Tag: TaxJusticeBlog

A month ago we wrote about the hope of positive tax reform developments in Illinois in the midst of continuous budgetary chaos. Unfortunately, no such end is in sight.

Here’s an update:

While the campaign to adopt a graduated income tax made significant progress, lawmakers failed to call the bill to amend the constitution before the deadline due to lost support needed to satisfy the three-fifths supermajority requirement. Certainly not aiding the effort was a flawed impact analysis released last-minute by the Illinois Department of Revenue, which failed to account for the positive effect new tax revenues have on public investments. (Read ITEP’s critique of the study.) The earliest Illinois can reconsider this effort is in another two years.

Further, the legislative session just ended May 31st and no appropriations bills were passed, meaning the state is going into its second year without a budget. Any budget agreement that could be reached now has to meet a supermajority hurdle, making passage all the more difficult.

End-of-session reports read like an ancient Greek comedy, complete with ongoing debate among the primary actors, outlandish costuming, and increasingly fantastical plot elements as this unprecedented standoff drags out. The House, Senate, and governor have each presented their own budget proposals, none of which (to date) has received the necessary support from the others. The back and forth among the principal actors is scheduled to continue into June and may not see an end until after the elections in November. It’s difficult to envision a compromise on the horizon amid all the political costuming.

In the meantime, the state continues to face a growing backlog of unpaid bills, needing to rely on emergency procurements to keep basic operations open. Public universities prepare for further budget cuts, human service providers face difficult decisions, and public schools may not open on time or at all this fall. As the Sun-Times Editorial Board writes, absurdity reigns, leading to outcomes that are increasingly damaging to Illinois residents now and for years to come.

Illinois could move past these comedic storylines and tragic outcomes by reaching agreement on revenue solutions. While adopting a graduated personal income tax is a critical piece of real reform, there are many other options lawmakers can consider right now to end the madness and move toward fiscal stability.  

Thanks for reading the State Rundown! Here’s a sneak peek: West Virginia lawmakers reject cigarette tax increase but still negotiating. Alaska legislature passes compromise budget, punts on oil and gas credits. Louisiana legislature will enter second special session to discuss tax reform. Oklahoma lawmakers gut EITC, use budget cuts, and one-time gimmicks to close budget gap. Progressive policy advocates win expansion of working family tax credit in Minnesota.

— Meg Wiehe, ITEP State Policy Director, @megwiehe

West Virginia lawmakers resumed budget talks this week after a failure to reach a deal before Memorial Day weekend. Previous efforts to pass a budget stalled when House lawmakers rejected Gov. Earl Ray Tomblin’s proposed increase of the cigarette tax. The 45-cent-per-pack increase, along with similar percentage increases on other tobacco products, would have raised $76 million in new revenue. The House instead passed a budget bill with no new tax increases but $143 million taken from the state’s rainy day fund, an amount that Gov. Tomblin is unlikely to approve. The Senate will now take up the House measure in addition to a proposal to increase the sales tax. Lawmakers need to close a $270 million budget gap, the result of ill-advised tax cuts and low energy prices. If they do not pass a budget by July 1, the state government will shut down. Some political observers believe the cigarette tax hike is not yet dead, and business groups lent their support in a letter to lawmakers.

Oklahoma lawmakers finalized a budget last week, closing a $1.3 billion gap also caused by plummeting energy prices and big tax cuts enacted in better times. The legislature managed to pass a budget with limited tax increases by slashing spending on core programs and instituting a number of one-time revenue-raising gimmicks. Lawmakers made up a small portion of the budget deficit by eliminating the refundabability of the state’s EITC, saving just $29 million but reducing aid to 200,000 working families. This move has rightly been described as an “empathy gap” and a move that “makes the poor poorer.” Efforts to increase the gas tax for transportation spending, the sales tax for teacher salaries, and the cigarette tax for healthcare expansion all failed. Legislative leaders acknowledged that the state’s structural budget gap will remain next year. One positive outcome was the state’s elimination of its nonsensical “double deduction,” a law that primarily benefits wealthy taxpayers who itemize their deductions. For more details on tax and budget policy in Oklahoma, check out Aidan’s recent blog post.

