $40 billion in taxes that it owes on the $194 billion in untaxed earnings the company has offshore. Expatriating to Ireland through an inversion will allow Pfizer to avoid paying any tax on its offshore hoard through an accounting gimmick called a hopscotch loan, which effectively allows the new foreign parent company to reinvest its untaxed offshore earnings without triggering the US taxes it would normally owe.

Treasury’s earlier inversion ruling disallowed hopscotch loans in the case of inverted companies which are owned by 60 percent of the shareholders of the original US company, but Pfizer skirted this regulation by structuring its merger so that only 56 percent of the new company was owned by US shareholders. As the letter to Treasury lays out, Treasury should use its existing authority to change its threshold to 50 percent or even lower, which could have the effect of ensuring that Pfizer would not be able to take advantage of hopscotch loans to avoid the $40 billion that it owes and could prevent its inversion altogether. In fact, changing this regulation could not only stop Pfizer, but it could have the effect of stopping similarly structured inversions by IHS and Johnson Controls (both of which structured ownership to be just under the 60 percent threshold) as well as other companies considering following in their footsteps.

Even if Treasury does fully implement the proposal on hopscotch loans, the reality is that its authority to take on inversions is relatively limited, meaning that legislation is required to put a permanent stop to inversions and related tax avoidance. The most prominent piece of anti-inversion legislation is the aptly named Stop Corporate Inversions Act, which would no longer allow a newly merged company to claim to be foreign if it continues to be managed and controlled in the United States or if the new parent company is more than 50 percent owned by the shareholders of the original American company. In addition, legislators have taken direct aim at the tax incentives behind corporate inversions with legislation that would curb earnings stripping and legislation that would require companies to pay what they owe on unrepatriated foreign earnings before they become a foreign company. In other words, Congress has plenty of ways to stop inversions, they just need to stop sitting on their hands and take action before more revenue is lost to this egregious loophole.

Perhaps T.S. Eliot was on to something when he deemed April the cruelest month. Spring is a mix of heady excitement and apprehension as they await word from universities across the county. For their parents, the season brings a hyper-awareness of their own finances since tax season and tuition bills loom concurrently. ITEP’s new brief, “Higher Education Income Tax Deductions and Credits in the States,” provides an overview of the ways state governments have sought to encourage more residents to pursue and pay for higher education through their income tax codes.

The soaring cost of college and the ensuing sticker shock has spurred government at all levels to action. Over the past few decades, many states have created tax incentives to encourage families to save for college via 529 plans. Others have focused on higher education costs, providing tax breaks for student loan and tuition payments, or room and board fees. The federal government offers two deductions for college costs, the student loan interest deduction and the tuition and fees deduction. Most states allow residents to use these deductions in determining taxable income for state filing purposes.

While the goal of bringing higher education to more citizens is laudable, many of the tax incentives that states have created don’t help the working class families who need the most help accessing college. As the report notes,

The benefits of [many] higher education tax breaks are modest. Since they tend to be structured as deductions and nonrefundable credits, many of these tax provisions fail to benefit to lower- and moderate-income families. These poorly targeted tax breaks also decrease the amount of revenue available to support higher education. And worse yet, they may actually provide lawmakers with a rationale for supporting cuts in state aid to university and community colleges.

For instance, of the many tax breaks documented in the brief only seven are credits. Of those seven credits, only three are refundable, which means they are capable of benefiting low-income families who earn too little to owe state income tax. For low-income families, far too many of the tax breaks offer no assistance at all.

States could provide more support to these families by transforming current deductions into refundable credits. They could also improve the targeting of existing tax breaks through the introduction of additional means-testing.  The two deductions offered at the federal level can only be claimed by taxpayers who earn less than $80,000 in Modified Adjusted Gross Income ($160,000 for married couples). Similar limits could be applied to the deductions offered for contributions to 529 savings plans, which vary in size and scope according to the state.

Read the full brief here.

Downloadable Maps:

State Tax Treatment of Federal Deductions for Student Loan Interest and Tuition and Fees

State Tax Deductions and Credits Related to Higher Education Costs

State Tax Deductions and Credits Related to Higher Education Savings

A cursory glance at the business practices of the latest inversion candidate, IHS, quickly dispels the erroneous anti-tax talking point that corporations are renouncing their citizenship because the U.S. tax rate is high.

Earlier this week, data solutions provider IHS revealed a planned merger with a British competitor, Markit. The Wall Street Journal labeled the announcement another example of a company inverting to take advantage of another country’s lower tax rate. Such pronouncements attempt to absolve U.S. companies instead of holding them accountable for brazen tax avoidance.

