Category: TaxJusticeBlog

States are just beginning to come to terms with the impact that the shutdown of the federal government will have on state residents. This informative blog post from the Wisconsin Budget Project tells us what programs folks should and shouldn’t be worried about on the state level and links to several resources from The Center on Law and Social Policy (CLASP) that readers might find helpful.

Another day…another company asking for enormous state corporate tax breaks. This time Archer Daniels Midland Company (ADM) is asking Illinois lawmakers for $20 million in tax breaks to keep their headquarters in Decatur. During a House Revenue and Finance Committee hearing, Rep. Barbara Flynn Currie characterized testimony of an ADM executive as “essentially blackmailing the state … saying if you don’t go through this hoop for us, we may think about going somewhere else.”  (H/T POLITICO’s Morning Tax.)

The Tax Foundation and the National Taxpayers Union are urging the U.S. Supreme Court to hear a case that could allow Overstock.com — and other online vendors like Amazon.com — to shirk  their responsibility for collecting state and local sales taxes. While a previous Supreme Court precedent bars states from requiring sales tax collection by vendors who have no “physical presence” in the state (a ban which Congress is considering lifting via the Marketplace Fairness Act, which passed the Senate by a rare bipartisan vote in May), some states have chipped away at e-tax-evasion by interpreting “physical presence” more broadly than others. In New York, for example, Overstock.com has agreements with in-state affiliates to pay for customer referrals, thus requiring the company to collect sales taxes from its New York customers under a 2008 state law that has been upheld by the New York Court of Appeals. While a national solution that levels the playing field between all online vendors and the brick-and-mortar stores who have always collected sales tax is preferable, states should be free in the meantime to require sales tax collection from online retailers who have legitimate ties to their local economies. Hopefully the Supreme Court agrees.

Having already made some backwards moves on the tax policy front, New York Governor Cuomo now appears to be abandoning his commitment to study and improve the state’s tax structure. In December, he announced the New York State Tax Reform and Fairness Commission. The Commission was “charged with addressing long term changes to the state tax system and helping create economic growth.” But instead of going forward with this thorough examination, the Governor has just appointed former Governor George Pataki and Controller Carl McCall to head a task force whose sole objective is to find a way to cut between $2 and $3 billion in taxes next year, in just one year! Maybe the junior Cuomo really does plan on running for President — of Texas.

On Sunday, House Republicans passed a budget plan that included the repeal of the medical device excise tax, making the end of this tax one of its demands in the ongoing budget negotiations. As the Center on Budget and Policy Priorities (CBPP) notes, the case against the medical device excise tax is being driven by misinformation put out by the medical device industry, which is hoping to avoid paying their fair share in taxes by getting the tax repealed. (The trade association even wrote the letter 75 members of the House sent to Speaker Boehner asking for the repeal.)

One argument made by the industry against the medical device excise tax is that it singles them out for higher taxes. The reality, however, is that the excise tax was passed as one of many levies on various healthcare sectors to help pay for health insurance expansion.

More vaguely, the industry has argued that the medical device excise tax will threaten “medical innovation and Americans jobs.” On its face, this charge is ridiculous considering that healthcare reform will increase demand for devices overall, and that the excise rate on the device is a mere 2.3 percent. That low tax rate should be a drop in the bucket to a medical device company like Medtronic, which had a profit margin of over 20 percent last year. In addition, the excise tax applies to medical devices imported to the US, and does not apply to devices made in the US if they are exported, meaning that the legislation was designed to protect competitiveness and job creation at US medical device companies.

The one critical thing that the medical device tax does accomplish is to raise crucially needed revenue. According to the Joint Committee on Taxation (PDF), the measure will raise about $30 billion over the next ten years. Given that the tax cuts passed earlier this year are already set to double the projected long term national debt, it does not make sense to exacerbate the debt further by passing billions more in tax cuts for an already lucrative industry.

As we noted last year, the push for repeal of the medical device excise tax is yet another example of corporate special interests trying to use their money and influence to increase their profits at the cost of ordinary American taxpayers. Hopefully, lawmakers will resist this relentless lobbying effort not only during immediate budget negotiations but in the long run as well.

