CTJ's Tax Justice Digest, February 2, 2007

Multi-State Focus: Senior Tax Cuts

Legislators in Missouri, Kansas, and Georgia are debating reducing taxes on seniors in their state. Lawmakers in Missouri and Kansas introduced legislation that would eliminate income taxes on Social Security benefits. On the surface, eliminating taxes on Social Security sounds like a wonderful idea. However, only a handful of states levy a tax on Social Security benefits and the Social Security Administration estimates that nationally about a third of current beneficiaries pay federal taxes on their benefits. Those who stand to gain the most from these proposals are better off seniors.

An ITEP analysis of the Missouri bill found that 72 percent of Missourians would receive no benefit from the proposal. Also, the bill carries a price tag of $100 million and the cost is likely to increase as Missourians age. For more on the Missouri proposal read the testimony presented by ITEP staff to the Missouri House of Representatives' Tax Reform Committee.

The Peach State already exempts Social Security benefits from their income tax and offers generous retirement income exclusions (totaling $35,000 of retirement income in 2009). But recently Governor Purdue introduced legislation that would completely eliminate tax on retirement income for Georgians 65 and over. Instead of turning to these poorly targeted tax cuts, legislators would do better to provide tax relief to those state residents with the least ability to pay - regardless of age considerations.

Two More States Pursue The Most Effective Weapon Against Corporate Tax Avoidance

Over the past few years, a number of states have taken incremental steps to reform their corporate income taxes to curtail tax avoidance by large and profitable companies. One such reform, combined reporting, prevents corporations from using a range of accounting schemes to shift profits from one state to another in order to artificially reduce the taxes they owe. The seventeen states that now use combined reporting may eventually get some company, as two Governors - Eliot Spitzer (D-NY) and Chet Culver (D-IA) - have included provisions in their budget proposals for the coming fiscal year to institute combined reporting. To learn more about combined reporting and how it works, see the Institute on Taxation and Economic Policy's updated policy brief.

Several tax avoidance techniques are available to corporations operating in states that don't have combined reporting. For example, a recent Wall Street Journal article (subscription required) notes that Wal-Mart may have been able to avoid as much as $350 million in state corporate income taxes between 1998 and 2001 due to a loophole that could be countered with combined reporting.

All Eyes on Michigan

Analysts, advocates, and many state legislators are keeping an eye on Michigan to see how the state will rebound from the elimination of the state's Single Business Tax (SBT) at the end of the year. For more on this check out our December 8 Tax Justice Digest. This week the state's Chamber of Commerce has endorsed a proposal that calls for new business income and license taxes that have a broad base and a low rate. One of the proposal's red flags is that only three-quarters of the revenue lost from the repeal of the SBT will be replaced. We expect the debate to become even more heated in the coming weeks.

Property Taxes Caps Assailed for Hurting Rural Schools

Property taxes are often a source of controversy, but now property tax caps are proving just as unpopular in Minnesota and Indiana. Last spring Indiana adopted a so-called "circuit breaker", which is in reality merely a two-percent property tax cap. The law has yet to go into effect, but the Association of Indiana Counties has already made repeal of the measure its top priority. Minnesota Governor Tim Pawlenty's similar property tax cap plan, which would cap property tax growth at the rate of inflation, has also come under fire from The Coalition of Greater Minnesota Cities, who have criticized the plan as anti-rural. Since rural counties tend to have lower average property values than their more urban counterparts, property tax caps force rural school districts to make do with less funding. A better solution for both states would be a genuine property tax circuit breaker, which would target property tax assistance to those who need it most, leaving more revenue available for local governments.

Tax Credit for Stay at Home Moms?

Oklahoma lawmakers in the House of Representatives are proposing a tax credit to benefit stay-at-home moms. The theory behind the proposal is that because the state offers a dependent care credit for costs incurred for child care expenses outside the home, stay-at-home moms should be given a similar credit for their work. This proposal brings up issues of discrimination (what about stay at home dads, grandparents?) and perhaps an even larger debate about whether or not the tax code should be used as a mechanism to promote family values. For a provocative article on this issue click here.

