Tag: TaxJusticeBlog

If a group of Walgreens shareholders get their way, the drug retailer will restructure itself to become — on paper — a foreign company for tax purposes. It’s likely that nothing would actually change in terms of Walgreen’s business or management. The scheme is a simply a gimmick to avoid taxes. The bad news is that the laws that are supposed to to prevent this kind of tax avoidance are weak, and Congress, particularly its Grover Norquist-directed contingent, has shown no inclination to address this sort of problem. The good news is that the Obama administration has at least proposed a reform that probably would prevent this sort of corporate tax avoidance.

In some parts of the United States, there is a Walgreens every few miles or even every few
blocks, and it’s difficult to think of a company that seems more American. But tax rules don’t always conform with common sense.

Walgreens recently acquired nearly half of the Swiss-based pharmacy chain Alliance Boots, and could acquire a majority of the company. A group of hedge funds that own almost 5 percent of Walgreens’s stock demand that it use the merger to officially become a “foreign” corporation for tax purposes. This type of maneuver is often referred to as a corporate “inversion.”

When a corporation renounces its Americanism, little or nothing about the way the company does business or is managed changes, and yet the company can claim to be a brand new entity incorporated in another country. For example, a U.S. corporation can merge with a foreign corporation resulting in a new company that is 80 percent owned by shareholders of the original U.S. corporation and still be treated as a foreign corporation for tax purposes. This is true even if the new company is managed and controlled in the United States.

Some anti-tax types argue that the problem facing Walgreens and other American corporations is that the United States taxes both domestic and offshore profits, and that this is unfair. But that’s neither true nor the real motivation behind corporate inversions.

U.S. taxes levied on American corporations’ offshore profits are extremely minimal or non-existent in practice. One reason for this is that American corporations get a tax credit equal to any taxes they pay to foreign governments. Another reason is that companies are allowed to “defer” U.S. taxes until they officially bring their offshore profits to the U.S.

The real reason American corporations sometimes invert is that it makes it easier to avoid U.S. taxes on their U.S. profits. Corporate inversions are often followed by “earnings-stripping,” which makes U.S. profits appear, on paper, to be earned offshore. The American part of the company is loaded up with debt that is owed to the foreign part of the company, so that interest payments officially reduce the American profits, which are effectively shifted to the foreign part of the company.

Congress can tighten up rules to prevent all this from happening. As CTJ has explained, under a reform included in President Obama’s most recent budget plan, a company that results from the merger of a U.S. corporation and a foreign corporation will be taxed as an American company if more than half its voting stock is owned by shareholders of the original U.S. corporation. That’s far more reasonable than the current rule, which would allow the resulting company to pretend that it’s a “foreign” corporation for tax purposes even if 80 percent of its voting stock is still owned by the shareholders of the original U.S. corporation.

Under another part of the Obama proposal, the resulting company would be taxed as an American corporation (regardless of how much the ownership has or has not changed) if it has substantial business in the U.S. and is managed and controlled in the U.S.

The President’s budget also includes a proposal to make it more difficult for all U.S. corporations (not just those involved in inversions) to engage in earnings stripping.

It’s impossible to know what Walgreens will do. Maybe it will be too ashamed to renounce its ties to the U.S., or fear customer blow back. But Congress should enact common sense reforms to ensure that it and other American corporations don’t avoid U.S. taxes simply by pretending to be foreign companies.

Photo via Kai Morgener Creative Commons Attribution License 2.0

New Hampshire’s gas tax will be increasing for the first time in nearly 23 years under a bill that will soon be signed into law by Gov. Maggie Hassan.  This increase comes on the heels of gas tax increases or reforms enacted in six states and the District of Columbia last year.

