Category: TaxJusticeBlog

One truism of American politics, often touted by governors on the campaign trail, is that state governments have to get stuff done. Thanks to the requirements that they balance their budgets each year, governors and state legislatures are forced to work across the aisle.

Unfortunately, the gridlock that has seized our divided federal government has seeped down to state capitals, which are finding it increasingly difficult to find common ground. Pennsylvania and Illinois are the two most egregious examples of the failure of state lawmakers to reach a deal. Louisiana, facing its own deep fiscal crisis, has been a hopeful counterpoint.

Pennsylvania and Illinois present bizzaro versions of one another with the same frustrating outcome – deadlock. Illinois voters elected Republican businessman Bruce Rauner governor in 2014. They also elected a Democratic majority to both houses of the Illinois General Assembly. Meanwhile, Pennsylvania voters elected Democratic businessman Tom Wolf governor in the same year and returned Republican majorities to both houses of the Pennsylvania General Assembly.

The path to crisis was similar in both states. Years of underfunded pensions and irresponsible tax cuts – including the rollback of a temporary income tax rate increase last year – left Illinois with a $6 billion budget gap at the beginning of 2015. Lawmakers have already cut over $2 billion in state services, but Illinois faces billions more in cuts if it doesn’t raise new revenue. So far, Rauner has refused to consider tax cuts unless legislators consider big-ticket items on his agenda: reforming worker’s compensation, freezing property taxes, term limits, and weakened collective bargaining. The legislature is not biting.

In Pennsylvania, revenue growth has lagged state spending for many years, in part due to unwise business tax cuts over the past five years. The danger for Pennsylvania is somewhat lower than for Illinois, though $2 billion in possible budget cuts still loom. Wolf wants to increase the state’s personal income tax rate or increase and expand the state’s sales tax to make up the shortfall and protect investments in education and human services, while legislators want budget cuts instead of tax increases.

In both states, lawmakers have long used accounting gimmicks, transfers from dedicated funding sources (such as for roads and schools), and other short-term fixes to stave off the day of reckoning. And both states have somehow found a way to bicker for months past the constitutionally prescribed date for a budget agreement. The unprecedented stalemates in Illinois and Pennsylvania over the budgets for FY 2016 have gone on for so long that both governors have already presented budgets for FY 2017. So far, no resolution is in sight for either state.

Louisiana offers hope for the efficacy of divided government. Voters there elected Democrat John Bel Edwards governor in 2015 while the General Assembly remains in Republican control.

Edwards inherited a massive budget shortfall from outgoing Gov. Bobby Jindal, whose mix of big tax cuts and clever accounting measures left the state treasury in ruins. Louisiana faced a $954 million shortfall for FY 2016 and a $2 billion gap for FY 2017. Legislators initially resisted calls for new revenue from the new governor, but they were outmaneuvered when Edwards highlighted what impact their deep cuts would have (the threat to LSU football was too steep a price to pay for many voters).

In the end, lawmakers approved a temporary increase in the state’s sales tax rate, from 4 percent to 5 percent, and removed many sales tax exemptions. They also approved increases in taxes on cigarettes and alcohol, and extended or reinstated taxes on vehicle rentals, cellphones, and landlines. Both chambers of the legislature also approved a measure designed to improve enforcement of sales taxes on online shopping, but the budgetary impact of that measure is yet to be determined.

Ultimately, Edwards and legislators were able to come to an agreement that raised all but $30 million of the revenue needed to cover the gap in FY 2016. Despite this, their effort was neither perfect nor comprehensive. The consumption tax hikes approved by lawmakers will worsen the unfairness of a state tax system that already heavily impacts the poor. And lawmakers will still need to come up with another $800 million to close the FY 2017 shortfall. But compared to the infighting in Pennsylvania and Illinois, the compromise is remarkable.

Wendy’s: Where’s the tax payments?

When the Burger King Corporation announced plans to renounce its U.S. citizenship through a corporate inversion last year, Ohio Sen. Sherrod Brown encouraged his constituents to boycott the company’s restaurants in favor of Ohio-based Wendy’s. But the burger company’s latest financial statements suggest that Brown might want to rethink his recommendation. Over the past three years, Wendy’s reports $440 million in U.S. pretax income on which it has paid zero in state corporate income taxes. At the federal level, Wendy’s reported a tax rate of just 1.8 percent over this three-year period. When the company’s use of tax breaks for executive stock options is factored in, its federal tax rate is also zero. While ending frivolous corporate inversions should be a priority for Congress so should eliminating generous corporate tax breaks.

