Category: TaxJusticeBlog

Kansas lawmakers just passed legislation to comply with the recent state Supreme Court ruling mandating increased K-12 funding to poor school districts, but it didn’t come easy.

The Kansas City Star notes that “[l]awmakers discussed taking the money out of the state’s reserve fund, but those dollars are needed just to keep the lights on in state government. They talked about taking from some educational funds to give to others. They considered shaking out pockets looking for spare change. At one point, senators were reduced to eying the $2 million in the problem gambling fund.”

These difficult choices are a direct result of the last two years of radical tax cuts. Governor Sam Brownback’s supply-side promises notwithstanding, his regressive income tax cuts show no sign of paying for themselves anytime soon, which means lawmakers must look under cushions to meet their court-mandated funding obligations.

The current budget is balanced precariously. As the Kansas City Star reminds us, “Right now, the budget is balanced only by dipping into reserve funds. If current revenue and spending trends continue, it will go underwater in 2016. After that, a state that is shortchanging its universities and disabled citizens will have to start cutting more deeply; forecasters estimate $962 million in cuts by the 2019 fiscal year. Kansas already is raiding its highway fund to pay for transportation of school students and even a chunk of the debt service for the recently completed statehouse reconstruction. Part of the teachers’ pension funds are coming from gambling revenues, in apparent violation of state statute.”

Having found $129 million in new money for poor school districts, the legislature clearly felt the need to dispel any illusion on the part of voters that they actually value public schools, and added legislative measures to undermine them. Kansas is now the latest state to enact “neo-vouchers,” corporate tax credits for companies making contributions to private schools. As we’ve explained in the past, this back-door approach to school vouchers erodes corporate tax revenues, takes money away from already-strapped public schools, and limits state policymakers’ oversight of the private schools receiving these state-funded scholarships. In other words, having grudgingly given new revenue to public schools with one hand, they now will be taking it away with the other.

Maine legislators are poised to crack down on corporations that use foreign tax havens to hide income from state tax authorities. The legislation, which has now been passed by both the House and Senate but still faces further votes, requires multinationals doing business in Maine to declare income otherwise attributed to more than thirty countries known to be popular tax havens (like the Cayman Islands and Bermuda, not to mention the Bailiwick of Guernsey, which turns out to be an island off the coast of France). Analysts estimate that such a change would increase state revenue by $10 million over the next two years. And U.S. PIRG, among other public interest organizations, has been beating the drum for this sensible reform, which we discussed in our recent report: 90 Reasons We Need State Corporate Tax Reform. Oregon and Montana already have similar laws on their books.

Thanks to a refundable tax credit included in New York’s budget this year, theater companies who launch their productions in upstate New York will enjoy having taxpayers foot the bill for 25 percent of the cost of “their so-called tech periods, the weeks long process in which a production gathers the costumes, tests the sets and choreography and establishes the lighting and musical cues.” Despite the credit’s extreme generosity, we’re still not sure it would have been enough to save Spider-Man.

Tax swap proposals that would trade income rate reductions for sales tax increases have been all the rage in conservative states in recent years. But what if your state doesn’t even have an income tax to begin with? Not wanting to be left out of the tax swap craze, Republican candidate for Texas Comptroller Glenn Hegar has a solution: completely replace property taxes with an increased sales tax. Texas already has a horribly regressive state tax system (PDF), but eliminating the property tax — which is at least close to proportional in its distribution across income groups — would only make matters worse. And while it is “easy to hate” the property tax, without it Texas would need to drastically cut services or more than double the sales tax. Such a trade could also mean less autonomy for localities (PDF) and a revamped school financing system.

Grover Norquist and the Koch brothers’ Americans for Prosperity are continuing to push for eliminating income taxes on investors in Tennessee, and there’s a chance they may succeed.  The state’s tax-writing committees will be voting this week on whether or not to gradually repeal Tennessee’s “Hall Tax” on dividends, interest, and some capital gains.  But repeal would be steeply regressive, as our partners at the Institute on Taxation and Economic Policy (ITEP) showed in a report cited by The Tennessean.  And on top of that, a spokesman for Governor Bill Haslam explains that “we’re in the middle of dealing with difficult budget realities … and this legislation would automatically put the issue above other priorities when revenues come back.”

