Category: TaxJusticeBlog

Thanks for reading the Rundown. Here’s a sneak peek: Despite a revenue shortfall, lawmakers in West Virginia are moving forward with their corporate tax cuts. North Carolina lawmakers are once again talking tax cuts, Pennsylvania lawmakers are barely talking – after legislative leaders declared Gov. Wolf’s budget bill DOA. Louisiana Gov. Edwards is threatening that if his state doesn’t balance its budget the end of college football is near.  Thanks for reading.

— Meg Wiehe, ITEP’s State Tax Policy Director

North Carolina lawmakers are looking at cutting income taxes – again. This time, a House committee considered a proposal to increase the standard deduction for the second time since last year. Joint filers would see an increase of $2,000, while individuals would get an increase of $1,000. If enacted, the change would mean an additional 70,000 to 75,000 filers would owe no income tax since their income would be below the standard deduction. State revenues would decline by $195 million to $205 million annually. An editorial in The News & Observer makes the case that lawmakers should restore the state’s Earned Income Tax Credit (EITC) rather than raise the standard deduction. The EITC is better targeted to those families hit hardest by regressive sales, excise, and property taxes, and it would be less costly than increasing the standard deduction, as has been pointed out by our friends at the North Carolina Justice Center.  An ITEP analysis found that the bottom 40 percent of taxpayers in the Tarheel state would receive just 28 percent of the tax cut from a change to the standard deduction, but would see more than 87 percent of the cut from reenacting a state refundable EITC.

Pennsylvania legislative leaders declared Gov. Tom Wolf’s budget dead on arrival last week after the governor unveiled his plan in a speech to the legislature. Pennsylvania has not had a budget since July 2015; negotiations between legislators and the governor have broken down multiple times over the past few months. Wolf’s budget address was a fiery rebuke to lawmakers with dire predictions of chaos for state workers and services if a deal is not reached soon. Wolf’s proposed $33.3 billion budget includes $2.7 billion in new revenue. Under his plan, the state’s flat income tax rate would increase from 3.07 to 3.4 percent, and the sales tax base would be expanded to include basic cable television, movie tickets and digital downloads. The governor would also levy a new 6.5 percent severance tax on natural gas extraction, increase the cigarette excise tax by $1 per pack, and raise taxes on other tobacco products.

Despite a major budget shortfall, West Virginia lawmakers are moving forward with a corporate tax giveaway to coal and natural gas companies. Senate Bill 419 would repeal two severance tax increases first implemented in 2005 to pay off the state’s workers compensation debts. One tax is a 56-cents-per-ton levy on coal producers while the other is a 4.7-cents-per-thousand cubic feet tax on gas producers. Together, the two taxes brought in $122 million in revenue during fiscal year 2015. If repealed, the state will lose $110 million next fiscal year. The Senate Finance Committee unanimously approved the tax cuts by voice vote, “in a committee room largely empty save for members of the governor’s staff and coal and gas lobbyists.” The state will finish the current fiscal year $353 million in debt.

Louisiana Gov. John Bel Edwards warned legislators that the continuing revenue shortfall could spell disaster for college athletics. In his state of the state address, Edwards told Louisianans that they could “say farewell to college football” since Louisiana State University is set to run out of money by April 30. Louisiana faces a $2 billion budget shortfall next fiscal year and needs to come up with $850 million to make it through the current fiscal year. Lawmakers have railed against the governor’s proposal to increase sales and alcohol and cigarette excise taxes, but the dire situation leaves them with few options.

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 in via email.  

This is the sixth and final installment of our series on 2016 state tax trends.

Boosting funding for transportation infrastructure—especially with gas tax increases—has been one of the most pronounced trends in state fiscal policy throughout the last three years.  With most state legislative sessions now underway, all signs point to that trend continuing this year.  There are at least nine states where gas tax increases will receive serious consideration in 2016, and a few additional states where a gas tax debate appears likely in 2017.

Most of the gas tax increases under discussion right now would help restore at least some of the purchasing power they lost while being frozen in time for as long as 20 years or more.  But too many of these long-overdue gas tax updates are only being considered on the condition that they are coupled with an equal, or larger, cut in other taxes.  Since those other taxes tend to fund services such as education and health care, these “tax shift” efforts have more to do with reshuffling state investments than with enhancing them.