Duke Energy: How’d They Do That?

A 2014 CTJ/ITEP report identified Duke Energy as one of 26 Fortune 500 corporations that paid zilch in federal income tax over the five-year period between 2008 and 2012. Three years later, nothing has changed. The company has since reported $10.7 billion in pretax U.S. income, on which its total current federal income taxes were minus $123 million. This astonishing eight-year, tax-free stretch is the product of perfectly legal tax breaks, primarily accelerated depreciation provisions that allow companies to write off the cost of their capital investments faster than they actually wear out. Since Congress’s main recent activity on accelerated depreciation has been to expand this tax break, it’s worth noting that the reason profitable corporations often are able to avoid paying income taxes is because Congress passes laws that make it easy for them to do so.

Citrix: Taking “Remote Access” to a New Level

The Citrix Corporation is a widely known provider of remote-access software, which allows employees to use “remote login” technogy to access a centrally located computer from their home offices. If the company’s corporate report is to be believed, it seems a substantial number of its 9,500 employees must be remotely logging in from homes in the Cayman Islands. How else to explain the fact that domestic sales accounted for 56 percent of its worldwide revenues last year but the company claimed none of its profits were earned in the United States?  One clue to this mystery lies in the company’s income tax note, which states that the company’s $2.3 billion in permanently reinvested foreign earnings are “primarily held by its foreign subsidiary in the Cayman Islands.” $2.3 billion also happens to be the total amount of profit the company has reported outside the United States in the last 11 years, dubiously suggesting that the lion’s share of the company’s income-generating activities must be taking place in the Caymans. 

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: Corporations Hold $2.4 Trillion Offshore
Today CTJ released a new report which shows that 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.

Tax Cut Fever in Georgia
This week Senior ITEP Analyst Dylan Grundman wrote about the tax cut fever that seems to have infected Georgia lawmakers. ITEP’s analysis of the various bills being debated shows that the biggest winners are the wealthiest Georgians. Here’s hoping lawmakers take the equivalent of fiscal Tylenol and lower their tax cut fever fast.

Super Tuesday: Round Up
In preparation for Tuesday’s contest we put together this helpful guide to the presidential candidates’ tax plans. Since it seems likely that taxes will be a central issue in this campaign,  we hope you’ll turn to this resource often.

State Rundown: Bills Moving Forward and Back
This week our Rundown focused on the Arizona House adopting an optional flat tax for low-income residents, an Indiana Senate committee approving a transportation bill after removing a gas tax increase and income tax cut, and a convoluted sales tax change that went into effect in North Carolina. Click here for the Rundown. If you’d like the latest state tax policy news to arrive in your inbox click here to sign up for the Rundown!

Shareable Tax Analysis:

ICYMI: As presidential candidates make highfalutin claims about the economic effects of their tax plans, we wanted to remind you that all tax models are not created equal. Here’s ITEP’s Research Director Carl Davis’ take on the Tax Foundation’s TAG (Taxes and Growth) model. Carl concludes that it “takes an exaggerated view of the impact that taxes have on the economy.” 

Happy March! Spring is coming! I really love hearing from readers. 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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Thanks for reading the State Rundown! Here’s a sneak peek: The Arizona House adopts an optional flat tax experiment for low-income residents. An Indiana Senate committee approves a transportation bill after removing a gas tax increase and income tax cut. Convoluted sales tax changes go into effect in North Carolina.

Check out Corporate Tax Watch, an exciting new resource that will keep you up-to-date on corporate taxes paid (or not) by profitable companies. Sign up here for occassional Corporate Tax Watch emails, just like the State Rundown!

– Carl Davis, ITEP Research Director

The Arizona House approved an optional flat tax for individuals who make less than $25,000 a year, or 660,000 tax filers. House Bill 2018 is being described as a five-year pilot project. Under the proposal, eligible filers can choose between calculating their tax liability under current law or choosing to pay a 1 percent rate on their income after taking a $10,000 standard deduction. Budget analysts believe the plan will cost the state $39 million in lost revenue, though supporters of the program hope to eventually enlarge that figure by extending the program to all tax filers. If that happens, the effects are virtually guaranteed to be regressive—Arizona’s graduated rate income tax is a rare bright spot in a tax code overwhelmingly stacked in favor of the wealthy.

