Tag: TaxJusticeBlog

Poverty among the elderly rapidly declined during the last century in part because of the Social Security program, which is credited today with keeping up to 22 million people out of poverty. No one wants to work a lifetime only to face poverty in their golden years, so it is no wonder that states offer varied tax breaks for their elderly citizens, including not taxing pensions and other retirement benefits.

But an updated brief from ITEP finds that, in spite of their popularity, tax breaks for the elderly are often a poorly targeted, costly commitment for states that may not be accomplishing their desired effect.  In many cases, wealthy elderly taxpayers reap the majority of the benefits from state income tax breaks designed for older adults. Further, with the nation’s aging population, these tax breaks threaten to become unaffordable in the long-run.

Many older Americans continue to work into their golden years. Others retire, yet they continue to bring in income by collecting Social Security and pension benefits. In most states, retirement income is frequently not taxed or sheltered through generous tax breaks. This shifts the cost of funding public services to members of society who remain in the labor market and non-elderly taxpayers. Of states with a broad-based income tax, three fully exempt all retirement income from taxation; 36 allow some exemption for private or public pension benefits; 20 allow senior citizens an additional personal exemption or exemption credit; and seven allow senior citizens to claim the higher federal standard deduction. In addition, 22 of the 30 states that provide a property tax credit limit availability to seniors or offer them a more generous version of the credit.

Ill-targeted elderly tax breaks raise concerns of both fairness and sustainability.

The percentage of the U.S. population over the age of 65 continues to grow, expected to exceed one-fifth of the nation’s population in the next 25 years. With a rapidly aging population come state budget challenges, in the form of both growing expenses and revenue loss. As older Americans age, they tend to earn less–bringing in a reduced amount of income tax revenue for states. They also spend less–providing states with a reduced amount of sales tax revenue. The Federal Reserve Bank of Kansas City produced a study on The Impact of an Aging U.S. Population on State Tax Revenues, finding that on a per-capita-basis demographic shifts alone will reduce individual income taxes and sales taxes, although to a lesser extent, in nearly every state in the country. Increasingly generous and often poorly targeted tax breaks for older adults only contribute to state budget woes.

There’s something to be said for being kind to your elders. But states should weigh whether these costly tax breaks are money well-spent, or if they are largely benefiting well-off retirees. The details are in the design of the break. Rather than providing broad, expensive breaks, states should retool their elderly tax breaks to better target low-income seniors. This will allow states to aid those most in need while committing to a more fair and sustainable tax system.

For more read “State Tax Breaks for Elderly Taxpayers,” ITEP’s updated report on the topic.

“If doling out tax incentives is a shopworn strategy, giving these tax breaks to bad actors such as United Technologies should be seen as an outright capitulation by the incoming Trump administration, rather than as a savvy deal.”

The Carrier Corporation Tuesday announced that it will not fully follow through on its threat to move 2,100 jobs from Indiana to Mexico, and instead will keep 1,000 of those jobs in the U.S.

The move comes in the wake of “wide-ranging policy talks” between representatives of the incoming Trump administration and Carrier officials. The New York Times reports that Carrier’s reward for this apparent change of heart will include new tax incentives from the state of Indiana and a commitment from the Trump administration to aggressively pursue federal corporate tax reform in 2017.

While this move is being described as ground-breaking by its supporters—incoming Treasury Secretary Steven Mnuchin said that he“[c]an’t remember the last time” a president took such steps—this approach to keeping jobs is hardly new. For decades, footloose corporations have used the threat of moving jobs to different cities, states or even countries to extract special tax incentives from state and local governments, despite the lack of evidence that these strategies create jobs. Company-specific tax breaks reward companies for what they likely would have done anyway, give tangible benefits to companies in exchange for tissue-thin promises of job creation, and send a clear signal to other tax-avoiding firms that they will be rewarded for making similar threats.

And Carrier’s parent corporation, United Technologies (UTC), certainly fits the description of a tax-avoiding firm. The company routinely pays effective federal tax rates of 10 percent or lower, far below the 35 percent statutory tax rate its executives have complained about. UTC also has aggressively shifted its profits offshore, holding $29 billion in undisclosed foreign countries at the end of 2015. If doling out tax incentives is a shopworn strategy, giving these tax breaks to bad actors such as United Technologies should be seen as an outright capitulation by the Trump administration, rather than as a savvy deal.