That being said, some amount of tax cutting alongside a gas tax increase can be justified.  Lower- and moderate-income families are less able to afford a higher gas tax, so there is good reason to consider pairing gas tax increases with a targeted tax cut specifically for those families.  Unfortunately, however, most of the tax cut proposals being considered alongside gas tax increases (such as estate tax cuts in New Jersey and income tax cuts in Indiana and South Carolina) are not at all targeted to taxpayers of modest means.

Nonetheless, the gas tax debate marches on.  The nine states where gas tax debates are already underway this year are:

1. Alabama: Almost 24 years have passed since Alabama last raised its gas tax.  Gov. Robert Bentley is supportive of efforts to update the tax this year, though he has not identified what level of increase he would support and has also not shown an interest in leading the charge on this issue.  A legislative committee holding hearings on the idea heard suggestions for an increase as large as 12 cents per gallon, and the chair of the legislature’s Joint Transportation Committee says there is a 70 percent chance that a gas tax hike could be enacted.

2. Alaska: The falling price of oil has decimated Alaska’s public revenues, and Gov. Bill Walker has proposed a package of tax increases to help close the yawning budget gap.  Among Walker’s proposed changes is an increase to the state’s lowest-in-the-nation gas tax rate from 8 cents to 16 cents per gallon.  No state has gone longer than Alaska without adjusting its basic gas tax rate (though it did add a small fee to gasoline last year), so there is a strong case to be made for updating the tax.

3. California: In his most recent budget proposal, Gov. Jerry Brown reiterated his support for a 6 cent per gallon increase in the state’s gasoline tax and an 11 cent increase in the diesel tax.  Since California’s gas tax rate is tied to the price of fuel, its transportation revenues have been dramatically reduced by falling gas prices.  While the fate of Brown’s proposal is far from certain, it did receive a high-profile endorsement from the Los Angeles Times and reportedly has some degree of bipartisan support in the legislature.

4. Hawaii: Gov. David Ige has proposed increasing Hawaii’s gasoline excise tax rate by 3 cents per gallon in order to generate additional funding for roads and other forms of transportation.  Vehicle registration fees and taxes based on vehicle weight would also rise if Ige’s bill becomes law.

5. Indiana: Legislation passed by the Indiana House of Representatives would raise the state’s gas tax by 4 cents per gallon and allow the rate to grow alongside inflation in the years ahead.  The bill faces an uphill battle, however, as Gov. Mike Pence is opposed to raising the gas tax and both he and the state Senate would prefer a short-term fix relying on general revenues.  In an attempt to gain the governor’s support, Indiana House members attached a gradual cut in the personal income tax to their gas tax bill.  An ITEP analysis of the package (which also includes a cigarette tax increase) showed that most taxpayers would see their overall tax bill rise under this swap.  At the same time, upper-income residents would receive a net tax cut and would benefit from the infrastructure enhancements funded by their less fortunate neighbors.

6. Mississippi: Business groups in Mississippi would like to see lawmakers enact the state’s first gas tax increase in 27 years, and Gov. Phil Bryant is supportive of that effort if it is accompanied by equally large tax cuts.  Bryant said that cutting the state’s corporate franchise tax could be one way to accomplishing that goal, though it may not be his preferred route.  According to the governor, “This tax cut does not need to apply to large corporations. They are and have been receiving the reduction in fuel cost for some time now. It is the working families of Mississippi I am concerned about.”  Notably, however, the chair of the Mississippi House Appropriations Committee is unenthusiastic about the idea of cutting general fund taxes in order to justify an increase in the gas tax, explaining that going that route means “you’ve paid for roads at the expense of the general fund.”

7. Missouri: Limits in Missouri’s constitution make it difficult to enact more than $90 million in tax increases in a given year—so Gov. Jay Nixon and some state legislators have thrown their support behind an $85 million plan that would raise gas taxes by 1.5 cents and diesel taxes by 3.5 cents per gallon.  While the proposal has received the backing of at least one Senate committee, House Speaker Todd Richardson would prefer to redirect other state funds toward infrastructure.  More specifically, the St. Louis Post-Dispatch explains that the Missouri Legislature is considering taking money it saved by slashing programs for the poor, especially poor children, and devoting it to highways.”