An Indiana Senate committee recently approved a transportation bill partially paid for with a $1-per-pack cigarette tax increase, though other tax changes were stripped out at the last moment. The original bill included an increase in the state’s gasoline excise tax and indexed the tax to inflation. It also included income tax cuts added by the House. As ITEP’s own Lisa Christensen Gee noted in a guest blog post for the Indiana Institute for Working Families, the combination of changes would have made the Indiana’s tax system more regressive by providing income tax cuts to the wealthy in exchange for tax increases that hit working and middle-class families hardest. Ultimately, both the gas tax increase and income tax decrease were removed during the amendment process.

A number of new sales taxes went into effect in North Carolina recently, affecting services such as car repair, shoe repair, flooring installation, and appliance installation. While broader sales tax bases are generally better than narrower ones, the base expansion in this case is part of a regressive tax-shift that lowers income taxes and makes up the lost revenue through higher sales taxes. Moreover, the implementation of these base expansions has created some confusion among retailers regarding which services are taxed and which are exempted. For instance, car washes performed by an employee are now subject to the sales tax while self-service and machine car washes are not. Likewise, some home repairs and installations will be taxed but home repairs where no materials are sold will remain tax free.

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.

A push to cut taxes for the wealthy that would pinch funding for Georgia schools, roads, and other services may have just become an even more dangerous effort to eliminate Georgia’s personal income tax and devastate the state’s ability to fund public investments.

Georgia lawmakers, spurred on by the fact that all 236 of them are facing re-election this year, are considering drastic changes to their state’s personal income tax. One proposal could entirely repeal the income tax.

One of the bills under consideration (HB 238) contains some positive provisions, such as limiting deductions that are primarily used by high-income households. But the bill would also flatten and reduce the state’s income tax to a single rate of 5.4 percent (the top rate is currently 6 percent). Lawmakers are selling this proposal as a tax cut for most Georgia families. But an Institute on Taxation and Economic Policy analysis of the plan reveals that most working families would receive minimal benefit. More than half of the resulting tax cuts would flow to just the top 20 percent (PDF) of Georgia residents, and even then the benefits are weighted most heavily for the very richest. Families earning less than $100,000 would receive an average tax cut of $100 while the top 1 percent of families would get an average cut of $2,850. Meanwhile, the overwhelming majority of Georgia families would lose because the state’s ability to fund crucial services would be seriously harmed. Nonetheless, the bill has passed the House and advanced to the Senate Rules Committee and appears to be on a fast track to passage.

Meanwhile, the state Senate has approved a measure (SR 756) that would amend Georgia’s constitution to force further income tax cuts when certain ‘triggers’ are met. The original version of this proposal would have brought the rate down in 0.2 percent increments until it reached 5 percent. But in a hastily conceived attempt to compromise before the state’s ‘crossover’ deadline on Monday, lawmakers changed the bill (PDF) in such a way that, due to its ambiguous wording, could result in the complete elimination of the state’s income tax in the long-term. While some observers argue that the bill lacks a minimum, or “floor” tax rate, others say that this is not the case and that rate cuts would stop once the state’s tax rate reached 5.8 percent. Even under that generous reading, however, revenues would fall by some $350 million and roughly 70 percent of the benefit would go to the top 20 percent of Georgia households.
 
Georgia’s pending tax cuts are part of a broader, disturbing trend at the state level that seeks to tilt already unfair state tax codes even more heavily in favor of the wealthy. In the case of Georgia, that effort would also come with a large price tag: the tax cut proposals under consideration would result in an annual revenue loss of $281 to $442 million (or nearly $10 billion if LR 756 ultimately eliminates the income tax). A revenue loss of that magnitude would undoubtedly jeopardize the state’s ability to adequately fund public priorities.

This Super Tuesday the presidential primary season will finally kick into high gear, as millions of Americans go to the polls. Taxes have been a key issue this election season, with all of the candidates spelling out substantial tax reform agendas. Over the past year, we have kept a close eye on each candidate’s proposals and provided full distributional analyses of their plans when possible.

Below are short summaries of each candidate’s record and recent tax reform proposals.

Democrats

Hillary Clinton

Throughout her career, Clinton has pursued incremental changes that would significantly improve the fairness of the tax code. As a candidate, Clinton has proposed a series of progressive revenue-raisers, including estate tax reform, enacting a surcharge on multimillionaires and limiting the value of itemized deductions. In addition, she has proposed a variety of tax breaks (to be offset by the aforementioned tax increases) to address issues ranging from incentivizing companies to engage in profit sharing to helping individuals pay for the expense of taking care of a loved one.

