Category: TaxJusticeBlog

Connecticut lawmakers earlier this year passed a budget with more than $1 billion in new revenue, including increased corporate taxes, to plug a budget gap and ensure the state has resources to make needed investments in education, transportation and health care.  In late June, Gov. Dannel Mallow called lawmakers back to the capital for a special session, essentially caving to notorious tax dodger General Electric (GE) and other corporations’ demand that the state pare back just enacted tax chages. The most significant change enacted in the special session was a delay in the start date for combined reporting. Combined reporting requires a multi-state corporation to add together the profits of all of its subsidiaries, regardless of their location, into one report for tax purposes. Connecticut Voices for Children puts it this way:

 “Combined reporting is an essential policy aimed at preventing corporations from using accounting gimmicks to shift profits actually earned within their borders to states and foreign countries where they will be taxed at lower rates or not at all.”

This week, the governor and legislature once again put GE’s interests over the health and well-being of the state’s residents.  Due to underperforming personal income tax collections, the state faces a projected $350 million budget shortfall for the current fiscal year and another $552 million in the next fiscal year.  To close the current year gap, the legislature voted this week to cut early-childhood programs, conservation efforts, and medical services for inmates. But, it also agreed to spend money to cut corporate taxes including modifying combined reporting requirements and changing how some corporate deductions can be claimed.

The new corporate tax changes are largely seen as an effort to keep GE headquartered in the state.  But not surprisingly GE hasn’t committed to staying put and news leaked this week they may be considering a move to Boston. Since Massachusetts also requires multinational corporations to file combined returns, this latest news would suggest that Connecticut is being played by GE executives.  

Louisiana Governor-elect John Bel Edwards may be a breath of fresh air for tax justice advocatesin Louisiana this upcoming legislative session.

Gov. Bobby Jindal prioritized policies aligned with his no new taxes pledge rather than meeting the needs of Louisianans. The outgoing governor even introduced a losing proposal that would have eliminated the state’s income tax and replaced the revenue with a broader sales tax.

But hope springs eternal for fundamental and thoughtful tax reform as way to help close the state’s projected budget gap of $370 million for the current fiscal year and a more than $1 billion budget gap for next year. The optimism for revenue raising tax reform is possible thanks to the Gov. Elect’s appointment of former Republican Lt. Gov. Jay Dardenne as the state’s commissioner of administration  (a position that is equivalent to chief budget officer). Dardenne was the architect of revenue-raising tax reform enacted but later repealed) in the early 2000s. That package lowered sales taxes and increased the state’s reliance on income taxes.  

Another bright spot–last week the governor-elect called for doubling the state EITC as part of his commitment to reduce poverty in the Pelican State. We’ll be closely following the tax debate in Louisiana in the new year.

For years, lawmakers interested in cutting or eliminating personal income taxes have held up Alaska as a model for what they would like to achieve.  Alaska is the only state to ever repeal a personal income tax and has been without one for 35 years.  But Alaska’s status as an anti-tax role model may not last.  Yesterday, Gov. Bill Walker proposed a plan to remedy the state’s massive revenue shortfall by, among other things, instituting an income tax equal to 6 percent of the amount that Alaskans pay in federal income taxes.

As background, Alaska’s decision to repeal its income tax always came with something of an asterisk attached.  The state’s 1980 repeal only occurred after drillers discovered North America’s largest oil field on land that happened to be owned by the state government.  During times of high oil prices, the billions of dollars in tax revenue collected from the energy sector were enough to fund 90 percent of the state’s general operations and to pay an annual dividend to Alaska residents (totaling $2,072 per person this year).

But as anybody who has driven by a gas station this year knows, these are not times of high oil prices.  Crude oil prices recently fell to just $37 per barrel and Alaska’s oil-dependent revenue streams are now raising enough to fund just 40 percent of the state’s budget, even with significant spending cuts enacted last year.  As Gov. Walker explains, “we cannot continue with business as usual and live solely off of our natural resource revenues.”

