Tag: TaxJusticeBlog

Donald Trump’s advisors have tried to spin his economic address earlier this week as yet another reboot of his campaign and of his tax reform plan.

Trump’s speech, coupled with the abrupt disappearance of his original tax plan from his campaign website, made it clear that his original tax plan has been “fired.”

He now embraces the higher personal income tax rate structure proposed by House Speaker Paul Ryan, and he also proposes a new tax break for child care expenses. Overall, however, the campaign has left many questions unanswered by releasing only limited details. This may be a deliberate strategy or a sign that the campaign has not fully fleshed out a revised proposal.

Among the unanswered questions:

1) How aggressively will Trump seek to close corporate loopholes? Even at the current 35 percent rate, U.S. corporate taxes are lower than those of most economically advanced/OECD nations. If the United States cuts its corporate tax rate without broadening the tax base, the nation’s corporate tax collections would spiral down and blow an even bigger hole in the federal budget. Corporate tax collections, mind you, are already at historically low levels. Under a best-case scenario argument for cutting the U.S. corporate income-tax rate, the U.S. would have to also aggressively close corporate loopholes and perhaps could settle on a revenue-neutral rate of 28 percent. But Trump proposes to drop the rate far below that level without closing even a single corporate loophole.

2) What about individual tax breaks? The personal income tax is equally riddled with unwarranted loopholes, and any sensible tax reform strategy must discuss how to deal with the elephant in the room: itemized deductions for mortgage interest, charitable contributions, and other expenses. Trump’s revised blueprint is silent on this point.

3) How would the revised Trump plan affect federal revenues—and the budget deficit? This is an area in which the contrast between Trump and his general election opponent, Hillary Clinton, has been most stark. Trump has proposed to cut taxes by $10 trillion over a decade, while Clinton’s plan would reduce the federal deficit somewhat over this period.

These blank spots notwithstanding, the dramatic reductions in tax rates outlined by Trump—a 15 percent corporate tax rate, a top rate of 33 percent for most individual income, a 15 percent rate on pass-through income, and the outright repeal of the estate tax—are a clear indication that no matter how aggressively Trump seeks to close loopholes, his plan overall would be a budget-busting giveaway to the best-off Americans.

Tax reform is never easy, but some parts are more painless than others. The easy part is cutting tax rates, and on this front the Trump plan is quite clear. Trump would repeal the estate tax while sharply cutting personal and corporate income tax rates.

The hard part of tax reform is paying for tax cuts: which tax breaks will be eliminated to make rate reductions affordable? And on this point, Trump remains virtually silent. Indeed, the biggest loophole-related change he announced this week is the full expensing of capital investments, which would create a giant new hole in the tax base. Until Trump provides more specifics on the hard work of loophole closing, the collection of ideas he presented this week may fit into the mold of a hyperbolic slogan, but it’s certainly not a real plan.  

This week’s Rundown features a troubling multi-state trend that would help shield the country’s wealthiest taxpayers from paying state income taxes, a message from voters about the Kansas tax cut experiment, and potential special sessions in Minnesota and Alabama. Also, be sure to check out the What We’re Reading section.  Thanks for reading the Rundown! 

— Meg Wiehe, ITEP State Policy Director, @megwiehe

• A New York Times report shows the troubling race to the bottom between a number of states including Alaska, Delaware, Nevada, New Hampshire, Ohio, South Dakota, Tennessee, and Wyoming – to attract trust funds controlled by the wealthiest Americans. States are doing so not only by slashing  taxes on such funds, but also by putting up barriers to protect the elite from child-support claims, divorce settlements, and the attempts of other states and the federal government to collect taxes owed.

• Tennessee officials are attempting to create marketplace fairness between online retailers and brick-and-mortar stores via a rule change that would require out-of-state sellers to collect state and local sales taxes. But opponents to the rule worry that other states will follow suit and level the playing field in their states as well – let’s hope they’re right! 

