Category: TaxJusticeBlog

Ohio’s John Kasich is one Republican governor who wants his state to accept federal dollars from the Affordable Care Act to extend Medicaid to his neediest constituents. Kasich included that money in his budget proposal early this year, but the legislature rejected it.  But then the Governor vetoed the language rejecting those dollars in the budget bill that he finally signed. Enter the Ohio State Controlling Board – a board of six legislators and a policy adviser for the Ohio Office of Budget and Management– whose members then went ahead and voted that the state will follow the Governor’s lead and expand its Medicaid program using the federal funds. But now, six House members are plaintiffs in a lawsuit challenging the authority of the Board to tap into that federal Medicaid money.

Now it’s up to the courts to decide whether the Controlling Board’s actions were constitutional, but a State Senator who serves on the Board (and who also voted for the expansion) has a very specific idea of how to spend the money. Senator Chris Widener is sponsoring a bill that would turn the savings generated from Medicaid expansion (about $400 million in savings from now through June 2015) into a 4 percent across the board permanent personal income tax rate reduction.

Widener’s plan is doubly irresponsible. First, the Medicaid expansion isn’t a done deal, so the revenue to pay for a tax cut may never materialize. Secondly, legislative staff has estimated the cost of the  proposed tax cut at more than $500 million by the end of the next fiscal year—substantially more than the $404 million Ohio could see from Medicaid expansion. The tax cut Widener proposed would also disproportionately benefit the wealthiest Ohioans. The Institute on Taxation and Economic Policy’s (ITEP) analysis of the tax cut proposal in this Policy Matters Ohio (PMO) report found that Ohioans in the top 1 percent of the income spectrum would receive an average state tax cut of $1,437 a year. Middle-income families would get an average of $28, and the poorest twenty percent of Ohioans would see a tax cut averaging $1.

PMO argues that it is inappropriate to discuss tax cuts when the state has so many other unmet needs. Check out PMO’s report, “Use Medicaid savings to improve Ohio, not to give even more tax cuts to the affluent.” It gives a slew of ways in which the expected $400 million in savings could be used more productively, such as hiring police, firemen and teachers and funding preschool programs. Ohio has suffered multiple rounds of tax cuts that have eviscerated state services and local governments; any windfall revenues should be spent trying to undo some of that damage.

Thankfully, the Columbus Dispatch is reporting that the “income-tax cut is getting a cool reception from House GOP leaders.” House Speaker William Batchelder seems to agree with PMO, when he says, “The veterans are not being adequately treated. We have tremendous problems with heroin addiction in this state. We have a lot of problems, and we’d probably look there first … before we do a (tax) cut of that size.”

A newly released study sponsored by General Electric and a corporate lobbying group argues in favor of a “territorial” tax system, which House Ways and Means chairman Dave Camp has proposed as part of comprehensive tax reform. Here’s Citizens for Tax Justice director Bob McIntyre’s take on the study.

General Electric and a corporate lobbying group called ACT have sponsored a “study” arguing that our economy would benefit from a “territorial” tax system — one that permanently exempts from U.S. taxes the offshore profits of American corporations. This flies in the face of overwhelming evidence that today many of these profits are really earned in the U.S. but characterized as “offshore” in order to obtain existing tax benefits that would be expanded under a territorial system. The “study” is hopelessly flawed for several reasons.

For starters, the long-term “improvement” in the U.S. economy that the report predicts is so small that it’s a rounding error. The authors claim that permanently exempting offshore corporate profits from tax would increase U.S. GDP by $22 billion a year. That’s an increase of only 0.1%. So even if one believed this would actually happen (we don’t), one wouldn’t care.

More fundamentally, the authors seem to believe that the trillions of dollars that multinational corporations claim they earn in tax havens are floating in baskets in the Caribbean, and are unavailable for use in the United States. But that’s not true. As we’ve learned from the annual reports of companies such as Apple, most of that money is actually invested in the United States, in the stock market, corporate bonds and government bonds. In other words, most of the money is already here. It just hasn’t been taxed.