The Alaska Legislature passed a compromise budget this week in an attempt to prevent layoffs for state government workers. Lawmakers broke an impasse by postponing decisions to cut tax credits for oil and gas producers and a range of revenue raising options. Instead, they agreed to restore budget cuts to senior benefits and K-12 and higher education, and to draw $3 billion (more than 40 percent of the fund) from the state’s Constitutional Budget Reserve to cover FY 2017 expenditures. The $8.8 billion compromise budget is still significantly below last year’s spending levels of $9.3 billion, largely due to overhauls of criminal justice and Medicaid spending. It is unclear how Gov. Bill Walker will respond to the spending plan. The legislature will remain in session to continue to address the state’s structural deficit.

Legislators in Louisiana will begin a second special session next week to address tax reform and the remaining budget deficit. Gov. John Bel Edwards issued the call for an extraordinary session from June 6th to June 23rd  to close a $600 million shortfall for FY 2017 and to resolve the state’s structural deficit. The governor also issued a plan for the session that includes possible changes in corporate and personal income tax rates, taxes on healthcare entities and reforming tax credits.

Progressive advocates in Minnesota won a big victory last week when legislators passed a significant expansion of the Working Family Credit, Minnesota’s version of the EITC. Under the changes, the size of the credit will grow for most eligible families and individuals, and the income cutoff for eligibility will be raised for some families and individuals. Moreover, the age requirement for childless workers to qualify for the credit will be lowered from 25 years old to 21 years old. Minnesota is the first state (after Washington, DC) to expand the portion of the state EITC granted to childless workers. About 386,000 Minnesota families and individuals will benefit from the credit expansion, which will reduce taxes by $49 million. The Minnesota Budget Project, which led the effort to expand the Working Family Credit, notes that the credit promotes work, helps kids succeed, and reduces racial income disparities.

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 Sebastian Johnson at sdpjohnson@itep.org. Click here to sign up to receive the Rundown via email.

Oklahoma’s legislative session came to a disappointing end late last week. Legislators now await Gov. Mary Fallin’s signature on a $6.8 billion budget that harms the state’s poorest residents and sets the Sooner State on an unsustainable fiscal path. Rather than delaying or canceling unaffordable cuts to the state’s income tax, lawmakers opted to rely heavily on one-time funds to fill a $1.3 billion shortfall. And despite the painful cuts being made to vital state programs, lawmakers still only managed to postpone, not solve, the state’s fiscal problems.

Over the past decade, Oklahoma lawmakers have repeatedly cut the state’s income tax – now resulting in more than $1 billion in lost revenue every year. The most recent reduction took place this January when the top tax rate was cut from 5.25 to 5 percent despite an official “revenue failure”. Attempts to roll back this tax cut were met with defeat—a fate that many other revenue raising options faced as well. Ultimately, proposals to increase taxes on cigarettes, alcohol, motor fuel, and purchases of services were all rejected.

Worse still, in a move that the Oklahoma Policy Institute rightly described as “deplorable,” the legislature changed the state portion of the Earned Income Tax Credit (EITC) from refundable to non-refundable, meaning that poor families earning too little to owe state income taxes will now be ineligible for the credit. This blow to Oklahomans who struggle to make ends meet on low wages has been referred to as a result of an “empathy gap” and as move that “makes the poor poorer.” This damaging policy change comes despite the EITC’s proven effectiveness and traditional enjoyment of bipartisan support, and despite the fact that it frees up only one fifth of what could have been raised by rolling back recent cuts to the personal income tax.

But what’s bad could have been worse. Thankfully, cuts to the state’s sales tax relief credit and the child tax credit were prevented, and full elimination of the state EITC was avoided. Another ray of light was repeal of the state’s “double deduction.” The bill, signed by Gov. Fallin, eliminates a nonsensical law that allowed Oklahomans to deduct their state income taxes from their state income taxes, primarily benefiting wealthy taxpayers who itemize their deductions.

Nonetheless, the overall budget – expected to be signed by Gov. Fallin this week – is a major step backward for Oklahomans. Rather than taking steps to avoid deep budget cuts, lawmakers refused to soften the blow by rolling back recent tax cuts, raising significant new revenue, or drawing on the full amount available from the Rainy Day Fund. No structural reforms were made to prepare the state for the long-term. There is no question that additional challenges still loom in Oklahoma.