• Alabama Gov. Bentley has released his proposal for a constitutional amendment creating the state’s first lottery. The amendment would create a lottery commission but would not authorize casino gaming or affect “traditional bingo.” The legislature convenes Monday for a special session focused primarily on the lottery proposal, and lawmakers may also discuss the state’s outdated gas tax. 

• Recent primary elections point to a changing landscape for fiscal policy in Kansas in January 2017, as 14 supporters of Gov. Brownback’s failed tax policy lost their races. Whether those seats ultimately are filled by more moderate Republicans or Democrats, the new lawmakers are not likely to be advocates of the governor’s tax cuts, which presents an opportunity for the state to reverse course.
• Minnesota may have another chance to pass critical tax and public works funding bills during a special session  if the governor and legislative leaders can reach a deal regarding metro transit. State leaders resume talks this Friday.  

• Missouri voters will decide on two different cigarette tax increases in November after both measures were approved for the ballot this week. One is a 60-cent-per-pack increase that would raise more than $300 million, primarily for early childhood education. The other is a 23-cent increase that would raise $95-$103 million for transportation infrastructure funding.

• After reiterating her commitment to her no-tax pledge in the face of looming revenue shortfalls last week, New Mexico Gov. Martinez has now ordered state executive branch agencies to cut 5 percent out of their budgets and implement the cuts immediately.

What We’re Reading…    

• A Center for American Progress study found that an EITC expansion for workers without children would save billions each year by reducing crime and improving public safety.  
• Governing magazine summarizes state efforts to tax online streaming services such ase Netflix and Hulu and looks at Kalamazoo, Michigan’s turn to private donations for needed revenue. 
• Jared Bernstein in the Washington Post debunks the faulty correlation between the size of government and economic growth. 

If you like what you are seeing in the Rundown (or even if you don’t) please send any feedback or tips for future posts to Kelly Davis at kelly@itep.org. Click here to sign up to receive the Rundown via email. 

The U.S. general election kicked off this week, and that means we’re going to be hearing about a lot of tax proposals—some good, others very bad—from House, Senate, and Presidential hopefuls. While the Puerto Rican debt crisis has taken a back seat in politics due to political conventions and a contentious presidential race, there is some talk in tax circles about resurrecting a lucrative business-friendly tax benefit centered on the island: Section 936. This is a bad idea.

Also known as the Possession Tax Credit, Section 936 was a provision in our tax code enacted in 1976 ostensibly to encourage business investment in Puerto Rico and other U.S. possessions. Congress voted to phase out Section 936 in 1996, citing excessive cost and the very limited number of U.S. companies that received the tax break. In 2006, the phase-out was completed.

Section 936 worked by exempting from federal income tax profits earned by U.S. companies in Puerto Rico and other possessions (under certain conditions). Corporations were quick to set up subsidiaries in Puerto Rico, and massive tax-dodging and profit shifting soon followed.

Over the 30 year lifespan of Section 936, companies shifted billions in corporate income to their Puerto Rican subsidiaries to receive partial or full exemption from federal taxes. In the 80s, corporations had an estimated total of $8.5 billion in tax savings and, in 1987 alone, these profit shifting activities are estimated to have cost the Treasury Department $2.33 billion in revenues. In 1998, during the phase-out period of the credit and when corporations were significantly disinvesting in Puerto Rico, six companies had a total of $912 million in tax breaks thanks to Section 936.

Even while the credit reduced corporate tax bills, Puerto Ricans did not see a proportional benefit. In fact, Puerto Rico soon found itself stuck with the “finance curse,” which occurs when a nation’s political and economic institutions are increasingly oriented towards and co-opted by wealthy international elites to the detriment of its people.