The authors brush aside the problem that a permanent tax exemption for “foreign” profits would encourage American corporations to work even harder at making their U.S. profits appear to earned in other countries that don’t tax them. The authors simply assert that they don’t think a permanent exemption would be any worse than our current system of indefinite “deferral” of U.S. taxes on such profits. What they don’t mention, however, is that there is a straightforward way to fix our current system.

As CTJ and others have pointed out, the solution is to repeal “deferral” and make multinationals pay tax on their overseas profits, with a credit for taxes paid to foreign governments. This would make profit-shifting to tax havens useless, and would also end tax incentives to move operations abroad. As a bonus, ending “deferral” would reduce the federal budget deficit by over $500 billion over the next ten years, making it much easier to protect essential public programs such as Social Security and Medicare.

General Electric, one of America’s most notorious tax dodgers, wouldn’t like such a reform, of course. That’s probably why it’s never mentioned by the authors of the study.

Despite being an off-year election, there were a few significant tax policy issues at stake in the elections held this week in Colorado, Minnesota, New Jersey, Ohio, Texas, Virginia, and New York City.

Ballot Measures

Colorado voters rejected Amendment 66, which would have raised $950 million in new tax revenues for education each year by converting the state’s flat rate income tax into a more progressive, graduated rate tax.

Colorado voters approved Proposition AA, imposing a 25 percent sales and excise tax rate on recreational marijuana, which voters legalized one year ago.  This 25 percent tax will be stacked on top of the 2.9 percent statewide sales tax and any local sales taxes (which average 3.2 percent).

Texas voters approved three very narrowly tailored tax breaks.  Those breaks will benefit disabled veterans, surviving spouses of military members, and manufacturers of aircraft parts.

While residents of Minnesota and Ohio didn’t vote on any statewide ballot measures this week, most of the local school tax levies on the ballot in those two states were approved by voters.

Major Candidates with Tax Plans

New Jersey residents voted to keep Governor Chris Christie in the governor’s mansion, rather than replace him with Democrat Barbara Buono.  Buono’s tax platform included raising taxes on incomes over $1 million and reversing the cut in the state’s Earned Income Tax Credit (EITC) that Christie signed in 2010.  Christie, by contrast, has said he wants to cut income taxes across the board.

Virginia voters chose Democrat Terry McAuliffe over Republican Ken Cuccinelli to be their state’s next governor.  Both candidates ran on a platform of reducing or eliminating local business taxes, though neither specified how to offset the resulting revenue loss.  Cuccinelli also said that, if elected, he would have pushed for regressive personal and corporate income tax cuts, as well as a spending cap similar to Colorado’s TABOR law.

New York City residents elected Democrat Bill de Blasio over Republican Joe Lhota in the city’s mayoral race.  De Blasio wants to expand pre-K education in the city by raising taxes on incomes over $500,000, but it’s not clear whether Governor Cuomo—whose approval would be needed for the tax increase—will support such a change.

On November 1, The New York Times published on op-ed written by John Cassara, formerly a special agent for the Treasury Department tasked with following money moved illegally across borders to evade taxes or to launder profits from criminal activities. The place where the money often disappeared, he explains, was the state of Delaware, which allows individuals to set up corporations without disclosing who owns them.

“I trained foreign police forces to “follow the money” and track the flow of capital across borders.

During these training sessions, I’d often hear this: “My agency has a financial crimes investigation. The money trail leads to the American state of Delaware. We can’t get any information and don’t know what to do. We are going to have to close our investigation. Can you help?”

The question embarrassed me. There was nothing I could do.

In the years I was assigned to Treasury’s Financial Crimes Enforcement Network, or Fincen, I observed many formal requests for assistance having to do with companies associated with Delaware, Nevada or Wyoming. These states have a tawdry image: they have become nearly synonymous with underground financing, tax evasion and other bad deeds facilitated by anonymous shell companies — or by companies lacking information on their “beneficial owners,” the person or entity that actually controls the company, not the (often meaningless) name under which the company is registered.”

Americans might comfort themselves by thinking that all countries have this problem, but Cassara points out that it is particularly bad in the U.S. He explains that a “study by researchers at Brigham Young University, the University of Texas and Griffith University in Australia concluded that America was the second easiest country, after Kenya, in which to incorporate a shell company.”