Professor Robert Reich is a former Secretary of Labor, the star of a new documentary generating all kinds of buzz, and he is also a member of the board of our partner organization, the Institute on Taxation and Economic Policy (ITEP).  His new movie, “Inequality for All,” examines the scale and causes of the economic inequality that plagues the United States (including, argues Reich, our democracy). Watch the trailer!

Here at our blog we track new reports and research on the interaction of tax policy and income inequality. We write about the unequal treatment the tax code gives to investment income in contrast to the ordinary income most Americans take home. We tell anyone who will listen there are no freeloaders when it comes to paying taxes – unless you’re talking about the super rich or big corporations.

In a recent interview, Professor Reich explained,

There’s a lot of confusion about inequality. People know that inequality is surging. Many people have a feeling the game is rigged. But they don’t really understand why, how it’s happened and why it is dangerous. Or what they can do about it. This film also provides a kind of guide to people. There’s a social action movement that is connected to the film. We hope that the film really spurs not just a different discussion in this country, but also a movement to take back our economy and democracy.

Click here to find out when “Inequality for All” is coming to a city near you.

And…. If you are in the DC area, join us Monday! After a screening of “Inequality for All” on October 1 at 7:15 PM at E Street Cinema, ITEP’s Executive Director Matt Gardner will join a panel to discuss how what should be done to reverse the growth of income inequality locally and nationally.

The Facebook event has the details – see you there!

At the request of Oregon Governor John Kitzhaber, the state’s legislature will convene a special session on September 30th to pass a negotiated pension reform and revenue package which lawmakers failed to act on during the regular session this year.  The Governor and key lawmakers have been back and forth for months trying to come up with a “grand bargain” that would please members of both sides of the aisle, allowing the state to move forward on reforming the public pension system and raising revenue to boost education spending.  Lawmakers reached an impasse early this summer because most Democratic lawmakers were willing to raise revenue, but were not eager to support cuts to public employee’s benefits while most Republicans were open to significant changes to the state’s public pension system, but would only accept revenue increases if they are balanced with tax cuts for “small” businesses.  And, even though Democrats have majorities in the House and Senate, thanks to Oregon’s supermajority requirement to enact tax increases, a handful of Republicans were needed to strike a deal. 

Now it appears the impasse has broken.  The Governor and the majority and minority leaders of the House and Senate reached a deal on a plan that will initially raise more than $200 million (over two years) in new revenue for education, further reduce costs to the state’s pension system, give tax breaks to some businesses, and slightly increase the state’s Earned Income Tax Credit.

Is it time to celebrate?  Not so fast.  Our friends at the Oregon Center for Public Policy (OCPP) are calling the deal a “Grandly Flawed Bargain” due to three major flaws with the revenue package:

• The initial revenue gains shrink substantially after the current budget period.
• The tax cuts included in the revenue package are highly tilted to the wealthiest 1 percent who will benefit from the new business tax break.  And, the special business tax breaks are the reason for the revenue collapse after the first budget period.
• Despite proponents’ claims, the revenue package will not create jobs.

The bargain contains two progressive revenue raising elements: eliminating the personal exemption credit for high-income taxpayers; and capping the additional deduction for medical expenses available to older taxpayers and phasing it out for upper-income households.  And, it gives a small tax cut to working families by bumping the state’s Earned Income Tax Credit up from 6 to 8 percent of the federal credit.  But, most of the progressive changes are more than offset and overshadowed by the new optional personal income tax rate structure for taxpayers with pass-through business income, which will amount to more than a $100 million tax break each year for those filers once fully phased-in.

Our partner organization, the Institute on Taxation and Economic Policy (ITEP), crunched the numbers OCPP highlights in its report.  ITEP found that the so-called revenue raising package largely amounts to a significant tax cut for the wealthiest 1 percent of Oregonians who report pass-through business income on their returns. This group receives almost 70 percent of the tax cuts contained in the package while low- and moderate-income taxpayers (the bottom 40 percent) who benefit from the increased EITC get less than 10 percent of the total tax cut.

