Category: TaxJusticeBlog

There are two types of tax legislation Congress may enact after it returns to Washington for its lame duck session in November: bad policy and extremely bad policy. 

The Least Bad Scenario

Let’s start with the least terrible scenario, which would involve Congress enacting the Expire Act, the “tax extender” legislation approved by the Senate Finance committee in April. This bill would extend for two years a list of tax breaks so long that almost no one understands them all. (Except us, of course, see our report explaining them.)

The bill is an $85 billion deficit-financed handout to businesses at a time when lawmakers refuse to provide any help to working people hit hard by the recession unless the costs are somehow offset.

You want to extend emergency unemployment insurance? That must be paid for. Want to undo the automatic spending cuts that slashed Head Start and medical research before Congress curbed them last year? Savings were found elsewhere to prevent an increase in the deficit. But businesses get a free pass as Congress shovels another $85 billion in deficit-financed tax cuts at them. If Congress continues this tradition of extending these breaks every couple of years, the cost over the next decade will be around $700 billion.

The tax extenders are also mostly bad policy. Some provide subsidies to businesses for doing certain things, like investing in research or equipment, that they would have done anyway, resulting in a windfall for companies and no clear benefit to the rest of the taxpayers. As our report explains, some of the extenders even encourage offshore tax avoidance by corporations.

However, the damage of this bill pales in comparison to what the House of Representatives has pursued this year.

The Very Bad Scenario

Not satisfied with the Senate’s approach, the House voted to make several of these provisions permanent, which of course has a much bigger price tag and eliminates the possibility of ever getting rid of them, or at least reforming them. The question on everyone’s mind is whether or not House Republicans will demand that tax legislation enacted during the lame duck session must include at least some of these permanent provisions.

Research Credit

One tax break the House has voted to make permanent is the research credit, at a cost of $155 billion over a decade. CTJ has assailed the research credit for subsidizing activities that most Americans would not consider “research.”

“In fact, the definition of ‘research’ is so vague that Congress seems to be inviting companies to push the boundaries of the law and often cross it. The result is the type of trouble associated with accounting firms like Alliantgroup, which is managed by a former high-level staffer of Senator Chuck Grassley of Iowa and has former IRS commissioner Mark Everson serving as its vice chairman. Alliantgroup’s clients range from a hair care products maker who claimed its executives were doing ‘research,’ to a software company who was advised to claim that its purchasing manager was doing ‘research.’”

Bonus Depreciation

Another tax break the House has voted to make permanent is “bonus depreciation,” which is a significant expansion of existing breaks for business investment, at a cost of $269 billion over a decade. The Congressional Research Service’s (CRS) review of the research on bonus depreciation found that it does not affect the overwhelming majority of firms’ investment decisions and is an ineffective way to stimulate the economy.

Members of the House majority might clamor for some other tax cuts that they also approved this year.

Repeal of the Medical Device Tax

Enacted as part of healthcare reform, the medical device tax raises a critically needed $26 billion over the next ten years to help pay for the costs of expanding healthcare to millions of Americans. It’s interesting that the House is so eager to award the medical device company Medtronic, which has lobbied for repeal of the tax, even while the same corporation plans to “invert,” and claim to the IRS that it is a foreign company that is mostly not subject to U.S. corporate income taxes. 

Ban on State Taxes on Internet Access

While the argument for restricting state and local governments from placing any tax on internet access was weak back in 1998, it makes zero sense in 2014 to continue to coddle the goliath internet companies by allowing them to escape the kinds of taxes that states impose on other services.

Before leaving Washington, the House voted to combine these provisions into a staggering half-trillion-dollar giveaway as part of the so-called Jobs for America Act.

Wild Cards

Corporate Inversions

If Congress is going to throw $85 billion in tax cuts at corporations, it would seem logical to at least attach one of the proposals that would end the worst tax dodging we have seen in years: corporate inversions. Corporations are basically claiming to be foreign companies to avoid taxes. In a spectacular failure to take responsibility, Congress went home to campaign without closing the loopholes that make inversions possible. The chairman of the Senate Finance Committee, Sen. Ron Wyden, is said to be negotiating with the committee’s ranking Republican, Sen. Orrin Hatch. Sen. Hatch has declared that he could not agree to any anti-inversion legislation unless it met a list of impossible and bizarre conditions, including absolutely no revenue raised and steps taken towards a territorial tax system. A deal between Wyden and Hatch seems unlikely, but it could happen.