Over the past few weeks the Tax Policy and Health subcommittees of the House Ways and Means Committee held Member Day hearings, in which Representatives pitched their favorite pet tax reform proposals to their colleagues in hopes of moving some of the measures forward.

A few things stand out: 1) many of our Representatives have great ideas on how to reform our tax code that makes it fairer, more equitable, and raises revenues, but; 2) the good proposals are overshadowed by a litany of horrible bills that would make our tax system less adequate and fair.

Here is a list of some of the best and worst bills covered during the Member Days:

The Good

Earned Income Tax Credit Improvement and Simplification Act (H.R. 902):  The Earned Income Tax Credit (EITC) is one of the most popular and effective anti-poverty tax credits. Awarded to low-income workers age 25 and older, the EITC and the Child Tax Credit (CTC), another tax credit for working families, lifted 9.8 million people out of poverty in 2014. In their current form, these credits fail to adequately meet the financial needs of childless workers and non-custodial parents. In 2012, the flaws in the EITC regarding childless workers resulted in 7 million workers being taxed into or deeper into poverty.

H.R. 902, introduced by Rep. Richard Neal (D-MA), seeks to rectify this oversight. In addition to directly increasing the overall tax credit available to single and married low-income workers with or without qualifying children, H.R. 902 also allows unmarried 21 year-olds with no qualifying children to claim the credit as long as they are not full-time students. Rep. Neal’s bill would provide10.6 million workers with an average tax benefit of $604.

Fairness in Taxation Act (H.R. 389):  Introduced by Rep. Jan Schakowsky (D-IL), the Fairness in Taxation Act aims to curtail the accumulation of wealth that the “super-duper rich” of the country have been enjoying for over a decade. The bill uses two mechanisms to accomplish this goal. The first is introducing five new income tax brackets between taxable incomes of $1 million and $1 billion (the top federal tax bracket currently starts at $373,000).

The second, and more important, policy in H.R. 389 would end the special preferential tax rate for capital gains and dividend income. Both capital gains and dividend income are currently taxed at much lower rates than ordinary income and are predominantly held by the richest among us. Citizens for Tax Justice (CTJ) projects that 94 percent of capital gains and 82 percent of qualified dividend income go to the richest 20 percent of the country, with 67 percent of capital gains and 38 percent of qualified dividend income going to the richest one percent alone. CTJ also estimates that Rep. Schakowsky’s bill would raise $849 billion in revenue over the next decade, helping to raise the revenue our country desperately needs to make more public investments.

Common Sense Housing Investment Act (H.R. 1662):  Introduced by Rep. Keith Ellison (D-MN), this bill would boost federal support for low-income housing. H.R. 1662 would cap the amount of a home mortgage eligible for a tax break at $500,000, down from the current cap of $1 million (only 4.5 percent of mortgages from 2011 to 2013 were above $500,000). The bill would also convert the regressive Mortgage Interest Deduction to a flat, 15 percent non-refundable mortgage interest tax credit.

These proposed changes would enable 16 million more homeowners with a mortgage to receive a bigger tax break. It would also make a significant contribution to the gap of 7 million affordable rental homes needed for extremely low-income families. Nearly half of renters spend more than 30 percent of their income on rent. The bill would raise $200 billion in revenue over the next decade, which would be invested into expanding the Low-Income Housing Credit and provide a source of permanent funding for the National Affordable Housing Trust Fund, supplying low-income homebuyers with even more support and financial security. These reforms would go a long way toward reversing the current upside down nature of the deduction, in which the wealthiest families get tens of thousands of dollars in housing support from these tax programs, while low- and middle-income families get next to nothing.

The Bad

Fair Tax Act (H.R. 25):  Introduced as H.R. 25 in every Congress since 2003 (and yet to make it out of Committee), the current iteration was introduced by Rep. Rob Woodall (R-GA). The Fair Tax Act would replace the entirety of the federal tax code (including corporate and income taxes) with a so-called 23 percent national sales tax (though in reality it’s more like 30 percent) on all purchases in the U.S.

An ITEP analysis of the Fair Tax  found that the bottom 80 percent of Americans would pay 51 percent more in sales taxes than they now pay in all federal taxes. In contrast, the best-off one percent of all taxpayers nationwide would get average tax reductions of about $225,000 per year.