What makes this deal especially worrisome is that UTC is among the multinational corporations that have been pushing for international tax “reform” focusing on a repatriation holiday. These firms routinely build up huge stockpiles of offshore cash in low-rate tax havens—presumably the reason for UTC’s subsidiary in the Cayman Islands—and threaten that they won’t bring the cash back to the United States unless they receive special tax breaks in exchange for unenforceable promises of domestic job creation. Sound familiar?

This move also raises the question of the opportunity cost of a state providing tax incentives to a corporation to keep jobs in the state. All would agree that keeping good, middle-class jobs is a commendable, worthy goal. But what about the flip side? What will be the cost to taxpayers per job? What will this mean in terms of state revenue, and will a corporate tax cut or tax subsidy mean less revenue for critical state services? Giving bountiful tax breaks to companies that threaten to move jobs offshore may preserve some jobs in the short-term, but it certainly isn’t a jobs creation strategy. Beyond the public relations spin, President-elect Trump and Vice President-elect Pence (who is still the governor of Indiana) owe the people of Indiana and the country answers to these tough questions.

It remains to be seen whether Carrier’s promise to keep jobs in Indiana will carry any weight. If these jobs evaporate in two or three years, or come with inadequate pay and health care benefits, the only real winner from the deal announced today will be the shareholders of United Technologies. But even if this deal results in the longer-term preservation of Carrier’s Indiana employment base, it suggests that the incoming Trump administration may be far too willing to give away even bigger tax breaks to United Technologies and its tax avoiding brethren at the federal level in 2017.

President-elect Donald Trump has placed a heavy emphasis on the need to rebuild the nation’s infrastructure, a plan that conceivably could secure bipartisan support with the right approach.

However, as outlined in a new ITEP issue brief, paying for infrastructure investments is a divisive topic, and there are copious reasons that Trump’s plan should be met with a healthy dose of skepticism.

Mr. Trump’s advisors have suggested (PDF) that additional infrastructure funding could be generated by giving private investors a tax credit that would wipe out 82 percent of the up-front costs associated with building toll roads or other income-generating infrastructure projects. They claim that offering $137 billion in federal credits would spur $1 trillion in infrastructure investments, and that the economic growth created by those investments would ultimately make the plan “fully revenue neutral.”

This claim of revenue neutrality is based on unrealistic assumptions about the impact these credits would have on overall infrastructure investment. More importantly, Mr. Trump’s infrastructure proposal is a short-term approach to a long-term shortfall in our nation’s infrastructure revenues. It would also fail to fund many important infrastructure investments and would needlessly subsidize private investors for at least some projects that would have been undertaken even in the absence of this program. While expanded investments in infrastructure are clearly needed, this proposal is a deeply flawed approach to realizing that goal.

After years of false starts, the passage of a major tax legislation package next year is looking increasingly likely given the election of Donald Trump and unified Republican control of Congress. While lawmakers and commentators agree that something called “tax reform” will move next year, a number of fundamental questions have been left unanswered as to what legislation might look like. Below we review the most critical outstanding questions on the shape tax legislation might take in 2017.

1. Will tax reform be revenue-neutral or a substantial tax cut?

2. Will tax reform be passed on a bipartisan basis or through budget reconciliation?

3. How will lawmakers reform the international corporate tax system?

1. Will tax reform be revenue-neutral or a substantial tax cut?

Perhaps the most fundamental question for tax reform is whether lawmakers are planning to pass revenue-neutral, revenue-positive or revenue-losing legislation next year. While revenue-positive reform seems to be off the table, there are mixed signals as to whether lawmakers will pursue a revenue-neutral or revenue-losing package.

For his part, Republican Chairman of the Ways and Means Committee Kevin Brady has repeatedly said that House Republicans will pass a revenue-neutral package. This claim is belied by the fact that the tax reform blueprint on which Brady and House Republicans are basing their efforts would lose an estimated $4 trillion over 10 years. In a fact-based world, this would mean that Republicans must either rewrite substantial portions of their proposal to raise more revenue or abandon their revenue-neutral goal.