Two Offshore Corporate Tax Breaks

The House has not voted to make permanent the two tax extenders that provide breaks for corporations’ offshore profits — but there is reason to wonder if they will try before this Congress ends. One of these breaks is the active financing exception (the G.E. loophole), which provides an exception to the general rule that corporations cannot defer paying U.S. taxes on offshore income when it takes the form of interest (which is easy to manipulate for tax avoidance purposes). Another is the seemingly arcane “CFC look-through rule” which aided Apple’s infamous tax avoidance schemes.

For years we’ve been telling you about the various tax cuts that have been signed into law by Ohio governors. Governor Bob Taft (who was elected in 1999) pushed through (among other tax changes) a 21 percent across the board income tax reduction. Those tax cuts were allowed to continue under Governor Ted Strickland. Current Governor John Kasich has pushed through his own series of tax cuts.  We’ve written about and crunched numbers on these flawed plans often. Look here,here, here, here and here.

The numbers are certainly compelling. For example, ITEP found that since 2004 the various tax changes signed into law cost the state $3 billion and are currently reducing tax bills for the state’s most affluent 1 percent of taxpayers by more than $20,000 on average, while the bottom three-fifths of state taxpayers as a group are actually paying more taxes now, on average, than they would if these tax changes had not been enacted.

But the purpose of this post isn’t to rehash these dreadful numbers but to urge readers to check out the recent Rolling Stone piece: Where the Tea Party Rules. Here you’ll read about real families living in Lima, Ohio who are just trying to get by. These families put a real face to ITEP’s numbers. (Added bonus: an ITEP analysis is referred to in the piece!)

Kentucky is the land of bourbon, horse racing, and – now – dubious tax cuts. Last week, The Courier-Journal reported that Ark Encounter, LLC, a company planning to build a facsimile of Noah’s Ark to biblical specifications as the centerpiece of an amusement park, may lose $18 million in state tax incentives due to religious discrimination. State officials are concerned by a job position posted by Ark Encounter that requires “applicants to provide salvation testimony, a creation belief statement, and agreement with the “Statement of Faith” of Ark Encounter’s parent organization, Answers in Genesis,” the organization behind Kentucky’s Creationism Museum. 

Earth, five thousand years ago

Since the beginning, the Noah’s Ark theme park has been mired in controversy. Originally slated to cost $173 million, the project was scaled back to a $78 million first phase after funding failed to materialize and junk bonds remained unsold. In a remarkable failure to appreciate irony, the second phase of the theme park will include a replica Tower of Babel, widely understood as a cautionary tale against hubris and ill-conceived megaprojects.

Religious discrimination in hiring is, of course, illegal, so Kentucky’s willingness to bankroll this project in the name of “tourism promotion” is especially egregious. Gov. Steve Beshear (D) is a long-time supporter of Ark Encounter, to the chagrin of some state political observers. But religious objections aside, Beshear is not so different from virtually every other governor in the country in being all too eager to throw public money at private companies.

Take Gov. Brian Sandoval (R) of Nevada, who recently pledged $1.25 billion in tax cuts to Tesla Motors for a billion-dollar battery factory, at a cost of almost $200,000 per anticipated job created. Meanwhile, the state ranks 49th in per-pupil K-12 education spending and has cut higher education spending by hundreds of millions of dollars, forcing staff layoffs and rising tuition bills.  

Or take Gov. Jay Inslee (D) of Washington, who signed an $8.7 billion incentives package for Boeing, “the single largest tax break any state has ever given to a single company.” Gov. Inslee and state lawmakers agreed to the package to keep production of the 777X jet in Puget Sound, but that didn’t stop Boeing from announcing that it would move thousands of engineering jobs and hundreds of manufacturing jobs to Oklahoma City and St. Louis. Now, some observers are grumbling that politicians “essentially gave [Boeing] a blank check.” 