This is evidenced by the discrepancies between corporate investment in Puerto Rico and the development of the island. Despite some economic growth, Puerto Rican per capita income remained less than 30 percent of the U.S. average and local unemployment remained more than double the mainland’s rate. Meanwhile, the firms located on the island enjoyed large profits and low tax bills. Pharmaceutical companies, by far the biggest beneficiaries of Section 936, enjoyed a $70,788 tax break per employee on the island in 1987. In general, when faced with the decision to make investments that maximized profits or promoted Puerto Rican development, firms overwhelmingly chose to pursue the former, eventually convincing the U.S. Congress that the costs of Section 936 greatly outweighed its benefits.

The possibility that Puerto Rico would suffer greatly from the finance curse was inherent from its beginning as a commonwealth. In 1952, Puerto Rico’s constitution was ratified. It included a severely shortsighted provision. Section 8 of Article 6 requires that the Puerto Rican government must make payments to reduce its public debt before paying any other expenses, including the funding of basic public services. From the start, economic institutions were working against the people of Puerto Rico.

Despite Section 936’s shortcomings, some U.S. legislators, backed by corporate lobbyists, are considering reenacting it. They argue that such a step is necessary in light of Puerto Rico’s current debt crisis. But such a step would be like putting a Band-Aid on a bullet wound with the bullet still inside the body. It may look nice from the outside, but the heart of the problem is merely covered up.

There are much better policy solutions to Puerto Rico’s debt crisis that will create sustainable growth. One option would be for the U.S. to expand the Earned Income Tax Credit (EITC) to include Puerto Rico, which it currently does not. Expanding the EITC in this way could encourage low-income and out-of-work Puerto Ricans to enter the labor force and help Puerto Rican businesses through higher demand for their products and services.

More broadly, Puerto Rico needs to embrace public investments, not new corporate tax breaks, as the best way toward economic development. To this end, the U.S. government needs to give Puerto Rico the ability to fully fund critical public investments rather than subjecting it to continued austerity policies to satisfy U.S. hedge funds and other wealthy investors that have bought Puerto Rican bonds cheaply and hope for a windfall if the bonds are redeemed at their face value.

Repealing the Possession Tax Credit was one of the few corporate tax-reform achievements in the 1990s. Bringing it back would be an expensive move in exactly the wrong direction.

Aaron Mendelson, a CTJ intern, contributed to this report.

Presidential candidate Donald Trump today announced a child-care tax break that offers nothing to the lowest-income, most vulnerable families, despite his claims to the contrary.

During a speech today in which he revealed the plan among other economic proposals, Trump said his economic policies are designed “especially for those who have the very least.”  But his proposed child-care tax break is incredibly light on details and, to the extent that it can be analyzed, it appears it will offer poor and even some middle- and upper-income families nothing.

Let’s start with those near (or below) the poverty line. The federal income tax is already designed to exempt most poor families. This doesn’t mean these families pay no taxes, of course—far from it. But it does mean that families earning too little to pay federal income taxes—including virtually all those living below the poverty line—can gain nothing at all from Trump’s plan to exclude child care expenses from taxable income.

Middle- and upper-income families are already eligible for a federal tax credit for dependent care expenses. The plan could benefit these families only if this new tax break is in addition to the existing credit. Again, the plan offers no clarity on this point. If the plan’s intent is to allow families to “double dip” by both excluding their child care from income taxation, and then taking a credit for the same expenses, it would offer a substantial—and likely regressive—income tax break for better-off families. If, however, the child care credit would be replaced with the deduction, then middle- and upper-income taxpayers could potentially get less help.

From a fairness perspective, Trump’s new exclusion would likely flip the existing tax break on its head. Right now, lower-income families can claim a credit for up to 35 percent of their expenses (up to a capped amount), and that percentage gradually drops to 20 percent for better-off Americans. By contrast, income tax exclusions of the sort Trump has proposed would pay for a higher percentage of child care expenses for high income families, since the tax savings would depend on their marginal income tax rate.

What makes this especially egregious is that this is an area where there is room to improve the tax system. Child care expenses can be a daunting financial burden for low-and moderate-income families. Simply making the federal credit refundable would help millions of families with children.  By choosing to create a new tax break that abandons the best features of the current child-care tax break rather than fixing its problems, Trump has missed an opportunity to truly help “those who have the very least,” as he claims he wants to do.

