Tag: TaxJusticeBlog

The chances of a major tax cut package passing next year just got a lot larger. For the first time in years there will be unified Republican control of both chambers of Congress and the White House. Unified party control will likely pave the way for legislative action, including a tax cut.

The starting point for any tax legislation next year will almost certainly be Republican Speaker of the House Paul Ryan’s “A Better Way” tax reform plan released in June 2016. Overall, Speaker Ryan’s tax plan would cut taxes by $4 trillion over 10 years, with about 60 percent of the benefits of the tax cut going just to the top 1 percent of taxpayers.

Of the $4 trillion in tax cuts, more than $2.4 trillion of the revenue loss would come in the form of corporate tax cuts, where Ryan is proposing to lower the corporate income tax rate from 35 to 20 percent, allow for the full and immediate expensing of capital investments and move the international code to a territorial tax system where foreign profits will never be taxed. On the individual side, Ryan’s plan would reduce the progressivity of the tax code by lowering the top marginal tax rate to 33 percent, eliminating the estate tax (even though only the top 0.2 percent of estates owe even a penny of estate tax), creating a special low rate on pass-through business income and reducing the tax rate on capital gains and dividends to 16.5 percent (half the proposed top rate on wage income). To be clear, Ryan’s proposal does include some base-broadening measures such as eliminating most itemized deductions and eliminating the deductibility of net business interest payments, but as the numbers above show, these base broadeners do not come close to making up for the regressivity or cost of the other provisions in the proposal.

For his part, President-elect Trump released a revised tax plan in September, which would lose less revenue than his original plan and is more in sync with Ryan’s plan. Overall, Trump’s plan would cut taxes by $4.8 trillion over 10 years with 44 percent of the cuts going to the top 1 percent of taxpayers. Like the Ryan plan, Trump proposes to cut marginal personal income tax rates. But on corporate taxes, Trump’s plan goes further by lowering the corporate and business pass-through rate to 15 rather than 25 percent. He also would repeal the estate tax. Trump’s plan does differ from Ryan’s in several specific ways, such as capping itemized deductions rather than just eliminating most deductions as Ryan proposed. More broadly however, both Ryan and Trump propose to substantially cut taxes for the wealthy and corporations. For a complete look, ITEP has created a chart with the breakdown of how the plans compare.

One of the biggest questions yet to be resolved is the extent to which Republican lawmakers are interested in making tax reform legislation bipartisan. Republican Senator and Chairman of the Finance Committee Orrin Hatch indicated his intention to move any tax reform legislation in the committee on a bipartisan basis. If this is the case, it could have major implications as Democrats would likely push for the legislation to be less costly or even have a revenue-neutral impact. Additionally, Democrats would likely push for more tax breaks targeted to low-income individuals and for reductions in the amount of cuts going to the wealthiest taxpayers.

If Trump and the Republican leadership decide against a bipartisan approach or such efforts break down, there is also a path for lawmakers to pass tax reform legislation with little to no input from Democratic lawmakers. The key is that Republicans could use a legislative maneuver know as budget reconciliation to pass the tax reform bill, which could allow them to sidestep any efforts by Democrats in the Senate to filibuster the package. This is precisely the approach Republicans took to pass the Bush tax cuts in 2001 and 2003.

At a time of growing deficits and income inequality, it remains to be seen whether public pressure can scale back the cost and regressive impact of the tax cuts for the wealthy and corporations. Unfortunately, unless the public and lawmakers stand up for progressive taxes, that is exactly the direction we are heading under the leadership of the Trump administration. 

Over the past few weeks we’ve written about a number of tax-related questions that voters will see on their ballots next week.

On income taxes, California voters will decide whether to continue the state’s progressive income tax rates on high earners enacted in 2012, while Maine may create a similar high-income tax bracket to help fund public schools. Colorado could implement the nation’s first universal healthcare plan, funded by a 10 percent payroll tax. Oregonians will cast their votes on a hotly debated corporate tax increase for education, health care, and senior services.