And please take Gov. Chris Christie (R) of New Jersey, who doubled down on $261 million in tax incentives for Revel, a casino and resort in Atlantic City, only to watch the $2.4 billion project go bankrupt. Even worse, the private market had already given up on the casino; Morgan Stanley was set to take a $1 billion loss rather than throw good money after bad in completing the project. Garden State residents can take solace in the fact that the tax incentives promised to Revel require that the casino make a profit, so they’re off the hook in that sense. But that didn’t stop the governor from investing $300 million in state pension funds with the hedge fund that owns 28 percent of the troubled casino. According to New Jersey Policy Perspective, Gov. Christie has spent over three times as much on business incentives since 2010 ($4 billion) as the state of New Jersey spent in the previous decade ($1.2 billion).

Who knew building a casino during a recession wasn’t such a great idea? Oh yeah, everyone involved.

So Kentucky may seem like an outlier, but it’s in good company. Politicians in every state selfishly put their desire to claim job creation or business bona fides above the priorities that would really spur economic development for their constituents – investments in education, support for working families, and improvements for vital infrastructure. As long as our leaders keep falling all over themselves to give corporations huge tax breaks disguised as “economic incentives,” we’ll fail to make the tough choices that will really put our economy on the path to prosperity. 

Looking for a good scare this Halloween? Right-wing film producer John Sullivan will have you hiding under your covers with his portrayal of jack-booted IRS thugs going door to door looking for any Christian, veteran or true freedom-loving American that they can squash.

Pulling no punches, Lori Marcus, a commentator in the recently released documentary “Unfair: Exposing the IRS,” says that if the IRS is not stopped then the next boxcar will be coming for you, an allusion to the boxcars used to carry Jews to Nazi concentration camps. Nazi allusions are part and parcel of Sullivan, whose right-wing propagandist films such as”2016: Obama’s America” and “Expelled: No Intelligence Allowed,” are chock full of factual errors and hyperbole in service of perpetuating a sense of mortal fear of all things Obama or progressive.

With Unfair, Sullivan uses the IRS’s recent scandals as a jumping off point to argue that the IRS is an inherently criminal organization at the forefront of turning America into a “fascist state.” In reality, the real scandal is how years of woefully underfunding the IRS has seriously hamstrung the agency’s ability to perform its even its most basic tax collection duties. The lack of adequate funds for computer infrastructure, staff and training is more the cause of the scandals than any fake conspiracy dreamed up by Sullivan.

Rather than pushing for adequately funding the IRS, the film calls for  abolishing the agency through the enactment of the so-called “Fair Tax,” which is a proposal that would essentially replace all federal taxes with a national sales tax. The film fails to mention that a realistic version of the Fair Tax would be extremely regressive, increasing taxes on the bottom 80 percent of taxpayers by an average of $3,200 annually, while cutting taxes for the top 1 percent of taxpayers by an average of $225,000 annually. In addition, the assertion that a Fair Tax system would “Abolish the IRS” is misleading in that it leaves out that fact that the IRS would simply need to be replaced by a complicated system of mini-IRS’s at the state level.

In other words, the Fair Tax plan promoted by the movie is really just a bait and switch, promising low taxes and the end of any tax collection issues, but delivering higher taxes for most taxpayers and a whole new set of state tax collection issues.

Unfortunately, the push to abolish the IRS and/or enacting the Fair Tax is not just the province of right-wing filmmakers. The Fair Tax Act, for example, has actually gained some legislative traction, earning as many as 76 sponsors in the House of Representatives and 9 sponsors in the Senate. Even scarier, the Republican National Committee is now parroting the Fair Tax playbook by fundraising on the promise to “Abolish the IRS,” though they did not exactly explain how they would go about doing this.

Rather than believing spun up stories about the ghouls and goblins having taken over the IRS this October, Congress should instead take its role seriously by substantially increasing the IRS’s budget, so the agency can more effectively collect critically needed revenue and provide better service to U.S. taxpayers. 

The Irish government’s announced plans to  phase out the infamous “Double Irish” loophole represents a significant victory for tax justice advocates worldwide who have sought to end this practice, but also leaves an opening for corporations to find new tax avoidance schemes.

The loophole — used by companies like Apple and Google to dodge billions in taxes — allows multinational corporations to route international profits to Irish subsidiaries and then tell Irish authorities that these subsidiaries actually have tax residence in a tax haven such as Bermuda or, in the case of Apple, have no tax residence at all. Irish lawmakers have proposed requiring corporations registered in Ireland to also be tax residents of the country.