The 4.2 cent increase won’t be enough to offset the loss in purchasing power that the state’s 18 cent tax has seen over these last two decades, but it will help generate some long-overdue revenue for transportation infrastructure.  Unfortunately, New Hampshire lawmakers chose not to allow the tax rate to rise alongside inflation in future years, as is the case in 18 states today.  But proposals for this kind of reform are still alive this year in at least three states:

Delaware: Governor Jack Markell continues to make the case for raising his state’s gas tax by 10 cents and linking the tax rate to inflation in future years.  The plan has received a lukewarm reception in the legislature where lawmakers are up for reelection this year, but Markell is right when he describes the basic problem with not adjusting the tax for inflation: “It’s not political. It’s not philosophical. It’s math.”

Iowa: It seems that a gas tax increase is always just out of reach in the Hawkeye State, but some lawmakers were recently encouraged to hear that Governor Terry Branstad thinks reforming the tax so that it grows alongside gas prices is a good idea.  While a gas tax increase or reform in Iowa is unlikely this year, it’s not impossible.

Michigan: The Republican majority in Michigan’s House recently unveiled a plan that would increase the state’s diesel tax and allow for future gas and diesel tax increases tied to the price of fuel.  The plan’s proposal to redirect millions in revenue away from the general fund and toward roads and bridges is troubling, but the fact that Michigan has an all-year legislative session means that lawmakers have plenty of time to work out these kinds of problems before voting on gas tax reform.

The anti-taxers are at it again in Missouri. The House and Senate for the second time in as many years passed a bill that would lower taxes on the wealthiest Missourians and reduce taxes on business income.

Fully aware Missouri Gov. Jay Nixon doesn’t support these irresponsible cuts, the Republican lawmakers behind this plan aren’t resting on their laurels; they’re working to drum up enough support to override an anticipated veto.

This tax cut package (Senate Bill 509) would eliminate the state’s top income tax bracket and introduce a 25 percent deduction for business income; It also includes a token exemption for low-income Missourians. A Missouri Budget Project report, using data from our partners at the Institute on Taxation and Economic Policy (ITEP), found that the poorest 20 percent of Missourians would see a tax cut of just $6 while the top one percent of families would see an average tax cut of $7,792.

Interestingly, at least one legal expert notes the bill’s language may be fatally flawed by not just eliminating the top tax bracket (which starts at $9,000), but actually doing away with taxes on income over $9,000. Such a drafting error would effectively end the state’s income tax. It would also balloon the bill’s price tag from $620 million to $4.8 billion.

The Governor hasn’t yet vetoed the bill and is instead allowing time for more administrative review. But his feelings on the bill are pretty clear. In a statement released Tuesday he said, “With the simple stroke of my pen, this bill would separate Missouri from every state in the nation – as the only one unable to meet even the most basic obligations to its people.”

This isn’t the first time Missouri legislators have tried to give the wealthy a tax break at the expense of everyone else.  In 2013, Gov. Nixon vetoed a regressive tax cut package passed by Republican lawmakers that would have cost the state $700 million annually. In his veto message the Governor called the legislation an “ill-conceived, fiscally irresponsible experiment that would inject far-reaching uncertainty into our economy, undermine our state’s fiscal health and jeopardize basic funding for education and vital public services.”

Last year, in a victory for tax justice advocates, his veto withstood an attempted override by the legislature.  Stay tuned as this debate over bill language, state funding, and fairness play out once again.

Have you recently purchased a multimillion dollar piece of artwork (say, a $142 million Francis Bacon)? If the answer is yes, we have a great tax loophole for you. Rather than immediately bringing the piece of art home with you — in which case you would be expected to pay use or sales tax on the purchase — first loan it for a few months to a museum in a state that doesn’t have a use or sales tax. Museums in these states aren’t complaining about this “first use” exemption, which is found in many state tax codes, but taxpayers across the country should be. The buyer of the aforementioned Bacon painting will likely save $11 million in Nevada use tax by loaning it for 15 weeks to a museum in Oregon.