Regarding sales taxes, Oklahoma voters could approve a constitutional amendment to raise the state sales tax by a percentage point to give teachers a raise and fund other education priorities. Meanwhile, Missouri could amend its constitution to prohibit modernizing the sales tax to apply to the growing service sector.

 Other tax questions on ballots this year include soda taxes in multiple cities, cigarette tax increases in four states (California, Colorado, Missouri, and North Dakota), and marijuana legalization and taxation initiatives in five states (Arizona, California, Maine, Massachusetts, and Nevada). And following years of state tax and funding cuts affecting cities, counties, and schools, many of these local jurisdictions are asking voters to approve new or higher local taxes to fill in for lost state funding.

In the Tax Justice Digest we recap the latest reports, blog posts, and analyses from Citizens for Tax Justice and the Institute on Taxation and Economic Policy. Here’s a rundown of what we’ve been working on lately.

Same Tax Shenanigans, Different Day
The annual financial report that Apple released last week indicated two things: One, the company continues funneling money offshore to avoid U.S. taxes on a scale unmatched by any other U.S. company ($216 billion and counting); and two, in spite of the European Commission’s (EC) recent finding that Apple has used its Irish subsidiary for an elaborate profit shifting scheme to illegally avoid taxes, the company has no intention of admitting any wrongdoing. Read more

Federal Gas Tax Remains at 90s-era Rates, But States Are Increasing Theirs
Lawmakers in 19 states and the District of Columbia have enacted gas tax increases or reforms since 2013 and more states will very likely follow suit next year. Check out ITEP Research Director Carl Davis’s recent post on which states have recently increased their gas tax.

Local Governments Put Tax Increases on the Ballot to Make up for Lost State Revenue
The strongest nationwide trend in local ballots is local governments asking voters to create new or raise local taxes to fill in for state funding that has been cut in recent years, often largely due to short-sighted recently enacted state tax cuts. Twenty-seven Ohio cities and villages will seek local income tax increases, and most of them cite state cuts as a primary reason. Atlanta, Ga., Boulder, Colo., Olympia, Wash., and several California cities also are voting on tax increases to fund services. Read more

Speaking of Ballot Measures, How about That Soda Pop Tax?
So-called sin taxes, such as cigarette taxes and alcohol taxes mostly are an accepted reality. But this new trend to consider taxing sugary beverages is more controversial. A new brief from ITEP looks at the advantages and disadvantages of taxing sugary beverages. Also, a recent blog post outlines which localities will vote on sugar taxes on Election Day.

Missouri Commission Eyes Reforms to the State Tax Code
Missouri’s tax code is in some ways stuck in the past, with income tax brackets that have not been adjusted for inflation since they were created in 1931. Even the state’s most recent tax changes enacted in 2014 are largely driven by outdated and debunked notions that slashing taxes on the wealthy is a path to economic growth. But the Missouri Study Commission on State Tax Policy has been taking a good hard look at these issues. Read more

If you have any feedback on the Digest or tax stories you’re watching that we should check out too, please email me rphillips@itep.org 

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Missouri’s tax code is in some ways stuck in the past, with income tax brackets that have not been adjusted for inflation since they were created in 1931, a corporate tax code that has not yet adapted to the multi-state structure of many of today’s businesses, and a sales tax base that includes a smaller share of the growing service sector than most other states.

Even the state’s most recent tax changes enacted in 2014 are largely driven by outdated and debunked notions that slashing taxes on wealthy families and joining Kansas’s race to the bottom are paths to economic growth. But the Missouri Study Commission on State Tax Policy has been taking a good hard look at these issues and more this year in an effort to identify ways to reform and modernize Missouri’s tax code.

The commission has been meeting and holding hearings throughout the year to review and study the structure, strengths, and weaknesses of Missouri’s tax laws, and consists of legislators, representatives of certain state agencies, and appointed members of the public with expertise in relevant areas. It will hold its final meeting and receive public testimony on tax policy issues in Kansas City on Nov. 15. I was fortunate to present to the commission on behalf of ITEP at its last meeting on Oct. 19 in St. Louis.