8. New Jersey: Before suspending his presidential campaign, Gov. Chris Christie told a New Hampshire audience that “I’m not going to increase the gas tax” in New Jersey.  Legislators in the state, however, are not so sure.  In the past, Christie has appeared amenable to a gas tax increase as long as it is paired with cuts in other taxes.  Assembly Speaker Vincent Prieto, who supports a gas tax hike, said that he takes Christie’s comments “with a grain of salt … He does know that we are running out of money.”  Unfortunately, the tax cut options that appear to be on the table are not at all well-suited to offset the regressive impact of a gasoline tax increase.  Estate tax cuts and an expanded income tax break for taxpayers with significant pension income are the most frequently discussed tax cut options.

9. South Carolina: Lawmakers in South Carolina are considering a package of tax changes that includes a gas tax increase of 12 cents per gallon (the first such increase in 27 years) and a hike in vehicle registration fees.  Gov. Nikki Haley has insisted that any increase in transportation taxes be accompanied by an equal, or larger, decrease in general fund taxes.  Some of the tax cuts under consideration—such as an Earned Income Tax Credit—could help offset the disproportionate impact that gas taxes have on low-income families.  Others, like a reduction in personal income tax rates, would primarily benefit high-income taxpayers (as our analysis of the governor’s 2015 proposal showed).

To be sure, these are hardly the only states where infrastructure funding and the gas tax have been topics of discussion.  Oregon and Tennessee have each given serious consideration to gas tax increases, though lawmakers in both states have opted to delay a fuller debate until 2017.  In Minnesota, Gov. Mark Dayton and the state Senate have proposed adding a price-based tax on gasoline, but the House is staunchly opposed and the Governor has since backed away from the idea, at least for the time being.  In Louisiana, Gov. John Bel Edwards has yet to put forward a formal transportation funding plan, but so far he appears to be keeping a variety of revenue options on the table—including a gas tax increase included in his transition committee’s “menu” of revenue-raising options.  In Colorado, calls to raise the gas tax (last updated over 25 years ago) seem to have become more common in recent months, though a lack of leadership from either the Governor or key legislators on this issue suggests that it is unlikely to gain traction this year.  And in Arkansas, a funding task force and the state’s trucking industry have floated a gas tax hike as a potential infrastructure funding option, but Gov. Asa Hutchinson’s adamant opposition makes passage this year unlikely.  Instead, Hutchinson wants to move funding away from education, health care, and other general services in order to spend it on highways instead.

Ultimately, there is good reason to expect that at least a few states will take action to boost funding for their transportation infrastructure in 2016.  Whether those efforts will constitute a step forward, or back, for each state is yet to be determined.  The gas tax increases being discussed in states such as Alabama, Alaska, and elsewhere are long overdue.  But the types of “tax shifts” being debated in Indiana and New Jersey, for example, could actually reduce the fairness and long-run sustainability of those states’ tax codes.

Read the Tax Justice Digest for recent reports, posts, and analyses from Citizens for Tax Justice and the Institute on Taxation and Economic Policy.

Here’s our weekly wrap up of tax debates:

Tax Foundation Revives Voodoo Economics
Carl Davis, ITEP’s Research Director, takes a close look at the Tax Foundation’s TAG (Taxes and Growth) model and concludes that it “takes an exaggerated view of the impact that taxes have on the economy.” For more on the flaws of the TAG model read the full paper here.

Our Take On President Obama’s Last Budget
This week President Obama released his budget, which contains $3.2 trillion in tax increases over the next ten years, most of which would fall on corporations and wealthy taxpayers. But the President also lets corporations with lots of offshore income off the hook with a proposed “transition tax.” The transitional tax would actually give $97 billion in tax cuts to just ten of our country’s biggest tax avoiders. Click here for more on the President’s budget. 

Carl Davis, ITEP’s Research Director, took a close look at the President’s proposed oil tax that would add an additional $10.25 to the price of a barrel of crude oil. Read more about it here.  