New York Governor Andrew Cuomo got his election-year wish: a $2 billion tax cut package that doles out goodies to Wall Street banks and rich homeowners. Cuomo, a Democrat who likely has presidential ambitions, sold the tax cuts under the false promise that they would help New York businesses “thrive.” Tax cuts have become something of an obsession for Cuomo, despite the fact that important public investments have been neglected by five consecutive years of austerity budgets.

Here’s a run-down of the tax changes in the budget deal:

Property tax: A three-year property tax rebate program will cut homeowners’ taxes by $1.5 billion by “freezing” the amount many currently pay. But the cuts won’t be evenly distributed and generally won’t target those most in need of relief. For those living in local jurisdictions that comply with a 2 percent property tax cap and working to consolidate services with neighboring jurisdictions, the state will send homeowners (only those with household income under $500,000 qualify) a check for the amount of any increase in property taxes over the prior year (the checks are conveniently scheduled to be sent out for right before the November elections). For those living in New York City, which is not subject to the tax cap, low-income homeowners and renters will be eligible for a small, refundable property tax circuit breaker credit which will cost $85 million a year. Unfortunately, an expanded circuit breaker tax credit available to homeowners across the state– one of the best ways to provide targeted property tax reductions– was dropped from the final bill.

Business taxes: Corporations will get more than $500 million in tax cuts, including a permanent across-the-board corporate income tax rate cut from 7.1 percent to 6.5 percent. Manufacturers will be zeroed out from paying the corporate income tax altogether and will also receive a new property tax credit. Though Cuomo has heralded his business cuts as a boon to manufacturers, they in fact already pay very low rates (Our recent state corporate tax study found that Corning, for example, paid only a 0.3% state tax rate on $3.5 billion in profits over the past five years) and the primary beneficiaries are predominantly Wall Street banks.  The package eliminates the state’s bank tax, subjecting banks instead to the corporate income tax, and also allows them to pay only 8 percent of their income from qualified financial instruments (securities) under the assumption that 92 percent of their income from these sales comes from customers outside of New York.

Estate tax: Though there had been talk of also lowering rates, legislators ultimately agreed to cut the state’s estate tax by increasing the exemption from $1 million to $5.25 million, the threshold currently used at the federal level.

We’ll let others analyze the budget as a whole, which is worth $138 billion and includes important provisions on charter schools, pre-K, and campaign finance. But on the tax front, the bill falls far short of the type of targeted, progressive reform that is so badly needed.

According to the Daily Tax Report (subscription only) a Treasury Department official said publicly on April 8 that the government’s goal in international negotiations over corporate tax dodging is to prevent dramatic change and preserve the “arm’s length” standard that has proven impossible to enforce.

Last summer, the Organization for Economic Co-operation and Development (OECD) released an “Action Plan on Base Erosion and Profit Shifting” in response to public outcry in several nations that multinational corporations are using tax havens to effectively avoid paying taxes in the countries where they do business.

At that time, CTJ criticized the plan as too weak, arguing that:

While the plan does offer strategies that will block some of the corporate tax avoidance that is sapping governments of the funds they need to make public investments, the plan fails to call for the sort of fundamental change that would result in a simplified, workable international tax system.

Most importantly, the OECD does not call on governments to fundamentally abandon the tax systems that have caused these problems — the “deferral” system in the U.S. and the “territorial” system that many other countries have — but only suggests modest changes around the edges. Both of these tax systems require tax enforcement authorities to accept the pretense that a web of “subsidiary corporations” in different countries are truly different companies, even when they are all completely controlled by a CEO in, say New York or Connecticut or London. This leaves tax enforcement authorities with the impossible task of divining which profits are “earned” by a subsidiary company that is nothing more than a post office box in Bermuda, and which profits are earned by the American or European corporation that controls that Bermuda subsidiary.