My presentation focused on principles of tax policy and how Missouri’s tax code stacks up in relation to those principles. As is true in all states to varying degrees, some aspects of Missouri’s tax code are upside down, out of date, and/or unnecessarily narrow. Missouri ranks as the 30th most unfair state and local tax system in the country, slightly above average. Reforms to address these issues include:

• Enacting a refundable state Earned Income Tax Credit would be an easily administered and high bang-for-the-buck way of bringing Missouri’s income tax code more in line with modern trends while helping offset the highly regressive nature of state sales and property taxes for low- and middle-income working families.

• Repealing Missouri’s deduction for federal income taxes – a $550 million tax break that mostly goes to the highest-income Missourians – would improve both revenue adequacy and tax fairness.

• Modernizing the state’s income tax brackets, which have been locked in place since the 1930s, could make the tax code more progressive but must be done carefully to ensure progressivity is improved without undermining revenue adequacy.

• Reforming itemized deductions, cancelling or rethinking regressive tax cuts enacted in 2014 that are set to be triggered in future years, enacting corporate combined reporting, and modernizing the sales tax base were also discussed.

• The state could also expand its sales tax base to include more of the growing service sector, though that option could be taken off the table by voters next week.

We look forward to hearing more about Missouri’s tax study commission and hope there is another productive conversation in Kansas City on Nov. 15.

Our “Revenues and Referenda” has so far focused on key state-level tax-related questions facing voters on Election Day. But many cities, counties, and school districts are posing questions to their residents Tuesday as well. Below we highlight some trends across states and a few of the more interesting local ballot questions.

The strongest nationwide trend in local ballots is that in many cases, local governments are asking voters to create or raise local taxes to fill in for state funding that has been cut in recent years, often largely due to short-sighted tax cuts enacted at the state level. For example, state support for K-12 schools remains below pre-recession levels in at least 23 states and the largest school funding cuts have often correlated with major income tax cuts.

Ohio is a case study in state-level tax slashing forcing costs onto localities that are now having to ask voters to approve local taxes to keep vital services afloat. The state eliminated its estate tax beginning in 2013.Eighty percent of its revenue went to cities and villages. Then the state cut its Local Government Fund in half as part of efforts to fill a budget shortfall caused by tax cuts. These and other measures have cut funding for local services by at least $1 million each in more than 70 Ohio cities. Twenty-seven Ohio cities and villages will seek local income tax increases, and most of them cite the state cuts as a primary reason. The measure in Cleveland, for example, would raise about $80 million to fund reforms in the police department and prevent layoffs.

Voters in Olympia, Washington, will consider enacting a local income tax of 1.5 percent on income over $200,000. This would raise $3 million to help local high school graduates and GED recipients attend community college or public university. The measure would also create the only income tax in Washington State.

State transportation and infrastructure funding has suffered as well, often due to failure to modernize state gas and sales taxes, and again some local entities are taking matters into their own hands. According to the Center for Transportation Excellence, “2016 will be a record-breaking year for transportation ballot measures. There will be 70 ballot measures in the United States” that could raise a combined $175 billion. Several California cities, for example, are voting on sales tax increases to pay for local transportation needs. Voters face similar questions in the Atlanta, Georgia, area.

Other localities are attempting to expand their tax bases rather than increase rates, most notably by taxing sugar-sweetened beverages. Three California cities and Boulder, Colorado, are among localities attempting to tax soda-pop.

The annual financial report that Apple released last week indicated two things: One, the company continues funneling money offshore to avoid U.S. taxes on a scale unmatched by any other U.S. company; and two, in spite of the European Commission’s (EC) recent finding that Apple has used its Irish subsidiary for an elaborate profit shifting scheme to illegally avoid taxes, the company has no intention of admitting any wrongdoing.