Corporate Tax Watch: Celanese Corporation
Celanese is a Fortune 500 company that makes engineering polymers (go ahead and Google that – we weren’t sure what they are either). Come to find out, these polymers are critical components used in a variety of industries: agriculture, pharmaceutical, aerospace, and even the automotive industry. Despite what we don’t know about engineering polymers, we do know that the company generates 30 percent of its profits from just four small tax haven companies. Click here for more on Celanese and its use of tax havens.

Bernie’s Tax Plan
CTJ staff analyzed the Sanders health care tax plan and found that his proposal would raise $13 trillion and yet increase after-tax incomes for all income groups except the very highest. Read CTJ’s full report on the plan (PDF). Don’t have time to read the full report? Here’s the CliffsNotes version.

Internet Tax Ban is a Defeat for Good Tax Policy
Congress just passed a permanent ban on taxing internet access. Here’s our take on why this ban is wrongheaded.

2016 State Tax Policy Trends:
Shifty Tax Proposals
This week ITEP Senior Analyst Lisa Christensen Gee took a careful look at the many states that are debating whether to reduce one tax to pay for increasing another tax. Tax shift proposals in Arizona, Mississippi, Indiana, Georgia, New Jersey and South Carolina are highlighted in this piece.

Addressing Poverty and Inequality Through Tax Breaks for Working Families 
ITEP Senior Analyst Aidan Russell Davis examines low-income tax credit debates in states across the country. We know that low-income credits are a vital tool for keeping low income families above the poverty line. Click here for more on how states are enhancing and protecting their Earned Income Tax Credit (EITC) – and check out our updated policy brief on EITCs here.

Shareable Tax Analysis:

ICYMI: This week our State Rundown focused on states with shortfalls specifically: Arizona, Kansas, Kentucky and Louisiana. To get a copy of the Rundown in your mail box sign up here. 

What a full week! Have a super weekend. Don’t hesitate to send me feedback at:  kelly@itep.org

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Sign up to receive our occasional Corporate Tax Watch emails here. 

February is a special time of the year for corporate tax watchdogs: it’s when hundreds of Fortune 500 corporations release their annual financial reports to shareholders, including potentially embarrassing details about their relationship with the U.S. tax system.

CTJ and ITEP’s corporate tax analysts will be knee deep in these reports for much of the next month, but will come up for air every now and then to give quick updates on their findings. Here’s a first take on what we’re seeing so far.

Perfecting the art of long-term tax dodging

A February 2014 CTJ/ITEP report highlighted 26 profitable corporations that paid no current federal income taxes over the five years between 2008 and 2012. The Michigan-based utility CMS Energy this week confirmed that its inclusion in this list was no accident: in the three fiscal years since CTJ’s original report, CMS has enjoyed $2.2 billion in U.S. profits—and hasn’t paid a dime in federal income taxes over this period. For those needing a scorecard, this means over the past eight years CMS has paid no federal income taxes on $4.6 billion in profits. Like many other big utilities, CMS appears to be relying on generous tax breaks for accelerated depreciation. With the resurrection of expired “bonus depreciation” measures in the December 2015 “extenders” package, the good times will likely continue to roll for CMS going forward.

Sending customers and profits all over the world

Washington-based Expedia is no stranger to arranging worldwide travel—and a side benefit appears to be that the company is adept at sending its own profits to exotic foreign climates. The company’s newest annual report discloses that Expedia is now declaring $1.5 billion of its profits to be “permanently reinvested” in undisclosed foreign nations. Taking advantage of a toothless provision in the Securities and Exchange Commission’s rules on corporate tax disclosure, the company refuses to divulge whether even a dime of income tax has been paid to foreign nations on these profits—but if their six Cayman Islands subsidiaries are any indication, a big chunk of these offshore profits may be enjoying the same beachfront view Expedia routinely provides its clients.

Changing the way we view television and avoiding tax at home and abroad

Not all corporations are as evasive about their offshore profits as Expedia: the Netflix corporation remains as open about their foreign and domestic tax avoidance as ever in its latest annual report. The company discloses that if it repatriated $65 million stashed offshore, it would face a tax bill of just a hair under 35 percent—which means that wherever its foreign profits are located, it’s someplace that levies about a zero percent tax rate. Domestically, the company is likely not too worried about that 35 percent rate since in 2015 it was able to use just one tax break, an unwarranted giveaway for executive stock options, to zero out all federal income taxes on its $95 million in U.S. profits.