The Governor proposed revenue changes that include raising the state’s comically outdated motor fuel tax rate, boosting taxes on alcohol and tobacco, reforming the tax treatment of oil and gas producers, and paring back residents’ annual dividend.  Of course, many of these changes would impact lower- and moderate-income Alaskans more heavily, which is part of the reason why (PDF) the package also includes an income tax piggybacked on the progressive federal income tax system.  Notably, Gov. Walker’s income tax design is similar to one proposed by lawmakers from both parties during this year’s legislative session, and also resembles the structures previously in place in states such as North Dakota, Rhode Island, and Vermont.

Ultimately, the plan put forth by Gov. Walker appears to be a serious attempt to address the state’s yawning, $3.5 billion deficit.  And as Alaska Public Media explains, it would also “shift the state away from a direct reliance on oil revenue and the boom-and-bust cycle of oil prices.”

Now that the Governor has spoken out about an income tax, wild, erroneous claims about the economy-destroying nature of personal income taxes are surely on the way.  But the reality is that if Alaska can’t count on oil revenues to fund its schools and infrastructure, an income tax is the most equitable and sustainable option available. 

When you think of a tax haven, you probably imagine the far off tropical islands of Bermuda or Grand Cayman, but the reality is that there is a major tax haven even closer to home in the state of Delaware. A new report from the Institute on Taxation and Economic Policy (ITEP) explains how one of our nation’s smallest states is one of the world’s biggest havens for tax avoidance and evasion.

What makes Delaware a tax haven? First, Delaware is one of the easiest places in the world to set up an anonymous shell corporation. In fact, setting up a company in Delaware requires less information than signing up for some library cards. This means that it is difficult for law enforcement to trace the activities of the anonymous shell corporations to the people who actually own and control them. This is what makes Delaware corporations an ideal vehicle not only tax evasion, but also for illicit activities like drug trafficking, terrorism finance and defrauding the government.

In addition, the state does not require companies to pay any tax on income relating to intangible assets held by companies based in the state. Companies take advantage of accounting gimmicks to shift their intangible income from other states into Delaware in order to take advantage of the zero tax rate on income earned from intangible assets. For example, Toys R Us has avoided millions in taxes by transferring its trademarks and trade names (including “Geoffrey the Giraffe”) into Delaware and charging its subsidiaries in other states for use of its trademarks.

Taken together, these two features help explain why there are 1.1 million companies registered in a state that has a population of only 935,000 people. While many in the media have highlighted the 19,000 companies listing the Ugland House in the Cayman Islands as their address, this pales in comparison to the 285,000 companies that are listed at the modest CT Corporation building in Wilmington, Delaware.

Barring action from the Delaware legislature , the good news is that individual states and the federal government can easily close down this onshore tax haven. To stop anonymous shell corporations, Congress could pass legislation, such as the Incorporation Transparency and Law Enforcement Act, mandating that states require the name and address of each owner of a company at the time of incorporation and after any change in ownership. This would lift the veil on individuals seeking to hide behind their anonymous shell corporations. And states can adopt “combined reporting,” which requires companies to report the income and expenses of all out-of-state subsidiaries for the purpose of determining corporate income tax.

Ending Delaware’s tax haven status would send a clear signal to other nations that the U.S. is a credible actor and thus bolster our efforts to combat offshore tax avoidance and evasion internationally. In addition, by putting an end to anonymous shell corporations, the United States could play a leadership role in promoting this critical policy throughout the rest of the world.

Read ITEP’s full report “Delaware: An Onshore Tax Haven” 

Earlier this week Donald Trump criticized Amazon chief Jeff Bezos for allegedly using his purchase of the Washington Post as a tax dodge. Trump’s claim that Bezos is using the Post’s losses to reduce Amazon’s profit is clearly wrong since the newspaper is owned by Bezos, not by Amazon. But by making this claim, Trump does draw attention to the fact that Amazon pays a low effective corporate tax rate and has dodged $1 billion in taxes thanks to various loopholes. In fact, Amazon has often incorporated tax avoidance strategies into its business plan.

For example, it’s well documented that Amazon’s growth as a retail giant was fueled by the company’s ability to avoid collecting sales taxes on its retail sales. Not collecting sales tax gave the company an immediate advantage over its brick-and-mortar competitors. For years, the company fought tooth and nail against sensible legislative efforts to put the company on a level playing field with mom and pop retailers. Yet, thanks to hard fought reforms in the states, this will be the first holiday season when Amazon will be collecting sales taxes in a majority of states.