Under the “Fair Tax,” revenues would likely fall dismally short of what the bill’s proponents claim; the Brookings Institute, CTJ, and the congressional Joint Committee on Taxation have each estimated that the national sales tax rate would have to be closer to 60 percent for the government to break even. Political leaders throughout history have shown a fondness for promoting simple solutions for complex problems that are very appealing on the surface, but overlook the intricacies of reality. The Fair Tax is no exception to this trend.

Create Jobs Act (H.R. 4518):  Introduced by Rep. Tom Emmer (R-MN), H.R. 4518 seeks to “allow the U.S. to better compete in the global economy.” The bill purports to accomplish this goal by cutting the federal corporate income tax rate from 35 percent to five percent below the average corporate tax rate for Organization for Economic Co-operation and Development (OECD) countries, or 10 percent if that reformed rate is still too high. The bill also requires a congressional joint resolution to approve a tax rate increase.

Rep. Emmer’s bill is based on the false premise that U.S. corporations are paying high corporate taxes, when in reality they are paying relatively low tax rates. While it is true that the U.S. statutory rate is 35 percent, most companies pay far less than that full rate. Thanks to the numerous subsidies and tax breaks afforded to big business, CTJ found 288 consistently profitable Fortune 500 corporations paid a federal income tax rate averaging just 19.4 percent over five years, with a third of the companies paying less than 10 percent and 26 corporations paying no federal income taxes at all. This explains why the United States corporate tax level is below the OECD average, even though our statutory rate is the highest. In other words, U.S. corporations already routinely pay below the OECD average, so all this bill would do is cut rates even lower and lose hundreds of billions in critical revenue.

Bad Exchange Prevention Act (H.R. 4297):  Introduced by Rep. Charles Boustany (R-LA) in response to guidelines issued by the U.S. Treasury Department regarding the OECD’s Base Erosion and Profit Sharing (BEPS) Action Plan, H.R. 4297 seeks to limit the sharing of corporate income and tax information between the U.S. and other countries. Also known as country-by-country reporting (CbCR), BEPS allows the U.S. and countries around the world to track international tax avoidance and evasion. H.R. 4297 would delay CbCR until 2017, and would instruct the Treasury to blacklist any foreign jurisdiction that “abuses” the confidential information in CbCR.

While safeguarding confidential information sounds like a reasonable requirement, it’s not. H.R. 4297 would effectively transform America into the world’s largest secrecy jurisdiction, in which corporations could hide behind their political friends in order to avoid disclosing financial information that provides evidence of tax fraud and evasion. Rather than joining the rest of the world in curbing the offshore tax avoidance, Rep. Boustany is complicit in the professional tax avoiders’ extortion of countries’ tax laws in the race to the bottom.

Last week, Tennessee Gov. Bill Haslam signed Senate Bill 47, affecting the state’s Hall Tax on dividend and interest income. But the unusual nature of the Hall Tax, and of this legislation, have created some lingering questions regarding this bill’s consequences.

Did Tennessee just eliminate its income tax? Yes and no. SB 47 reduces the tax rate from 6 percent to 5 percent in the first year, eliminates the tax entirely in 2022, and declares the legislature’s intent to gradually reduce the rate in the intervening years. In essence, lawmakers bought a ring and set a wedding date, but gave themselves six years to plan the wedding and find the money for it. That’s a big commitment, but not quite the same as tying the knot; people can change over the course of six years, and the Tennessee legislature will have new members and be operating in a different context six years from now.

So why the long engagement? While Tennessee had a modest budget surplus coming into this year, the Hall Tax brings in more than $300 million per year and Gov. Haslam and others expressed concerns about the state’s ability to afford full repeal of the tax. And because more than $100 million in Hall Tax revenues are distributed to Tennessee cities and counties each year, opposition to repeal from local officials was strong as well. By delaying repeal until well outside the current budget window (2022), current legislators can take credit for “eliminating” the Hall Tax without having to identify a way to deal with the associated revenue drop for another six years—if they are even still in office when that time comes.

Who will be harmed and who will benefit? As we have written about here, here, and here, the primary beneficiaries of this bill are a small number of the wealthiest Tennesseans. The highest-income 5 percent of households will receive 61 percent of the tax cut while only 14 percent of the benefit will flow to the 95 percent of Tennesseans who earn less than $173,000 per year. The remaining 25 percent actually ends up going to the federal government as Tennesseans will lose the ability to write off their Hall Tax payments on their federal tax returns and will pay more in federal taxes as a result.

