CTJ's Tax Justice Digest, June 15, 2007

Energy Bill Debated in U.S. Senate

The U.S. Senate began debate this week on H.R. 6, a bipartisan energy bill that promises to protect consumers from price gouging, strengthen the economy, increase energy efficiency and develop clean alternative fuels. Senate Majority Leader Harry Reid spoke Monday morning at the Center for American Progress about America's "oil addiction" that has resulted in tax breaks and record profits for the oil-industry while low-income consumers still face higher energy prices.

Senator Reid claims that too few resources are being devoted to the development of clean, efficient, and renewable alternative fuels. The multi-part bill would set new green standards for federal buildings, raise Corporate Average Fuel Economy (CAFE) standards for new cars and trucks to 35 mpg by 2020, reduce crude oil consumption by 10 percent over 15 years by producing renewable fuels, and set new energy efficiency standards. It would also punish companies that "price gouge," provide research funds for carbon sequestration programs, and seek to improve relations with worldwide energy partners.

Debate has been moving swiftly but not without protests from the auto, coal and oil industries who stand to be the hardest hit by reductions in subsidies and the higher CAFE standards. Questions are being raised as to whether or not the bill can garner enough support and still create policies that will prevent consumers from seeing energy prices rise.

As the week ended, Senate Finance Committee Chairman Max Baucus (D-Mont.) released a proposed $13.7 billion package of tax incentives to go along with the energy bill aimed at improving energy efficiency and expanding production. More than $9 billion of the package's cost would be offset by eliminating the manufacturing tax deduction for major oil producers. Baucus expects that the committee markup next week will add another $10-12 billion in additional amendments. Reid hopes to finish the bill by next week.

Hedge Fund Managers May Finally Face Fair Taxes

The visibility of a tax dodge for hedge fund managers continued to grow this week, as former Treasury secretary Robert Rubin spoke Tuesday at a forum arranged by the Hamilton Project about why hedge fund and private equity managers ought to be taxed at a higher rate. Currently, these managers charge a fee for their investment and money management services and report their fee as a capital gain, making it subject to a tax rate of just 15 percent. Fees are assessed as 20 percent of profits.

Private equity firms, and increasingly hedge funds, operate by using independent investor money to purchase companies, improve them, and then sell them for a profit. The overall investment process, which may take up to seven years, does constitute a capital gain. However, fund managers are performing a management service, not risking their own money, so any capital gains are not really theirs to report.

Rubin argued that the managers are performing a basic service, and "fees for that service would ordinarily be thought of as ordinary income." Income for these wealthy managers, he argued, should be subject to the regular income tax rates of up to 35 percent. Manager income has skyrocketed recently with earnings ranging from $500 million to $2 billion a year. With an already quite low capital gains rate, fund managers are clearly not paying their fair share, and a new plan could bring in additional revenue and create a more progressive tax system. On a related issue, Democrat Max Baucus and Republican Charles Grassley of the Senate Finance Committee proposed on Friday that some private equity firms should be taxed under the corporate tax rate rather than being taxed as partnerships as they currently are. We look forward to hearing more about this proposed legislation.

Florida Special Session on Property Tax Cuts Makes Progress -- Of Sorts

Some are calling it the biggest tax reduction in Florida history, but it might better be described as the most confusing. After almost a year of documenting the flaws of Florida's "Save our Homes" property tax break for homeowners (which include its complexity and unfairness), the state legislature this week ratified a plan that will provide a replacement homeowner tax break known as the "super exemption." This new exemption will shelter up to 75% of the first $200,000 of a home's value (and up to $195,000 of value for wealthier homeowners) from property taxes. The catch: homeowners who decide they prefer the old Save Our Homes break can keep it. But they'd better think carefully: if a homeowner decides to claim the new homestead exemption, they can never again file under the old system.

Because Florida's property tax breaks are enshrined in the state constitution, this proposal must go before Florida voters; a January 2008 vote is set.

Better Ideas for Illinois Tax Reform

Many observers thought this could be the year for progressive tax reform in Illinois. But in the wake of a disappointing regular legislative session that was dominated by one poorly-thought-out idea (Governor Rod Blagojevich's proposal for a "gross receipts tax"), lawmakers are back in Springfield for a special "overtime session." A new report from Voices for Illinois Children reminds lawmakers that reforming the state's low,flat-rate income tax could make the Illinois tax system both fairer and more sustainable. To read the Voices report, click here.

A Thumbs Up for Combined Reporting in Massachusetts

Massachusetts' corporate taxation study commission this week released a set of interim findings that endorsed two key reforms to the Bay State's tax code. Appointed by Governor Deval Patrick and legislative leadership in April, the commission recommended that Massachusetts immediately enact changes in its corporate income tax - commonly referred to as "check the box" rules - that would prevent companies from exploiting differences in state and federal law that determine how they are classified for tax purposes and that allow them to avoid taxes in Massachusetts. Forty-five other states already have these rules in place; instituting them in Massachusetts would generate an additional $100 million in FY 2008. The commission also expressed its support for combined reporting - a still more comprehensive reform that New York and West Virginia approved this year and that twenty states now employ - but will study implementation and design issues further in the coming months. Of note, the commission also found that the absence of such safeguards as effective "check the box" rules and combined reporting has allowed Massachusetts corporate income tax to fall from 11.5 percent of corporate profits in 1989 to 5.5 percent last year. The commission also points out that "Insisting on greater shared responsibility for our Commonwealth's future, principally by asking a fairer share from larger, multi-state businesses, will not harm competitiveness and economic growth … influential economists cited to the Commission have concluded that, while taxes are one factor that businesses consider in deciding where to locate or expand, the predominance of other factors usually renders business taxation a much less significant consideration."

Earned Income Tax Credits Advance Around the Nation

Over the past few weeks, three more states have taken steps towards helping low-wage workers and their families by means of the earned income tax credit (EITC). In Delaware, the Senate Revenue and Taxation Committee recently approved a measure that would make the state's existing EITC refundable, meaning that individuals and families who owe less in personal income taxes than the value of their EITCs would receive refund checks to help offset other taxes and to make it easier to make ends meet. In Oregon, Republican and Democratic members of the House Revenue Committee have put forward a proposal that would raise that state's EITC from 5 percent of the federal EITC to 12 percent. As the Eugene Register-Guard observes this proposal would help to achieve a vital goal - eliminating income taxes on working families living in poverty in Oregon. Lastly, the Louisiana Senate has passed legislation that would create a state EITC equal to 5 percent of the federal EITC. This report from the Louisiana Budget Project details the positive impact that such a credit would have.

Tennessee: More Taxes on Cigarettes, Less on Groceries

This week the Tennessee General Assembly adjourned after passing legislation that increases the state cigarette tax by 42 cents a pack and also reduces the state's sales tax on food from 6 to 5.5 percent. Progressive groups like Tennesseans for Fair Taxation are calling the reduction in the grocery tax "a very positive first step that we can build [on] as we move forward."