The most recent development in the income tax fight in Illinois comes from Chicago Mayor Rahm Emanuel, who ruled out a city income tax last week. Emanuel faces serious pension gaps in his municipal budget, which is why he is pushing for a $250 million increase in property taxes. But some, including Chicago Tribune columnist Eric Zorn and Center for Tax and Budget Accountability Executive Director Ralph Martire, think the mayor’s position is misguided and that a city income tax is worth considering. Regular Quick Hit readers will find Zorn’s and Martire’s arguments familiar: unlike property taxes, income taxes can be easily targeted at those most able to pay. ITEP’s own Matt Gardner was quoted in Zorn’s column, rebuffing arguments on the other side that a city income tax will drive people out of the city and kill jobs.

Arizona Governor Jan Brewer signed a pair of business tax cuts into law last week. In addition to a sales tax exemption for electricity used by manufacturers, she also signed a $5 million tax break that many expect will only benefit Apple, Inc. Regular readers may recall that Apple currently has billions of dollars stashed in foreign tax havens.

Oklahoma lawmakers have gone over a quarter century without approving an increase in their state’s gasoline tax, and have instead opted to fund transportation by redirecting money away from other areas of the budget. But that redirection of funds may have gone too far, as the Oklahoma Policy Institute explains that “Oklahoma’s transportation spending has grown considerably at a time when almost every other area of public services has seen cuts or flat funding.” Now lawmakers, at the urging of 25,000 Oklahomans who recently rallied at the state capitol, are considering legislation that would boost funding for schools by scaling back the amount of general fund money being spent on transportation.

Unscrupulous lenders in Texas are takingadvantage of homeowners struggling to pay their property taxes–a practice Texas lawmakers could halt by providing relief to homeowners once property taxes reach a certain percentage of income.

This form of predatory lending has nothing to do with more common payday advances, tax refund anticipation loans, or auto title loans. Instead, property tax lenders pay off homeowners’ delinquent taxes and allow them to repay the loan over a set period. These lenders take advantage of consumers much in the same way as other predatory companies by offering loans at usurious rates and entangling customers in a web of debt that most can ill afford.

The industry, not surprisingly, claims it provides a service to homeowners facing financial pressure from rising property taxes, but as Robert Doggett, an attorney for Texas Rio Grande Legal Aid, explained, these borrowers are “jump[ing] from a frying pan into a fire.” Property tax loans, which totaled $224 million in 2011, give the lender first priority at recouping its money at foreclosure.

“Low” Taxes Cost

Texas prides itself on being a low-tax state. But in truth its regressive tax structurerequires fairly high tax payments from poorer residents. The poorest 20 percent of Texans pay more of their income in taxes than the rest of the state’s population, and they pay more than low-income residents in all but five states. This is in part due to high sales and property taxes.

Just as payday loans are not the solution to persistent poverty and the plethora of low-wage jobs, property-tax loans are not a solution for homeowners struggling to pay property taxes.

Property-tax lenders are a business foremost concerned with profitability. They don’t have consumers’ best interest in mind. While a local government may be willing to put a resident on an installment plan to prevent foreclosure — and all the negativeeconomic and social costs that come with it — private property tax lenders are all too happy to scare consumers into predatory loans and push homes into foreclosure.

State authorities are trying to regulate the industry, and state lawmakers have recently passed legislation that would give homeowners better options for paying off delinquent property taxes. But one simple way to prevent the root cause of the problem has been overlooked: a property tax circuit breaker.

Policy Solution

Property tax circuit breakers provide a tax credit to homeowners (or, in some cases, renters) once property taxes reach a certain percentage of their income. Thirty-three states and the District of Columbia have some form of the credit in their tax code, but not Texas. In fact, Texas Gov. Rick Perry vetoed legislation in 2009 that would have required the state comptroller merely to study the feasibility of a circuit breaker. Circuit breakers protect low- and moderate-income taxpayers from unaffordable property tax increases, which helps avoid tax delinquency and the subsequent need for property tax loans. Texas would be wise to consider such a policy.