More than 60 percent of the wealthiest 1 percent of taxpayers will actually pay more under the plan thanks to the changes to the personal exemption credit.  So, it is a small number of wealthy business owners sharing the big cut that’s going to cost more than any part of the plan.     

OCPP is recommending lawmakers consider removing the costly wealthy business owner tax break from the bargain package in order to ensure adequate revenue for education, not only for this year but for years to come.  It would also make the tax package more fair, giving tax cuts only to low- and moderate-income working families while raising revenue from the state’s wealthiest residents.

A new report from the non-partisan Congressional Budget Office (CBO) confirms that Congress’s decision to make 85 percent of the Bush tax cuts permanent as part of the fiscal cliff deal will dramatically increase the annual deficit and the long term national debt going forward, something Citizens for Tax Justice (CTJ) has been projecting for years. In fact, the impact of the tax cuts was the biggest factor in causing the CBO to nearly double their estimate of the national debt from 52 percent of GDP to as much as 100 percent of GDP 25 years from now.

After digging all of us into this fiscal hole by passing these tax cuts, lawmakers like Wisconsin Representative Paul Ryan are using the CBO’s new, more dire debt projection to argue that it proves that “spending is out of control” and thus the solution to our fiscal problems is – wait for it – more spending cuts.

It’s become “common-sense” to argue that the federal government should immediately cut spending to reduce the deficit, but this is mistaken. Over the past two years lawmakers have already enacted enough debt reduction (primarily through spending cuts) that the CBO projects that the national debt will actually go down slightly over the next decade, going from 73 percent of GDP in 2013 to 70 percent of GDP in 2022.  Even over the long term, when the debt is projected to grow substantially, “out of control” spending is not what is driving the increase that Paul Ryan is talking about. 

According to the CBO, even with the much talked about growth in healthcare costs and aging of the population, total spending on federal government programs will only grow a modest 10 percent over the next 25 years. The much more dire predictions of the growth in government spending that are often cited are largely driven by the projected increase in interest payments on the national debt, an amount which the CBO expects to nearly quadruple over the next 25 years if nothing is done.

Rather than being inevitable, the good news is that this massive increase in interest payments is entirely avoidable if lawmakers modestly increase revenue, rather than letting the debt substantially increase each year in order to cover the costs of massive tax cuts that were made permanent with the fiscal cliff deal in January. In fact, the CBO estimates that revenues would only have to increase by about 4.5 percent compared to current policy to stabilize the debt over the next 25 years and substantially reduce projected interest payments. Whether it’s through ending corporate tax avoidance or reforming individual income tax expenditures, raising this modest amount of revenue could not only reduce the deficit but also have the added bonus of making our tax system more equitable as well. 

Next Tuesday the federal gas tax will celebrate an unfortunate anniversary: 20 years stuck at a rate of exactly 18.4 cents per gallon.  A unique new report from our partner organization, the Institute on Taxation and Economic Policy (ITEP), puts this occasion in context and explains why the gas tax has fallen some $215 billion short of what a better-designed tax would be raising. The report shows that Congress’ embarrassing failure to plan for growth in construction costs is the main cause of our transportation funding gaps.

To hear some gas tax naysayers tell it, hybrids and other fuel-efficient vehicles are consuming so little gasoline that the gas tax can’t possibly raise enough money to keep our infrastructure from falling apart.  But ITEP’s new analysis shows that just 22 percent of the gas tax shortfall we’re experiencing today is due to growth in vehicle fuel-efficiency.  By far the more important factor (accounting for the other 78 percent of the shortfall) has been Congress’ decision to stop the gas tax rate from rising alongside normal growth in the cost of asphalt, machinery, and other construction inputs.

Seventeen states, home to over half the country’s population, now use smarter “variable-rate” gas taxes that tend to rise over time.  And we note that the federal government wisely allows other parts of the tax code to rise each year with inflation—like the personal exemption, standard deduction, and Earned Income Tax Credit (EITC), so similarly giving the gas tax room to grow shouldn’t be that hard.

