Category: TaxJusticeBlog

The Congressional Budget Office (CBO) Tuesday provided a sneak preview of its forecast for the nation’s finances over the next decade. And the news isn’t good. The CBO projects that, after years of shrinking, the federal deficit will grow in fiscal year 2016 to $544 billion, a $130 billion increase over what the office previously predicted.

Tuesday’s report summarizes the top-line findings of the CBO’s annual “Budget and Economic Outlook” document, which will be released next week. It’s pretty easy to see why the CBO wanted to give Congress as much time as possible to mull these data over: they show the nation’s finances deteriorating dramatically going forward.

The shift from decreasing to growing deficits shouldn’t be surprising to members of Congress who in December enacted tax extenders, a huge package of primarily business-oriented tax cuts. The short-term cost of this “extenders” tax package explains virtually all of the big bump in the forecast 2016 deficit.

If nothing changes, deficits will only continue to grow after 2016, according to CBO. In fact, the new CBO data show annual budget deficits gradually growing to more than $1 trillion by 2022. This means that 10-year budget deficits totaling almost $9.4 trillion will face our next commander in chief.

All of which makes the fiscal policy priorities of most of the presidential candidates seem even more surreal. Faced with a massive, $9.4 trillion 10-year budget hole, the most sensible directive for fiscal policy going forward would be to “stop digging.” Unfortunately, the tax policy proposals outlined by every Republican candidate would dramatically decrease federal revenues and make the 10-year budget deficit at least twice as big as what the CBO is currently projecting.

Doubling down may be an entertaining strategy for gamblers, but it is no way to run a country. The new CBO data make it clear that the main criterion for evaluating sensible tax reform plans going forward must be that these plans raise new revenues, both to reduce the budget deficit and to pay for essential government programs on which all Americans rely.

Ending months of media speculation, General Electric announced this week that the company will relocate its headquarters from Fairfield, Conn., to Boston, Mass.The company’s press release announcing the move explained that its choice is driven by amenities Boston and the state of Massachusetts offer, including its “diverse, technologically fluent workforce” and its emphasis on research and development.

Conspicuously absent from the announcement is any reference to tax-related reasons for the relocation. Earlier this year after the Connecticut legislature marginally increased business taxes, GE threatened to move and anti-tax advocates wrongly held up the state’s tax increases as a cautionary tale. GE’s choice of Massachusetts (New York was the company’s other consideration), hardly a tax haven for footloose corporations, demonstrates that a wide variety of factors, not simply the lowest tax rate, determine where businesses will locate. Boston and runner-up New York are recognized as centers of commerce and innovation. As GE said in its own press release, it chose Boston as its new corporate headquarters because of the broader “ecosystem” it offers.

It should be noted, however, that the biggest winner in this move is GE, not other taxpayers. The company has long been spectacularly successful in avoiding state income tax obligations as a Connecticut resident. In 2014, the company enjoyed $5.8 billion in pretax profits and didn’t pay a dime in state income tax on these profits. Over five years, the company paid just a 1.6 percent state income tax rate on $34 billion in U.S. profits, and it paid less than 1 percent in federal income taxes. The company is one of the nation’s most notorious tax dodgers.  

These hard facts haven’t stopped idle speculation over the role of recent Connecticut tax changes in prompting the move. GE CEO Jeffrey Immelt fanned the flames when he wrote a memo earlier in 2015 complaining about tax changes enacted by the state legislature last year. But it’s unlikely that these changes really factored into the company’s decision. After all, the “combined reporting” changes corporate lobbyists in Connecticut complained most vocally about have been in place in Massachusetts since 2008. Moreover, the Connecticut Legislature quietly enacted special new tax breaks for GE in November, and the company itself has been very clear that “GE’s move is not being driven by tax policy. It’s being driven by a major change in GE’s strategy.” Further, the company’s press release admits that corporate leaders had “been considering the composition and location of its headquarters for more than three years,” long before Connecticut’s recent corporate tax changes saw the light of day.  

Long-time business leader Michael Bloomberg said that “any company that makes a decision as to where they are going to be based on the tax rate is a company that won’t be around very long.” General Electric’s latest announcement strongly suggests that tax rates weren’t even a blip on the radar in the company’s relocation move. 