However, Brady has created some wiggle room for Republicans in how he defines “revenue-neutral.” First, Brady has said that he would use dynamic scoring in designing a revenue-neutral package. This means that a tax package could lose substantial revenue under traditional scoring methods, and still be scored as revenue-neutral by dubiously claiming economic growth will partially offset the cost of the tax cuts. Brady has also indicated that he will seek revenue-neutrality only over the next decade, which could allow him to use one-time revenues from a repatriation holiday to conceal the longer-term fiscal irresponsibility of his plan.

While House Republicans have at least paid lip service to the goal of revenue-neutral reform, President-elect Trump has long advocated a substantial tax cut. For example, Trump said during one of the presidential debates that his tax cut would be the “biggest since Reagan.” Backing this up, Trump’s revised tax plan proposed during the campaign would cut taxes by $4.8 trillion over 10 years.

Given that Republicans have enough votes to pass a package without Democratic support (as discussed below), the big question facing tax reform could be whether Republicans can reconcile Trump’s call for a substantial tax cut and many congressional Republicans’ call for a revenue-neutral (however defined) package.

2. Will tax reform be passed on a bipartisan basis or through budget reconciliation?

The last major tax reform bill, the Tax Reform Act of 1986, was famously passed on a bipartisan basis. For the past thirty years, lawmakers have unsuccessfully sought to replicate this success. With Republicans now in control of the White House and Congress, the question is whether they will seek to pass reform along party lines or by pushing for a bipartisan bill.

Republicans leaders are giving mixed signals on this point. Senate Republican Majority Leader Mitch McConnell and Senate Finance Committee Chairman Orrin Hatch have both indicated their desire to pass a bipartisan package, as has House Ways and Means Chairman Brady. Republican leaders in the Senate have also indicated that they will pass a pair of budget resolutions that will allow them to pass tax reform (and Obamacare repeal) through a process called budget reconciliation, which would allow Republicans to avoid a Democratic filibuster and pass tax reform through the Senate on a slim party-line vote.

President-elect Trump himself has not specified a preference on the issue, but one of his economic advisers has suggested that combining corporate tax reform and infrastructure spending into a single bill would garner bipartisan support. A variety of bipartisan proposals would use revenue generated from a tax on the $2.5 trillion in earnings companies are holding offshore to pay for new infrastructure spending. This approach faces challenges, since many Republicans do not support new infrastructure spending and the tax credit-driven approach proposed by Trump is already being heavily criticized by Democratic policy analysts.

The key advantage of pursuing the budget reconciliation approach for Republican leaders is that they would not have to compromise with Democrats. On the other hand, the use of budget reconciliation would have two disadvantages. First, reconciliation bills prohibit provisions that do not affect revenue or spending. This restriction could exclude many of the transition and enforcement provisions that are required to make comprehensive tax reform legislation work. Second, budget reconciliation legislation may not result in revenue losses outside the ten-year budget, which the Republican proposals almost certainly would. To get around this requirement, Republican lawmakers could allow the tax reform legislation to expire after 10 years, which is the method they took to pass the revenue-losing Bush tax cuts in the early 2000s. However, this approach creates uncertainty in the tax code and opens the door for Democratic lawmakers to roll back the tax reform package when it expires, as happened in 2012 with the Fiscal Cliff Deal.

3. How will lawmakers reform the international corporate tax system?

While the broad contours of different Republican tax reform plans match up in many cases, these plans diverge sharply on reforming the international corporate tax system.

The House GOP plan proposes the most radical change in that it would shift our corporate tax system from a residence-based system to a destination-based one. The plan would exempt all exports of goods and services from taxation, while at the same time applying the tax to all goods and services imported into the United States. The key problem with this proposal is that it would almost certainly violate international trade rules and bilateral tax treaties with countries around the world. In addition, this approach is already raising the ire of retail and other major companies that depend on imports, which would face large tax increases under the new system. The question with this approach will be whether House tax writers will be able to convince enough lawmakers and the new administration to go along with this untested and complex new approach to international taxation.