More than a decade ago, a Republican-led Congress held a series of “show trials” designed to paint a picture of the Internal Revenue Service as intrusive, jackbooted thugs. It worked — at least well enough to convince Congress, which has since embarked on a decade-long trend of gradually defunding the IRS’s enforcement capabilities. But a new report from the General Accounting Office  (GAO) is the latest indicator that the pendulum has swung too far toward defanging the IRS’s enforcement capabilities. The GAO report shows that a business form known as “widely held partnerships” is growing dramatically — and that the IRS is able to audit less than 1 percent of the very largest such firms.

Businesses that are partnerships are not subject to the corporate income tax. Instead, the profits are passed along to the partners, who pay personal income taxes on them. Under current rules, this means that when the IRS wants to audit the partnership’s tax filings, it must examine the tax returns of each of the organization’s partners — and levying an adjustment is similarly burdensome for the IRS. The largest such partnerships, including hedge funds and private equity firms, can have hundreds or even thousands of partners. Even an adequately funded IRS might understandably find it difficult to audit even the most blatant partnership tax dodger.

But of course, the IRS is not adequately funded.The agency has lost 10,000 employees since 2010, more than 30 percent of which worked in enforcement areas.

If the prospect of large partnerships being able to bank on the inability of the IRS to audit them sounds like trouble, it is: the revenue stakes are potentially huge. The GAO estimates that the largest partnerships had $69.1 billion in total net income in 2011 alone. Any aggressive tax avoidance practiced by these firms will have a real effect on our nation’s budget deficit.

In a statement on the report, Senator Carl Levin from Michigan said, “Auditing less than 1 percent of large partnership tax returns means the IRS is failing to audit the big money. It means over 99 percent of the hedge funds, private equity funds, master limited partnerships, and publicly traded partnerships in this country, some of which earn tens of billions each year, are audit-free.”

Astonishingly, both President Barack Obama and outgoing House Ways and Means Chair Dave Camp have proposed sensible (partial) solutions to this problem. Both propose to allow the IRS to audit partnerships at the entity level, the same way they audit publicly traded corporations. Sadly, neither has proposed to completely reverse the damaging loss of IRS audit capacity caused by recent budget cuts.

Unfortunately, Camp’s proposal is embedded within a larger tax plan that altogether would result in a massive $1.7 trillion dollar deficit and make the tax code more regressive. Congress should enact the specific reform that would address the problem with partnerships now, on its own.

Grover Norquist’s Americans for Tax Reform, along with the Tax Foundation and Koch brothers-backed Americans for Prosperity all tried to convince Tennessee lawmakers that the state’s wealthiest investors need a tax cut.  Fortunately for Tennesseans, their elected officials rejected that idea this week.

 At issue was the state’s “Hall Tax,” a 6 percent levy on stock dividends, certain capital gains, and interest.  Tennessee does not tax wages, business income, pensions, Social Security, or virtually any other type of income imaginable.  But for anti-tax groups, even the state’s narrow income tax on investors was too much to stomach.

The Tax Foundation put out an alert claiming Tennessee could improve in its (highly questionable) tax climate ranking by repealing the tax, while Grover Norquist traveled to Tennessee to urge repeal and Americans for Prosperity ran a series of radio ads doing the same.

The state’s comptroller got in on the action as well, bizarrely suggesting that the Hall Tax is bad policy because it is not primarily paid by large families or low-income people lacking health insurance.

But ultimately, sensible concerns that repeal would require damaging cuts in state and local public services eventually won out, and the bill’s sponsor dropped his plan.