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.

Ridiculous Olympic Tax Break Would Complicate the Tax Code
As thousands of athletes compete in the Rio Olympics later this week, U.S. lawmakers appear to be competing for the most ridiculous legislative tax proposals. One gold medal contender is Sen. Chuck Schumer (D-NY), whose proposed plan to make cash prizes won by Olympic athletes exempt from the federal income tax. Read our take here.

Fiscal Policy Shake-up Comes to Energy States
The sharp decline in oil and other energy prices in recent years has saved consumers hundreds of dollars annually at the pump but also has left states that rely on energy-sector revenue clamoring to come up with policy ideas to make up for lost revenue. Here’s Aidan’s full piece.

Microsoft’s $39 Billion Tax Holiday Continues–But Ratings Agency Cries Foul
Stern warnings from credit rating agencies are generally not shrugged off lightly. Yet Microsoft has a straightforward, if crass, reason for ignoring Moody’s advice: tax avoidance. Matt’s analysis is here. 

Treasury Regs Aim at Ending an Estate Tax Dodge for the Very, Very Wealthy
Earlier this week, the U.S. Treasury Department proposed new regulations designed to prevent wealthy business owners from avoiding estate tax liability by artificially undervaluing their assets. Since congressional action does not appear to be forthcoming, Treasury’s draft regulations are an important step in preserving the estate tax. What you need to know about the new regs. 

State Rundown: Looming Revenue Shortfalls and Short-Sighted Tax Reform Talk
This week’s Rundown features a reiterated commitment to no new taxes in New Mexico, talk of a special revenue session in Oklahoma, tax debates in Mississippi, and a looming budget shortfall in Missouri. Read the Rundown here.

If you have any feedback on the Digest or tax stories you’re watching that we should check out too please email me kelly@itep.org
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For frequent updates find us on Twitter (CTJ/ITEP), Facebook (CTJ/ITEP), and at the Tax Justice blog.

As thousands of athletes compete in the Rio Olympics later this week, U.S. lawmakers appear to be competing for the most ridiculous legislative tax proposals. One gold medal contender is Sen. Chuck Schumer (D-NY), whose proposed plan would make cash prizes won by Olympic athletes exempt from the federal income tax. Though the Senate passed the bill through unanimous consent, the House won’t be able to vote on it until lawmakers return from recess in September (and after the Olympics are over).

The proposed tax break for Olympic cash winnings conveniently pops up every couple of years from grandstanding legislators. A bipartisan group of lawmakers championed an identical proposal before the 2014 Winter Olympics, with even President Barack Obama supporting the measure. In 2012, Sen. Marco Rubio and his counterparts in the House also proposed the Olympic cash prize tax exemption (puzzlingly, Rubio called the current tax code “a complicated and burdensome mess” in the same press release detailing his plan to add the Olympian tax exemption and thereby further complicate the tax code.)

These legislative proposals have been fueled by a fear-mongering 2012 press release put out by the Grover Norquist-led Americans for Tax Reform (ATR) asserting that Olympians could face up to $10,000 in taxes on their gold medal cash prizes. (The U.S. Olympic Committee awards $25,000 to gold medalists.) Politifact rated the claim as “mostly false,” since less than one percent of Americans pay the top tax rate of 35 percent that the ATR report falsely assumes.

There is no moral or economic case for exempting the earnings of Olympic athletes over other categories of workers. Is the work done by athletes really more important than that of computer programmers, doctors, firefighters, or soldiers?  Why exempt Olympic prizes while taxing recipients of the Pulitzer or Nobel prizes? It’s not the place of the federal government to decide whose profession is more valuable than anyone else’s, so Olympic athletes should receive no special treatment in the tax code.