The move comes just two weeks after the European Commission ratcheted up pressure on the country by announcing that the special tax deal that Apple cut with Ireland could violate the European Union’s trade rules. This crackdown came on top of last year’s blockbuster U.S. Senate hearing, where Sen. Carl Levin laid out the breathtaking audacity of Apple’s tax avoidance scheme, including its use of Irish subsidiaries to pay nothing in taxes on tens of billions in profits.

The use of Irish subsidiaries to dodge taxes is widespread. A joint 2014 report by CTJ and U.S. PIRG found that more than 30 percent of Fortune 500 companies had at least one Irish subsidiary. While not every company with an Irish subsidiary is necessarily using it to dodge taxes, IRS data indicates that the amount of income being reported as earned in Ireland by U.S. companies is laughably implausible considering that it would constitute as much as 42 percent of the country’s overall GDP.

While Ireland’s current move appears to be more substantive than the empty gesture it proposed last year in an effort to assuage critics, there is still much to be desired about the proposal. To start, it keeps the loophole in place for all companies currently using it until 2020, which leaves plenty of time for companies to find new tax avoidance schemes or for the country to reinstate the loophole. In addition, Ireland’s announced plans to close the loophole coincided with Irish lawmakers announcing they would enact a new “patent box” tax break, which, depending on the details, could mean creating a substantial new loophole for companies to use.

Though Ireland’s decision to close its most egregious tax loophole shows that international pressure can push tax haven countries to change course, such reforms do not fundamentally change the incentive for U.S. multinational corporations to find other offshore tax loopholes to exploit. The way to end this incentive once and for all would be to end the rule allowing corporations to indefinitely defer U.S. taxes on their offshore profits. Short of ending deferral entirely, Congress should pass the Stop Tax Haven Abuse Act, which takes aim at the worst abuses of deferral. At the very least, Congress should not expand deferral by renewing the active financing exception and CFC look-through rule as part of the tax extenders package.

By Wesley Tharpe, Policy Analyst
Georgia Budget and Policy Institute (GBPI)

Georgians will vote Nov. 4 whether to permanently enshrine the state’s top income tax rate of 6 percent in the state constitution.

The so-called “tax-cap” amendment sounds American as apple pie. No one looks forward to the day their income tax bill comes due, and the prospect of capping the rate understandably sounds appealing at first. But Georgia voters who take a second look at the proposal will see it for what it truly is:  an attempt to keep taxes for the wealthiest Georgians low and to block future generations from meeting the needs of a rapidly growing state.

States across the country face questions of how to raise enough revenue to meet basic needs, from infrastructure to education and health care. It’s a public policy question that, unfortunately, all too often becomes a political question. Georgia would be the first state to cap income taxes through its constitution, if voters approve. But states like California, Colorado and Illinois have passed other restrictive tax measures in the past and come to regret it later. State governments need flexibility to make course corrections when their needs outweigh available funds. Georgia’s proposed amendment is one example of efforts to prevent states from doing so by tying their hands for the future. 

In the 2014 legislative session, Georgia lawmakers placed Senate Resolution 415 on the ballot for voters to decide in November. The ballot question asks, “Shall the Constitution of Georgia be amended to prohibit the General Assembly from increasing the maximum state income tax rate?” If voters approve, Georgia’s top income tax rate will never surpass its current 6 percent, barring the unlikely removal of the cap in a future vote.

Here’s the problem. Income taxes are one of the main tools for state lawmakers to meet taxpayers’ needs, and Georgia’s needs have exploded in recent decades. The state’s population more than doubled in the past half century, rising from 15th most populous in 1970 to 8th most today. If Georgia’s growth continues apace, it could break into the top five by the middle of this century. Georgia is no longer a small, sleepy, agricultural corner of the South. It is a complex modern economy that needs a qualified workforce, world-class transportation and adequate health infrastructure to compete.