For more:
CTJ Commentary on Clinton’s Tax Fairness Proposals 

CTJ Commentary on Clinton’s Anti-Inversion Proposals 

CTJ Commentary on Clinton’s Proposal to Pay for College Affordability 

Hillary Clinton’s Record on Tax Issues 

Bernie Sanders

Sanders has a long record of championing tax fairness through his many progressive legislative proposals, such as his bill to end offshore tax dodging and another to substantially reform the estate tax. During the campaign, Sanders has proposed more than $13 trillion in mostly progressive tax increases to fund his expansive agenda: moving to a single-payer healthcare system, increasing infrastructure spending and expanding access to college education.

For more:
CTJ Analysis of Sanders Health Tax Plan 

Bernie Sanders’ Record on Tax Issues 

Republicans

Ben Carson

Though he has not held any elected office, Ben Carson has used his position as a public figure to advocate for a flat income tax system based on the biblical tithe of 10 percent. As a candidate, he has proposed a 15 percent flat income tax – but in truth, the income tax rate would be 30.2 percent for many since his plan retains payroll taxes. A CTJ analysis finds Carson’s plan would cost $9.6 trillion in revenue over 10 years, actually increase taxes on the bottom 50 percent of Americans and provide the top 1 percent with two-thirds of the overall tax break.

For more:

CTJ Analysis of Ben Carson’s Tax Plan 

Ben Carson’s Record on Tax Issues 

Ted Cruz

Ted Cruz has made a name for himself as one of the most radical anti-tax lawmakers in the country by calling for the abolition of the IRS and for a move to an extremely regressive flat tax system. A CTJ analysis of Cruz’s tax reform plan found that his plan was the most costly, losing $16.2 trillion over 10 years. Even that number assumes he doesn’t eliminate tax collection altogether by following through on his call to eliminate the IRS.

For more:

CTJ Commentary on Ted Cruz’s Tax Plan 

Ted Cruz’s Record on Tax Issues 

John Kasich

While John Kasich has sought to portray himself as the moderate choice in the GOP race, his record as governor of Ohio is very conservative on tax issues. Kasich relentlessly pushed for largely regressive tax cut and reform measures. Unfortunately, Kasich has not specified his tax reform agenda in enough detail for CTJ to analyze, but what he has released indicates that his plan would follow the pattern of other candidates in cutting taxes by trillions of dollars, mostly for the rich.

For more:

CTJ Commentary on John Kasich’s Tax Plan

John Kasich’s Record on Tax Issues

Marco Rubio

Rubio has sought to set himself apart from other candidates by highlighting his proposals to replace the standard deduction with a refundable tax credit and to adopt a more robust refundable child tax credit. While this effort is commendable, CTJ’s analysis of Rubio’s plan found that only 6 percent of the $11.8 trillion in tax cuts he proposes would go to the bottom 20 percent, while over a third of the total would go just to the top 1 percent of taxpayers.

For more:

CTJ Analysis of Marco Rubio’s Tax Plan

Marco Rubio’s Record on Tax Issues

Donald Trump

Donald Trump has been all over the place on tax policy during his career, proposing at one time to impose a heavy tax on wealthy individuals and later proposing massive tax cuts for those same individuals. Early in the campaign, Trump indicated that he would raise taxes on the well-off, but his tax reform plan would likely lower taxes for the rich (including himself). According to a CTJ analysis, his plan would cost an astounding $12 trillion in revenue over the next ten years, with a majority of the tax breaks going to just the richest 5 percent of taxpayers.

For more:
CTJ Analysis of Donald Trump’s Tax Plan

Donald Trump’s Record on Tax Issues

Thanks for reading the Rundown! Here’s a sneak peek: Alaska legislators consider moving money from their oil tax fund to shore up the budget. Maine lawmakers consider tax changes that would benefit the top 5 percent of earners while Oklahoma lawmakers consider delaying a tax cut that would also primarily benefit the wealthy. Hawaii’s legislature will mull a new state Earned Income Tax Credit. And the South Dakota House passes a sales tax increase by a one-vote margin.

 – Meg Wiehe, ITEP State Policy Director

Efforts to raise taxes in Alaska to close a yawning budget gap caused by declining oil revenues may be pushed to next session. Legislators are instead considering plans to use the Permanent Fund to plug the state’s revenue hole. The Permanent Fund is a constitutionally-mandated sovereign wealth fund, financed with oil tax revenue that pays Alaska residents a dividend each year. Dividends have ranged from $878 to $2,072 per person over the last decade. Under Gov. Bill Walker’s plan, that payout would be reduced as the state would transfer $3.3 billion from the Permanent Fund to the state budget each year. Rep. Mike Hawker’s plan would go even farther, putting dividends on hold until the state’s deficit is eliminated. A large reduction in the dividend is likely to impact lower- and moderate-income families much more heavily than the wealthy, though a progressive income tax (as has also been proposed by the Governor) could help offset some of that regressivity.