Hillary Clinton on Tuesday released a series of new proposals that she says would help restore “basic fairness to our tax code.” The proposals, which she estimates would raise about $500 billion over the next decade, include a multi-millionaire income tax surcharge, a Buffett Rule-style tax increase and closing several prominent loopholes and reforms to the estate tax. These proposals would represent a positive step toward ensuring that the wealthy pay their fair share in taxes.

What Are Clinton’s Tax Reform Proposals?

Clinton’s plan includes what she calls a “Fair Share Surcharge,” which would impose an additional 4 percent tax on adjusted gross income (AGI) over $5 million. Because the tax applies to AGI–including both wages and capital gains–it would effectively decrease the benefit of the special preferential tax rate on investment income, which makes up the largest share of income for many multi-millionaires. This provision would raise roughly $204 billion over 10 years.

In addition to the surcharge, Clinton proposes to implement the Buffett rule, which would create a minimum tax of 30 percent on millionaires. The rule was originally inspired by billionaire Warren Buffett’s call for higher taxes on millionaires because he said he pays a lower effective tax rate than his secretary. This provision would raise about $50 billion over 10 years.

The third plank of Clinton’s tax reform plan would close down three egregious tax loopholes. Like many other candidates, including both Republicans and Democrats, Clinton proposes to end the carried interest loophole, which allows investment managers to misclassify their earnings as capital gains income to pay a lower preferential tax rate on this income. The plan also calls for eliminating the reinsurance loophole, which allows super-wealthy investors to use derivatives to avoid paying the normal (and higher) tax rate on short-term capital gains. The plan would also eliminate the so-called “Romney Loophole,” which allows some wealthy families to use retirement accounts to shelter large swathes of their income from taxation. Eliminating these three loopholes would raise about $51 billion.

While the Buffett Rule, the Fair Share Surcharge, and other loophole closers would help level the playing field between wealthy investors and average taxpayers, Clinton’s proposals avoid dealing directly with the federal tax code’s central problem: the preferential tax treatment on investment income, which is both taxed at a lower-than-normal rate and is often not taxed at all. Rather than creating two new taxes and engaging in a never-ending game of whack-a-loophole, a more straightforward solution would be to tax capital gains and dividend income the same as wage income, and to make more transfers of appreciated assets subject to tax on gains. A Citizens for Tax Justice (CTJ) report has found that eliminating the preferential tax rate would raise $533 billion over a decade and would be extremely progressive.

The final plank of Clinton’s plan would lower the estate tax exemption from $5 million to $3.5 million and increase the top estate tax rate from 40 to 45 percent, which would raise about $189 billion over 10 years. According to the campaign, lowering the threshold to $3.5 million would still mean only the wealthiest 4 out of 1,000 estates would owe even a penny in estate taxes. Clinton is also proposing to curb estate tax avoidance through closing down certain estate-tax shelters, such as the infamous GRAT loophole. These proposals represent significant steps in restoring the robustness of the estate tax, which is crucial to counteract the increasing growth in wealth inequality.

Clinton’s revenue-raising proposals are in stark contrast to every single one of the Republican presidential candidates’ plans, all of which would cut taxes by trillions of dollars. The GOP plans would also make the tax system much less progressive by providing the wealthy with massive new tax cuts. CTJ analyses have shown that candidates Trump, Bush, Rubio and Carson would each give the wealthiest 1 percent of Americans tax breaks averaging more than $170,000 a year.

However, Clinton has not specified how she would propose using the revenue raised if her reforms were implemented. Given the nation’s dire need for more revenue to pay for public investments, using the revenue to finance tax cuts would be ill-advised. 

Late last year, the New York Times published an article revealing the disturbing but not surprising news that the nation has separate and unequal tax systems: one for the rich and powerful who have created a cottage “income defense industry” and another one for we regular Joes and JoAnnes.

The same day, the IRS released data showing that the average effective tax rate for the richest 400 Americans rose to 22.9 percent in 2013 (the latest year for which data are available), a substantial increase over the historically low effective rate of 16.7 percent that the group collectively paid the previous year.  How this happened is no mystery. Tax changes enacted at the end of 2012 as part of the “fiscal cliff” deal as well as Affordable Care Act tax provisions that took effect in 2013 increased top income tax rates on both wages and capital gains.