The negative effects of Tennessee losing more than $300 million in revenue, meanwhile, are more likely to fall on everyday Tennesseans. Local officials have been vocal that they are “definitely not happy about” losing their share of the funding (three-eighths of total Hall Tax revenues) and will “have to either increase property tax or cut services or both.”

The state will ultimately face a similar decision, either having to cut funding for services like schools and public safety or raise other taxes to replace the lost Hall Tax funding. But finding potential cuts in Tennessee’s already lean budget will be difficult, as the state currently ranks 48th in education spending and 43rd in total state and local spending as a share of personal income.[1] Moreover, the fact that Tennessee is unusually reliant on its sales tax (2nd highest reliance on general sales taxes in the country) to fund government means that its budget situation is likely to grow increasingly difficult in the years ahead if Tennesseans’ consumption habits continue to shift away from (taxed) goods and toward (often untaxed) services and Internet purchases.

What is more, the Hall Tax was already one of the few progressive features of Tennessee’s tax structure, so any future tax increases to offset the revenue loss are likely to hit low- and middle-income Tennesseans the hardest. The Tennessee tax system is more regressive (meaning it captures a greater share of income from the lowest-income residents than the wealthiest) than in all but six other states, a situation that will only worsen under SB 47.

Is this an example other states can follow? Anti-tax advocates in other states might mistake this year’s action in Tennessee as an indication that their state may be able to eliminate its own income tax. In reality, however, Tennessee’s situation is unique enough that it’s unlikely to offer many lessons for would-be tax repealers elsewhere.

To be clear, Tennessee already lacks a broad-based income tax as the Hall Tax only applies to certain types of dividend and interest income. Moreover, the tax already includes generous exemptions that keep the vast majority of Tennesseans from paying anything at all. So while the Hall Tax is an important source of revenue for Tennessee’s state and local governments, it is also much more modest than the broad-based income taxes that advocates in other states sometimes seek to repeal.

The Hall Tax generates 1.3 percent of state and local tax revenue in Tennessee, the lowest share of any state outside of the seven states that have no personal income tax at all.[2] Other states that have recently considered eliminating their income taxes are many times more reliant on those taxes than is Tennessee. For example, personal income taxes are 15 percent of tax revenues in Arizona, 21.7 percent in Oklahoma, and 22.9 percent in Kansas.

And despite the Hall Tax’s comparatively small size, Tennessee lawmakers were only able to cut the rate by one-sixth this year—meaning that instead of losing 1.3 percent of public revenues, the short-term loss will be closer to 0.2 percent. In this light, income tax elimination in Oklahoma or Kansas would be about 100 times more damaging than what is occurring in Tennessee this year, and 17 times more damaging than what Tennessee is hoping to do over the next six years.

What’s the bottom line? Tennessee’s Senate Bill 47 has the potential to significantly reduce the adequacy and fairness of Tennessee’s tax system. But lawmakers’ desire to avoid making difficult budgetary tradeoffs led them to delay most of the bill’s impact until 2022, meaning that there is plenty of time for the law to be scaled back or repealed before it takes effect. Moreover, lawmakers and advocates in other states should be careful not to read too much into Tennessee’s experience—income tax repeal in a state like Tennessee means something very different than it does in a state deriving 15 to 20 percent, or more, of its revenue from taxes on income.

[1] Data in this paragraph are for Fiscal Year 2012-13 from U.S. Census Bureau Survey of State and Local Government Finances, the most recent data comparable across states; spending measure is direct general expenditures; Personal Income data from U.S. Bureau of Economic Analysis.

[2] Data in this paragraph also from U.S. Census Bureau Survey of State and Local Government Finance, Fiscal Year 2012-13.

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. 

Millionaire Migration Myth Debunked for Good?

A new study provides the best evidence yet that progressive state income taxes are not leading to any meaningful amount of “tax flight” among top earners. Read ITEP research director Carl Davis’ full analysis of this important study here.

Google and Tax Avoidance

How does Google’s restructuring open the door to tax avoidance? Through some creative accounting and “Delaware Alphabet Soup.” We explain all the details here.