As we often point out, a broad swath of profitable Fortune 500 pay nowhere near the statutory 35 percent corporate tax rate. The federal tax code regrettably offers a plethora of loopholes that allow corporations to whittle or altogether eliminate their tax bills by writing off expenses for equipment depreciation, research, manufacturing, executive stock options and, in the case of IHS, shifting their U.S.-earned profits offshore.

These intentional loopholes have made it easy for big business to dodge taxes while staying within the confines of the law. Nonetheless, some corporate filings often defy logic. IHS appears to have found a way to make the U.S. corporate tax rate an abstract concept, reporting virtually no taxable income in the United States despite holding most of its assets and generating most of its revenues domestically. The company reports that 87 percent of its income-producing assets are in the United States and more than 60 percent of its revenues are from U.S. customers, yet virtually none of its worldwide profits are taxed in the United States. Further, IHS has enjoyed $992 million in worldwide profits over five years but claims it only earned $6 million of that on U.S. soil.

For emphasis, all of that is worth repeating: 60 percent of IHS’s revenue is from U.S. customers, but the company claims that only about half of 1 percent of its profits are earned in the United States. IHS’s skilled (or cunning, depending on how you look at it) tax accountants and lawyers are finding ways to artificially shift its profits out of the United States and into lower-rate jurisdictions.

Over the same five-year period that IHS earned $992 million, it amassed $747 million of permanently reinvested foreign earnings, profits that it claims were earned abroad and will be kept there indefinitely. It’s hard to see exactly how IHS is “investing” its offshore cash in anything substantial since the U.S. share of its worldwide assets (again 87 percent of its income-earning assets are on U.S. soil) crept steadily upward during this period.

To be sure, tax minimization is certainly part of the story behind the IHS inversion. Our current tax rules will require IHS to pay tax on its offshore stash when it eventually ends the pretense that the money is offshore and uses the cash in the United States. But if the company inverts and becomes British, it could more easily continue its streak of reporting virtually no U.S. income and avoid ever paying taxes on its offshore hoard.

Congress is enabling IHS and other tax dodging, citizenship-renouncing companies every step of the way. Lawmakers could easily prevent companies such as Pfizer, Johnson Controls and IHS from inverting. And it could also curb tax avoidance strategies like earnings stripping that allow multinationals to shift so much of their income outside the United States in the first place.

This article originally appeared in The Hill. 

For almost four decades, American voters have been fed a tall tale by anti-tax politicians and their allies. They’ve been told that government wastes their money, produces nothing of value, and needlessly robs American workers of their hard-earned pay. And they’ve been told that since their tax dollars aren’t buying anything worthwhile to begin with, even the biggest tax cuts don’t need to be paid for.

These calculated, misleading messages have helped pave the way for a series of irresponsible, unfunded tax cuts that have endangered our nation’s long-term fiscal health. The huge, deficit-financed tax cuts pushed through by President George W. Bush more than a decade ago were one result of this movement. In the current election cycle, the major Republican presidential candidates have presented the American public with tax-cutting plans that would double down on the Bush tax cuts, but they have offered few or no details about how they would pay for these cuts. It’s clear that the latest generation of Republican leaders views fiscal policy through the same rose-colored lenses as their supply-side predecessors.

Such breathtaking fiscal irresponsibility creates an analytic challenge for those who care about tax fairness. On its face, a plan to cut taxes by $12 trillion over the next decade, as Donald Trump’s proposal would do, would result in a net income gain for virtually all Americans in the same way that dropping hundred dollar bills from a helicopter would benefit all those beneath it. But any analysis of Trump’s plan that focuses solely on the tax cuts is woefully incomplete: in the long run, tax cuts of this magnitude will have to be paid for, and it won’t be pretty. If history is any guide, a mix of unpopular spending cuts and across-the-board tax increases will be required to offset most or all of the tax cuts.

My organization, Citizens for Tax Justice, has a new report that tells both sides of the story. We not only show the effects of the tax cuts that GOP presidential candidates boast about, but we also count what the candidates don’t want to talk about: the effects of the inevitable spending cuts and/or offsetting tax increases that will be necessary to avoid fiscal catastrophe.

Looking at the GOP tax proposals this way tells a very different story: every income group except the very highest ones would be worse off under the GOP candidates’ tax plans.