Yesterday Congress passed a bill, which President Obama is expected to sign, that will ban states from imposing taxes on Internet access.  The so-called “Internet Tax Freedom Act” (ITFA) was originally enacted in 1998 as a temporary measure meant to assist an “infant industry.”  Now, however, it is being made permanent for exactly the opposite reason: because the Internet is “a resource used daily by Americans of all ages, across our country,” according to Sen. Majority Leader Mitch McConnell.  The bill effectively forces a tax cut onto the states, without any direct cost to the federal government.  It’s Congress’ favorite kind of tax cut: one that it does not need to pay for.

The most tangible effect of ITFA will come in 2020 when the seven states that began applying taxes to Internet access prior to 1998—Hawaii, New Mexico, North Dakota, Ohio, South Dakota, Texas, and Wisconsin—will lose their “grandfathered” status and be forced to enact special Internet tax exemptions costing a total of $563 million per year.  But Michael Mazerov at the Center on Budget and Policy Priorities (CBPP) explains that the impact on existing state taxes may not stop there.  According to Mazerov, this sweeping new ban could provide Internet access providers with a legal basis for arguing that all of their purchases, from computer servers to fiber-optic cable and even gasoline, must be exempted from tax in order to avoid any “indirect tax” on Internet access.

For years, permanent enactment of the ITFA had been stopped short by members of Congress who insisted that it be packaged with a measure that could actually improve state sales tax systems: the Marketplace Fairness Act (or similar legislation) that would allow states to require online retailers to collect the sales taxes owed by their customers.  Today, enforcement of sales taxes on purchases made over the Internet remains a messy patchwork, with many e-retailers enjoying an inequitable and distortionary price advantage over brick and mortar stores.  In order to secure passage of ITFA, Sen. McConnell pledged to hold a vote on the Marketplace Fairness Act later this year—though if history is any guide, that may not mean much.  The Senate already passed the Act once, in 2013, before watching it languish in the House.

Regardless of what happens to the Marketplace Fairness Act, the permanent extension of ITFA marks a step backward for state tax policy.  ITFA narrows state sales tax bases, makes them less economically neutral, and damages the long-run adequacy and sustainability of state revenues.  Limiting states’ ability to apply their consumption taxes in a broad-based way is antithetical to sound tax policy.

This is the fifth installment of our six-part series on 2016 state tax trends. An overview of the various tax policy trends included in this series is here.   

As we explain in our annual report on low-income tax credits, the strategic use of Earned Income Tax Credits (EITCs), property tax circuit breakers, targeted low-income tax credits and child-related tax credits can have a meaningful impact on addressing poverty, tax fairness and income inequality in the states.  

The use of these tools is so important especially because states have created an uneven playing field for their poorest residents through their existing tax policies. Every state and local tax system requires low- to middle-income families to pay a greater share of their incomes in taxes than the richest taxpayers and, as a result, tax policies in virtually every state make it even more difficult for those families in poverty to make ends meet. Unfortunately, it does not stop there–many recent tax policy proposals include tax increases on the poor under the guise of “tax reform”.   

That reality may seem bleak, but it provides state lawmakers plenty of opportunities to improve their tax codes in order to assist their state’s lowest-income residents. Targeted low-income tax cuts can serve as a vital tool in offsetting upside down tax systems and proposed regressive tax hikes. On top of that, targeted tax breaks and refundable credits do not only benefit a state’s low-income residents–they can also pump money back into the economy, providing both immediate and long-term economic stimulus. With this in mind, a number of lawmakers are heading into the 2016 legislative session with anti-poverty tax reform on the agenda.  

This year we expect states to build on reforms enacted in 2015 with a range of policies to address poverty and income inequality–including, most notably, efforts to enact or improve state EITCs in as many as a dozen states. Unfortunately, lawmakers in a few states are looking to reduce or eliminate their EITCs.  Here’s a look at the opportunities and threats we see for states in 2016:   

Enacting state EITCs:   

Twenty-six states plus the District of Columbia currently have a state EITC, a credit with bipartisan support designed to promote work, bolster earnings, and lift Americans low-wage workers out of poverty. 