With the addition of its latest $29 billion in offshore cash, Apple now has amassed a $216 billion offshore stockpile, on which it appears to have paid a foreign tax rate of less than 4 percent. This means its unpaid U.S. tax bill is up to $67 billion. It seems the company remains adamantly opposed to paying taxes to any government on its alleged Irish profits.

The new financial report also shows that Apple’s spin machine doesn’t miss a beat. The EC’s August announcement made it clear that Apple must pay $14.5 billion in back taxes as a result of illegal deals with the Irish government. The company’s latest annual report goes out of its way to prey on the fears of U.S. policymakers by noting that if and when it’s forced to repay its illegal Irish tax breaks, “any incremental Irish corporate income taxes potentially due would be creditable against U.S. taxes.”

This warning may explain the U.S. Treasury Department’s unfortunate public opposition to the EC ruling. Perhaps officials are convinced that if Apple pays a billion dollars of tax to Ireland on profits that will eventually be repatriated to its Cupertino headquarters, that’s a billion dollars the U.S. government will never see—even though it should.

But this thinking is both misleading and wrongheaded. In its August announcement, the EC went out of its way to point out that some of the unpaid $14.5 billion could go to the United States, rather than Ireland, “if the US authorities were to require Apple to pay larger amounts of money to their US parent company for this period to finance research and development efforts.” Put another way, the EC’s main concern is not that Apple pays tax to Ireland, but that the company pays owed taxes to the country in which Apple’s allegedly Irish profits really were earned.

Congress certainly has both the motive and the means to require Apple to pay its taxes. It could require Apple (and other companies shifting their intangible profits from the U.S. to foreign tax havens, for that matter) to pay their fair share by ending deferral of tax on offshore profits. This would give an immediate shot in the arm to U.S. tax collections, and it would help counteract the corrosive public fear that tax rules are written for and by powerful corporate interests.

Beyond changing international tax rules, Congress could prevent Apple’s rampant tax avoidance by paring back more conventional U.S. tax breaks as well.

Besides indefinitely stockpiling even more cash offshore to avoid U.S. taxes, Apple further reduced its U.S. income tax bill by $407 million using tax breaks for executive stock options. The research and development tax credit knocked another $371 million off the company’s tax bill, and the special lower tax rate for domestic manufacturing yielded $382 million in tax reductions. These three tax breaks alone netted Apple more than $1.1 billion in U.S. tax breaks last year. We have argued that each of these tax break are unwarranted giveaways that should be repealed—but even defenders of these tax breaks should agree that it makes no sense to give them to a company whose tax avoidance strategies are just as inventive as the sleek products it manufactures. 

Maine voters will decide the fate of Question 2 next week, a ballot measure that increases taxes on the state’s wealthiest households and provides additional revenue for K-12 education.  If approved, a 3 percent tax surcharge would apply to taxable income above $200,000 generating more than $150 million annually for a new dedicated public instruction fund.  An ITEP analysis found that the measure would only impact Maine’s wealthiest 2 percent of households who currently pay an effective state and local tax rate lower than the other 98 percent of Mainers.

Proponents of the measure, led by Stand up for Students Maine, say that school funding has been falling short and years of tax cuts for wealthy Mainers are partially to blame.  Measure 2 would not only bring in additional revenue for K-12 spending, but it would also help to improve tax fairness by requiring the state’s wealthiest households to pay their fair share. 

Opponents argue that the new revenue generated by the measure will not solve public school inequities.  There is also concern that the three percent surcharge would make Maine’s top marginal personal income tax rate the second highest in the country behind California.

Polling results show Question 2 has strong support from potential voters.  If such support pans out at the ballot, Maine will have a more fair and adequate revenue stream for public education.

While New Jersey is getting plenty of attention this week for increasing its gas tax for the first time in decades, it’s worth remembering that the Garden State is not alone in boosting its gas tax to fund infrastructure improvements. Lawmakers in nineteen states and the District of Columbia have enacted gas tax increases or reforms since 2013 and more states will very likely follow suit next year. Here’s a quick rundown of where state gas taxes have been increased or reformed since 2013:

2016 Enacted Legislation

1. New Jersey: A 23 cent per gallon increase in the gasoline tax took effect on November 1, 2016. The diesel tax will rise by a similar amount next year in two stages (on January 1 and July 1).