This creates enormous problems for U.S. tax enforcement efforts. It’s more difficult to persuade foreign governments to help the IRS track down money hidden offshore when several U.S. states seem to be helping people from all over their world evade taxes owed to their governments. Another problem is that much of the money hidden in shell companies incorporated in Delaware or other U.S. states may be U.S. income that should be subject to U.S. taxes, and/or income generated by illegal activities in the U.S.

The good news is that legislation has been proposed to require states to collect information on the beneficial owners (i.e., whoever ultimately owns and controls a company) when a corporation or LLC is formed and make that information available when ordered by a court pursuant to a criminal investigation. The Incorporation Transparency and Law Enforcement Assistance Act has bipartisan sponsorship in the Senate (including Senators Levin, Feinstein, Grassley and Harkin) and has been referred to the Judiciary Committee. This is an improvement over the last attempt to pass this legislation, in 2009, when it was referred to the Homeland Security and Government Affairs Committee (HSGAC), where it was memorably sabotaged by Delaware’s Senator Tom Carper. Last month, a similar bill was introduced in the House by Rep. Maloney.

Of course, enactment of this legislation would not solve all of the problems with our tax code. For example, it would not address the major problem of big, publicly traded corporations like Apple avoiding taxes by using offshore tax havens in ways that are (probably mostly) legal under the current rules. But, the incorporation transparency legislation would be huge progress in clamping down on tax evasion (the illegal hiding of income from the IRS) by individuals, including those engaged in other criminal activities like drug trafficking, smuggling, terrorist funding and money laundering.

In fact, as we have argued before, it is disappointing that the Obama administration has not put any real energy into advocating for this type of comprehensive legislation. This is not too much to ask for. The Conservative Prime Minister of the UK recently announced that his government would go even farther — not just recording names of owners of all UK corporations and making them available to enforcement authorities, but even automatically making those names public.

Last year the Facebook corporation made headlines when it used a single tax break—the ability to write off part of the value of executive stock options—to eliminate every last dime of federal income tax on $1 billion in US income in 2012. But for Facebook and other emerging tech companies—including Twitter, whose IPO is scheduled for this week—the best is yet to come.

A new CTJ report shows that a dozen emerging tech companies have stockpiled enough un-used tax breaks for executive stock options to eliminate all income taxes on the next $11.4 billion of US income they collectively earn—which means a net federal tax cut of $4 billion for these twelve companies.

There are familiar names here for any Internet user. LinkedIn is set to zero out tax on $571 million of US income. Priceline can expect to pay no tax on $900 million of income, and Facebook will likely be able to avoid any tax on a whopping $6.2 billion of income.

As CTJ has previously documented, hundreds of Fortune 500 companies have already used lavish executive stock options as a tax dodge. Apple alone has saved a breathtaking $3.2 billion in the last three years from this single tax break. Happily, pending legislation sponsored by Senator Carl Levin (D-MI) would pare back the stock option break to a degree. The most sensible long-term step would be to repeal the stock option tax break entirely, but Levin’s bill is a welcome step in that direction.

New Report Link:
http://ctj.org/ctjreports/2013/11/twitter_and_other_tech_firms_poised_to_shelter_11_billion_in_profits_using_stock_option_tax_loophole.php

We’ve followed the tactics of corporations in Illinois, from Motorola to CME Group, who again and again ask lawmakers for pricey handouts they claim they need to keep doing business in the state. House Majority Leader Barbara Flynn Currie has called this egregious behavior “blackmail.” She recently said, “[i]t essentially is saying, if you don’t jump to, if you don’t go do this for us we might think about going somewhere else.”  

Now the list of companies asking for handouts is growing, including: Archer Daniels Midland Company, OfficeMax, Zurich North America Insurance, Univar, and High Voltage Software. Giving individual companies special treatment is a violation of the neutrality principle and means that similarly situated companies are treated differently based on who can get the Legislature to bend to their will. Granting these singular incentives creates an environment wherein states end up competing in a “race to the bottom” and, ultimately, ordinary taxpayers pay the price through higher taxes or fewer services.