For example, Donald Trump’s tax plan ostensibly offers middle-income Americans a tax cut of about $2,500 a year. But paying for that tax cut will eventually cost them about $4,600, for a net loss of about $2,100 a year. For the same group, Ted Cruz’s plan will have a net annual cost of more than $7,000. And Marco Rubio’s promised tax cut for the middle of $1,400 ends ups as a net cost of almost $2,500 a year.

The same logic applies to plans that would increase taxes. Democratic candidate Bernie Sanders has proposed to increase taxes and provide a government-funded universal health insurance program. As part of that proposal, employer-related health insurance would become unnecessary, and would likely be converted into higher cash wages. Of course, those higher wages would be subject to taxes, but most workers would end up with significantly higher after-tax earnings. Meanwhile, they would get the same or better health insurance coverage than they have now, as would all Americans.

A complete analysis of Sanders’s health proposal would find that the vast majority of Americans, especially those with limited or no health insurance, would be much better off than they are now. Yet according to tables published by some groups and widely covered by the media, all income groups would be worse off because everyone would pay a portion of the taxes imposed to fund the universal insurance program, albeit a very small portion for most of us.

The bottom line is this: Focusing solely on the tax side while ignoring the public services that taxes make possible doesn’t just tell only half of the story. It gets the whole story completely wrong.

Robert McIntyre is the director of Citizens for Tax Justice, a Washington D.C.-based policy organization that does analyses and advocacy for fair tax policies that allow the nation to raise the revenue it needs to fund its priorities.  

Thanks for reading the Tax Justice Digest. We hope you are having a great week. In the Digest we recap the latest reports, posts, and analyses from Citizens for Tax Justice and the Institute on Taxation and Economic Policy.

New CTJ Report: Ted Cruz’s Tax Plan Would Cost $13.9 Trillion, While Increasing Taxes on Most Americans

This week CTJ released a report detailing the cost of Sen. Ted Cruz’s tax plan. Despite proposing the largest tax cut of any candidate ($13.9 trillion), Cruz’s tax plan would increase taxes on 60 percent of Americans. Read all the details here.

State Tax Rundown: Luck of the Double Irish 

This week our Rundown takes a close look at the DuPont/Dow merger along with tax and budget happenings in West Virginia and Florida. We also offer a list of states where legislative sessions have ended. Read our St. Patrick’s Day edition of the Rundown.

Corporate Tax Watch: Nabisco

In a recent blog post, ITEP’s Executive Director Matt Gardner makes a good case for why Nabisco deserves even closer scrutiny after deciding to lay off 600 works in its Chicago plant. Turns out the company is also likely dodging taxes thanks to offshore subsidiaries. Click here for all the details.

Congressional Progressive Caucus Budget

CTJ’s Senior Policy Analyst Richard Phillips offers his take on the budget released earlier this week from the Congressional Progressive Caucus. Richard writes the budget has “important policy ideas that, shamefully, have no chance of passing in the current political climate. Read his full post here.

Shareable Tax Analysis:

ICYMI: CTJ recently updated its analysis of Trump’s Tax Plan so now you’ll be able to find the cost distribution of the tax plan by income level and the net effect of paying for the tax cut in one report. The full report is here.  

If you have any feedback on the Digest or just want to send some lucky greetings email me here: kelly@itep.org

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

The Congressional Progressive Caucus (CPC) earlier this week released a proposed federal budget with important policy ideas that, shamefully, have no chance of passing in the current political climate.

The budget proposes revenue-raising tax reforms, both on the individual and corporate side, and would use the proceeds to reduce the deficit, invest in universal preschool, substantially boost infrastructure spending, make college more affordable and restore spending to domestic programs that have been hacked in recent years.

In contrast, the prevailing discourse in Washington has been driven in recent years by a relentless push for ever more spending cuts, ignoring entirely the value of the programs or investments being made. Even after facing the fallout of deep tax cuts in 2001 and 2003, discussing how to raise more revenue is anathema to the party that controls Congress. The perfect articulation of this is the recently released House GOP budget, which would raise no new revenue, yet it calls for making draconian cuts to low-income programs—cuts that would be in addition to reductions already made as part of the sequester and other budget deals. The Center on Budget and Policy Priorities (CBPP) notes that the GOP budget would cut roughly 40 percent of federal resources for low-income assistance, representing the “most severe budget cuts in modern history for Americans of limited means.”

It’s time to shift the national dialogue about the federal budget away from plans for deeper spending cuts or more tax cuts.

What’s in the CPC Budget Proposal?