ITEP’s report offers a better path forward, and explains how reform could have prevented our current funding predicament.  By allowing the gas tax rate to grow alongside both construction cost inflation and fuel-efficiency, the federal transportation fund could have been brought from frequent deficits to consistent surpluses.  ITEP finds that more than $215 billion in additional revenue could have been raised over the 1997-2013 period—money that would have made a real difference in putting people to work and improving the efficiency of our transportation network.

Read the report, A Federal Gas Tax for the Future.

The lopsided benefits of Virginia gubernatorial candidate Ken Cuccinelli’s tax plan are back in the news following the release of a new report featuring data from our partner organization, the Institute on Taxation and Economic Policy (ITEP).

Cuccinelli has proposed eliminating a variety of local business taxes (like his Democratic rival) and slashing the state’s corporate income tax. But the centerpiece of Cuccinelli’s tax plan would scrap the state’s top personal income tax bracket. Under his proposal, the top income tax rate would fall from 5.75 to 5.0 percent, and would even apply to taxpayers starting at the very low level of $5,000 of taxable income.

According to an ITEP analysis published by the Center for American Progress (CAP), and picked up by the Washington Post this week:

• Attorney General Cuccinelli’s personal income tax plan would have cut his own tax bill by $985 last year if exemptions, deductions, and other “loopholes” benefiting him had remained unchanged.

• A typical $1 million-a-year earner would see their tax bill drop by $6,391 per year under Cuccinelli’s plan.

• Overall, 47 percent of all the personal income tax cuts proposed by Cuccinelli would flow to the wealthiest 5 percent of Virginians.

• An average middle-income family could expect to see a tax cut in the range of $98 (or just 0.2 percent of their total income).

• A minimum wage worker, or an elderly taxpayer relying mostly on Social Security income, should each expect to receive no tax cut at all.  (An earlier ITEP analysis published by the Commonwealth Institute showed that 39 percent of Virginians overall would see no benefit.)

Tax reform is a serious undertaking. The majority party in the House of Representatives now proposes to allow the U.S. to default on its debt obligations — refuse to pay the debts built up by Congress itself — unless it can force through a “tax reform” that raises no new revenue, along with other controversial measures.

Don’t be fooled. Raising the debt ceiling to avoid a default on U.S. debt obligations is a matter that should not require much debate, while tax reform is a completely separate issue that will require a vast amount of discussion and debate. The two do not belong in the same bill.

When lawmakers are serious about tax reform, they should turn to a new report from Citizens for Tax Justice that lays out just what tax reform should accomplish. If Congress is going to spend time on a comprehensive overhaul of America’s tax system, this overhaul should raise revenue, make our tax system more progressive, and end the breaks that encourage large corporations to shift their profits and even jobs offshore.

Read CJT’s new report —
Tax Reform Goals: Raise Revenue, Enhance Fairness, End Offshore Shelters

Senator Carl Levin (D-Mich.) today introduced the “Stop Tax Haven Abuse Act.” The bill, cosponsored by Senators Sheldon Whitehouse (D-R.I.), Mark Begich (D-Alaska) and Jeanne Shaheen (D-N.H), would curb some of the worst tax dodges used by multinational corporations to avoid their U.S. tax responsibilities.

Multinational corporations are currently allowed to indefinitely “defer” paying U.S. taxes on their foreign profits, even when those profits have been shifted out of the United State and into foreign tax havens.

The Levin bill does not go so far as to repeal “deferral.” But its enactment would be an important step in limiting incentives for multinational corporations to shift jobs and profits offshore. The bill is estimated to raise $220 billion over the upcoming decade.

Among the key features of the “Stop Tax Haven Abuse Act” are the following:

■ There are numerous problems with “deferral,” but it’s particularly problematic when a U.S. company defers U.S. taxes on foreign income even while it deducts the expenses of earning that foreign income to reduce its U.S. taxable profits. The Levin bill would defer corporate tax expenses related to offshore profits until those profits are subject to U.S. tax.

■ Individuals or companies with income generated abroad get a credit against their U.S. taxes for taxes paid to foreign governments, in order to prevent double-taxation. This makes sense in theory. But, unfortunately, corporations sometimes get foreign tax credits that exceed the U.S. taxes that apply to such income, meaning that the U.S. corporations are using foreign tax credits to reduce their U.S. taxes on their U.S. profits, not just avoiding double taxation on their foreign income. The Levin bill would address this problem by requiring that foreign tax credits be computed on a “pooled basis” so that no credits would be allowed for tax-haven profits.