Members of the exclusive, richest 400 club on average derive 70 percent or more of their income from capital gains. They also each enjoyed $100 million or more in income in 2013. The increase in their tax rate in 2013 is notable for several reasons. One, it is 6 percent more than the average from the previous year. Two, the rate, nonetheless, remains far below the nearly 30 percent average rate the group paid in the 1990s when the IRS first began publishing these data.

Average tax rates for the richest remain well below 1990s-era levels because even after the fiscal cliff deal, the top tax rate on capital gains is still only 23.8 percent, compared to the 28/29 percent capital gains tax rate in the early 1990s and the 39.6 percent top tax rate now applicable to wages. The way the IRS taxes income from wages versus income from wealth creates a disparity in the tax system that favors the wealthiest Americans and allows them to reduce their effective tax rates to well below the rates paid by less affluent Americans.

This is important information in the context of a presidential election in which all of the major Republican presidential contenders have proposed top-heavy tax cut proposals that would mostly benefit the wealthiest Americans while adding trillions of dollars to the national debt. On the Democratic side, none of the candidates have yet released comprehensive tax proposals. However, Hillary Clinton this week released a plan that, among other things, would close “certain” tax loopholes, impose a 4 percent surtax on households with income over $5 million, restore the estate tax to 2009 levels and increase the tax rate, a move the campaign says would raise $400 billion to $500 billion over a decade.

The next president’s policy on taxes will determine whether an elite sliver of the nation’s population will see their effective tax rates go back down to historically low levels or inch up and move the nation toward a more progressive federal tax system.

The sheer amount of wealth held by the top 400 means that tax increases on this group would have a measurable effect on the nation’s revenues and its ability to fund roads, bridges, education, public safety, public health, nutrition and other vital programs and services. Ending special tax breaks for capital gains would have an even better effect on tax fairness and our budget deficit.

And because the nation’s income continues to concentrate at the top—the richest 400 Americans, a tiny group, enjoyed 1.17 percent of nationwide AGI in 2013, more than twice as big as their 1992 share of nationwide income—failing to end tax breaks for these best-off Americans hurts public investments more and more each year. Obviously, the answer to the nation’s need to raise more revenue cannot solely be to tax this exclusive group more. Lawmakers and candidates, though, must stop peddling massive tax cuts–especially for the rich–as a policy panacea at a time when the nation isn’t raising enough revenue to meet its priorities.

It’s welcome news that tax rates on the top 400 Americans have rebounded from their recent historic lows. But the recent reversal of the downward trend in tax rates for the richest Americans is only a first step toward undoing the regressive, top-heavy tax cuts of the past 20 years rather than a sea-level change in tax fairness. 

The revenue crisis in Louisiana is worse than anticipated, according to Gov.-elect John Bel Edwards. The state is short $750 million this fiscal year, which must be accounted for by the end of June. Next fiscal year, which starts in July, will put the state $1.9 billion further in the hole. Edwards has said he will unveil a “menu of options” to address the shortfall in advance of a special session he plans to call next month.  He will likely ask lawmakers to consider revenue raising measures to help soften the impact of spending cuts in the current year and to boost available revenue for next year’s budget (which will get sorted out in March). 

A tax cut for the middle class took effect on January 1 in Arkansas. Gov. Asa Hutchinson won approval last year of a 1 percent cut in the income tax rate for those making between $21,000 and $75,000, at a cost of $135.7 million over the biennium. Hutchinson sees the cut as the first step toward a broader income tax reduction, but he has no plans to propose new cuts before the 2017 legislative session. But some lawmakers and advocates warn that the income tax cuts will lead to further cuts in state services such as the state’s severely underfunded preschool and child welfare programs. “That’s just a huge amount to come out of the budget and we’re seeing a lot of current unmet needs in Arkansas,” noted Ellie Wheeler of Arkansas Advocates for Children and Families.