The irony of the Olympic medal exemption proposal is that it is antithetical to the tax reform rhetoric coming from most lawmakers, which calls for the cleaning out of exactly these kind of special interest exemptions. In fact, the bill’s bipartisan support suggests that lawmakers on both sides of the aisle may be more interested in appealing to the public than in achieving true tax reform. Lawmakers would do better to pursue principled tax reforms that would raise revenue, decrease income inequality and close down pervasive corporate tax loopholes. If they did this, they would be truly deserving of a gold medal.

Earlier this week the U.S. Treasury Department proposed new regulations designed to prevent wealthy business owners from avoiding estate tax liability by artificially undervaluing their assets.

The tax avoidance strategy the new regs are designed to prevent takes advantage of a provision of the law that has to do with how minority interests in businesses are valued for tax purposes. Minority interests, and interests in companies that are hard to sell, are worth less than other business interests, and are routinely (and sensibly) valued less for this reason.  But this provision can be abused by wealthy people seeking aggressive estate-planning strategies. Someone whose assets, properly valued, would likely put them in the economic stratosphere—the less than one half of one percent of estates that would actually be subject to the federal estate tax—can reduce their estate’s apparent value by seeking out a business investment in which their minority interest would be valued much lower, for tax purposes, than other investment uses of the same amount of money.

Put another way, if you have $20 million in assets, abuse of this provision can allow you to squeeze it into a $10 million package for no purpose other than tax avoidance. The Treasury regs are intended to prevent these transactions only when they are clearly motivated by tax avoidance.

The technique Treasury wants to prevent clearly isn’t something just anyone is going to try. In 2016, estates and cumulative gifts valued at less than $5.45 million ($10.9 million for a married couple) are exempt from all federal taxes. Nor is it a strategy that’s easily available to owners of a small business or family farm for whom this single asset is the lion’s share of their estate. Rather, it’s a tax dodge that’s available to a small number of super-rich Americans who enjoy enough liquidity to contemplate moving tens of millions of dollars in assets around at a moment’s notice.

As things stand, estate tax cuts over the past two decades already mean the tax only applies to the very largest estates. Reversing this trend would require more than regulatory steps. Fortunately, Congress has reform options available in the form of the Responsible Estate Tax Act, which would reduce the estate tax exemption and crack down on other egregious estate tax abuses such as the “GRAT” loophole. But since Congressional action does not appear to be forthcoming, Treasury’s draft regulations are an important step in preserving the estate tax. 

This week’s Rundown features a reiterated commitment to no new taxes in New Mexico, talk of a special revenue session in Oklahoma, tax shifting debates in Mississippi, and a looming shortfall in Missouri. Be sure to check out the What We’re Reading section for a guide to income inequality trends and an article examining studies on tax and spending levels. Thanks for reading the Rundown!

— Meg Wiehe, ITEP State Policy Director, @megwiehe

• With New Mexico facing revenue shortfalls, some lawmakers are urging Gov. Susana Martinez to consider revenue solutions and save the state’s schools, roads, and public safety services from further funding cuts. But so far, Gov. Martinez has rejected these pragmatic pleas and only reiterated her devotion to her ideologically driven no-tax pledge.
• Oklahoma Gov. Mary Fallin is weighing whether to call the Legislature into special session to consider an alternative plan to fund teachers’ pay. Already under consideration is a 1 percentage point increase to the state’s sales tax, a proposal that will appear on the ballot this fall. Fallin’s proposed alternative would use, in part, $140.8 million that the state collected from cuts to state agencies. The call for a special session, however, faces criticism across the aisle.
• A Mississippi legislative “working group” has begun looking at the state’s tax structure with an intent to shift the responsibility to fund state services even further onto low- and middle-income families by slashing income taxes and replacing them with regressive sales taxes. And some are already hoping for “an overall reduction in taxes” despite the massive, regressive, and short-sighted tax cuts already enacted earlier this year.
• Results are in from a state study showing Missouri‘s state workers are some of the lowest-paid in the nation, and that these low wages “have led to high turnover rates, costing taxpayers additional money in overtime and training.” And the Missouri Budget Project reports that more revenue shortfalls could be looming. But one silver lining on this cloudy outlook is that slow revenue growth has so far saved the state from a tax-cut “trigger” enacted two years ago, buying legislators time to change course and avoid reducing the revenues used to pay state workers even further.