In the Senate, Finance Committee Chair Orrin Hatch is working on a corporate integration proposal that he has pitched as the best approach to make our tax code more competitive in the international arena. The main feature of his plan would be to allow companies to take a deduction for dividend payments to shareholders. Hatch argues that a dividend deduction would be advantageous because it would make our tax system less dependent on taxing corporations directly and companies could wipe out any taxes owed on repatriated funds by simply issuing a dividend with the money. The main problem with this approach is that about two-thirds of dividend income goes to tax-exempt entities, meaning Hatch’s proposal will either need to eliminate the very popular tax advantage given to these entities to make up for lost revenue or else allow a huge portion of corporate income to go entirely untaxed.

A third approach advocated by President-elect Trump in his initial tax plan and the Democratic Ranking Member of the Senate Finance Committee Ron Wyden is to move the U.S. to a full worldwide tax system by ending the ability of corporations to defer paying taxes on their foreign profits. Ending deferral would be the ideal way to reform the international tax system because it would eliminate the ability and incentive for corporations to avoid taxes by shifting their profits into offshore tax havens. In his revised tax plan, Trump removed language advocating an end to deferral, but at the same time left the door open to this approach by not specifying a preferred alternative approach to international taxation.

While not preferred by any of the major tax writers at the moment, another frequently-discussed change to international tax rules would be to shift our code to a territorial tax system, in which corporations owe no U.S. taxes on their foreign profits. Moving to a territorial tax system would be disastrous for the corporate tax system because it would dramatically increase the incentive for companies to shift their profits offshore to completely avoid U.S. taxes on these profits. The amount of damage done to the tax base and resulting revenue loss would depend on the extent to which lawmakers pair this change with anti-base erosion measures. For example, in proposing a shift to a territorial tax system, President Obama proposed pairing this system with a minimum tax, which would help prevent companies from paying extremely low tax rates by shifting their profits into tax havens. Similarly, former Republican Chairman of the Ways and Means Committee Dave Camp proposed a number of important measures that would substantially limit the base erosion from the movement to a territorial tax system. Some form of a territorial tax system will likely be the fallback option if lawmakers reject the other approaches being pushed now. 

Last summer, Indiana-based Carrier Corp. incurred bipartisan wrath after announcing it would move 2,100 jobs to Mexico in 2017. Now, the Wall Street Journal reports that representatives of President-elect Trump’s incoming administration are engaging in “wide-ranging policy talks” with executives of United Technologies Corporation (UTC), Carrier’s parent company, with a focus on reducing its federal corporate income tax rate.

Trump has pledged repeatedly to keep UTC and Carrier from offshoring jobs, and it now appears that UTC may want a lower tax rate as the price for complying with this demand. Saving middle-class jobs is an important and laudable goal. But policymakers should approach such consequential discussions with all the facts. And the fact is that Carrier’s parent company already pays a relatively low effective tax rate.

As we previously noted, UTC does not have a lot of skin in the game when it comes to federal income taxes. The company paid an effective federal tax rate averaging just 10.3 percent over the 15-year period (PDF of full tax calculation) between 2001 and 2015. UTC’s 2015 annual report shows the company paid a federal tax rate of just 9.4 percent on $2.8 billion in U.S. profits last year. This means year after year, the profitable company pays only a fraction of the federal statutory rate of 35 percent. 

The company’s push for a corporate tax cut likely has a lot to do with its offshore cash. As of 2015, UTC had a cumulative $29 billion in profits stashed offshore that it claimed it earned abroad and has no intention of repatriating to the United States. The profits, if repatriated, would be subject to the federal corporate tax rate less any taxes it paid to foreign governments.

It’s impossible to know how much of this offshore cash is in the hands of the company’s zero-tax haven subsidiaries in the Cayman Islands or the British Virgin Islands because UTC refuses to disclose this information. (The limited disclosures that have been made by other corporations with offshore cash show these companies are paying single digit tax rates on their foreign profits.) But it seems plausible that when the company warns of “adverse tax consequences” of repatriating from “certain of our subsidiaries,” it has its Caribbean affiliates in mind.