Corporate Tax Watch: Icahn Enterprises, Airbnb and Coca Cola Enterprises

Read this edition of Corporate Tax Watch to see how tax reform could benefit Carl Icahn, more on the taxes Airbnb may (or may not) be paying, and how earnings stripping is impacting Coca Cola’s bottom line.

The Nation’s Most Irrational State Tax Break Falls Out of Favor

ITEP research director Carl Davis writes that the state income tax deduction for state income taxes paid is losing favor in the handful of states that offer this bizarre and circular deduction. Davis writes that Oklahoma’s deduction is on the chopping block; and rightfully so given that its mere existence was a legislative accident. Read the full post here.

State Rundown: Bad Ideas, Worse Budgets

This week’s state tax policy rundown focuses on tax happenings in Kansas, New York, Minnesota, Tennessee and Massachusetts. Read the full Rundown.

ICYMI: Dana Milbank’s recent column in the Washington Post raised some serious questions about why Donald Trump may not be releasing his tax returns. CTJ Director Bob McIntyre told Milbank he’d “be shocked if he (Trump) isn’t pretty much writing off his whole life.” Read Milbank’s full column.

If you have any feedback on the Digest, 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.

Thanks for reading the State Rundown! Here’s a sneak peek: Kansas marks tax cut anniversary with budget cuts. New York governor expected to sign tampon tax repeal. Minnesota legislators pass tax cuts amid chaos. Tennessee repeals its Hall Tax. Massachusetts legislators give initial approval to millionaire tax.

— Meg Wiehe, ITEP State Policy Director, @megwiehe

This week marks the fourth anniversary of Kansas Gov. Sam Brownback’s tax cut “experiment,” and the governor recently celebrated by signing another austerity budget. Brownback’s mid-biennium budget adjustment includes $97 million in cuts for most state agencies. The budget cut by 4 percent all agencies except for public safety and K-12 education, with higher education being hit worst. More than $30 million of the cuts were to the higher education system; the University of Kansas (KU) has already proposed a 4 percent tuition increase for next year. Meanwhile, a recent report found that the state’s highest paid public employee – KU basketball coach Bill Self – pays virtually no state income tax thanks to Brownback’s derided exemption of business pass-through income. Self receives the bulk of his $2.75 million in annual compensation through a limited liability corporation. Not quite the outcomes Brownback claimed would come from his income tax cuts.

New York Gov. Andrew Cuomo is expected to sign a bill that would eliminate the state’s sales tax levy on female hygiene products. Right now, the sales tax adds approximately 88 cents to an $11 pack of 50 tampons. The so-called “tampon tax” has come under fire in some circles for being regressive and an unfair imposition of the sales tax on a product that should be considered a necessity. Others, however, have noted that exempting products from the general sales tax base erodes the base over time, necessitating higher rates on other purchases. They also note that targeted sales tax credits for working families would be a better solution to sales tax regressivity.

Minnesota‘s legislative session ended in chaos this week, with lawmakers scrambling to pass a series of major deals but falling short. The legislature managed to pass a $260 million package of tax cuts before the Sunday night deadline but fell short on bills for transportation funding and public works. The tax cuts include property tax cuts for farmers and businesses, a new tax credit for Minnesotans with student loan debt, and credits to help Minnesota families with childcare costs. Interestingly enough, lawmakers also passed a $3 million sales tax exemption for the purchase of suites at sports stadiums, but not an exemption for ordinary game tickets. Gov. Mark Dayton has suggested he could call a special session in June to give lawmakers another shot at passing the transportation and public works bills. EDIT: The package of tax cuts also includes a strong expansion of the Working Family Credit, Minnesota’s version of the EITC. Under the changes, the size of the credit would expand for most families and individuals, and the income cutoff for eligibility will be raised for some families and individuals. Moreover, the age requirement for childless workers to qualify for the credit will be lowered from 25 years old to 21 years old. Minnesota is the first state (after Washington, DC) to expand the state EITC to childless workers. About 386,000 Minnesota families and individuals will benefit from the credit expansion, which will reduce taxes by $49 million.