Pennsylvania officials still haven’t reached an agreement on their state’s budget (now almost seven months past due), but that hasn’t stopped them from approving the funding of tax breaks for corporations. Gov. Tom Wolf conditionally approved several requests for tax credits from businesses, including breaks for donations to private schools, film tax credits and credits for research and development.  Apparently, this represents a reversal for the governor, who said last Tuesday that emergency funds recently made available for school districts and social services would not be used to fund tax credit programs. The state government approved 3,000 requests for the education tax credit, up from 2,700 last year. Businesses can take a 75 percent credit on their donations (up to $750,000) to organizations that provide scholarships to low-income students to attend private schools.

Utah Gov. Gary Herbert wants his state’s legislature to reconsider its earmarking practices, saying that automatically directing new revenues to specific purposes can reduce flexibility in funding state priorities. Herbert specifically argued that money earmarked for transportation could be better spent on educational priorities. “We’re coming to a point where there’s a crossroads decision, because if we don’t reduce some of the earmarks, we will have a difficult time funding education, particularly higher education,” noted the governor. Some lawmakers have also argued that the automatic earmarking practices prevent the state from regularly reviewing if funds are being spent efficiently.

Snack lovers in Maine will pay a little more at the register this year. Since Jan. 1, a number of products including marshmallow fluff and beef jerky were added to the sales tax base. The sales tax base expansion was one element of the tax reform package passed by the legislature last summer which also included a permanent hike in the sales tax rate, significant changes to the state’s personal income tax, and the introduction of a refundable sales tax credit. 

Media giant Viacom is being sued by a former senior executive who claims she was fired for objecting to an unethical, and possibly illegal, offshore corporate tax dodge.

Viacom allegedly sought to avoid paying U.S. income taxes on the licensing rights for various Viacom TV shows and movies, including “Teenage Mutant Ninja Turtles,” “SpongeBob” and “Dora the Explorer.” Nataki Williams, a former vice president for financial planning at Viacom, alleges that her vocal objection to shifting the company’s intellectual property into a Netherlands subsidiary for tax purposes was the reason the company fired her.

So far Viacom’s hasn’t denied shifting its profits offshore through the use of offshore tax havens; instead, the company has claimed that it fired Williams for an entirely unrelated reason having to do with improperly claimed family benefits.

If Viacom isn’t pleading innocence in the court of public opinion on the charge of offshore tax dodging, it is plausible that this is because such a plea would seem laughable. After all, as a Citizens for Tax Justice report documented last year, Viacom’s most recent annual report discloses the existence of 39 Viacom subsidiaries located in known tax havens. These subsidiaries tend to be located in resort islands such as the Bahamas, Barbados and the Channel Islands.

It is, of course, possible that Viacom chose to locate its inscrutably named “Yellams LDC” subsidiary in the Cayman Islands to better capitalize on that tiny beachfront nation’s insatiable appetite for Dora the Explorer-themed flip flops and other such licensed products. But it’s far more likely that this subsidiary, and Viacom’s six other Cayman Islands subsidiaries, exist for one simple purpose: to funnel Viacom profits out of the United States and into jurisdictions with little or no taxes on intellectual property. Nataki Williams’ allegations suggest that the same may be true of the company’s 24 Netherlands subsidiaries.

Because Viacom and other multinationals aren’t required to disclose the location of their offshore cash, we can’t know just how much of the media giant’s $2.4 billion in permanently reinvested offshore earnings have been shifted into tax havens in the way alleged by Nataki Williams. The Securities and Exchange Commission should require this disclosure. 

Presidential candidate Ben Carson, who had previously outlined his general support for a flat tax based on the biblical “tithe,” laid out more details of his tax plan earlier this week. The plan’s $9.6 trillion 10-year cost puts it squarely in the footsteps of the tax giveaways proposed by other candidates. Carson is pitching the plan as a 14.9 percent flat tax that would be simpler and fairer, but in reality the plan would be a major giveaway to the wealthiest Americans and, in fact, would impose a 30.2 percent tax rate on most working people. 

The Carson campaign’s PR effort is focused on the flat 14.9 percent tax with which he would replace the current graduated federal income tax. But Carson’s campaign literature fails to mention that the plan would leave in the federal payroll (FICA) tax. Counting the employer and employee side of the FICA and Medicare tax, both of which are generally thought to fall ultimately on workers, the payroll tax clocks in as a 15.3 percent tax rate on salaries and wages. Carson would leave this unchanged. So when Carson claims his plan would tax “income at a uniform 14.9 percent rate,” he’s understating the actual tax rate on working families by a factor of two. Overall, the wages of working families would see a tax rate of 30.2 percent under Carson’s tax plan.