The rules that are supposed to address this today (but that fail miserably) require multinational corporations to deal with their offshore subsidiaries at “arm’s length.” This means that, for example, a corporation based in New York that transfers a patent to its offshore subsidiary should charge that subsidiary the same price that it would charge to an unrelated company. And if the New York-based corporation pays royalties to the offshore subsidiary for the use of that patent, those royalties should be comparable to what would be paid to an unrelated company.

But when a company like Apple or Microsoft transfers a patent for a completely new invention to one of its offshore subsidiaries, how can the IRS even know what the market value of that patent would be? And tech companies are not the only problem. The IRS apparently found the arm’s length standard unenforceable against Caterpillar when that company transferred the rights to 85 percent of its profits from selling spare parts to a Swiss subsidiary that had almost nothing to do with the actual business.

It turns out that some of the OECD governments are proposing reforms that challenge the arm’s length concept at least to some degree, but the US government is pushing a line that is more favorable to the multinational corporations.

Robert Stack, the Treasury Department deputy assistant secretary for International Affairs in the Office of Policy, is quoted by the Daily Tax Report as saying that the “main challenge for the U.S. is to get this project to work back from blunt instruments and towards policies that are understandable, fair, clear, administrable, and reach the right technical tax results.”

Stack also said that the “United States feels very strongly that the 2014 deliverable should be a clear articulation of intangibles under the arm’s-length principle—and should reserve on the evaluation of potential special measures to treat BEPS [base erosion and profit-shifting] that depart from the arm’s-length principle.”

The international tax system needs reform that is more fundamental than anything that either the OECD or the US is contemplating. Any system that relies on the artificial boundaries between the dozens (or hundreds) of entities in a multinational group and the ways they price transactions between them is unworkable. The US’s “deferral” system and Europe’s “territorial” system, which both require transfer-pricing rules and the hopeless “arm’s length” standard, should be eliminated. CTJ has proposed its own tax reform plan that would provide fundamental solutions. 

The estate tax, Earned Income Tax Credit (EITC), and film tax credits were all major topics of debate in Maryland this year.  Now that the state’s legislative session has ended, here’s a quick look at what happened on each of these issues.

Estate tax:  Despite having the highest concentration of millionaires in the country, Maryland lawmakers say they’re very concerned the estate tax may be driving wealthy residents out of the state.  Because of this, both the House and Senate approved a bill benefiting estates worth more than $1 million.  Assuming the governor signs the bill, which seems likely, Maryland’s estate tax exemption will increase from $1 million to more than $5.3 million by the end of the decade.  This is unfortunate since, as CTJ explained in testimony before both of Maryland’s tax-writing committees, an estate tax cut will reduce the adequacy and fairness of the state’s tax system without producing any economic benefit.

Earned Income Tax Credit:  In better news, Maryland lawmakers unanimously agreed to expand the state’s EITC.  Maryland currently allows taxpayers to choose between a refundable EITC equal to 25 percent of the federal credit, or a 50 percent nonrefundable EITC.  Legislation approved on Monday will gradually increase the refundable portion of the credit to 28 percent, which means low-income taxpayers who earn too little to owe personal income taxes will receive a somewhat larger refund to help offset the significant amounts (PDF) of sales and property taxes they pay each year.

Film tax credit:  A couple months ago, the producers of Netflix’s “House of Cards” threatened to leave the state unless lawmakers gave them more taxpayer dollars through the state’s film tax credit program.  Despite trying mightily to comply with their demand, the legislature ultimately failed to reach an agreement on a bill that would have shelled out an extra $3.5 million to the filmmakers.  Less encouraging, however, is that the show could still collect another $15 million in tax credits—on top of the millions it has already received.

The tax extenders making their way through Congress would cut federal revenue below the level proposed in Rep. Paul Ryan’s budget. This once again demonstrates that anything goes when it comes to providing tax breaks for corporations.

As CTJ explained in its report last week, the Ryan plan includes huge tax cuts for the very rich. But Ryan nonetheless proposes to eliminate unspecified tax breaks to offset the costs and thus collect the same amount of revenue as current law.