2015 Enacted Legislation

2. Georgia: A 6.7 cent increase took effect July 1, 2015. A new formula for calculating the state’s tax rate will allow for future rate increases alongside inflation and vehicle fuel-efficiency improvements. This will allow the tax to retain its purchasing power in the years ahead.

3. Idaho: A 7 cent increase took effect July 1, 2015.

4. Iowa: A 10 cent increase took effect March 1, 2015.

5. Kentucky: Falling gas prices nearly resulted in a 5.1 cent gas tax cut in 2015, but lawmakers scaled that cut back to just 1.6 cents by setting a minimum “floor” on the state’s gas tax rate. The net result was a 3.5 cent per gallon increase relative to previous law.

6. Michigan: The state’s gasoline and diesel taxes will rise by 7.3 cents and 11.3 cents, respectively,on January 1, 2017. Beginning in 2022, the state’s gas tax will begin rising annually to keep pace with inflation.

7. Nebraska: A 6 cent increase was enacted over Gov. Pete Ricketts’ veto. The gas tax rate will rise in 1.5 cent increments over four years. The first of those increases took effect on January 1, 2016.

8. North Carolina: Falling gas prices were expected to trigger a gas tax cut of 7.9 cents per gallon, but lawmakers scaled that cut down to just 3.5 cents—resulting in a 4.4 cent increase relative to previous law. Additionally, a reformed gas tax formula that takes population and energy prices into account will bring further gas tax increases in the years ahead.

9. South Dakota: A 6 cent increase took effect April 1, 2015.

10. Utah: A 4.9 cent increase took effect on January 1, 2016. Future increases will occur under a new formula that considers both fuel prices and inflation. This reform made Utah the nineteenth state to adopt a variable-rate gas tax.

11. Washington State: An 11.9 cent increase was implemented in two stages: 7 cents on August 1, 2015 and a further 4.9 cents on July 1, 2016.

2014 Enacted Legislation

12. New Hampshire: A 4.2 cent increase took effect July 1, 2014.

13. Rhode Island: The gas tax rate was indexed to inflation. This resulted in a 1 cent increase on July 1, 2015 and will lead to further increases in most odd-numbered years thereafter (2017, 2019, etc).

2013 Enacted Legislation

14. Maryland: The first stage of a significant gas tax reform, which tied the tax rate to inflation and fuel prices, took effect on July 1, 2013. Since then, the rate has increased by a total of 10 cents above its early-2013 level.

15. Massachusetts: A 3 cent increase took effect July 31, 2013.

16. Pennsylvania: The first stage of a significant gas tax reform, tying the rate to fuel prices, took effect on January 1, 2014. So far the rate has increased by 19.1 cents per gallon.

17. Vermont: A 5.9 cent increase and modest gas tax restructuring took effect May 1, 2013. Since Vermont’s gas tax rate is linked to gas prices, however, the actual rate has varied since then.

18. Virginia: As part of a larger transportation funding package, lawmakers raised statewide diesel taxes effective July 1, 2013, as well as gasoline taxes in the populous Hampton Roads region. Outside of Hampton Roads, gasoline taxes are 1.3 cents lower than they were before the reform, but a new formula included in the law will cause the tax rate to rise alongside gas prices in the years ahead.

19. Wyoming: A 10 cent increase took effect July 1, 2013. Gov. Matt Mead’s signature on this increase made Wyoming the first state to approve a gas tax increase in over three and a half years.

20. District of Columbia: Legislation approved in 2013 has yet to impact DC’s gas tax rate in practice, though by tying its tax rate to fuel prices the District opened the door to potential gas tax rate increases in the future.