■ Current tax rules allow U.S. corporations to tell foreign countries that their profits are earned in a tax haven, while telling the United States that the tax-haven subsidiaries do not exist. This allows corporations to shift profits out of the U.S. and real foreign countries and avoid paying income taxes to any country. The Levin bill would repeal the “check-the-box” rule and the “CFC look-through rules” that allow such tax avoidance.

■ Multinational corporations can often use intangible assets, such as patents and know-how, to make their U.S. income appear to be “foreign” income. For example, a U.S. corporation might transfer a patent for some product it produces to its subsidiary in a tax-haven country that does not tax the income generated from this sort of asset. The U.S. parent corporation will then “pay” large fees to its subsidiary for the use of this patent. The Levin bill would limit the worst abuses of this tax dodge.

For a more detailed description of the reforms discussed above, see our Working Paper on Tax Reform Options.

Annual state and local finance data from the Census Bureau are often used to rank states as “low” or “high” tax states based on state taxes collected as a share of personal income. But focusing on a state’s overall tax revenues overlooks the fact that taxpayers experience tax systems very differently.  In particular, the poorest 20 percent of taxpayers pay a greater share of their income in state and local taxes than any other income group in all but nine states.  And, in every state, low-income taxpayers pay more as a share of income than the wealthiest one percent of taxpayers.

Our partner organization, the Institute on Taxation and Economic Policy (ITEP) took a closer look at the Census data and matched it up with data from their signature Who Pays report which shows the effective state and local tax rates taxpayers pay across the income distribution in all 50 states.  ITEP found that in six states— Arizona, Florida, South Dakota, Tennessee, Texas, and Washington —  there is an especially pronounced mismatch between the Census data and how these supposedly low tax states treat people living at or below the poverty line. 

See ITEP’s companion report, State Tax Codes As Poverty Fighting Tools.

The major reason for the mismatch is that these six states have largely unbalanced tax structures.  Florida, South Dakota, Tennessee, Texas and Washington rely heavily on regressive sales and excise taxes because they do not levy a broad-based personal income tax.  Since lower-income families must spend more of what they earn just to get by, sales and excise taxes affect this group far more than higher-income taxpayers.  Arizona has a personal income tax, but like the no-income tax states, the Grand Canyon state relies most heavily on sales and excise taxes.

To learn more about how low tax states overall can be high tax states for families living in poverty, read the state briefs described below:

Arizona has the 35thhighest taxes overall (9.8% of income), but the 5thhighest taxes on the poorest 20 percent of residents (12.9% of income).  The top 1 percent richest Arizona residents pay only 4.7% of their incomes in state and local taxes.

Florida has the 45thhighest taxes overall (8.8% of income), but the 3rdhighest taxes on the poorest 20 percent of residents (13.2% of income).  The top 1 percent richest Florida residents pay only 2.3% of their incomes in state and local taxes.

South Dakota has the 50thhighest taxes overall (7.9% of income- making it the “lowest” tax state), but the 11thhighest taxes on the poorest 20 percent of residents (11.6% of income).  The top 1 percent richest South Dakota residents pay only 2.1% of their incomes in state and local taxes.

Tennessee has the 49thhighest taxes overall (8.3% of income), but the 14thhighest taxes on the poorest 20 percent of residents (11.2% of income).  The top 1 percent richest Tennessee residents pay only 2.8% of their incomes in state and local taxes.

Texas has the 40thhighest taxes overall (9.1% of income), but the 6thhighest taxes on the poorest 20 percent of residents (12.6% of income).  The top 1 percent richest Texas residents pay only 3.2% of their incomes in state and local taxes.

Washington has the 36thhighest taxes overall (9.7% of income), but the 1sthighest taxes on the poorest 20 percent of residents (16.9% of income).  The top 1 percent richest Washington residents pay only 2.8% of their incomes in state and local taxes.