Amazon has been equally adept at avoiding the corporate income tax. A 2014 Citizens for Tax Justice and Institute on Taxation and Economic Policy report found that Amazon paid just a 9.3 percent effective federal income tax rate over a five-year period between 2008 and 2012. In other words, the company found ways to avoid paying taxes on almost three-quarters of its U.S. profits during this period. The same report found that Amazon reduced its tax bills by $1 billion through an arcane tax dodge generated by lavish executive stock options—more than any Fortune 500 corporation other than Google, Facebook, ExxonMobil and J.P. Morgan.

Donald Trump has shown little evidence that he’s concerned about making our tax system more sustainable. But he’s likely correct about one thing: Amazon would not be where it is today absent the company’s long-term pattern of aggressively avoiding taxes at the federal, state and local levels. 

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

Facebook CEO Mark Zuckerberg made waves this week with his announcement that he will eventually giveaway virtually all of his wealth for charitable purposes. As Bloomberg’s Jesse Drucker noted, Zuckerberg appears poised to implement his plan through a new entity that, unlike more conventional charitable foundations, won’t actually be required to act philanthropically. 

But for those familiar with the tax avoidance tactics practiced by the Facebook Corporation in the U.S. and abroad, it should come as no surprise that Zuckerberg’s approach to philanthropy is set up to avoid any unnecessary tax liability.

Facebook has used an executive stock-option tax break to lower its taxes by $4 billion dollars over the past five years, allowing the company to pay a federal income tax rate of only about 8 percent during that time. Put another way, the company has been able to shelter almost eighty percent of its profits from tax during this period using just this one tax loophole. And Facebook has also been an unabashed user of a complex foreign tax dodge known as the “double Irish.”

These aggressive tax-avoidance maneuvers impose a real cost: every dollar of income tax that Facebook doesn’t pay is, ultimately, a dollar that must be made up by the rest of us, either through higher taxes on middle-income families or draconian cuts in infrastructure spending.

Since Andrew Carnegie, our country has had a long tradition of philanthropy among the wealthiest Americans. If Mark Zuckerberg ultimately lives up to his promise to donate his wealth to needy causes, his contributions could make a huge difference in the lives of many Americans. But we shouldn’t lose sight of the fact that his company’s pattern of aggressively reducing corporate income tax payments is making the lives of Americans worse right now, by shortchanging America’s tax system of needed revenues. 

Pennsylvania leaders have again pledged that a budget deal is in reach, despite the collapse of a recent compromise (and, of course, the compromises before that). The state is also in its sixth month of stalemate. Gov. Tom Wolf says that negotiations are down to “details and language,” with revenue raising measures being a sticking point. Legislative leaders have ruled out a broad-based tax increase so negotiators are working on a way to raise $600 million without a sales tax rate increase. Rather, a wider range of goods and services will be subjected to sales tax, including admission to museums, amusement parks, and golf courses. A proposed property tax reduction is no longer under consideration. Both houses of the legislature plan to work through the weekend on reaching a deal.

Mississippi leaders will push forward with tax cuts next legislative session even though revenue collections are sluggish enough to threaten mid-year budget cuts. Gov. Phil Bryant and Lt. Gov. Tate Reeves, both recently reelected, will try again to push tax cuts after being defeated during the last session. A likely target is the state’s business franchise tax, which is a levy on a business’s property used, invested, or employed. Eliminating the tax, which brings in $245 million annually, is a prime item on both men’s agenda, and bigger Republican majorities in the legislature make it a possibility. House Republicans are just on vote shy of the 3/5 supermajority required to pass a tax cut. Mississippi’s Legislative Black Caucus warned that the state would be unable to afford a deep tax cut like the ones proposed by leaders last session.