In 2016, a number of states are looking to join this group by enacting their own state EITCs. For instance, Mississippi Gov. Phil Bryant recently called for “blue collar tax dividends” to give people back a portion of their hard-earned tax dollars (he has proposed a nonrefundable state EITC). In South Carolina, a refundable EITC is on the table to help offset a largely regressive transportation revenue raising package. And lawmakers in Idaho have proposed the enactment of an EITC at 8 percent of the federal credit (PDF).  Advocates in Georgia, Hawaii, Kentucky, Missouri and West Virginia are calling on their state lawmakers to enact state EITCs as a sensible pro-work tool that would boost incomes, improve tax fairness, and help move families out of poverty. 

Even states without an income tax could offer a state EITC and lift up the state’s most vulnerable. Washington State enacted a Working Families Tax Rebate at 10 percent of the federal EITC in 2008, though it still lacks sufficient funding to take effect.  

Enhancing state EITCs:   

While state EITCs are undoubtedly good policy, there is still room for improving existing credits. Three states (Delaware, Ohio and Virginia) have EITCs but only allow them as nonrefundable credits–a limitation which restricts their reach to those state’s lowest-income families and fails to offset the high share of sales and excise taxes they pay. Lawmakers in Delaware seem to have recognized this shortcoming by recently introducing a bill that would make the state’s EITC refundable, but only after reducing the percentage from 20 to 6 percent of the federal credit and then gradually phasing it back up to 15 percent over the course of a decade.  Advocates in Virginia are calling for a strengthening of the state’s EITC as an alternative to untargeted tax cuts proposed by Gov. Terry McAuliffe. 

In addition to refundability, many states are discussing an increase in the size of their credit. Governors, in particular, are stepping up to the plate: Rhode Island Gov. Gina Raimondo recently announced her plan to raise the state’s EITC to 15 percent, up from 12.5 percent of the federal credit; Louisiana Gov. John Bel Edwards, meanwhile, has called for doubling the state EITC as part of his commitment to reduce poverty; and Maryland’s governor, Larry Hogan, called to accelerate the state’s planned EITC increase. In California, Gov. Jerry Brown reiterated his support for the state’s new EITC in his 2016-17 budget. In New York, Assembly Speaker Carl Heastie proposed increasing the EITC by 5 percentage points over two years. And Oregon lawmakers are calling to bring the EITC up to 18 percent of the federal credit.   

Another “enhancement” trend that is building momentum is expanding the EITC to workers without children. At the federal level, President Obama proposed just that (PDF) in 2014 and again reiterated his support for such a change in his most recent State of the Union address and budget proposal. Just last year, the District of Columbia expanded its EITC for childless workers to 100 percent of the federal credit, up from 40 percent, and increased income eligibility.   

Protecting state EITCs:  

Rather than focusing on proactive anti-poverty strategies, a handful of states will be spending the better part of 2016 protecting their state EITCs from the chopping block. Tax reform debates in Oklahoma have led to calls that the state’s EITC should be re-examined and possibly eliminated, possibly in combination with the elimination of the state’s low-income sales tax relief and child care tax credit.  

For more information on the EITC, read our recently released brief that explains how the EITC works at both the federal and state levels and highlights what state policymakers can do to continue to build upon the effectiveness of this anti-poverty tax credit. 

How do tax reform plans affect economic growth? And can an economic model that always assumes tax cuts stimulate economic growth and tax increases stifle growth credibly answer this important question? In a word, no.

A new paper by Carl Davis, research director at Institute on Taxation and Economic Policy (Citizens for Tax Justice’s research partner), takes an analytic look at the Tax Foundation TAG (Taxes and Growth) Model and outlines why observers of the organization’s data should be skeptical.

“The TAG model currently views government investments in infrastructure, education and other services as worthless,” Davis wrote. “The model ventures even further into the territory of economic voodoo by depicting tax cuts as a means of raising federal revenues, and tax increases as ineffective at achieving that same goal.” 

Read the full paper here. 