Anti-tax advocates in Tennessee succeeded in their years-long push to eliminate the state’s Hall income tax on investment income. Gov. Bill Haslam signed a bill that cuts the tax rate from 6 to 5 percent this year, and that eliminates the tax entirely in 2022. The bill also says that its “intent” is for future legislators to enact additional, gradual rate cuts in the years before full repeal takes effect. The Hall income tax is levied on some dividend and interest income, and was expected to generate $341 million in revenue in FY 2017. ITEP data show that eliminating the tax would give the top 1 percent of Tennessee taxpayers an average $5,000 tax break while doing nothing for the vast majority of Tennesseans. As senior analyst Dylan Grundman notes, “The Hall Tax plays an important role in offsetting the otherwise regressive impact of Tennessee’s tax system. Overall, the state’s tax system captures a greater share of income from low- and middle-income people than from the wealthy but the Hall tax is one of the few taxes that runs counter to that trend.” Municipalities could struggle to make up lost Hall tax revenue, which delivers more than $100 million to the state’s cities and counties each year.

In a bit of good tax policy news, a proposed “millionaire tax” ballot initiative gained initial approval in Massachusetts. Lawmakers  voted 133-57 to advance a 4 percent surtax on income over $1 million. Massachusetts currently has a flat tax rate of 5.1 percent on all income, and the uniform rate is constitutionally mandated. To change this, the millionaire tax ballot initiative must be approved by at least 25 percent of lawmakers in a joint session during two successive legislative sessions. If lawmakers vote again to advance the measure next year then voters will have the chance to weigh in. If enacted, the millionaire tax would generate an additional $1.9 billion in revenue for transportation and education.

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 Sebastian Johnson at sdpjohnson@itep.org. Click here to sign up to receive the Rundown via email.  

A new study (PDF) released today provides the best evidence yet that progressive state income taxes are not leading to any meaningful amount of “tax flight” among top earners.

Stanford University researchers teamed with officials at the Treasury Department to examine every tax return reporting more than $1 million in earnings in at least one year between 1999 and 2011.  They found that while 2.9 percent of the general population moves to a different state in a given year, just 2.4 percent of millionaires do so.  Even more striking is that for the most “persistent millionaires” (those earning over $1 million in at least 8 years of the researchers’ sample), the migration rate is just 1.9 percent per year.  As the researchers explain: “millionaires are not searching for economic opportunity—they have found it.”

The researchers examined the specifics of where those few migrating millionaires decided to relocate.  They found that “outside of Florida, differences in tax rates between states have no effect on elite migration. Other low-tax states, such as Texas, Tennessee, and New Hampshire, do not draw millionaires from high-tax states.”

In other words, Florida is only one of the nine states without broad-based income taxes that seems to possess any kind of special allure for high-income taxpayers.  Given that reality, the study notes that “It is difficult to know whether the Florida effect is driven by tax avoidance, unique geography, or some especially appealing combination of the two.”  In any case, this study refutes the notion that repealing state income taxes can transform a state into a magnet for high-income taxpayers: it’s simply not playing out that way in eight of the nine states without such a tax.

None of this should be terribly surprising.  By definition, high-income taxpayers are already living comfortably.  A very small minority of them may be willing to uproot their lives in search of an even better bang for their buck, but they are the exception rather than the norm.  In fact, even when the researchers narrowed their focus to less disruptive migration options—moving just across a state border in regions where notable differences in tax rates exist—they were unable to find a meaningful tax effect in either the short- or long-term.  Despite the mythology, high-income earners do not simply pack their bags and leave in search of locales that will allow them to chip in less for public investments. 

You may have heard about Google Inc.’s restructuring last year, which resulted in the technology company becoming a wholly owned subsidiary of a new Delaware corporation called Alphabet Inc. What you may not know is how this restructuring can help the company potentially avoid millions in state taxes.

In a recent academic paper “Google’s ‘Alphabet Soup’ in Delaware”, the authors explain how Alphabet Inc. will allow Google to take advantage of the “Delaware loophole” to lower its corporate income tax. The Delaware loophole, which is detailed in the 2015 Institute on Taxation and Economic Policy (ITEP) report “Delaware: An Onshore Tax Haven”, is estimated to have cost states $9.5 billion in lost revenues over a 10-year period. It works like this:

A company sets up a “Delaware Holding Company,” which owns its intellectual property (IP), such as patents and trademarks. The company’s subsidiaries (in this case, Google Inc. and its affiliates) then pay royalties to the holding company (Alphabet Inc.) for the use of the IP. In Delaware tax law, corporations whose activities within the state consist only of managing “intangible investments” (including but not limited to stocks, bonds, patents, and trademarks) and collecting income from those investments are exempt from taxation on that income. At the same time, the corporation can deduct the royalty payments as a business expense on tax returns filed in other states where it has subsidiaries. Google’s restructuring provides Alphabet Inc. with the opportunity to exploit this strategy. For example, the company could artificially inflate the price of its IP and effectively shift all or most profits into Delaware where they won’t be taxed.