The United States is one of the world’s most advanced democracies, which our federal tax system enables. Infrastructure, public education, health and safety, clean water, safe food, and national defense all require tax dollars—from citizens and corporations. The Unites States simply cannot compete with a zero-percent tax rate, nor should it try.

A company like Carrier, which may be accustomed to stashing money in the Cayman Islands and paying a zero-percent tax rate, certainly would consider the U.S. federal statutory rate “adverse.” But given UTC’s consistent ability to avoid that tax rate over the past 15 years, it’s hard to see why Congress or the incoming Trump administration should prioritize finding a way to cut the company’s taxes even further. 

Correction: The original blog post misindentified the time period of our 15 year calculation as 2000-2014, rather than 2001-2015.

With a Trump administration and Republican-controlled Congress that have similarly-aligned goals for tax reform, the likelihood of a tax reform package being enacted in 2017 is higher than it has been in years. A key component of these discussions will be how to tax $2.5 trillion in collective profits that U.S. multinational corporations have parked offshore to avoid paying U.S. taxes.

U.S. multinationals are avoiding up to $718 billion in taxes on this offshore profit cash hoard.

The key reason companies use accounting gimmicks and other maneuvers to book profits offshore is that our corporate tax code allows them to indefinitely defer paying U.S. taxes on their foreign profits until they are officially repatriated to the United States. For example, Apple now holds $216 billion in earnings offshore on which it appears to have paid a tax rate of less than 4 percent, meaning that deferring taxation on these profits has allowed it to avoid an estimated $67 billion in U.S. taxes.

This offshore cash sum and the tax revenue it could generate is no secret to lawmakers. For the last several years, various lawmakers have introduced proposals that would either incentivize or force corporations to repatriate their profits. Unfortunately, most of the proposals would either perpetuate corporate tax avoidance or incentivize corporations to repatriate their current offshore profits but then return to stashing cash offshore in anticipation of another future tax break.

For example, a “repatriation holiday” is a popular proposal floated by Republicans and Democrats that would allow companies to voluntarily repatriate offshore profits at a sharply reduced rate. Similarly, a “deemed repatriation” proposal would levy a one-time mandatory tax (ranging from 8.75 to 14 percent) on the accumulated offshore funds at a reduced rate. For example, President-Elect Donald Trump has proposed a deemed repatriation at a 10 percent rate as part of his tax reform plan, with no plan on how he might treat future offshore earnings. What this means is that under Trump’s plan, companies would be let off the hook for more than $500 billion of the $718 billion in taxes they owe on their offshore earnings, representing a substantial reward to those companies engaged in offshore tax avoidance.

Lawmakers seem to be willing to compromise on this as they are eying a quick fix way to finance much-needed infrastructure improvements at a time when they cannot agree, for example, on how to ensure the Highway Transportation Fund remains solvent in the long-term. One possibility moving forward is that revenues raised from a deemed repatriation could be used to finance infrastructure improvements. Variations of this idea have been proposed by President Obama and members of Congress including Representative John Delaney and Senators Barbara Boxer and Rand Paul. In a recent meeting between Trump advisor Stephen Moore and Republican lawmakers, Moore proposed linking Trump’s 10 percent deemed repatriation with infrastructure spending as one way to make the plan bipartisan. However, many congressional Republicans (including House Ways and Means Committee Chairman Kevin Brady, who is tasked with drafting tax reform legislation) would prefer that revenues from a deemed repatriation be used to lower corporate rates. And if Republicans decide to push through tax reform using “budget reconciliation” (a special legislative process where the threat of a filibuster is eliminated), Democratic support will not be needed to pass tax changes. Other Trump advisors have also suggested new tax credits for corporate infrastructure equity investments, which could potentially offset or eliminate a company’s repatriation tax liability.

Rather than grant corporations a substantial tax break on their offshore earnings to generate a short-term revenue boost, lawmakers should no longer allow companies to defer paying taxes on their foreign earnings. Such a move could curtail offshore tax avoidance and generate substantially more revenue, which could be used to make the public investments in infrastructure, health care and other critical areas that we need.

For additional information on the various repatriation proposals and how they would work, see ITEP’s new Comprehensive Guide to Repatriation Proposals or our related two-page fact sheet What You Need to Know About Repatriation Proposals.