Meeting these challenges requires public investments with an eye on the future, and those investments require tax revenue. Georgia’s current leadership is unwilling to confront that essential truth, choosing instead to further erode the state budget through new tax cuts and business tax breaks. Lack of public investment has consequences. Georgia today is plagued by overcrowded classrooms, congested roads and one of the most underfunded health systems in the country. That trifecta scares away high-wage businesses and makes Georgia less attractive for workers, families and entrepreneurs.

Future generations of Georgians might be willing to forge a better path. Twenty, 50 or 100 years from now, state lawmakers might want to consider, say, adding a 7 percent top rate to fund universal pre-kindergarten or a modern transportation system. They might want to temporarily raise income taxes to confront some extraordinary need like a natural disaster or deep recession. If the amendment is approved, making those choices will be off the table.

That raises the second problem. Georgia will inevitably need a way to raise more revenue in the future, but capping the state’s income tax will shield the wealthiest Georgians from paying their fair share. Other sources of revenue, such as sales taxes and fees, fall disproportionately on low-wage and middle-class workers, whereas income taxes fall more on the wealthy. That means deemphasizing income taxes will likely raise taxes on most Georgia families long-term.

It could also worsen the growing gap between the wealthiest Georgians and regular working families. The share of Georgia’s yearly income taken home by the top 1 percent nearly doubled to 18.7 percent in 2007 from 9.5 percent in 1979. And evidence already suggests that rising inequality makes it harder for states to fund the people’s business, since the wealthy are often able to shield much of their income from taxes.

Georgia voters will soon make a pivotal choice. Voting to cap the state income tax might seem like a no brainer to many. But if voters gave it more thought, they’d realize capping Georgia’s income tax does nothing to clear a path to prosperity for Georgia businesses or families. Instead, it will put future generations in a financial straightjacket, unable to solve our most pressing problems. It is a shortsighted and unnecessary restriction that could haunt Georgia down the road. 

After announcing Ohio-based Steris Co.’s plans to become British for tax purposes on Monday, CEO Walter Rosenbrough later said on a conference call, “We’re not typically users of aggressive tax policies and I don’t think we are here.”

That’s his story, and he’s sticking to it. But even a cursory look at the company’s financial reports tells another story. Like so many other U.S.-based multinational companies, Steris pays nowhere near the 35 percent statutory federal rate. But early coverage has pointed to Steris’s potential financial benefits due to Britain’s lower 21 percent statutory tax rate.

A Bloomberg story estimates that Steris “set aside about 32 percent of its pretax earnings to pay taxes” over the past three years, and the Wall Street Journal pegs the company’s most recent tax rate at 31.3 percent. This, of course, provides much fodder for anti-corporate tax advocates who argue inversions and other tax shenanigans are justified because the U.S. corporate tax is too high and is what’s driving Steris (and other poor, defenseless health care giants and multinationals) to abandon their U.S. citizenship.

But Steris isn’t writing a check for 32 percent of its profits to the U.S. government. The Bloomberg and Wall Street Journal numbers are both worldwide tax rates. This means the figure includes income earned in other nations, and the foreign taxes the company paid on those earnings. It also includes not just the current taxes the company actually pays in each year, but also deferred taxes, which the company does not pay.

The tax rates that actually matter in the debate over corporate inversions—the current federal taxes, as a share of pretax U.S. profits, that Steris reports each year— paint a starkly different story. Steris’s average tax rate for the last three years was 16.3 percent, less than half the 35 percent statutory federal income tax rate that the company presumably uses at least some of its lobbying muscle to complain about.

In fact, over the same three-year period, Steris reported a foreign tax rate of 28.5 percent, which is well above its 16.3 percent U.S. tax rate. All of this suggests that Steris’s activities in developed nations with real tax systems around the world are generally being taxed at rates at or above those it faces in the U.S.

As we noted Tuesday, it’s clear that prior to its announced inversion, Steris already engaged in foreign tax hijinks, contrary to its CEO’s claims that the company doesn’t aggressively exploit tax policies to its maximum benefit.

Even though about 75 percent of the company’s profits and revenues are earned in the United States, and roughly 90 percent of its assets are stateside as well, the company discloses, in a Houdini-esque flourish, that fully 94 percent of its worldwide cash somehow now resides outside the country, possibly in its tax-haven subsidiaries in the British Virgin Islands and Mauritius.