Under the cloud of a large budget deficit, the Oklahoma Senate Finance Committee has voted to reverse itself on a previously approved income tax cut. The committee surprised many by voting 10-2 to delay the 0.25 percent reduction in the state’s top income tax rate that went into effect January 1. Gov. Mary Fallin and the leaders of the House and Senate all want the income tax cut to remain in effect. The author of the bill to postpone the tax cut, Sen. Mike Mazzei, rallied support to his cause last week, as we covered on The Tax Justice Blog. Expect additional fireworks in this developing story.

A column in the Portland Press Herald makes the case against a bill that would give upper-income Mainers a tax break. The column’s author, Bill Creighton, is in the top 5 percent of Maine taxpayers and would see a tax cut if LD 1519 were passed. The proposal would eliminate the cap on itemized deductions adopted last year in a comprehensive tax reform package and would come at a cost to the state of roughly $52 million. ITEP crunched the numbers on behalf of the Maine Center for Economic Policy and found that over half the benefit of eliminating the cap on itemized deductions would go to the top 1 percent of taxpayers. That group would receive an average tax cut of $4,000 per year. No Mainer in the bottom 80 percent of the income distribution (those making less than $93,000) would see any benefit.

Hawaii lawmakers will consider creating a state Earned Income Tax Credit (EITC). SB 2299 would implement a state credit equal to 10 percent of the federal EITC—providing an average benefit of approximately $220 per eligible filer. In 2013 over 315,800 Hawaii residents, including 127,200 children (PDF), benefited from the federal version of the EITC. Enacting an EITC could go a long way toward lessening the unfairness of a tax system that ITEP ranks as levying the 2nd highest taxes in the country on low-income taxpayers.

The South Dakota House voted to raise the state sales tax rate by half a point, from 4 to 4.5 percent, in order to fund an increase in pay for teachers. The measure initially failed by one vote, but supporters were able to convince their colleagues to reconsider. The measure will now go to the Senate for consideration. The South Dakota Budget and Policy Institute, citing ITEP data, says the change will raise $107 million but will also make the state’s tax structure more regressive. They suggest an alternative plan that would remove food purchases from the sales tax base but raise the rate an entire percentage point on all other goods. This alternative would raise $128 million while actually cutting taxes for the bottom 20 percent of earners.

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. 

Greetings! 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 ITEP Report: Undocumented Immigrants’ State and Local Tax Contributions
If we could send sound with this email you’d hear a drum roll! This week ITEP released its popular report showing that the 11 million undocumented immigrants currently living in the United States pay $11.6 billion annually in state and local taxes. Want to know more and how much undocumented immigrants pay in your state? Click here for a helpful map and the full report.

Tax Breaks for Manufacturing . . . Death?
Great title, right? In his thoughtful piece, ITEP Executive Director Matt Gardner examines the manufacturing deduction and the tobacco companies who “manufacture” cigarettes. Tobacco companies benefited from the deduction and avoided an astonishing $1.3 billion in taxes over the last five years. Read the full post here.

How Pfizer Could Get Away With Avoiding $35 Billion in Taxes
This week Americans for Tax Fairness released a new report, based in part on CTJ research, which found that Pfizer has likely understated the size of its permanently-reinvested offshore stash by a factor of two. In fact, Pfizer may avoid paying as much as $35 billion on its offshore profits, if its proposed inversion goes ahead as planned. Read all the gory details here.

New Report: Tennessee Hall Tax Repeal Would Overwhelmingly Benefit the Wealthy
Senior ITEP Analyst Dylan Grundman took a close look at a bill in the Tennessee legislature that would eliminate the Hall Tax, the state’s limited income tax on interest and dividends that generates $341 million per year. The wealthy would win in a big way if the tax is eliminated. Read the full report here.

Guest Blog: Income Tax Cuts to Offset Gas and Cigarette Tax Increases? There are Better Ways
Senior ITEP Analyst Lisa Christensen Gee published a post in the Indiana Institute for Working Families’ blog. Her piece describes the ITEP analysis of a proposal that would hike the state’s gas and cigarette taxes and reduce the personal income tax rate. Lisa concludes that “the bill undermines revenue potential for infrastructure improvements, deprives the state of revenue needed for other critical investments, and exacerbates the unfairness of Indiana taxes (Indiana has the tenth most unfair tax system in the country).” Click here for ITEP’s full analysis and Lisa’s post.