Illinois is facing an enormous budget crisis, due in part to the tax breaks for big multistate corporations that lawmakers have enacted over the years. Now is not the time for pandering to corporations at the expense of investing in the state’s future.

Iowa Senator Jack Hatch is one of three Democratic candidates running to unseat Governor Terry Branstad. If elected, the Senator intends to pursue a package of tax changes that would cost the state $415 million in Fiscal Year 2015 and $300 million in the following years. Most components of his plan are quite progressive: eliminating the flawed deduction for federal income taxes paid and asking the wealthiest Iowans to pay more overall.  But we wonder if permanently reducing tax revenues is the best approach when (for example) food insecurity in the state is rising.

Interested in how college textbooks are taxed in your state? Check out this New York Times piece which also explains why Amazon is telling its customers not to carry the textbooks they “rent” from Amazon across state lines. It’s one of the many convoluted steps the company takes in efforts to dodge its sales tax collection responsibilities.

The Kansas City Star explains in an editorial why the gas tax is a better tool for funding infrastructure than the sales tax.  As the Star notes, relying on a general sales tax to pay for roads “is a big leap away from the “user pays” world in which motorists help finance road repair and construction … [and] many drivers from outside the state who use the state’s roads would pay little if anything in sales taxes to maintain them.”  Our partner organization, the Institute on Taxation and Economic Policy (ITEP) makes a similar point in its 50-state report on the gas tax.

Nebraska’s Tax Modernization Committee, which we have been following, has moved on from taking public comment and is now back to deliberating potential changes to the Cornhusker state’s tax system.  At the suggestion of the Committee’s Chairman, members are focusing first on how they would pay for any proposed tax cuts – which could include fully exempting social security from the personal income tax and providing state aid to help reduce property taxes. While tapping into the state’s Rainy Day Fund and reserves is one option under consideration, many lawmakers wisely cautioned against using one-time money to pay for permanent tax changes. We are also happy to see that some Committee members are making tax fairness an important part of the debate. To this point, State Senator Jeremy Nordquist said, “There’s a number of options for us to address the regressivity of our state and local tax system, and that’s certainly what my goal will be.”

During a year in which far too many tax proposals have been focused on cutting taxes for the affluent, and in some cases actually raising them on the poor, Montgomery County Maryland’s decision to expand its Earned Income Tax Credit (EITC) is very welcome news.

As we noted in August, Montgomery County’s EITC is just one of two local EITCs in the country (the other is in New York City).  The credit is a powerful tool for blunting the regressivity (PDF) of Maryland’s sales and property taxes, and is an effective way to alleviate poverty, encourage work, and improve the long-term prospects of children raised in low-income families.

Unfortunately, when the Great Recession battered Montgomery County’s revenues, the County Council decided to scale back its EITC in order to help balance its budget.  Rather than matching the state EITC dollar-for-dollar, the credit dropped as low as 68.9% of the state credit in Fiscal Year 2012, and stands (PDF) at 75.5% of the state credit for Fiscal Year 2013.  Under a newly approved measure, however, that dollar-for-dollar match will gradually come back into effect by 2017.

As Councilman Hans Riemer explained, “Most of the services in the county have been restored from their cuts at the bottom of the recession. Except this one … So we are about back to where we were years ago.”  Montgomery County’s decision to continue its long-running commitment to its poorest residents is one that officials in other states and localities would be wise to emulate.

At the behest of Kansas Governor Sam Brownback, the state legislature has enacted two rounds of major tax cuts that disproportionately benefit the wealthiest Kansans. After signing into law the first set of tax cuts, Governor Brownback called the radical bill “a real live experiment.” He was quite proud of the legislation, saying that it wouldn’t affect the state’s ability to provide quality education and meet the needs of its poorest residents because the tax cut would eventually pay for itself by generating increased economic growth. The Governor said, “I want to ride the income tax rates on down, keep this glide path going to zero that we’re on, to get to a pro-growth position.”  But any good experiment calls for constant monitoring and so far, the Governor’s experiment is failing.