And that’s probably what Steris’ inversion is all about: the company has gradually accumulated $222 million in offshore cash, much of which is likely U.S. profits in disguise, on which it would prefer to not pay any U.S. tax.

More than three weeks ago, the U.S. Treasury Department announced regulations intended to crack down on corporations seeking to invert to dodge U.S. taxes. But the Obama Administration can only do so much through regulatory action. Congress should take steps to make sure that Steris’s offshore profits—much of which may be untaxed—and offshore profits of other companies seeking to renounce their citizenship are brought back to the United States and fairly taxed.  

As we mentioned a couple weeks ago, the Treasury Department cannot fix the inversion crisis by itself. Only weeks after the Obama Administration announced that Treasury will take important regulatory steps to help prevent U.S. -based companies from inverting to foreign havens as a tax-dodging strategy, the Ohio-based Steris Corporation announced its plan to purchase a British health care firm and reincorporate in the United Kingdom.

While Treasury’s new efforts appear to have dissuaded at least one company from going forward with previously-announced inversion attempts, all it appears to have done in this case is to make Steris’s leadership deny that inversion was their idea: Steris’ CEO, Walt Rosebrough, said in a press conference that “[i]t was only our advisers that brought [the tax advantages] to us. It’s not naturally something we would think of.”

This is a little hard to swallow given the company’s recent history. Steris has subsidiaries in a wide range of tax havens, from the British Virgin Islands and Barbados to Mauritius and Luxembourg. Despite consistently earning more than two-thirds of its revenue in the United States and holding about 90 percent of its assets domestically, the company discloses that, somehow, 94 percent of its cash is currently being held (at least on paper) outside the United States.  Steris now holds a total $222 million in “permanently reinvested earnings” abroad—profits that have never been taxed by the U.S., and after a successful inversion may never be subject to our federal income tax. It’s impossible to know just how much of this cash is sitting in beach-island tax havens, but it seems unlikely that Steris owns a Virgin Islands subsidiary because of that country’s lucrative market for hand hygiene compliance programs (that’s one of the things Steris sells). 

As recently as 2012, the company reported a large cut in its U.S. taxes as the result of what it cryptically describes as “the rationalization of operations in Switzerland.”

So when it comes to tax avoidance, this is emphatically not Steris’s first rodeo.

Even more interesting, it appears that Steris is currently paying lower income tax rates to the federal government than it is to the other nations in which it does business. Over the past three years, the company has faced a current federal tax rate averaging 16.3 percent—well below the 28.5 percent foreign tax rate Steris paid on its overseas profits over the same period.

If Steris’ inversion is a naked attempt to avoid paying any taxes on its offshore cash, will the Treasury Department’s new regulatory strategy prevent it? No. As CTJ’s Rebecca Wilkins points out, the Treasury “can make getting at that offshore cash a longer and more complicated process, but ultimately cannot stop Steris from dodging taxes—they can only slow them down.”

All the more reason why the next Congress should do what this Congress couldn’t find the courage to—enact legislative fixes that will stop inversions in their tracks.

In a development sure to shock you, the Oklahoma State Lottery has not fixed Oklahoma’s education funding woes (in other news, water is wet). The Oklahoma Policy Institute reports that the combination of the economic downturn and ill-advised tax cuts has reduced education funding by more dollars than the lottery, created in 2003, has raised. For example, last year the lottery brought in $70.1 million, while the Legislature passed an income tax cut projected to cost $237 million. The kicker is that the bottom 60 percent of Oklahoma families will get just 9 percent of the benefits from this tax cut, while lotteries have a notoriously regressive impact.

For the fourth time in six months, tax collections in Kansas fell way short of revenue projections — $21 million short, according to state officials. The shortfall would have been twice as large if not for a big increase in corporate income tax receipts, as individual income tax receipts were $42.4 million less than estimated. The report is a blow for Gov. Sam Brownback’s administration after July and August revenue met official estimates, suggesting that the worst was over. The Topeka Capital-Journal reports that “the state could burn more rapidly through cash reserves and force the 2015 Legislature to take a scythe to the budget in January.”  The governor said his tax cuts were “like going through surgery. It takes a while to heal and get growing afterwards.” It looks like the patient is back on life support.