In addition to the move from a graduated-rate to a flat-rate tax, Carson would repeal virtually all of the income tax deductions and credits currently in place. Everything from the Earned Income Tax Credit and the Child Tax Credit to itemized deductions would be eliminated. In lieu of these tax breaks, Carson would introduce one new deduction that exempts income below 150 percent of the federal poverty line, imposing only a small “de minimus” tax on this income.

Carson’s plan also contains the usual array of goodies for the best-off Americans: estate tax repeal, a zero tax rate on capital gains, dividends and interest, and an end to the alternative minimum tax. CTJ’s new analysis shows that fully two-thirds of the tax cuts under Carson’s plan would go to the very wealthiest 1 percent of Americans. This is roughly twice as big a share as this best-off group received from the tax cuts engineered by President George W. Bush more than a decade ago. 

As a new Citizens for Tax Justice analysis shows, on balance these proposed changes would have a disastrous effect on both tax fairness and the federal budget. Not only is the plan misleading when it asserts everyone would pay a 14.9 percent flat tax, the poorest 40 percent of Americans would see big tax hikes and federal revenues would be decimated by $9.6 trillion over ten years.

Carson’s plan, like the other Republican proposals before it, is selling a dream that experience has shown will never come true. The nation cannot have drastic tax cuts that disproportionately benefit the wealthy and also fund basic programs and services and grow the economy.

Last year we reported that the Netflix corporation had given itself the ultimate Christmas gift, using a stock option tax break to zero out every last dime of income taxes on its $159 million in US profits. Now there is at least circumstantial evidence that Netflix’s worldwide ambitions extend to manipulating foreign tax codes. An investigation by the Sunday Times finds that Netflix is booking all of its profits from sales to U.K. customers in a Luxembourg affiliate—which means that the company claims it’s not earning a dime from the $200 million of revenue it derived from U.K. customers last year. 

Since 2013, eighteen states have enacted laws either increasing or reforming their gas taxes to boost funding for transportation infrastructure.  A snapshot of gas tax rate changes scheduled to occur this upcoming January 1st, however, reveals that five states will actually move in the opposite direction as 2016 gets underway.

Gas tax rates will decline in New York, North Carolina, Pennsylvania, Vermont, and West Virginia—in most cases because of gas tax rate structures that link the rate to the average price of gas (an approach similar to a traditional sales tax applied to an item’s purchase price).  But cutting gas tax rates is problematic because doing so reduces funding for economically vital transportation infrastructure investments.  And with drivers already benefiting from gas prices that have just reached a six-year low, the timing of these rate cuts is difficult to justify.

Given these realities, many states have recently taken steps to limit gas tax volatility by imposing “floors” on the minimum tax rate, limitations on how much the rate can change from one year to the next, and in some cases even moving toward entirely different formulas based on more stable (and arguably more relevant) measures of inflation. 

While five states will be forced to grapple with the consequences of reduced transportation revenue, there are four states where gas tax rates will actually rise on January 1: Florida, Maryland, Nebraska and Utah.  In addition to those increases, Washington State has a gas tax increase scheduled for July 1st and governors in states such as Alabama and Missouri have said they intend to pursue gas tax increases during their upcoming legislative sessions.  With lower gas prices having become the norm for now, lawmakers in those states that have gone years, or even decades, without raising their gas taxes should give real consideration to enacting long-overdue updates to their gas tax rates

The five states that will see their gas tax rates decline on January 1st include:

• West Virginia (1.4 cent cut), New York (0.8 cent cut), and Vermont (0.27 cent cut) will see their gas tax rates fall because their rates are tied to the price of gas, which has been declining in recent months.
• North Carolina (1.0 cent cut) was scheduled to see an even larger decline in its gas tax rate due to falling gas prices, but lawmakers intervened in 2015 to limit the size of the cut and its impact on the state’s ability to invest in infrastructure.  Moving forward, North Carolina will also have a somewhat more stable gas tax because of a reform that removed a linkage to gas prices and instead tied the rate to population growth and energy prices more broadly.
• Pennsylvania (0.2 cent cut) is the only state in this group whose decline is not directly linked to falling gas prices.  A reform approved by lawmakers in 2013 included a modest tax rate cut in 2016, though notably, this cut is bookended by significantly larger increases in 2014, 2015, and 2017.