Tax policy figured prominently during the national election and likely will be high on the agenda of President-elect Donald Trump and Congress.  And while state and local elections didn’t receive as much national media attention as the presidential race, shake-ups in statehouses will pave the way for significant tax policy debates in a number of states. Just as the election results will shape the direction of the nation’s tax policy in the coming year, it also will affect the direction of tax policy debates in a number of states next year. 

In coming weeks, ITEP will provide a comprehensive overview of state tax policy trends to anticipate in 2017 as well as a look at other states where tax policy will be a dominant issue.  For now, here’s a glance at some of the most important states to watch where the election made a mark on potential tax changes:

Kentucky

The recent election shifted the state exclusively to Republican control. The Kentucky GOP now holds the governor’s mansion, the Senate, and a supermajority of the House of Representatives. Gov. Matt Bevin has announced that Kentucky’s new Republican legislature will overhaul the state’s tax code in 2017. Specifics of what such a reform would look like are unclear, but the governor remains open to eliminating the state’s income tax, and supply-side guru Arthur Laffer is helping to shape the plan.

Alaska

After the election, lawmakers in Alaska formed a new 22-member majority caucus comprised of 17 Democrats, two Independents, and three Republicans. This newly formed majority in the House of Representatives has pledged to set aside party labels to address the state’s fiscal challenges, largely the result of declining oil revenue and legislative inaction. Their focus will be on a sustainable budget that will not abandon core state services. ITEP has weighed in on potential revenue options in two recent reports: Distributional Analyses of Revenue Options for Alaska and Income Tax Offers Alaska a Brighter Fiscal Future, both of which make the case for reinstating a personal income tax.

Iowa

Republicans in Iowa now have control of the House and Senate for the first time since 1998, in addition to the governorship. The 2016 session ended without significant tax changes and many of this year’s issues are likely to resurface when the legislature reconvenes in 2017. For example, the state has not resolved its need for water quality improvements, for which a small sales tax increase has been proposed. But the push to cut taxes for the wealthy will likely have more strength than ever. Legislative action may includeproposals to convert the state’s graduated rate structure to a flat tax, and the new legislature may demand regressive income tax cuts in exchange for funding water quality improvements. Such a compromise, of course, would further weaken the state’s historically low levels of school funding, especially if revenues continue to underperform.

Kansas

Gains by moderate Republicans and Democrats in Kansas’s legislature could usher in a new ideological majority more resistant to Gov. Brownback’s tax and economic policies. Though far from the votes needed to override a gubernatorial veto, these shifts could result in a new bipartisan majority coalition that is likely to work together to raise significant revenue to address the state’s continuing revenue problems stemming from the governor’s failed supply-side tax cuts.

Montana

Incumbent Gov. Steve Bullock won re-election in a pricey contest against Republican candidate Greg Gianforte. With the election behind them, lawmakers are now preparing for the 2017 legislative session that starts in January. This week Gov. Bullock released his two-year budget plan, which includes several revenue measures to help plug the state’s revenue gap. Proposed tax cuts include tax incentives for new or expanding businesses touted on the campaign trail, as well as the creation of a state Earned Income Tax Credit (EITC) at 3 percent of the federal EITC. Proposed increases include consumption tax reforms (increased alcohol and taxing medical marijuana) and progressive reforms of adding a new top bracket and rate for income over $500,000 and limiting the tax credit for capital gains to income under $1 million. These proposals face Republican majorities in both the House and Senate.

Missouri

Missouri will go into session with both legislative chambers and the governorship in the hands of Republicans. It is unknown if a major push to cut taxes in Missouri will occur this year, however, as Missouri is one of the states that joined (in 2014) the fiscally irresponsible trend of passing tax cuts that won’t take effect until future years. Those cuts are one reason the state is already looking at revenue shortfalls in coming years, and will also make it all the more difficult to solve issues like the fact that the state’s employees are the lowest-paid in the nation. But some aspects of Missouri’s tax code are woefully out of date, and any reform efforts this year will benefit from the hard work of a special tax study commission that has been meeting all year to identify tax-related issues and options for reform.

UPDATE: A new post on this topic is available here.