A music industry lobbying group is pushing the New York state legislature to pass a tax incentives bill similar to the state’s film credits program, according to The New York Times. If the group, New York Is Music, gets its way, $60 million in tax breaks will be available to studios, record companies and other firms involved in creating music. Businesses would be entitled to a 20 percent credit on expenses related to music production. Supporters claim that high rents in New York City and the attraction of incentives in other states mean the measure is vital to the health of New York’s music industry. The truth, however, is that incentives merely subsidize already-planned economic activity rather than promoting new business, and that they rarely pay for themselves. For more, check out this ITEP report on state tax incentives.

California Democrats hope to use the upcoming 2016 election to advocate for the extension of sales and income tax increases, according to The Sacramento Bee. Proposition 30, which increased the sales and income tax for the state’s highest earners, was passed in 2012 as a temporary measure. Supporters of extending the tax increases, including state superintendent Tom Torlakson and the California Federation of Teachers, argue the revenue will be critical to maintaining investments in education and the social safety net. Critics argue that lawmakers would be acting in bad faith if they sought to extend Proposition 30, which was sold as a temporary measure, and that the measure has hurt the state’s business climate. Gov. Jerry Brown, who supported Proposition 30 when it was introduced, has not taken a position on its extension. 

Got a great state tax story you want to share? Send it to Sebastian at sdpjohnson@itep.org for the next Rundown! 

The European Commission’s recent action to crack down on special deals some European Union governments offer to corporations could be a blow to multinational corporations’ tax-dodging strategies.

As we noted in a report earlier this year, three European countries (Ireland, Luxembourg and the Netherlands) are among the top twelve tax haven countries for U.S.-based multinationals. Corporations use these and other tax havens to artificially shift their profits to foreign jurisdictions and avoid U.S. tax.

Now it seems these European tax havens are offering additional tax deals to corporations that may amount to unfair competition, according to the European Commission. During the past week, The EC notified several multinational corporations that some of the special tax deals they have made with EU member states may not survive. The EC has characterized the arrangements as illegal “state aid” to the companies.

European Union rules do not prohibit member states from offering lower tax rates to lure companies. But they do prohibit countries from making special deals that aren’t available to all companies. The Commission’s investigations appear to focus on transfer pricing – the way multinational corporations price goods and services transferred between members of the affiliated group of companies. According to the EC, tax authorities in Ireland, Luxembourg, and the Netherlands (so far) have agreed to transfer-pricing practices that improperly allow certain multinationals to reduce their tax rate.

Apple. Last Tuesday the EC released to the public a letter sent to the Irish government in June regarding the country’s tax agreements with Apple. If the Commission’s decision stands, the company could owe billions in back taxes to Ireland and possibly other countries.

The EC is challenging what is, in effect, an advance pricing agreement between the Irish tax authority and Apple that allows the company to shift profits to subsidiaries that are not taxable in Ireland—in fact, taxable nowhere in the world. Apple has avoided billions in tax through these arrangements.

Amazon: Discover Anything Any Way to Avoid Tax. This Tuesday the EC revealed that it is investigating Amazon’s deal with Luxembourg. Joaquín Almunia, the Commission’s vice president responsible for competition issues, said the investigation involves a web of Luxembourg subsidiaries and an agreement that capped Amazon’s Luxembourg tax regardless of the amount of its European profits.

Starbucks. The EC has also opened an investigation into Starbucks’ agreements with Netherlands. The company’s Dutch subsidiary charges other subsidiaries for use of  intellectual property it holds, such as the “coffee roasting process,” the recipes, and the Starbucks brand. These payments move earnings from high-tax jurisdictions to the Netherlands where they are taxed at a very low rate.

A New Era. The EC’s actions are potentially quite a blow to multinational corporations’ European tax-dodging strategies. Multinational corporations can’t avoid the EC crackdown by simply moving headquarters outside the European Union. For many reasons, including tax, trade, and currency issues, it’s important for companies to have  European operations headquartered in an EU country. If the EC is successful in undoing the tax agreements, it will severely hamper multinationals’ ability to shift profits out of the EU to low-tax jurisdictions.

The Commission’s actions may signal the beginning of the end for this kind of tax competition among member states. But Congress will have to act to solve profit-shifting out of the U.S.