Florida Gov. Rick Scott has never met a tax cut he doesn’t like, and if he has his way the upcoming legislative session will give him plenty to love. Scott wants the legislature to pass $1 billion in tax cuts aimed at businesses to fulfill a campaign promise. So far, leaders in the Senate have balked at the hefty price tag, arguing that the governor shouldn’t push business tax cuts at the same time he wants to rely on property tax increases for more school funding. Budget officials estimate that Florida will see a surplus of $635 million this fiscal year, but some argue it would be irresponsible to use that one-time money for permanent cuts. In a rare move, Scott appeared before a House panel to argue that his tax cuts would be good for the state’s economy. A recent editorial in the Sun-Sentinel pushed back on the governor’s claims, saying that eliminating corporate income taxes for manufacturers and retailers won’t address Florida’s problems. 

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Do you have a exciting piece of state tax news that should be featured in the State Rundown? Send it to Sebastian at sdpjohnson@itep.org. And don’t forget to sign up for the Tax Justice Digest and follow ITEP on Facebook and Twitter!

Leaders in Illinois, which has not had a budget for six months, have thrown up their hands when it comes to making a deal. Despite the resumption of talks between the governor and legislative leaders, a compromise is nowhere in sight. Since July, the state’s bond rating has been downgraded twice and social service agencies are scrambling to provide crucial services without money. The state’s problems go beyond not having a budget in place – revenues are also short more than $5 billion needed to fund government services.  This is because lawmakers allowed a temporary increase in the state’s personal and corporate income tax rates to rollback on schedule at the beginning of the year, even though the state was not back on solid fiscal ground.

Many lawmakers spent Tuesday’s budget summit patting themselves on the back for being in the same room, but divisions remain. Gov. Bruce Rauner wants the legislature to agree to non-budget issues as a part of any compromise, including legislative term limits, changes in redistricting and weaker collective-bargaining laws. His opponents in the legislature say these measures would harm the middle class. Furthermore, there has been no agreement on raising needed revenue to patch the budget gap.  Meanwhile, the state continues to spend money at a rate that eclipses revenue coming in, adding to the deficit. Leaders did agree to a stopgap measure that would allow lottery winners to be paid and help municipalities shovel snow and operate 911 centers.

Of course, this budget drama could have been avoided. Lawmakers have always had revenue raising options available to them, as this report from Illinois Fiscal Policy outlines.  

Congress is on the verge of passing a five year transportation funding package built around a strange mix of revenue sources.  As many observers have pointed out, a more coherent and long-term solution would have been to increase and reform the nation’s largest source of transportation revenue: the federal gasoline tax.  Unfortunately, this option has been kept off the table for over 22 years.

Why is that?

An article in The Washington Post linked the lack of Congressional interest in the gas tax to “a pledge inspired by the conservative activist Grover Norquist, promising never to raise taxes.”

Similarly, the former head of the National Association of Manufacturers recently said that “the Norquist anti-tax pledge” is the primary reason that Congress has not taken the “obvious” step of raising the gas tax.

And Sen. Sherrod Brown (D-Ohio) indicated that a gas tax increase was not seriously considered this year because the “majority party … signed a pledge to a Washington lobbyist.”

Without a doubt, anti-tax attitudes in Congress have been a major factor in keeping gas tax increases off the table since 1993.  And Grover Norquist of Americans for Tax Reform (ATR) has done quite a bit to shape and maintain those attitudes.

But when it comes to his “Taxpayer Protection Pledge,” it appears that Norquist’s reach is being exaggerated.

The full text of the 57 word pledge (PDF) signed by members of Congress is as follows:

I, ___________, pledge to the taxpayers of the state of __________, and to the American people that I will:

ONE, oppose any and all efforts to increase the marginal income tax rates for individuals and/or businesses; and

TWO, oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates.

Clearly, there is no language in this pledge that is designed to prevent signers from voting for a gasoline tax increase.  Only income tax rates, deductions, and credits are mentioned in the federal pledge (the state-level pledge is another matter).

Of course, the folks at Americans for Tax Reform should know this better than anyone.  But when asked about the significance of the pledge during debates over the gas tax, the group is inevitably coy.  Politico, for example, reported earlier this year that ATR “did not say whether it would consider a gas tax hike this year a violation of its anti-tax pledge.”

In reality, Politico did not need to bother asking.  Anti-tax attitudes have certainly played a role in keeping overdue gas tax reforms off the table.  But Grover Norquist’s pledge is very clearly not a factor.