 What We’re Reading… 

• The Florida Policy Institute’s latest report calls for the state to carefully examine the “silent spending” it undertakes in the form of tax expenditures that total nearly $18 billion per year but receive very little scrutiny.
• CBPP’s guide to historical trends in income inequality.
• The New York Times reviews recent studies on tax and spending levels, including one important study that asks “How Big Should Our Government Be?” and concludes that a significantly higher level of public investment would improve security, opportunity, and middle-class lives without sacrificing economic growth.
• The Center for American Progress released a report this week, making the case for rainy day funds as a tool to help enact progressive policies.

If you like what you are seeing in the Rundown (or even if you don’t) please send any feedback or tips for future posts to Kelly Davis at kelly@itep.org. Click here to sign up to receive the Rundown via email. 

The sharp decline in oil prices since summer 2014 has allowed consumers to save hundreds of dollars annually at the pump, but it also has left some energy producing states clamoring to come up with policy ideas to make up for lost revenue.

Before the recent precipitous decline in oil and other fuel prices, states that rely on the energy sector for revenue enjoyed years of fiscal bliss thanks to the high price of natural resources. Rarely fretting about ways to pay for public services, many of these states found themselves so flush with funds that they began cutting taxes and offering corporate giveaways. With energy revenues flowing, lawmakers failed to make the tough, long-term decisions needed to ensure their states had a diverse portfolio of broad-based taxes.

Now that oil prices have remained comparatively low for the last two years, and the price and demand for coal, natural gas, and other energy commodities also have taken a hit, there is no way to know for sure when the fortunes of the energy industry may rebound. This reality imposes a revenue challenge for states with budgets that are heavily dependent on energy markets.

Many of the most consequential tax debates taking place right now are in states with a significant energy sector presence. States such as Alaska, Louisiana, New Mexico, North Dakota, Oklahoma, Texas, West Virginia, and Wyoming have been forced to find ways to fill budget holes in the past year, which in some cases has necessitated rethinking the very structure of their state tax systems.

How Did We Get Here?

To be sure, these states are reeling in part because of low-energy prices. But that is not the whole story. Most energy-reliant states celebrated “boom” times with ill-advised tax cuts and corporate giveaways. The most egregious example is Alaska’s elimination of its personal income tax some 35 years ago (Alaska is the only state to ever repeal a personal income tax). With near complete reliance on the energy sector, Alaska has no personal income tax or state sales tax to turn to in times of crisis.

Other states did not go as far as to repeal personal income taxes, but many made ill-advised tax cuts when they were awash in energy revenue. Louisiana’s decision to eliminate the “Stelly Plan” in 2008, for example, significantly reduced tax rates for the wealthy. This politically charged policy change cost the state an estimated $800 million a year. Over that same period, Gov. Bobby Jindal handed out lavish credits and rebates for corporations. As a result, this year alone the state has paid $200 million more in tax breaks than it has collected in corporate income and franchise taxes.

New Mexico lawmakers’ phased in cuts to the state’s top personal income tax rate, costing  an estimated $500 million in revenue per year. The damage done in the early 2000s continues to play out as the state struggles with year after year of budget challenges. Oklahoma’s shortfall was driven in large part by generous tax breaks and unaffordable, repeated cuts to the state’s income tax over the past decade. The most recent income tax rate reduction had the poorest timing of all, triggered this January despite an official “revenue failure.” Today this series of cuts comes with an annual price tag in excess of $1 billion in lost revenue.

North Dakota lawmakers slashed income tax rates for years, pushing to lower or even eliminate them as energy prices slumped. 2015 legislation alone reduced both individual and corporate income taxes across the board by 10 percent and 5 percent, respectively. While near the peak of its oil boom in 2011, voters concerned about service cuts overwhelmingly rejected a referendum to eliminate the state’s property tax.