This is good news for people concerned with the fairness and adequacy of state tax systems.  As our colleagues at the Institute on Taxation and Economic Policy (ITEP) explained in a report picked up by The Tennessean, these cuts in public investments would have come with no corresponding tax benefit for the vast majority of households:

“Nearly two-thirds (63 percent) of the tax cuts would flow to the wealthiest 5 percent of Tennessee taxpayers, while another quarter (23 percent) would actually end up in the federal government’s coffers. Moreover, if localities respond to Hall Tax repeal by raising property taxes, some Tennesseans could actually face higher tax bills under this proposal.”

Tennesseans can breathe a sigh of relief that this top-heavy tax repeal plan didn’t make it into law this year.  But you can bet that Grover et al. will try again soon as they attempt to set in motion a national trend away from progressive income taxes.

Back in 2004, as the presidential contest between George W. Bush and John Kerry heated up, so-called NASCAR dads were identified as a potential key constituency in swinging the election results—and the NASCAR dad vote was courted accordingly by both sides. Entirely coincidentally, Congress chose to codify a four-year “NASCAR tax break” into law in 2004 as part of the American Jobs Creation Action of 2004, a corporate-gift-laden package pushed through just before the election. The idea was that corporations building race tracks and related facilities should be able to write off costs of these investments over seven years, a much shorter period than the likely lifespan of the tracks.

Although some members of Congress have attempted to make this tax break permanent since then (most notably former Pennsylvania Sen. Rick Santorum’s Fairness and Permanency Act of 2005) none have succeeded. But Congress has done what, in the eyes of the racing industry, is the next best thing: they’ve made the NASCAR break part of the “tax extenders,” the growing array of temporary, primarily corporate tax breaks that are routinely authorized by Congress for one or two years to obscure their long-term cost.

The International Speedway Corporation, which owns tracks in Daytona, Darlington and Watkins Glen, has benefitted handsomely from Congress’s largesse. In 2013, the company reported $73 million in U.S. profits, didn’t pay a dime in federal income tax but received a rebate of $8 million. In fact, over the past five years, ISC has enjoyed a federal tax rate of just 11 percent on $400 million in US profits.

ISC’s competitor Speedway Motorsports has been even more blessed: the company reports a 6.9 percent federal tax rate over the past five years on $287 million in U.S. profits, and reports zeroing out its federal income tax entirely in two of those years.

To be clear, if the federal corporate income tax is on the skids, the NASCAR tax break plays only a small direct part in this decline. The temporary extension of the tax break envisioned by Sen. Ron Wyden’s “Expiring Provisions Improvement Reform and Efficiency Act of 2014” would never cost more than $18 million a year. But the NASCAR giveaway is perfectly emblematic of the “death by a thousand cuts” that plagues the corporate tax: as long as the racetrack industry continues to enjoy this special privilege, it will be difficult for Congress to repeal tax breaks for other favored businesses. Any movement toward true corporate tax reform needs to start by rooting out even the smallest targeted corporate giveaway. Wyden’s extenders bill fails utterly to achieve this.   

In spite of mounting evidence that greenhouse gas emissions will continue to increase the earth’s temperatures, political polarization in Washington is standing in the way of the United States doing its part to address this global crisis.

A new report from the United Nations’ Intergovernmental Panel on Climate Change paints a sobering picture of the need for the governments to take immediate action to reduce carbon emissions. The report finds that despite ongoing efforts by developed nations to curb these emissions, greenhouse gas emissions “have grown at about twice the rate in the recent decade (2000–2010) than any other decade since 1970.” The report also outlines compelling arguments for enacting policy solutions (such as a carbon tax or a “cap and trade” mechanism) to curb emissions in the very near term, because delays could make it impossible to prevent substantial increases in worldwide temperatures and would likely increase the cost of any mitigation efforts.

But as the New York Times notes in its coverage of the report, these findings are falling on deaf ears in Congress. The Times spends far more ink detailing the political impossibility of a carbon tax than it does discussing the report’s bleak findings. The politics surrounding the carbon tax are, indeed, challenging. Congressional efforts to reform the tax code are widely perceived to have ground to a halt in this election year, and any effort to hike carbon taxes would face additional opposition from lawmakers.