For states that use combined reporting, this profit shifting is not as worrying. The rule requires corporations with subsidiaries in multiple states to report the income of all of their subsidiaries for the purposes of determining their corporate income tax liability. In these states, Alphabet would have to report the royalty income of the Delaware holding company along with the income of all other subsidiaries, regardless of location, and apportion its total income among all the states where it is subject to tax. In contrast, states that use separate accounting, which allows corporations to report profits for each subsidiary independently, can see their tax bases significantly eroded as a result of corporations using this strategy. Adopting combined reporting is the best way that states can protect themselves from falling victim to the Delaware loophole and other tax-shifting strategies.

Should Google use this restructuring to avoid taxes, this wouldn’t be the first time it has employed complex accounting and paper work to reduce its tax bill: it funneled billions in profits to offshore tax havens through a series of foreign subsidiaries with a strategy that has been dubbed the “Double Irish With a Dutch Sandwich.” As of the end of 2015, Google had $58.3 billion in offshore “permanently reinvested” profits on which it pays no U.S. taxes, up from $47.4 billion in 2014.

In the press release announcing the restructuring last year, Google co-founder and Alphabet CEO Larry Page stated that the purpose of the restructuring was to allow more management scale and to “run things independently that aren’t very related.” Though we can only speculate about the degree to which the restructuring was motivated by tax considerations, it is undeniable that it has created new opportunities for tax avoidance.

A constant refrain among advocates for tax reform is that there are too many special breaks built into our nation’s tax system.  While some tax breaks are worthwhile, far too many are ineffective, unfair, complicated, or politically motivated.

But even the most flawed tax break typically has some kind of rationale—however flimsy—that its supporters can trot out in its defense.  Without a rationale or purpose, why would a tax break ever be enacted in the first place?

The answer is that sometimes tax breaks get enacted by accident.

Last week, the Oklahoma legislature sent Gov. Mary Fallin a bill—at her request—eliminating just such a break: a state income tax deduction for state income taxes paid.  Oddly enough, Oklahoma taxpayers who happen to claim itemized deductions can currently write off their state income tax payments when calculating how much state income tax they owe.  This bizarre, circular deduction did not come into existence because of its policy merits (there are none), but rather because Oklahoma accidentally inherited it when lawmakers chose to offer the same package of itemized deductions made available at the federal level.

The federal deduction for state income taxes paid exists primarily as a way for the federal government to aid state governments.  In effect, by letting taxpayers write off their state income tax payments, the federal government is indirectly providing states with a portion of the income tax revenue they collect.  Since a state obviously cannot provide aid to itself, however, this rationale is thrown out the window at the state level.  Accordingly, state deductions for state income taxes paid have been described as irrational, absurd, (PDF) and lacking “economic justification” (PDF).

Making matters worse, these purposeless tax breaks actually exacerbate the unfairness built into state and local tax systems.  According to an ITEP analysis, over half (58 percent) of the revenue lost through Oklahoma’s deduction flows to just the wealthiest 5 percent of taxpayers.

The good news is that this deduction seems to be on its way out.  New Mexico and Rhode Island both repealed their state income tax deductions in 2010 and Vermont followed suit in 2015.  Now, after years of urging from the Oklahoma Policy Institute, it appears that the Sooner State will join this group as well.

Once Gov. Fallin signs Oklahoma’s repeal into law, only four states will offer the deduction in full: Arizona, Georgia, Louisiana, and North Dakota.  A fifth state, Hawaii, allows the deduction only for taxpayers earning under $100,000 per year (or under $200,000 for married couples).  These nonsensical deductions may not last long, however, if tax reform advocates (PDF) in the remaining states are successful in their efforts (PDF).