Business tax cuts are a major contributing factor to West Virginia’s fiscal problems. The state’s elimination of its business franchise tax took full effect last year, and over the last several years the corporate income tax has been reduced as well.

State Actions This Year

Booms are followed by inevitable busts. Cutting taxes while flush with revenue is not advisable for energy-dependent states. Particularly for states with narrow tax portfolios that are highly reliant on the success of the energy sector.

To date, the tax policy changes enacted in energy states have been limited largely to regressive tax hikes, though there are indications that more meaningful tax reforms could be on the horizon. 

Tax Increases

Lawmakers in traditionally conservative states such as Louisiana, Oklahoma, and West Virginia all approved tax increases in 2016 to help address significant revenue shortfalls. Legislators in Louisiana raised $1.3 billion in new revenue through a 1-cent sales tax increase, the elimination of certain exemptions from the state sales tax base, and tax increases on beer, alcohol, wine, and tobacco. Lawmakers tried, but failed, to enact long-term personal income tax changes. A task force is now exploring comprehensive reform options for 2017. 

Tobacco tax debates were a common theme in energy states this year—West Virginia lawmakers also opted to raise tobacco taxes and Oklahoma lawmakers came close to doing the same.

While a cigarette tax increase was not ultimately enacted in Oklahoma, lawmakers did raise revenue by repealing the state’s “double deduction,” a nonsensical law that allowed Oklahomans to deduct their state income taxes from their state income taxes. In addition, they voted to change the state portion of the Earned Income Tax Credit (EITC) from refundable to non-refundable, a move that disproportionately affects low-income taxpayers by denying the credit to families that earn too little to owe state income taxes.

In New Mexico, Gov. Susana Martinez has reiterated her “no tax increase” pledge despite the state’s projected $600 million shortfall. Given the breadth of the revenue gap, state legislators have urged her to reconsider her position.

While major tax increases have yet to come to The Last Frontier, the significant fiscal debates that took place in Alaska this year are also worth mentioning. There, lawmakers discussed a range of options to remedy the state’s multi-billion-dollar deficit during the state’s regular legislative session and two special sessions called by Gov. Bill Walker.

Spending Cuts

In 2016, virtually every energy-reliant state cut vital public services. North Dakota saw cuts exceeding 4 percent earlier this year. That was followed by a May announcement for a total of 10 percent across-the-board cuts for the coming biennium. And the problem persists—Gov. Jack Dalrymple called a special session to address yet another shortfall.

Similarly, New Mexico lawmakers passed budget amendments early this year to cut spending across state agencies. New revenue gaps have since appeared, leading lawmakers to request that Gov. Susana Martinez call a special session. In Wyoming, Gov. Matt Mead recently announced another round of cuts, this time nearing $250 million. Those cuts and the associated loss of federal funds are expected to result in massive layoffs across the state.

Alaska, Louisiana, Oklahoma, and West Virginia accompanied their tax increases (or in Alaska’s case, proposals for tax increases) with cuts to state spending. And many additional cuts are anticipated for the coming years. For example, Texas lawmakers have asked most state agencies to lower funding requests for the coming biennium, with a call for 4 percent nearly-across-the-board cuts to many programs that are already underfunded.

Short-Term Fixes

While all of these states have made progress in closing their current budget gaps, there remains a need for revenue and structural reforms in the long run. One-time revenues were used heavily in both Oklahoma and West Virginia. In Oklahoma, 60 to 80 percent of the budget hole was filled with non-recurring revenue such as one-time bond issues and cash transfers. West Virginia filled its gap with a range of one-time funds, including a $70 million withdrawal from the state’s Rainy Day Fund.

Similarly, Louisiana’s solution was primarily dependent upon temporary tax measures. Changes to the state’s inventory tax credit and corporate franchise tax come with expiration dates attached.