Corporate Tax Watch: Facebook and Verisign
This week ITEP Director Matt Gardner took a close look at Facebook and Verisign’s tax filings. Here’s his piece. If you’d like to get Corporate Tax Watch emails – sign up here.

Shareable Tax Analysis: 

ICYMI: Just a month ago we joined with groups across the country in celebrating EITC Awareness Day. For a refresher on who is helped by the Earned Income Tax Credit, click here.

It’s no secret that federal tax breaks for manufacturing corporations aren’t very well targeted. Since Congress enacted a special tax deduction for companies engaged in domestic manufacturing back in 2004, we have deplored its use by companies “manufacturing” items as various as gift baskets, B movies and even restaurant reservations. Relentless efforts by aggressive corporate lobbyists have stretched the definition of eligible manufacturing income almost beyond recognition.

But sometimes the manufacturing deduction applies to activities that, while they should be considered to be manufacturing, are nonetheless not activities we want to encourage as a nation. Tobacco companies “manufacture” cigarettes—but do Americans, or lawmakers, really think it’s a good idea for the federal government to subsidize this activity? New financial reports from major corporations in this sector show that cigarette makers are enjoying substantial manufacturing tax breaks for producing products that kill people.

The Altria Corporation, maker of Marlboros, cut its federal taxes by $799 million over the past five years using the manufacturing deduction.  Reynolds American, maker of Camel cigarettes and Kodiak chewing tobacco, raked in $359 million over this period, with Lorillard enjoying $233 million in federal tax breaks. The three biggest U.S. tobacco producers cut their federal taxes by $1.3 billion over the last five years using this single tax break.

What makes this even more maddening is that these tax breaks fly in the face of other federal public policies designed to discourage the production and consumption of cigarettes. In the same year that the manufacturing deduction was enacted, Congress enacted a landmark tobacco buyout designed to encourage farmers to shift away from tobacco production. And of course, the substantial cigarette excise taxes levied at both the federal and state level are often viewed as a means of discouraging Americans from spending money on tobacco products.  

In a perfect world, Congressional tax writers would be asking hard questions right now about whether it makes sense to offer a special lower tax rate for manufacturing in the first place. But at a minimum, policymakers should be asking whether it makes any sense to subsidize an industry producing products that kill thousands of Americans a year. 

Last year Citizens for Tax Justice (CTJ) published a report showing that the drug manufacturer Pfizer was holding (on paper) $74 billion of its profits offshore, declaring that these profits would be “permanently reinvested” abroad to avoid incurring even a dime of U.S. tax on those profits. Now a new report from Americans for Tax Fairness (ATF), based in part on CTJ research, finds that Pfizer has likely understated the size of its untaxed offshore stash by a factor of two. In fact, Pfizer may avoid paying as much as $35 billion on its offshore profits, if its proposed inversion goes ahead as planned.

How is this possible? The ATF report shows that Pfizer has been using accounting gimmicks for many years to systematically shift its profits to its offshore subsidiaries. While Pfizer officially declares that it has $74 billion in earnings offshore for tax purposes, its real offshore cash could be as much as $148 billion based on its deferred tax liabilities declared in the company’s annual financial report. This means that Pfizer could get away without paying an estimated $35 billion in taxes on this enormous stash of offshore earnings if it is allowed to complete its planned inversion. Pfizer’s planned inversion will allow it to permanently shift this enormous stash of offshore earnings out of the US tax system and therefore allow it to avoid the $35 billion in taxes that it currently owes.

The ATF report rightly asserts that the Treasury Department could take regulatory steps that could reduce the tax benefits of inversion for Pfizer and other tax-averse multinationals. By tightening its 2014 rules governing “hopscotch loans,” ATF argues, the Treasury could help take away one of the largest incentives for Pfizer and other companies to invert.

But as University of Southern California Professor Ed Kleinbard noted (PDF) in testimony before a House Ways and Means Committee hearing on international tax reform earlier this week, we shouldn’t have to depend on regulatory reforms to end this tax-dodging charade. Congress has a much more direct path to ending sham inversions. Sadly, many representatives at this week’s hearing appeared more interested in holding a show trial on the alleged flaws of our corporate tax system than in constructing a sensible policy strategy for ending corporate tax avoidance.

Read the Americans for Tax Fairness full report here.