This holiday season, the media will cover throes of consumers who will wait in line for door-buster specials, but a large and growing number of shoppers will opt to avoid the crowds by making their purchases over the Internet. 

For Amazon.com customers, this used to mean additional “discounts” because while shoppers have always owed sales taxes on their online purchases, the company didn’t bother to collect the tax in most states.  In fact, as recently as 2012, the bulk of American consumers lived in states where Amazon.com refused to collect sales tax.  The practical result was an automatic price advantage of around 5 or 10 percent (depending on each state’s sales tax rate) for the e-retailer, and less money in the coffers of state and local governments.

But Amazon.com’s sales tax collection practices have changed dramatically in the last five years.  As of 2016, the company collects sales tax from its customers in 29 states, including 19 of the 20 most populous states in the country.  Altogether, about 86 percent of the U.S. population lives in states where Amazon.com collects sales tax.

This change, unfortunately, isn’t due to the company seeing the error of its ways.

Thanks to a decades-old Supreme Court case, e-retailers operating outside of a state’s borders cannot be compelled to collect the sales taxes owed by their customers.  For years, Amazon.com took advantage of this provision.  In fact, in 2011, the nation’s largest e-retailer collected sales taxes from its customers in just five states, home to 11 percent of the country’s population. 

This recent change in Amazon.com’s tax collection practices is a side effect of its effort to cut down on delivery times by opening distribution centers near its customers.  As the company expanded its physical footprint to more states, it has increasingly lost the ability to hide behind its out-of-state status as a way of avoiding sales tax collection requirements.  The result is a somewhat more rational application of the sales tax in most states: today most Amazon.com shoppers are paying the same sales taxes as their neighbors who prefer to shop at local “brick and mortar” stores.

But the march toward a more reasonable sales tax is far from over.  Online shoppers can still evade the sales tax by buying from smaller e-retailers that lack a physical presence in their state.  And even Amazon.com, despite proving itself capable of collecting sales tax from the vast majority of its customers, is refusing to participate in the sales tax collection systems of 17 states where it lacks a physical presence: Alaska, Arkansas, Hawaii, Idaho, Iowa, Louisiana, Maine, Mississippi, Missouri, Nebraska, New Mexico, Oklahoma, Rhode Island, South Dakota, Utah, Vermont, and Wyoming.  (The company also does not collect tax in Delaware, Montana, New Hampshire, and Oregon since these states lack a state or local-level general sales tax.)

As we explain in an updated policy brief, the sales tax collection practices of e-retailers will remain a messy patchwork until the federal government gets involved.  That involvement could take the form of legislation allowing states to require sales tax collection by out-of-state e-retailers.  Or it could come through a future decision by the Supreme Court to expand the circumstances under which states can require sales tax collection.  While some holiday shoppers may not like it, either of these outcomes would bring about a major improvement in the enforcement of our state and local sales tax laws.

Read ITEP’s policy brief on the sales tax issues associated with online shopping

This week we are bringing you news about the unfortunate similarities between the failed tax cut experiment in Kansas and the president-elect’s tax proposal, the potential for another Laffer-led tax overhaul (this time in Kentucky), a promising progressive tax proposal out of Montana, and more dire budget news out of Oklahoma, New York and Pennsylvania.

— Meg Wiehe, ITEP State Policy Director, @megwiehe

• An article in the Wichita Eagle this week explains the similarities between President-elect Donald Trump’s tax plan and the disastrous tax changes enacted in the state under Gov.Sam Brownback. In particular, Brownback’s tax changes and Trump’s proposal largely benefit wealthy households and are justified by “trickle-down” economics, a worn out and disproven ideology pushed by Arthur Laffer that tax cuts will pay for themselves.  This has certainly not been the case in Kansas.  In fact, a growing number of Kansas lawmakers plan to undo the Brownback tax cuts next year.

• Arthur Laffer is pushing a “new agenda” in Kentucky. He and associates contributed heavily to the state’s key House races this month. The new majority has emboldened Gov. Matt Bevin’s commitment to tax reform in 2017. Kentuckians cannot afford to go down the road of Kansas’ failed experiment with Laffer-backed supply-side and trickle-down tax cuts.
• Arkansas Gov. Asa Hutchinson plans to ask lawmakers to enact a $50 million tax cut that would focus on lower- and higher-income brackets. Details of the proposed cut will be released in advance of the 2017 legislative session. The state is $23 million behind forecasted revenue for the current fiscal year.