The tax extenders, on the other hand, would cut revenue, and increase the deficit, by $700 billion over the coming decade if Congress continues its practice of extending these breaks every couple of years or makes them permanent.

Even organizations not particularly known for progressive positions have pointed out this fact and how it damages the fiscal outlook that lawmakers claim to care about whenever they are discussing domestic spending.

CTJ has explained that the tax breaks that make up the bulk of the “tax extenders” do not provide any economic benefits that would justify the increase in the budget deficit that would result.

We have called the “tax extenders” the biggest budget buster many have never heard of. Fortunately, more and more people are publicly decrying this giveaway to corporations.

Citizens for Tax Justice:
“Four Reasons Why Congress Should Reject the “Tax Extenders” Unless Dramatic Changes Are Made”

Citizens for Tax Justice op-ed in the Hill:
“Tax Extenders: The Biggest Budget Buster You’ve Never Heard Of”

Americans for Tax Fairness:
“35 National Organizations Say Oppose Offshore Corporate Tax Loopholes in Tax-Extenders Legislation”

The Financial Accountability & Corporate Transparency (FACT) Coalition:
“FACT Urges Chairman Wyden: Don’t Let First Major Action Favor Multinationals”

The National Priorities Project:
“Congress May Extend Corporate Tax Breaks But Not Unemployment Benefits”

U.S. PIRG:
Offshore Loophole Got Snuck Back in Tax Extenders Bill Behind Closed Doors

New York Times editorial:
“Hypocritical Tax Cuts”

Washington Post editorial:
“Lawmakers Should Offer Up a Fiscally Responsible ‘Tax Extenders’ Bill”

Large tech companies are among the most notorious tax dodgers, but they are hardly the only ones to enlist crafty accountants to avoid paying U.S. taxes.

So it’s refreshing to see lawmakers also taking a look at other companies, as Sen. Carl Levin’s Permanent Subcommittee on Investigations did last week when it documented that Caterpillar is exploiting loopholes to dodge taxes just like companies in Silicon Valley.

Caterpillar is one of the most widely recognized manufacturers of heavy construction equipment in the United States. Its major profit center is spare parts sales.ons did last week when it documented that Caterpillar is exploiting loopholes to dodge taxes just like companies in Silicon Valley.

So just how did Caterpillar dodge taxes?

Until 1999, Caterpillar purchased spare parts from suppliers and subsequently resold them to local dealers. But for the past 15 years, Caterpillar has transferred ownership of most of its parts to a Swiss subsidiary, CSARL. Even though the Swiss subsidiary “owned” the parts, Caterpillar continued to store them in its Illinois warehouse and send them directly to buyers, exactly as it always has.

But when Caterpillar shipped the parts to overseas customers, it attributed the profits to CSARL, even though the Swiss subsidiary never took physical possession. The result? According to the subcommittee report, the company declared at least 85 percent of its profits on sales to non-U.S. customers—profits that appeared on U.S. tax returns before 1999—as Swiss income, subject only to a special single-digit tax rate negotiated directly with the Swiss government.

In depositions before the subcommittee, Caterpillar executives and tax attorneys were sometimes remarkably candid in admitting that this maneuver did not change the way the company does business, and the rationale for the move was simply to avoid taxes. During investigations prior to last week’s hearing, this exchange occurred:

Government: Was there any business advantage to Caterpillar, Inc., to have this arrangement put into place other than the avoidance or deferral of income taxation at higher rates?

Caterpillar: No, there was not.

Caterpillar Counsel: Let’s take a break.

The subcommittee report estimates that since 1999, Caterpillar has shifted $8 billion in profits offshore, avoiding $2.4 billion in U.S. income taxes.

Policy solutions?

Fortunately, Congress has the option to enact straightforward policies to end shenanigans practiced by Caterpillar, as well as the army of tech-company tax dodgers. Ending deferral—the ability of multinationals to postpone paying U.S. taxes on their foreign profits until those profits are brought home to the US—would remove the incentive of companies to shift their income into foreign tax havens because it would require companies like Caterpillar to pay tax at the U.S. rate (minus any taxes already paid to foreign governments) on offshore profits. Until Congress finds the backbone to enact this needed reform, it can put a stop to Caterpillar’s hijinks using the “economic substance” doctrine it codified in 2010, which says that for a corporate transaction to be recognized for tax purposes, the transaction must have a legitimate non-tax business purpose—a purpose Caterpillar executives were generally at a loss to identify.