The CPC 2016 budget proposal provides an exceptional blueprint for how Congress could make the tax system fairer, while at the same time raising sufficient revenue to pay for important public investments. According to an analysis by the Economic Policy Institute (EPI), the CPC budget would create millions of jobs, reduce the deficit to a fiscally sustainable level and make substantial investments in infrastructure, healthcare and education.

On the individual side of the tax code, the CPC would end the preferential tax rate on capital gains, restore the pre-Bush tax rates on individuals over $250,000 and enact new higher tax brackets on individuals making over a million dollars. Ending the preferential rate on capital gains is especially important because it would ensure that wealthy investors are no longer able to pay lower tax rates than many middle-income working families. Citizens for Tax Justice (CTJ) estimated for the CPC that these provisions together would raise $1.5 trillion over 10 years.

The CPC budget contains a few additional progressive revenue raisers on the individual side of the tax code. First, the budget would finally end the outrageous provision of the tax code, known as stepped up basis, that allows accrued capital gains to escape taxation at death, a move that would raise $825 billion over 10 years. In addition, the budget proposes to cap the value of itemized deductions at 28 percent, a progressive provision that would raise an estimated $646 billion in revenue over 10 years and significantly curtail the extent to which itemized deductions disproportionately benefit the wealthy. Finally, the budget would make the estate tax more robust by lowering the exemption level to $3.5 million, increasing the progressivity of its rate structure and closing loopholes, all of which would raise an estimated $231 billion over 10 years.

On the corporate side, the CPC budget takes aim at a number of the most egregious corporate tax breaks. To start, the budget would close the deferral loophole, which is a provision that allows companies to defer paying taxes on their “foreign income” and thus drives corporations to store large swaths of their income in tax havens. The CPC estimates that eliminating deferral (which includes ending the Active Financing Exception) would raise about $983 billion over 10 years. Adding to this, the CPC would also take aim at the inversion loophole ($41 billion) and the stock option loophole ($32 billion) as well as end tax breaks for fossil fuel companies ($139 billion).

Taken together, the CPC budget would raise $8.8 trillion in additional revenue over the next 10 years. To put this in context, revenue levels as a percentage of GDP would rise from its current average projected level of 18.1 percent under current law to 21.9 percent under the CPC budget. While they are unlikely to be passed anytime soon as a group, the tax proposals in the CPC budget reveal the sheer number of options that lawmakers could choose to provide much needed revenue to make new investments, stave off further austerity and curb annual deficits. 

Thanks for reading the State Rundown! Here’s a sneak peek: Delaware lawmakers approve a corporate tax
 giveaway for a potential DuPont and Dow merger. West Virginia lawmakers leave without a budget after voting down tax increases. Florida lawmakers reject the governor’s big tax cut plan, opting for more modest cuts and school spending increases. 

– Carl Davis, ITEP Research Director 

 America’s own tax haven of Delaware approved huge tax breaks for Dow and DuPont in the hope that if the companies merge as planned, they will establish their new company in Delaware. In a move that will cost the state $14.1 million in lost revenue, the Delaware Senate passed a bill eliminating the $5 million aggregate cap on the research and development tax credit, and made the credit refundable. The bill passed unanimously and there was no debate. Senators also revived a never-used tax credit that rewards companies for establishing new headquarters in Delaware, expanding it to include in-state companies that retain jobs after a merger. The credit would be applied retroactively to the jobs retained under the Dow-DuPont merger. The bill is expected to swiftly pass the House. Meanwhile, lawmakers continue to consider a bill that would make the state’s Earned Income Tax Credit (EITC) refundable, but only after reducing it from 20 to 6 percent of the federal credit. To learn more about Delaware’s fiscal malfeasance, check out ITEP’s report “Delaware: An Onshore Tax Haven.” 

West Virginia lawmakers have failed to come up with a solution to the state’s estimated budget shortfall of $238.8 million – an amount larger than initially expected because of the ongoing downturn in energy prices. Earlier this year legislators tabled a proposed gas and sales tax increases to pay for roads. After the West Virginia Senate approved a 3 cent increase in the state’s gasoline excise tax and a 1 cent increase in the sales tax rate, the House Finance Committee batted both measures down, arguing that the state’s public services can absorb more cuts. The House committee also voted down a Senate measure that would have increased the cigarette excise tax by $1 per pack. Gov. Tomblin has announced that he is sending legislators home and will bring them back later this spring to regroup and deal with the shortfall.