And in Alaska, legislative inaction forced Gov. Bill Walker to veto large swaths of the state’s spending plan. In doing so, the governor capped next year’s Permanent Fund dividend, a flat dollar payment that most Alaskans receive each year, at $1,000. This is down more than 50 percent from the state’s 2015 dividend payout of $2,072. A restructuring of the state’s dividend program will likely be revisited next year.

Some Progress, But More Reforms Are Needed

While lawmakers in energy-sector states have taken steps to close their revenue shortfalls, not nearly enough is being done to address the structural inadequacies driving the problem. Inaction or short-term fixes were too often a theme for energy-reliant states in 2016. While partly driven by hope that energy prices will rebound, this tendency for delay is not a long-term solution. Rather than watching desperately for signs of improvement in energy markets, lawmakers should take matters into their own hands by reconsidering past tax cuts that have drained state coffers and by fundamentally rethinking the makeup of tax structures that have become over-reliant on energy revenues.

Earlier this summer, Microsoft announced it would finance its purchase of the professional social networking site LinkedIn by borrowing $26 billion, rather than dipping into its substantial hoard of offshore cash. The ratings agency Moody’s subsequently placed the company under review for a downgrade.

And just last week after Microsoft released its annual report, Moody’s warned that “[t]he long term rating could be downgraded if… the company undertakes additional large, debt funded acquisitions … without a substantial increase in cash balances.” This appears to be a long-winded way of telling Microsoft not to try the LinkedIn strategy again.

Stern warnings from credit rating agencies are generally not shrugged off lightly. Yet Microsoft has a straightforward, if crass, reason for ignoring Moody’s advice: tax avoidance. The company, over the years, has declared $124 billion of its profits to be “permanently reinvested” overseas, much of which appears to have been untaxed. As long as the company keeps these profits offshore, they will stay tax free—but repatriating the profits to (for example) pay for a domestic acquisition would require the company to pay federal income taxes on this income. Microsoft’s executives and tax attorneys appear to have decided it makes more sense to borrow the money domestically than to give up the tax-free status of some of its foreign cash.

How do we know that much of Microsoft’s off-shore cash is tax-free? The company’s latest annual report, released last week, discloses that it has $124 billion in permanently reinvested offshore profits, an astonishing $15.7 billion jump over the $108.3 billion it reported last year. The company says that the unpaid U.S. income tax on repatriation of these profits would be $39.3 billion. Since the tax due on repatriation is 35 percent less whatever has already been paid to foreign governments ($39.3 billion is 31.7 percent of $124 billion), Microsoft has paid an effective income tax rate of just 3.3 percent on its offshore cash. This is a clear indicator that most of its offshore cash is in zero-rate tax havens.

Paradoxically, even though Microsoft is telling the IRS this income is abroad—and staying abroad—much of it likely never left the United States. The U.S. Senate Permanent Subcommittee on Investigations has estimated that more than 75 percent of Microsoft’s so-called offshore cash is in U.S. bank accounts. This means that even though the company can’t invest this cash domestically in ways that create U.S. jobs, it can still enjoy the protections of U.S. banks without paying taxes on profits stashed in these banks.

It shouldn’t take a public scolding from a ratings agency to make corporate leaders stop subverting the U.S. tax system. The choice made by Fortune 500 corporations to hold their cash offshore for tax purposes has real, and damaging, fiscal consequences for our nation. The $39 billion in federal income taxes that Microsoft has not paid on its offshore stash would be more than enough to cover the cost of the Pell Grant program next year, for example. Fortune 500 companies collectively are avoiding up to $695 billion in taxes by stashing profits offshore. Congress, rather than the Moody’s rating agency, should hold corporations accountable and do away with gaping loopholes that allow such egregious tax avoidance. Ending the indefinite deferral of U.S. tax on foreign corporate income would take away the perverse incentive for companies like Microsoft to borrow billions domestically while sitting on far larger troves of unused “foreign” cash.