For starters, there is evidence that local governments are feeling enormous pressure to make up for reductions in state support by increasing their property tax rates. Hannes Zacharias, Johnson County’s Manager said, “Indeed, we are at the end of the food chain, and we’re the ones who have to clean up the mess.”  And as the Associated Press reports: “the county has lost state revenue for jobs such as inspecting sewer septic tanks for new residents in rural areas. In addition, furloughs in district court operations caused by limited state funds mean defendants must stay in county jails longer while awaiting trial, a cost picked up by local governments.”

And what of the Governor’s promise to continue to provide quality education?  It turns out that this is another instance where the state’s supply-side experiment has apparently been less than successful.  The Lawrence Journal-World reports that because of cuts in state classroom spending, school finance as a percentage of Kansas personal income will next year hit its lowest level in history. And soon the Kansas Supreme Court will be taking up this very issue. The Topeka Capital-Journal writes that the lawsuit before the Kansas Supreme Court could actually “end Brownback’s tax legacy.”  If the Court rules that more state money needs to be spent on public education, the legislature will likely need to raise hundreds of millions of dollars in new taxes.

The Governor’s office claims that state general fund monies to schools have increased since he took office, but this is apparently because the administration is now including contributions made to teacher retirement funds in its math. Teacher retirement funding dollars have never been used to calculate overall classroom spending in the past.

So far, the Governor’s experimental policies are actually not that popular with Kansans. But in some circles, the clamor for tax cuts persists.  Infamous billionaire anti-taxer Rex Sinquefield, for example, is urging Missouri lawmakers to follow Kansas’ lead.  He writes (with no evidence) of the Kansas experience: “Lower income tax rates have in fact stimulated the economy by reducing the price both of work and conducting business in the state, not to mention that lower rates have predictably proven effective when it comes to luring out-of-state businesses to Kansas’ friendlier business environment.”

Thankfully, the Kansas City Star took the time to refute Mr. Sinquefield’s wild claims: “What we do know is corporations have moved from Missouri to Johnson County and vice versa because of generous tax incentives that have nothing to do with Brownback’s income tax cuts. One year later, what we also know is from July through September, revenue to the state coffers has declined by $135 million, or a 9 percent drop from last year. The Legislature’s research staff projects that there will be a net reduction this fiscal year of a half billion dollars and a billion dollars by 2018.”

The House and Senate budget conference committee that was formed as part of the deal that ended the federal government shutdown and raised the debt ceiling is unlikely to come to any “grand bargain” that dramatically reduces the deficit or increases public investments. This is because, as House Budget Committee Chairman Paul Ryan reiterated this week, Congressional Republicans will oppose any proposal that includes new revenue.

“Taking more from hardworking families just isn’t the answer. I know my Republican colleagues feel the same way,” Ryan said during a meeting of the conference committee on Wednesday. “So I want to say this from the get-go: If this conference becomes an argument about taxes, we’re not going to get anywhere. The way to raise revenue is to grow the economy.”

There can be no reasonable “grand bargain,” which is usually interpreted to mean a deal including cuts to programs like Social Security and Medicare, if Congressional Republicans continue to block any and all revenue increases. The U.S. collects lower taxes as a percentage of its economy, than any Organisation for Economic Co-operation and Development (OECD) nations other than Mexico and Chile. Our current federal tax system is projected to collect revenue equal to 18.5 percent of our economy a decade from now. As we have pointed out before, in only a handful of years over the past three decades has federal spending been this low.

There are still useful things the committee might do, in theory, like changing the way sequestration affects certain programs. But the overall level of federal spending may be stuck at its current austere level, which has already done much damage to the economy.

Even the apparent glimmers of interest in revenue among Republicans on the conference committee are misleading. Rep. Tom Cole, for example, raised the possibility of “raising revenue” by enacting a tax amnesty for repatriated offshore profits like the one that was enacted in 2004. The non-partisan Joint Committee on Taxation has already concluded that allowing American corporations to officially bring to the U.S. their offshore profits (many of which are already being invested in the U.S.) would raise revenue for a few years and then lose revenue as companies are encouraged to shift even more profits offshore and wait for the next tax amnesty.

Committees can talk around the issue all they want, but there is simply no getting around the need for increased revenue.