As expected, the budget unveiled by President Obama this week includes a proposed new tax of $10.25 per barrel of crude oil.  The revenues raised by this tax would go toward not just shoring up our nation’s anemic Highway Trust Fund, but also expanding it into a more ambitious (and renamed) Transportation Trust Fund that would bring with it a heavier emphasis on public transit projects.

Since most crude oil is ultimately converted to gasoline or diesel fuel, much of the impact of this oil tax would be identical to a 20 or 25 cent increase in the nation’s existing fuel taxes.  The primary difference is that a tax on crude oil would also fall on a wider range of products, including heating oil and jet fuel.

In a sense, a tax on crude oil can be thought of as straddling a middle ground between the nation’s current taxes on transportation-related fuel use, and a more comprehensive tax on all carbon emissions.  In its budget proposal (PDF), the Obama Administration’s case in support of an oil tax sounds very similar to one that could be made for a carbon tax: “a fee on oil … creates a clear incentive for private-sector innovation to reduce America’s reliance on oil and invest in clean energy technologies.”

In addition to its likely environmental benefits, a crude oil tax of this size could also ensure solvency in the nation’s transportation account throughout the entire 10 year budget window (in contrast to the 2021 insolvency being forecast today), and is described (PDF) by the Administration as generating “a sustainable revenue level … going forward.”  Part of this sustainability hinges on the fact that the President’s proposed $10.25 per barrel tax would be allowed to grow alongside inflation in the years ahead.  This is in sharp contrast to the nation’s current gas tax which has stagnated at a fixed rate of 18.4 cents per gallon for over 22 years and lost roughly 40 percent of its purchasing power in the process.

Even if a new tax on crude oil is “dead on arrival,” as House Speaker Paul Ryan recently claimed, members of Congress should take note of the inflation indexing component of this proposal and consider its relevance to the gas and diesel taxes already on the books today.  As we’ve explained in the past, tying fuel taxes to inflation is smart policy and, at least at the state level, is becoming increasingly routine.

Today we are taking a look at several states that are dealing with budget shortfalls. Despite shortfalls, governors in Arizona and Kentucky are calling for tax cuts. Newly elected Louisiana Gov. Edwards is taking a different approach and calling a special session next week to talk about tax increases. Meanwhile the sad saga of Kansas continues as lawmakers grapple with revenues that again fell short of monthly projections.
Thanks for reading. 
— Meg Wiehe, ITEP’s State Tax Policy Director

Years of tax cuts have left Arizona low on cash, despite state officials’ protestations to the contrary. While lawmakers point to lingering effects of the Great Recession to explain sluggish revenue collections, economists at Arizona State University blame over 20 years of tax cuts, which have reduced the 2016 general fund by $4 billion. Revenues will continue to decline as corporate tax cuts are phased in through 2019, but no matter — Gov. Doug Ducey affirmed his commitment to cutting taxes further in his State of the State address (while somehow also promising increases in education spending).

Advocates in Kentucky say years of budget cuts show that the state needs more revenue. Under former Gov. Steve Beshear, the state cut spending by $1.5 billion. Gov. Matt Bevin has proposed $650 million in additional cuts under his latest budget. Recently, a coalition of 20 groups called on lawmakers to consider raising revenue instead of enacting more cuts. Using data from our state partners at the Kentucky Center for Economic Policy (KCEP), the Kentucky Together coalition advocates for eliminating tax breaks for corporations and wealthy property owners as well as broadening the sales tax base to include services. The KCEP report (PDF) cites ITEP data showing that state and local taxes hit middle-income families hardest (10.8 percent of family income) and are relatively light on the top one percent of Kentucky earners (6 percent of family income).

The sad saga of Gov. Sam Brownback continues for Kansas. The governor and his revenue officials continue to make the case that relying heavily on consumption taxes will provide “more stability” for state revenues despite mounting evidence to the contrary. In January, sales tax receipts were $3.9 million under expectations, and since July have come in as much as $10 million under monthly projections. Brownback and lawmakers increased the sales tax rate last June in an effort to pay for the governor’s costly income tax cuts. Revenue Secretary Nick Jordan insists that the short-term data are an aberration, and that the sales tax is more reliable than the income tax “over a 5-10 year trend.” Conveniently, Jordan won’t be around then to see if his prediction was correct. And despite the assertions of Art Laffer and Stephen Moore, the Kansas economy doesn’t prove the wisdom of Brownback’s “experiment.” As Yael Abouhalkah of The Kansas City Star notes, those economists have failed to acknowledge the consumption tax hikes, budget cuts and highway trust fund raids made necessary by the state’s recent tax cuts.