Congress should also take a hard look at the role played in this mess by their accountant, PricewaterhouseCoopers, which actually dreamed up this tax dodge for Caterpillar in its capacity as the company’s tax advisor, and later approved its own tax-dodging ideas in its capacity as Caterpillar’s tax auditor.

It’s not acceptable for burglars to moonlight as parole officers, nor should accounting firms be free to create clear conflicts of interest by evaluating their own tax schemes.

It’s tax time. Across the nation, millions of families are rolling up their sleeves to file federal and state income tax forms—and millions more are awaiting refunds. But as a New York Times report documents, a cottage industry of untrained, unregulated “tax preparers” is jeopardizing those refunds for many low-income families. Astonishingly, more than half of the 79 million returns filed in 2011 were completed by paid preparers who were entirely unregulated. And all too often, these unregulated tax preparers are using tax season as an illicit profit-making enterprise, illegally claiming tax breaks for their taxpayer clients and keeping a share of the haul.

The Obama administration has, sensibly, attempted to implement regulations that would allow the Internal Revenue Service to regulate tax preparers. But earlier this year, a federal court struck down the regs as beyond the IRS’s regulatory authority.

Some tax preparers are vociferously opposed to having their industry regulated. Hysterically, one itinerant tax preparer complained to the author of the Times report that, “Each year it’s getting tighter and tighter…It’s hard to defraud the government now.” But a recent report from the National Taxpayer’s Advocate—a position created to represent the interests of individual taxpayers in their dealings with tax administrators—concludes that there is currently no “meaningful IRS oversight of preparers” at all, and calls for reforms mirroring those sought by the IRS’s now-discontinued attempts to regulate the industry.

The good news is that Congress can easily enact legislation that achieves the regulatory goals President Obama has proposed. In fact, Obama’s proposed budget for the upcoming fiscal year includes such a measure. Senate Finance Committee Chair Ron Wyden has scheduled a hearing on predatory tax preparers for today, saying that “there should be a floor of basic consumer protection and fairness” for low-income taxpayers depending on tax filing assistance.

Congress has, laudably, enacted a variety of targeted tax breaks designed to reduce the federal income tax’s impact on middle- and low-income families. These families deserve an infrastructure of tax preparers that they can trust to help them claim the tax breaks to which they are entitled. 

With Obamacare exceeding the Administration’s goal of 7 million sign-ups for private health coverage this week, there’s no longer any doubt about the dramatic impact that the Affordable Care Act (ACA) is having on healthcare coverage throughout the country. Unfortunately, there is a lot of misunderstanding about the various tax provisions included as part of the ACA.

Here are the five key facts to remember about tax policy in the ACA:

1. The Affordable Care Act includes tax subsidies of $940 billion for low- and middle-income families.

While endless coverage has been given to the tax increases (mostly on the rich) used to pay for the ACA, the reality is that the act also includes over $940 billion in tax subsidies over the next decade to help individuals and families pay for health insurance. In fact, a recent report by the Kaiser Family Foundation found that as of February 28, 2014, 3.5 million people have already qualified for a total of about $10 billion in annual premium subsidies, which breaks down to an average subsidy of $2,890 per person. By 2018, the CBO expects the number of people receiving tax subsidies to help pay for healthcare to reach as high as 20 million.

2. Only two percent of Americans will pay the tax penalty for not having insurance.

The tax penalty on individuals who do not purchase health insurance will be paid by hardly anyone. According to the CBO, only an estimated two percent of the US population will owe the rather modest penalty.

More importantly, the provision in the ACA banning discrimination against pre-existing conditions cannot work without the penalty for not purchasing health insurance. Without the tax penalty, the ban would cause a significant increase in the cost of health insurance premiums because it would allow individuals to simply delay obtaining insurance until they need care.