This opposition is, in part, sensible: in general, a national tax on consumption is a bad idea that would make our already unfair tax system even more so. Taxes on consumption are regressive, taking a much larger percentage of income from middle- and low-income families than from the rich. This is because middle- and low-income families must spend most or all of their income on basic necessities, while rich families can put a lot of their income toward savings (which are not touched by a consumption tax).

A tax on carbon emissions, while inherently regressive, could be coupled with features to keep it from burdening middle-income Americans and hitting low-income Americans the hardest. Because any such tax would likely generate substantial new revenues—the Congressional Budget Office (CBO) has found that a carbon tax that starts off at $20 per ton and then rises by 5.6 percent annually could raise as much as $1.2 trillion over ten years—it would be straightforward to design a tax cut, such as a reduction in the federal payroll tax or a targeted tax credit, that would help to offset the impact of the carbon tax on middle- and low-income families. Since our tax system already imposes substantial taxes on low-income families who would be hit hardest by a carbon tax, a low-income offset must be part of any acceptable environmental tax reform.

And there are other compelling arguments in favor of some form of carbon tax. It would create a market incentive to develop low- or zero-carbon emission energy sources and simultaneously create a market disincentive to using carbon emitting energy sources. In other words, while it would raise substantial new revenues, it would reduce the amount of greenhouse gasses released into the atmosphere, as manufacturers, shippers, and consumers shift away from fossil fuels.

Of course, discussions of environmental tax reform should not distract lawmakers from the fundamental challenges facing our existing tax code. As we have argued, both the individual and corporate income taxes are ridden with loopholes that should be repealed as part of revenue-raising federal tax reform. And we’ll shed no tears if Congress starts its 2015 session by requiring General Electric and other big multinationals to pay their fair share of the corporate tax rather than dealing with the thorny carbon tax issue. But the latest UN report is a stark reminder that the potential costs of delay on environmental tax reform will be substantial.

Kansas lawmakers just passed legislation to comply with the recent state Supreme Court ruling mandating increased K-12 funding to poor school districts, but it didn’t come easy.

The Kansas City Star notes that “[l]awmakers discussed taking the money out of the state’s reserve fund, but those dollars are needed just to keep the lights on in state government. They talked about taking from some educational funds to give to others. They considered shaking out pockets looking for spare change. At one point, senators were reduced to eying the $2 million in the problem gambling fund.”

These difficult choices are a direct result of the last two years of radical tax cuts. Governor Sam Brownback’s supply-side promises notwithstanding, his regressive income tax cuts show no sign of paying for themselves anytime soon, which means lawmakers must look under cushions to meet their court-mandated funding obligations.

The current budget is balanced precariously. As the Kansas City Star reminds us, “Right now, the budget is balanced only by dipping into reserve funds. If current revenue and spending trends continue, it will go underwater in 2016. After that, a state that is shortchanging its universities and disabled citizens will have to start cutting more deeply; forecasters estimate $962 million in cuts by the 2019 fiscal year. Kansas already is raiding its highway fund to pay for transportation of school students and even a chunk of the debt service for the recently completed statehouse reconstruction. Part of the teachers’ pension funds are coming from gambling revenues, in apparent violation of state statute.”

Having found $129 million in new money for poor school districts, the legislature clearly felt the need to dispel any illusion on the part of voters that they actually value public schools, and added legislative measures to undermine them. Kansas is now the latest state to enact “neo-vouchers,” corporate tax credits for companies making contributions to private schools. As we’ve explained in the past, this back-door approach to school vouchers erodes corporate tax revenues, takes money away from already-strapped public schools, and limits state policymakers’ oversight of the private schools receiving these state-funded scholarships. In other words, having grudgingly given new revenue to public schools with one hand, they now will be taking it away with the other.