• Newly re-elected Montana Gov. Steve Bullock released his budget plan yesterday, which included several revenue measures such as adding a new top bracket for incomes over $500,000; limiting the capital gains tax credit; enacting a state Earned Income Tax Credit (EITC); and taxing medical marijuana. The new revenues are intended to help bolster lagging energy revenues, fund an infrastructure package, shore up the rainy day fund, and fund job training and preschool initiatives.

• Four Mississippi state senators are mounting an attempt to repeal the destructive tax cut passed there earlier this year. Their plan would devote the revenue to roads and infrastructure. They may have a hard time building support for that effort, considering members of the legislative committee formed to study the state’s tax code support the cuts and experts informing the work have suggested speeding up their implementation.

• Oklahoma lawmakers admitted today that the recent funding cuts to higher education, down nearly 16 percent from the previous year, were done in anticipation of a ballot measure to fund education initiatives. State question 779, that would have increased the sales tax by one percent, was defeated at the polls, leaving the state’s education system to pay.

• In its mid-year budget analysis, New York’s Budget Division reports that the state’s personal income tax collections “continued to be disappointing,” resulting in budget gaps in this and coming years. Projected gaps are due in part to the planned elimination of the state’s top personal income tax rate and the recent multi-year “middle-class” income tax cuts for joint filers making up to $300,000.

• Pennsylvania‘s Independent Fiscal Office reports a $1.7 billion structural deficit for the coming fiscal year that is expected to continue to grow. It is yet to be seen whether state lawmakers will raise necessary revenue through sustainable broad-based changes, or continue to kick the can down the road by relying on gimmicks, one-time fixes, and spending cuts.

• S&P downgraded New Jersey’s credit rating this week, the third of the three major ratings agencies to do so recently in response to the state putting a massive hole in its budget this year with a harmful, regressive package of tax cuts. This marks the tenth time the state’s ratings have been downgraded under Gov. Christie, the most for any governor in history.

What We’re Reading…

• National Council of La Raza released a fact sheet on how EITC expansion will benefit Latinos.

• The Economic Policy Institute released a new report this week on the need for progressive revenue increases to help meet the nation’s fiscal challenges.

• The Council of State Governments has a new report out looking at the impact of the aging population on state revenues.

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Ballot measures to levy a tax on sugar-sweetened beverages passed in three Bay Area, Calif., cities – Albany, Oakland and San Francisco – and Boulder, Colo., on Election Day. And just two days after, the Cook County (Illinois) Board of Commissioners also decided to tax sweetened beverages. A one-cent-per-ounce tax will be levied in Bay Area cities and Cook Country, and a two-cent-per-ounce tax will apply in Boulder.

The number of U.S. residents living in localities with a soda tax law increased by almost 350 percent last week, from 1.7 million to 7.5 million (though a number of these taxes have yet to take effect). This striking increase is largely due to Cook County—the county that includes Chicago and surrounding suburbs and has a population of over 5.2 million residents. Cook County is nearly 5 times as populous as the next largest city with a soda tax on the books, Philadelphia. The recent success of the tax has spurred proponents to set their sights on Santa Fe, New Mexico, and the state of Illinois, per reporting by Politico Pro Agriculture.

Cook County Board President Toni Preckwinkle pushed the soda tax proposal primarily as a revenue- raising measure to balance the county budget and avoid further layoffs. But as we noted in our recent report, The Short and Sweet on Taxing Soda, taxing sugar-sweetened beverages is regressive and an unsustainable source of revenue. U.S. soda consumption is reaching record lows. If the tax has its intended effect, it would drive consumption even lower, meaning localities may not be able to rely on it as a consistent source of revenue.

Despite the shortcomings of soda taxes, new research suggests that on balance, taxing sugar-sweetened beverages can improve public health and reduce healthcare spending. Whether those public health benefits outweigh the fiscal shortcomings of these taxes is a matter for the public and their elected officials to decide.