Senate Passes Minimum Wage Hike - With a Package of Tax Breaks for Business

The Senate voted 94-3 Thursday to raise the minimum wage by $2.10 over two years. Unlike the minimum wage hike passed by the House of Representatives a couple of weeks ago, the Senate bill also includes a package of tax breaks and other offestting provisions to replace the revenue. House Democrats and labor advocates have rightfully argued that businesses do not need to be "compensated" with tax breaks whenever the minimum wage is increased. It is nonetheless reassuring to know that the tax breaks in question are paid for, with the offsets affecting business. The new tax breaks include an extension of the Work Opportunity Credit and provisions allowing restaurants and retail businesses to write off costs more quickly. Half of the offsets would come from further cracking down on sale-in, lease-out (SILOs) arrangements, which can involve an American bank buying something like a subway or sewer system in another country and "leasing" it back to the foreign government for tax advantages.

One provision, which constitutes a smaller fraction of the offsets but has caused surprising consternation among lobbyists, would end tax advantages for "non-qualified deferred compensation" over $1 million a year. To put this in context, the tax code allows employees to defer paying taxes on money that they or their employer put into "qualified" retirement savings plans, such as 401(k)'s, until they take money out during retirement. But contributions to such "qualified" plans are limited, to no more than $30,000 a year depending on the type of plan.

Many corporate executives, however, have set up "non-qualified" deferred compensation plans, which are not taxable to the executives until they take the money out (and which are not deductible by companies until then either). Currently, there is no limit on how much money executives can defer taxes on through these plans. The Senate bill would limit such tax-deferred compensation to $1 million a year. President Bush admonished business executives this week to "pay attention to the executive compensation packages that you approve" but did not endorse the Senate provision.

Senators Propose Legislation to Crack Down on Offshore Tax Havens

A bill introduced in the U.S. Senate would make the frequently abused "deferral" of taxes on American-owned corporations unavailable when those corporations are operating in a tax haven, that is, a country that does not cooperate with U.S. tax enforcement efforts. The legislation is sponsored by Senators Byron Dorgan (D-ND), Carl Levin (D-MI) and Russ Feingold (D-WI) and targets a tax provision that should be eliminated according to CTJ Executive Director Bob McIntyre. His testimony to the Senate Budget Committee last week regarding the "Tax Gap" included a proposal to repeal the "deferral" of these taxes, which is more like an exemption for the income that is claimed to be foreign. McIntyre argues that anyone with income that really is taxed overseas gets a credit for foreign taxes paid anyway, so the real effect of such a proposal would be simply to reduce tax evasion.

Congress May End IRS's Use of Private Debt Collectors

Two Democrats in the U.S. House of Representatives, Steve Rothman (D-NY) and Chris Van Hollen (D-MD) have introduced a bill that would end the IRS's program using private companies to assist in collecting delinquent taxes. This comes after Nina Olsen, the National Taxpayer Advocate, who heads an independent office within the IRS, called upon Congress to end the private collection program in her annual report. The problem is that the private collectors receive a commission of 21 to 24 cents for each dollar they collect, while it's argued that IRS employees could do the same work for just 3 cents for every dollar collected. IRS Commissioner Mark Everson admitted last year that the IRS staff could collect these debts for less cost but said that the agency lacked the funding to do so.

Congress needs a mechanism in its budget process to recognize the increase in revenues that will result from any boost given to IRS enforcement, which only shows up in the budget as a spending increase. This is a problem that comes up in the debate over closing the Tax Gap. One of the suggestions Bob McIntyre offered for closing the Tax Gap in his testimony before the Senate Budget Committee last week was to simply to increase funding for IRS enforcement. The IRS estimates that somewhere between $5 and $30 could be collected for every new dollar of funding for enforcement.

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