At the request of new Gov. John Bel Edwards, Louisiana will hold a special session beginning next Monday to deal with its budget crisis. The session is limited to considering bills that would increase taxes, rollback tax cuts and incentives, or cut spending in an effort to balance the budget. However, it will be up to the legislature to decide if a bill meets the parameters established by the governor. One piece of legislation expected to be considered is a repeal of the SAVE higher education act, a bill passed by Louisiana lawmakers at the behest of former Gov. Bobby Jindal. The convoluted law created a fake tax credit to cover for a tax increase so that Jindal could pretend to keep his no-taxes pledge.

State of the State Addresses This Week:
Louisiana Gov. John Bel Edwards — Friday, Feb. 12
Pennsylvania Gov. Tom Wolf — Tuesday, Feb. 9 (watch here)
Wyoming Gov. Matt Mead — Monday, Feb. 8 (watch here)

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The recently released annual report from the Celanese Corporation, a Fortune 500 manufacturer of engineering polymers, is a helpful reminder of why multinational companies should be required to report their earnings to tax authorities in countries where they claim to earn profits. In its 2015 annual report, Celanese discloses that its foreign income over the past three years totaled $1.46 billion, the bulk of which ($900 million) it reported earning in four tax havens: Bermuda, Luxembourg, the Netherlands and Hong Kong. This means the company is claiming that more than 60 percent of its foreign income, and an incredible 30 percent of its worldwide income, is earned in these tax-haven countries.

As we’ve argued in the past, country-by-country reporting is a vital tool for tax administrators in the United States and abroad to help them detect corporate tax avoidance schemes. The Internal Revenue Service has released rules implementing OECD recommendations for country reporting, but Rep. Charles Boustany, chair of the House Ways and Means Tax Policy Subcommittee, is doing whatever he can to postpone this effort in the United States.

Whether you’ve heard of Celanese or not, you’ve used a product created with raw materials manufactured by the company. Its customers are industries as varied as agriculture, pharmaceutical, electronics, aerospace and automotive. And while it profited handsomely over the last three years, the company’s claims about where it is earning its profits are, at best, questionable. Country-by-country reporting would provide much-needed transparency and, possibly, prevent the company’s elaborate tax-dodging scheme.

What makes the company’s income reporting seem implausible is that Celanese also discloses the location of its sales, property, plant and equipment—and remarkably little of it appears to be in any of these tax havens. [See CTJ’s report on tax haven abuse for a brief explanation of why corporations’ claims of massive profits in tax haven countries is unbelievable.]

In 2015, Celanese reports that $146 million of its $5.67 billion in worldwide sales are generated in a residual “other” category of countries, which includes but is presumably not limited to these four tax havens. These “other” countries also represent just $70 million of the company’s worldwide $3.6 billion in property, plant and equipment.

So how can it be that a small group of tax havens in which Celanese has at most 2.6 percent of its sales and 1.9 percent of its property is nonetheless generating 30 percent of its worldwide income?

The only information about the company’s Bermuda operations in its financial statement is the existence of a subsidiary, Elwood Limited. If the well-documented income shifting hijinks of other big multinationals are any indicator, Celanese’s Bermuda subsidiary exists solely to act as a home away from home for the company’s intellectual property, patents and trademarks, most of which were really generated in a country in which the company actually has sales, property and employees.

Rep. Boustany has argued that country-by-country reporting would result in foreign governments engaging in “fishing expeditions” to ferret out sensitive information about corporate practices. But even the limited disclosures made by Celanese show that in fact, the main effect of country-by-country reporting would be to put an end to the tall tales many corporations are creating about where they earn their profits. Like the proverbial “fish that got away,” the invisible manufacturing plants allegedly creating nearly a third of Celanese’s income in four tax havens are a whopper, but a far more harmful one than your average fish tale.