3. About three-fourths of the tax increases included to pay for health reform apply to businesses or married couples making over $250,000 and single people making over $200,000.

Our calculations show that about three-fourths of tax increases apply to businesses or married couples making over $250,000 and single people making over $200,000. For example, the biggest revenue-raiser in the ACA is the expansion of the Hospital Insurance tax so that it applies at a higher rate for very high-earners and no longer exempts wealthy people’s investment income. These reforms were originally proposed (PDF) by Citizens for Tax Justice.

4. Healthcare reform includes billions in tax subsidies to help small businesses.

Every politician loves to talk about helping small businesses, but opponents of the ACA have been surprisingly quiet when it comes to discussing the estimated $14 billion in tax subsidies that the ACA will provide small businesses over the next decade to help pay for health insurance for their employees. The tax credit can actually be worth up to 50 percent of a small business’s contribution toward its employees’ premium costs.

5. The medical device excise tax is worth keeping.

Since the passage of the ACA, the effects of the medical device excise tax have been wildly distorted by industry opponents of the tax. They will enjoy increased business as a result of the ACA’s increase in coverage, but don’t want to shoulder any of the costs. Despite their claims to the contrary, the tax is not large enough to have a significant impact on the industry.

Repealing the tax would cost about $30 billion over 10 years, which would either require raising taxes on other groups or increasing the deficit. It’s also worth nothing that medical device companies like Baxter International already pay extremely low effective income tax rates tax rates and enjoy substantial profits. 

Earlier this year our partners at the Institute on Taxation and Economic Policy predicted Illinois would be a state “taking on real tax reform.” Policymakers in Illinois are making our crystal ball look very reliable as a bevy of tax reform measures are being seriously discussed. The pressure is on Illinois lawmakers to do something to enhance revenue because the state’s temporary 5 percent income tax rate is set to fall to 3.75 percent in 2015. The following is a roundup of some of the proposals being discussed.

Last week, Gov. Pat Quinn delivered his budget address. During the speech he discussed “comprehensive tax reform [that] protects children, working families and seniors while preventing radical cuts to critical services.” The governor’s proposal includes making permanent the temporary income tax hike, doubling the state’s small Earned Income Tax Credit (EITC), providing a new $500 refundable tax credit for homeowners, and new tax cuts for businesses.

The day before Gov. Quinn’s address, Sen. Don Harmon released his own version of tax reform that would increase the progressivity of the state’s income tax by introducing a graduated rate structure. Taxpayers would see their first $12,500 of taxable income taxed at 2.9 percent. Taxable income between $12,500 and $180,000 would be taxed at 4.9 percent, as opposed to the current 5 percent rate. And taxpayers with taxable income over $180,000 would see that income taxed at 6.9 percent. No Illinoisan with income under $200,000 would see a tax hike under this plan.

Since the Illinois constitution mandates a single income tax rate, Senator Harmon’s plan would require a 3/5th majority vote in the House and Senate, as well as a vote of the people. Illinois Voices for Children rightly argues that Senator Harmon’s proposal (or one like it) is necessary to create a more equitable tax structure.

But Harmon and Quinn’s plans are hardly the only ones under discussion. Late last week, House Speaker Michael Madigan put forward his own constitutional amendment that levies a 3 percent surcharge on Illinois millionaires. The proposal was approved by the House Revenue Committee. Speaker Madigan admits his plan wouldn’t solve the state’s budget woes noting that this is especially true if the current income tax rate is allowed to expire, “We’ll still struggle with a budget for the state of Illinois because there will be a great loss of revenue unless we extend the increase in the income tax.” That same House committee voted down a proposal that would eliminate the state’s current flat rate income tax and replace it with graduated rates and brackets. Let’s hope there is more debate on this important issue.

We aren’t going to press our luck again and dust off our crystal ball to predict what the outcome of this debate will be. But tax justice advocates everywhere should be heartened to hear that real reform is being discussed in a state where there is a desperate need for it. The Illinois tax structure is one of the ten worst in the nation in terms of fairness, and income tax reform could go a long way to improving this grim situation.