Florida Gov. Rick Scott’s billion-dollar tax cut failed to get a sympathetic hearing from legislators, who instead passed a modest property tax measure paired with more spending on K-12 education. The centerpiece of his plan, eliminating corporate income taxes for manufacturers and retailers, was swiftly rejected by the House. The Senate then pared the House version of Scott’s tax cut plan back to just $129 million in sales tax reductions for manufacturing equipment purchases and specific groups and products. The Senate also passed $400 million in local property tax cuts by assuming more state responsibility for K-12 funding. Florida’s per-pupil state spending on K-12 education will increase by 1 percent, a state record but anemic by national standards. House and Senate negotiators came together to present the governor with a final measure that largely followed the Senate proposal. There was speculation that Gov. Scott would veto the entire budget in protest, forcing the legislature into special session. Instead, the governor opted to veto $256 million from the budget.

States Ending Session: 

Utah (March 10)

Washington (March 10)

Florida (March 11)

Virginia (March 12)

Indiana (March 14)           

West Virginia (March 15, but will reconvene later this spring)

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 Sebastian Johnson at sdpjohnson@itep.org. Click here to sign up to receive the Rundown via email. 

Nabisco, the purveyor of Oreos and ‘Nilla wafers, is facing renewed blowback over its decision to lay off 600 workers at its Chicago plant while shifting production to Mexico. But the loss of manufacturing jobs is not the sole reason the company’s activities deserve closer scrutiny.

A corporate spokesperson predictably explained that the layoffs were about automation rather than offshoring, but others have hinted that the very low worldwide tax rates paid by Nabisco’s parent company, Mondelez, might have played a role in the decision.

The real story is likely far more complicated. USA Today reports that Mondelez paid a worldwide tax rate of 7.5 percent last year. This is well below the United States’s statutory 35 percent corporate tax rate and also substantially below Mexico’s 30 percent rate. If Mondelez is avoiding taxes through its foreign activities, it is more likely that the company’s subsidiaries in the Bahamas and the Netherlands are responsible.

Call It a Double Whammy

While losing 600 jobs would deal a body blow to Chicago working families, the $6 billion of profits that Mondelez moved offshore in just the last year (and the needed tax contributions it is able to avoid because of this action) represent yet another way the company is harming working families.

Mondelez now has a total of $19.2 billion in “permanently reinvested” offshore profits, but the company refuses to disclose how much of those profits are being held in tax havens or whether any foreign tax has been paid on these billions of dollars in profits.

Several politicians have cried foul, including presidential candidate Hillary Clinton who responded to Nabisco’s move by proposing that companies moving jobs overseas should lose some or all of the tax breaks previously received for domestic job creation.

Such a plan could raise difficult implementation questions (for example, should Mondelez lose its tax breaks for domestic Triscuit production just because the company moves its Oreo production abroad?). Even so, the goal of “clawing back” undeserved tax breaks is a sensible one that has been achieved in a number of states, thanks in part to the work of watchdog group Good Jobs First. But a fiscally important reform would be taking away the incentive for corporations to shift their profits into offshore tax havens to avoid U.S. income taxes. 

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

New CTJ Report: Large Majority of Americans are Net Losers Under GOP Candidates’ Tax Plans Over the Long Term
This week CTJ released a report that takes a radically different approach to analyzing the presidential candidates’ tax proposals. It provides an analysis of how Americans would be affected if Congress eventually passed legislation to pay for the tax cuts Bottom line: the idea that tax cuts don’t have to be paid for is a myth.  Read the full report here.

State Tax Drama: Louisiana, Illinois, and Pennsylvania
This week ITEP took a close look at three major state tax policy debates that continue to make headlines. Progress was made this week in Louisiana, but the budget situation in both Illinois and Pennsylvania flounders. Read our post, Budget Woes and Partisanship here. 

Corporate Tax Watch: Wendy’s, Duke Energy, Citrix
ITEP’s Executive Director Matt Gardner examined three well-known companies this week in Corporate Tax Watch. Whether they’re selling burgers or energy, profitable companies find ways to cook the books and dodge taxes. Read the latest here.  You can get Corporate Tax Watch emails by signing up here.

Shareable Tax Analysis: 

ICYMI: Last week CTJ released a report that revealed U.S. corporations now hold a record $2.4 trillion offshore, a sum that ballooned by more than $200 billion over the last year as companies moved more aggressively to shift their profits offshore. The full report is here  

If you have any feedback on the Digest or the fine work of CTJ and ITEP send it here:  kelly@itep.org

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