Voters in Albany, Oakland and San Francisco, Calif., as well as Boulder, Colo., will soon decide whether their cities should tax soda and other sugar-sweetened beverages. Proponents of sugar taxes are touting these ballot measures as public health initiatives that would reduce excess consumption of sugary drinks linked to obesity, type 2 diabetes, and tooth decay. Similar taxes were enacted in Berkeley, Calif., in 2014 and in Philadelphia, Pa., earlier this year.

You can read more about the advantages and disadvantages of taxing sugary drinks in our new report, The Short and Sweet on Taxing Soda.

The ballot measures would levy an excise tax ranging from 1 to 2 cents per ounce on producers and distributors. A 12-pack of 12-ounce sodas that costs $4 now would be $5.44 after the tax in the California cities and $6.88 in Boulder. The tax would be applied to sodas, energy and sports drinks, sweetened iced teas and lemonades, and juices with added sugar. It would not apply to diet sodas, milk products, naturally sweet beverages (such as 100 percent fruit or vegetable juice), meal replacements, baby formula, drinks taken for medical purposes, or alcohol (which is subject to a separate tax).

The battle over soda taxes has drawn big money on both sides of the campaign. California leads the country in campaign contributions for ballot initiatives, and the Bay Area soda tax measures have drawn nearly $14 million to campaign initiatives. Opponents of the taxes, largely funded by the American Beverage Association, have spent $10 million on television ads, while supporters, including former New York Mayor Michael Bloomberg, spent $3.7 million in San Francisco and Oakland.

While proponents of the taxes argue that they are necessary public health measures, opponents counter that the taxes are regressive and will hurt low-income communities. They also stress the taxes will hurt small retailers who, they claim, will have to raise the price of all their products to cover the new tax. Preliminary interviews from a UC Berkeley researcher examining the impact of Berkeley’s tax did not identify any retailers who reported raising prices of non-food items to cover the beverage tax. And Albany’s measure specifies that the tax exempts “small retailers.”

Many campaigns against the taxes have framed them as a “grocery tax” and suggested that lawmakers may levy taxes on other food products later if this is enacted. This is misleading because first, taxing other groceries wouldn’t achieve the public health goals of these measures, and secondly, most states that don’t tax groceries already exclude soda from that exemption. This means soda is already subject to the alleged “grocery tax” by being included in the general sales tax base.

The public health principle behind taxing sugar-sweetened beverages is the same as taxing cigarettes or other so-called vice products. A price increase should decrease consumption, thus decreasing the negative health outcomes associated with consumption.  But the link between sugary drinks and obesity or diabetes isn’t as straightforward as the link between tobacco and cancer. Many other factors, such as family history and physical activity, determine a person’s likelihood for obesity or diabetes. Further, although sugar-sweetened beverages are responsible for most of the calories from sugar consumption and the body digests liquid sugar differently than sugars in solid foods, sugary drinks represent only a small portion of most people’s total daily caloric intake.

Despite their public health goals the ballot measures in California cities are not well targeted to reduce sugar consumption. The taxes are determined by the calorie content of drinks rather than sugar content.  If the public health goal is to reduce sugar consumption, then sugar content should determine the tax.

A similar ballot measure in 2014 failed in San Francisco. Although the measure received a majority of the vote, it fell short of the required two-thirds majority. This year’s measure will only require a simple majority vote to pass. If passed, San Francisco projects the tax will generate $15 million annually and would make it the second largest U.S. city with a tax on sugary drinks.

If all three California cities pass their ballot measures this year, more than 20 percent of Bay Area residents could expect to pay more for sugar-sweetened beverages. The measures in Albany and Oakland are expected to generate $223,000 and $6 million annually for the cities’ respective general funds. The city of Boulder estimates the tax would generate $3.8 million in revenue to be used for a variety of public health campaigns to combat obesity.

As our report outlines, soda taxes like other consumption taxes are inherently regressive. But the excess sugar content in sugary sweetened beverages have public health implications, and new research suggests soda taxes can improve public health and reduce healthcare spending. Voters will have to weigh all of this at the polls in November.

Read the Short and Sweet on Taxing Soda