And in the four states where gas tax rates will rise:

• Florida (0.1 cent increase) is seeing its tax rate rise due to a forward-thinking law, in place for more than two decades, that links the state’s gas tax rate to growth in a broad measure of inflation in the economy (the Consumer Price Index).
• Maryland (0.5 cent increase) is implementing a rate increase as a result of the U.S. Congress’ failure to pass legislation empowering states to collect the sales taxes owed on purchases made over the Internet.  In 2013, Maryland lawmakers enacted a transportation funding bill that they had hoped would be partially funded by requiring e-retailers to collect sales tax.  Rather than trusting Congress to act, however, state lawmakers also built in a backup funding source: an increase in the state’s gas tax rate from 3 percent to 4 percent of gas prices this January 1st, plus a further increase to 5 percent on July 1 if Congress continues to delay action.
• Nebraska (0.7 cent increase) and Utah (4.9 cent increase) are seeing their gas tax rates rise because of legislation enacted by each state’s lawmakers in 2015.  The Nebraska law (enacted over the veto of Gov. Pete Ricketts) scheduled 1.5 cent rate increases for each of the next four Januarys, though more than half of this year’s scheduled increase was negated by a separate provision linking the state’s gas tax rate to (currently falling) gas prices.  In Utah, the 4.9 cent increase is the first stage of a new law that could eventually raise the state’s gas tax rate by as much as 15.5 cents, depending on future inflation rates and gas prices.

Earlier this year, lawmakers in states such as Georgia, Kentucky, and North Carolina realized that allowing gas tax rates to fall would harm their ability to invest in their states’ infrastructure.  As a result, each of those states acted to limit scheduled rate cuts and curtail the volatility of their gas tax rates moving forward.  Without question, linking gas tax rates to some measure of growth (be it gas prices, inflation, or fuel-efficiency) is a valuable reform that can improve the long-run sustainability of this important revenue source.  But as the gas tax cuts taking effect next month demonstrate, that linkage should be done in a way that manages potential volatility in the tax rate.

View chart of gas tax changes taking effect January 1, 2016 

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

Happy Holidays! We wish you and yours a cookie filled and relaxing end to your 2015. Sit back and take a deep breath, we’ve got a jammed packed Tax Justice Digest for you this week:

Extenders Bill Passes

Late last week Congress passed the extenders bill – a package of legislation mostly made up of tax breaks for businesses that have actually already expired. Citizens for Tax Justice weighed in on the package and urged lawmakers to reject the deficit-financed $690 billion tax cut deal.

Apple CEO Gets It Wrong on Tax Avoidance
This week the Institute on Taxation and Economic Policy weighed in on Tim Cook’s 60 Minutes interview in which he responds to questions about the company’s history of tax avoidance by saying that raising the issue is simply “political crap.”

Inquiring Minds….   
Ever wonder how CTJ analyzes tax proposals? This post about ITEP’s microsimulation tax model should help answer your questions.

Our Gifts to You: 8 Book Recommendations and Tax Wars
We are a wonky bunch during work hours, but after hours and on weekends we go crazy and read some pretty entertaining books. Here’s a list of 8 books we read this year that we recommend. Enjoy.

The new Star Wars movie is getting rave reviews (our staff who saw it enjoyed it too). Here’s our take on Star Wars and taxes. We call it Tax Wars.  

State News

Looking Back on 2015: This year states enacted a mix of tax policy changes—some good and some bad.  But there were more than a few bright spots worth highlighting.  Here are five tax policy trends from 2015 that we hope will keep on giving into the new year.

Predictions for 2016: As the year comes to a close, several tax bills are already being debated in states across the country. In the new year we will write more about state tax policy trends for 2016, but in the meantime, here are some of the big state tax policy developments happening now.

Shareable Tax Analysis: