Next week the Senate is expected to take up the patent reform bill which, as of today, includes a provision to prohibit patents on tax strategies. Opponents are expected to offer amendments to weaken the language or completely strip this provision from the legislation.

Since 1998, when a federal appeals court ruled that business methods could be patented, the U.S. Patent Office has granted more than 115 tax strategy patents and more than 150 applications are in process. The holders of these patents can charge a fee to taxpayers that use their strategies.

Citizens for Tax Justice joined other national organizations in a letter to the Senate Judiciary Committee to make sure the provision banning tax strategy patents stays in the bill. As Senator Carl Levin has noted, the primary rationale for issuing patents is to encourage innovation and "the last thing we need is a further incentive for aggressive tax shelters."

Despite reporting nearly $10 billion in domestic pre-tax profits between 2008 and 2010, the Boeing Corporation, which was granted a contract worth as much as $35 billion to build airplanes for the federal government earlier this week, did not pay a dime of U.S. federal corporate income taxes during this three-year period.

Read the report.

CTJ’s critique of claims that wealthy New Yorkers are fleeing the state’s so-called “millionaires’ tax” was publicized by two media outlets this week.  Similar claims being made in Connecticut and Rhode Island were also shot down in the media.

In last week’s Digest, CTJ pointed out numerous distortions in the Partnership for New York’s claims that wealthy New Yorkers were fleeing as a result of a recent tax increase on high-income earners.  (The Fiscal Policy Institute also issued a detailed rebuttal). 

For starters, the Partnership erroneously claimed that a “9.4 percent decrease in the state's taxpayers who earn $1 million or more” occurred between 2007 and 2009.  But the data it used (but failed to cite) actually show a 9.4% drop in New Yorkers with wealth exceeding $1 million.  Since New York’s income tax obviously applies to income — not wealth — this is an important distinction. 

The Partnership has since revised its report to correct this mistake, but it continues to ignore a much more important one: according to the same dataset, every state in the country saw its number of wealthy taxpayers decline between 2007 and 2009 (due to the recession) and 43 states experienced declines exceeding New York’s 9.4% drop.  In fact, Phoenix International – the firm that released the data – made very clear in its 2009 press release that the U.S. as a whole saw its millionaire population decline by nearly 14%.  So it’s a little odd, to say the least, that the Partnership would interpret New York’s 9.4% rate of decline as providing any evidence that could be useful in its crusade against taxing high-income earners.

Fortunately, Robert Frank at the Wall Street Journal’s Wealth Report quickly publicized CTJ’s analysis, and labeled the Partnership’s migration claims a “myth.”  Frank also followed up with the Partnership’s CEO, who when confronted with the data problems described above retreated by saying: “It’s a very difficult thing to measure… We get a lot of it anecdotally.”

Crain’s New York Business similarly picked up on the CTJ analysis, ultimately declaring that “the nationwide decline suggests that New York lost millionaires primarily because New Yorkers made less money and saw their property values drop during the recession, not because they moved to other states.” 

Crain’s does err, however, in claiming that the data might partially reflect the fact that “New Yorkers could have left the state in mid-2009 and filed 2009 tax returns as residents of their new states.”  The 2009 data in question was actually released in early July 2009, and was left unchanged in the September 2010 update.  It is exceedingly unlikely that a dataset released just two months after the May 2009 enactment of New York’s “millionaires’ tax” could have captured the effects of any tax-induced wealth flight.

In addition to beating back ridiculous claims in New York, the WSJ’s Wealth Report also recently debunked similar claims being made in Connecticut by the Connecticut Policy Institute.  The story is a familiar one:

“How do we know why or even if high-earners moved out? It is possible that some previously high earners simply fell below the $1 million-dollar-a-year mark because their incomes fluctuated. In the land of hedge funds, this seems to be just as likely as people moving to Florida. It also is unclear whether the population of high-earners in Connecticut is aging and simply moved to warmer, more golf-friendly climes...The report doesn’t break down the destinations. Still, it says many go to Florida and New York. Florida, of course, has no state income tax. But New York state has a top tax rate of 8.97% and New York City’s top rate is 3.876%. Combined that is nearly twice as high as Connecticut’s tax. If the rich decide where to live based on taxes, why would they be moving to a higher-tax city? Perhaps because the quality of their life matters as much or more than the quantity of their taxes—up to a point, of course.”

Finally, Rhode Island claims of wealth flight ran into similar resistance in the media when Politifact took a lengthy look at the Ocean State Policy Research Institute’s (OSPRI) migration claims, and ultimately found them to be “false.” 

OSPRI’s report attempts to show that “the most significant driver of out-migration [from Rhode Island] is the estate tax.”  But as Politifact notes, “IRS data cited by OSPRI shows that Florida was increasingly attractive to Rhode Island taxpayers in the years when it had an estate tax. The flow slacked off significantly when the [Florida estate] tax was eliminated. That runs contrary to the trend OSPRI claims to have proven.” 

Moreover, Politifact points out that even the conservative Tax Foundation — hardly a big fan of the estate tax — hasn’t jumped onto the migration bandwagon: “Kail Padquitt, staff economist for The Tax Foundation … said he hasn’t seen any proof that the prospect of paying estate taxes drives people to move.”  We certainly haven’t either.

Huge changes to Missouri's tax system are being debated, ranging from terrible ideas (repeal of the main business tax and replacing the income tax with an enormous sales tax) to excellent (making the state's tax structure more progressive than it is now).

In bad news, the state Senate has voted to gradually phase out the state’s corporate franchise tax. This is a tax that was established in 1917 and is levied on the greater of either the total assets of a corporation or the value of its paid up capital stock.  Now it’s up to the House of Representatives to see if it will follow suit and eliminate this tax, which in fiscal year 2009 brought in $83 million for the state. In even worse news, the so-called "Fair Tax" continues to move forward. This proposal would eliminate the state's income tax and replace the revenue with a broader sales tax. The latest news we reported was that the State Auditor couldn’t estimate what the sales tax rate would need to be to make the proposal revenue-neutral.

Despite the lack of such basic information, the legislature approved the various versions of the ballot initiative (which would all basically do the same thing) for the 2012 ballot. Meanwhile, efforts are still underway to enact the "Fair Tax" through the legislature, without a ballot measure.

On a much brighter note, Representative Jeanette Mott Oxford (D-St. Louis) and 23 co-sponsors have filed HB 637, which would modernize the state’s income tax rates and brackets, eliminate the state’s deduction for federal income taxes paid, and introduce a per-person refundable credit.  The bill would make the state’s tax structure more progressive while also providing much needed revenue. This legislation is a bright light in the darkness of Missouri's tax debate.

The Iowa House of Representatives has approved a bill to cut income taxes by 20 percent, despite an analysis from ITEP showing that the richest 1 percent of Iowans would receive an average of $6,822 while those in the bottom quintile would enjoy a break of just $18 on average.

The bill, H.F. 194, which reduces income tax rates by 20 percent across the board, will now go to the Senate. For more information, see the Iowa Policy Project’s brief on this enormous tax cut.

Debate over the recommendations from Georgia’s Special Council on Tax Reform continues. Should the state flatten its income tax rates? Should the state broaden the income tax base? Folks are likely still making up their minds about how they feel about adding groceries back to the sales tax base, among other possible changes.

Georgians concerned about tax fairness should read the new brief from the Georgia Budget and Policy Institute. It offers several alternatives (using ITEP data) that would tweak the Council’s recommendations and would improve the tax fairness implications of the Council’s initial proposal.

The budget outline released by President Obama this week, just like last year’s proposal, includes about $3.5 trillion in tax cuts over ten years. Most of that cost comes from his $3.1 trillion proposal to make permanent most of the Bush tax cuts, which would cost 81 percent as much as extending all the Bush tax cuts.

The President’s budget outline does include several laudable provisions to raise revenue, but not nearly enough to offset the costs of the proposed tax cuts.

The net effect of the tax proposals in the budget plan would be to reduce federal revenue by $2.8 trillion over ten years, compared to what would happen if the Bush tax cuts simply expired (as they will under current law if Congress does nothing).

Read the report.

It seems that each week brings another round of regressive tax proposals from the states, but there are a few bright spots. As previously reported, the governors in Connecticut, Hawaii and Minnesota have been strong proponents for taking a balanced approach to their state’s budget gaps and have unabashedly supported raising revenue in mostly reform-minded and progressive ways.  More details emerged this week on the Connecticut and Minnesota governors’ revenue-raising proposals.   Also, Illinois Governor Pat Quinn, who recently backed a successful initiative to increase the state’s flat personal income tax rate, started sending positive messages this week about the need to make his state’s tax system fairer.

On Wednesday, Connecticut Governor Dan Malloy released his plan to deal a budget gap exceeding $3 billion. As promised, his plan would not to rely solely on spending cuts to close the gap. He offered a $1.5 billion package of new revenues including reforms to the personal income tax, sales tax, business taxes, and estate tax.
  
Under his plan, the state’s personal income tax would expand from 3 to 8 brackets, the top marginal rate would increase from 6.5 to 6.7 percent, and the bottom marginal rate of 3 percent would phase out for high-income earners.  The plan also eliminates an existing property tax credit which is most beneficial to middle-income families. 

Perhaps most significantly, Governor Malloy would buck a recent trend by adding a refundable state Earned Income Tax Credit (EITC) set at 30 percent of the federal program.  If enacted, Connecticut would become the 26th state to have an EITC.
 
Governor Malloy also proposed expanding the sales tax base by taxing several services, including pet grooming, boat repairs and hair cuts, eliminating the exemption on clothing under $50, and imposing an additional 3 percent sales tax on “luxury items.  The state sales tax rate would increase from 6 to 6.25 percent. 

Governor Malloy also supports positive changes to business taxation including adopting what is known as the "throwback rule," which mandates that sales into other states or to the federal government that are not taxable will be “thrown back” into the state of origin for tax purposes.  His plan would improve the estate tax by lowering the taxable estate threshold from $3.5 million to $2 million.

Minnesota Governor Mark Dayton ran on a pro-tax platform, promising to increase taxes on his state’s wealthiest households in order to stave off massive spending reductions.  Governor Dayton released a plan this week to raise $4.1 billion in new revenues over the next two years to help solve a $6.2 billion budget shortfall.   Sticking to his campaign pledge, the majority of the new revenue would be raised from the wealthiest 5 percent of taxpayers in the state. The plan would add a new top income tax bracket, charge a 3 percent surtax on filers with taxable income above $500,000, and add a new statewide property tax on homes valued at more than $1 million.

The Minnesota Budget Project had the following to say about Governor Dayton’s proposal: “The Governor’s tax proposal seeks to add balance to the state’s tax system. Over time, the state has cut progressive taxes (like the income tax) during good times and increased regressive taxes (like property taxes) during the bad times. These policy changes, combined with economic trends, have led to a tax system that has shifted more of the responsibility for funding state and local services on to low- and moderate-income Minnesotans. People at the highest income levels pay a smaller share of their income in state and local taxes (8.9 percent) than the average for all Minnesotans (11.2 percent).”

Illinois lawmakers should be applauded for temporarily raising the state’s flat income tax rate from 3 to 5 percent in January to help fill a $15 billion budget gap. However, they missed an opportunity to fix the state’s broken, outdated, and unfair tax system rather than just raise rates.  But the opportunity may still be available.  This week, Governor Pat Quinn asked state lawmakers to consider modernizing the tax system and making it fairer.  He did not offer specific suggestions on how to achieve this goal, but explained that Illinois’ tax system is regressive, requiring more from its poorest residents than from the rich. 

In response to his call for reform, some Democratic lawmakers offered a few suggestions, including moving the state to a graduated income tax, expanding the sales tax base to include services, and relying less on property taxes to pay for schools.

The Virginia Senate voted down a bill this week which would have provided tax credits to corporations that give scholarships to low-income children in order to attend private schools.  The proposal was backed by Governor McDonnell as part of his “Opportunity to Learn” initiative and passed the House of Delegates on February 8.

Critics of the bill argued that the tax credit would divert the state’s general fund dollars away from the public school system towards private schools.  Proponents, including the Governor, claimed it would afford low-income students educational opportunities they would otherwise not be able to access.

The debate over the education tax credit bill contrasts vividly with Virginia’s reduction in Earned Income Tax Credit (EITC) benefits last year.  Virtually every state with an EITC ties its benefits to the federal program.  However, when President Obama expanded the federal EITC, Virginia was one of two states that decided to “decouple” its EITC from the federal changes.  Obama's EITC expansion increased benefits for families with three or more children and reduced the marriage penalty.  This would have made a minimal impact on the cost of Virginia’s EITC, which is set at 20 percent of the federal level, yet would have provided greater benefits to low-income families.

Of course, decoupling creates administrative difficulties, because it's far easier to calculate a state EITC that is simply a percentage of the federal one.

Soon, Virginia will again be faced with this decoupling issue.  The federal tax compromise enacted in December of 2010 extended the Obama EITC expansion through 2012.  When the issue arises again, lawmakers and citizens should grapple with why Virginia’s governor and House members seem willing to provide a tax credit to corporations for removing low-income children from public schools, but not a credit that goes directly into the hands of hard-working Americans.

In what is surely a blow to anti-taxers and so-called “fair tax" advocates, Missouri State Auditor Tom Schweich recently said that the impact of ballot initiatives to eliminate the state’s income tax and replace the revenue with an expanded sales tax cannot be estimated.

Through a Freedom of Information Act request, the Kansas City Star determined that “Schweich’s office said the impact on state revenues could not be determined because there are too many actions required by lawmakers and too many uncertainties about how consumers will respond to the new tax.”

One of the largest questions about these initiatives is what the sales tax rate would need to be to ensure that this radical shift is revenue-neutral. Despite the Auditor’s misgivings about offering an estimated rate, ITEP and others have. For example, a recent ITEP analysis based on legislation from last year found that the rate would need to be more than 11 percent. Jim Moody, a lobbyist who used to be Governor John Ashcroft's Commissioner of Administration, found that the sales tax rate would need to be more than 12 percent. He went further, calling the ballot initiatives “fiscally untenable” and suggested that they would “either bankrupt the state or, in the alternative, bankrupt the poor and the working lower- and middle-income classes.”

Tax rate estimates aside, if the State Auditor can’t estimate the impact of this radical change to the state’s tax structure, that should be the first clue that perhaps this ballot initiative, bankrolled by millionaire anti-taxer Rex Sinquefield, isn’t in the best interest of most Missouri families or businesses.

It’s pretty evident that state corporate income taxes are especially flawed and riddled with loopholes. But, of course, that doesn’t have to be the case. In fact, there are lots of things that legislators can do (given the political will) to strengthen their corporate income taxes, including enacting combined reporting, increasing corporate tax disclosure, and closing selected loopholes.

Despite all these options to strengthen the corporate tax, lawmakers from coast to coast are doing their best to undermine this inherently progressive tax. This seems especially sort-sighted given the revenue needs of many states.

Here are some recent bad ideas regarding state corporate income taxes:

Arizona Governor Jan Brewer’s budget outline includes a proposal that would phase out the state's corporate income tax over four years.  

Florida Governor Rick Scott has proposed reducing the corporate income tax rate from 5.5 to 3 percent.

Indiana’s Senate is considering a bill to reduce the state’s corporate income tax by 20 percent. This bill recently passed the Senate Committee on Tax and Fiscal Policy.

Iowa Governor Terry Branstad has said that he would like to cut Iowa’s corporate income tax in half, despite evidence that this tax change would only benefit large corporations.

Recently, bills have been dropped in the both the Kansas House of Representatives and the Senate which would phase out the state's corporate income tax altogether.

North Carolina Governor Beverly Perdue is proposing that the corporate income tax rate be reduced to 4.9 percent from 6.9 percent.

Instead of slashing or completely eliminating the state corporate income tax, lawmakers should be working to strengthen this revenue source.

Online retailers benefit from a tax loophole which allows for internet sellers to avoid collecting sales taxes from customers unless the company has a physical presence in their state. This has given companies like Amazon.com an unfair advantage over "bricks and mortar" stores and smaller, locally owned businesses all over America who must collect sales taxes from customers.

One place where Amazon.com certainly does have a physical presence is Texas. Recently, Texas asked Amazon.com to pay $269 million dollars in past due sales taxes.  The company runs a distribution center in the state and, as the Texas Comptroller said, “If you have a physical business presence in the state of Texas, you owe sales tax.”  Amazon refused to pay the bill, claiming a subsidiary owned the distribution center.  Last week, news came that Amazon has decided to shut down the center because they were “unable to come to a resolution with the Texas comptroller’s office.”  As the Dallas Morning News explained it, “Amazon.com has decided to take its ball and go home.”

Of course, the real answer to this problem is for Congress to end the loophole by allowing states to require sales tax collection from any company that sells to its residents.

In the past year, we've documented ad nauseum the lengths that anti-tax advocates will go to in order to convince lawmakers that the so-called "millionaire's tax" is prompting wealthy taxpayers to move to other states. In Maryland, New Jersey and Oregon, these groups have selectively presented data in order to "show" that resident millionaires are packing up their Lear Jets and moving to Florida. And in each case, we've shown that when the data are presented honestly and fully, there's simply no evidence that millionaires are voting with their feet.

But the latest such effort, by the Partnership for New York City, breaks new ground by simply making data up. For example, the report says that "Since the imposition of New York's surcharge in 2009, there has been a 9.4 percent decrease in the state's taxpayers who earn $1 million or more, decreasing from 381,786 in 2007 to 345,892 in 2009." Take a minute and read that quote again. What the Partnership is implying is that millionaires had the magical ability to see into the future and start moving out of New York in 2007 and 2008 as a result of a tax increase that hadn’t even happened yet.

Next, it’s worth taking a closer look at that 381,786 figure, the supposed amount of millionaires in New York in 2007. Interestingly enough there is state-by-state data available from the IRS which shows that there were actually only 375,265 returns with federal adjusted gross income over $200,000 in 2007. Of course, not all 375,265 returns were all millionaires. So the 381,786 figure sited by the Partnership is troubling to say the least.

What is even more troubling is that there isn’t actual data available (from New York or the federal government) for 2009 showing the number of tax returns by income group. Which leaves us with a very troubling question — where does the Partnerships earlier figure of 345,892 millionaires in 2009 actually come from?

The answer: they're using a forecast of the number of households in each state with wealth, not income, of $1 million or more. See the data. Released last September by a marketing firm, these estimates tell us a few interesting things. One is that between 2007 and 2009, the nation as a whole lost 13.9 percent of its net-worth "millionaires" between 2007 and 2009, which makes the 9.4 percent loss for New York seem not that impressive. Another is that 43 of the 50 states lost proportionally more of their net-worth "millionaires" over this period than did New York. So, leaving aside the minor detail that income taxes are based on income rather than wealth, which makes these marketing data utterly irrelevant to the point the Partnership is trying to make, any objective look at this data would suggest that New York is doing better than most other states.

For more on the many flaws of the Partnership’s paper, read this brief from the Fiscal Policy Institute. Suffice to say, the theory that New York millionaires are moving because of a targeted tax increase is based on deeply flawed (and perhaps even made up) data.

Lawmakers in Congress have been discussing a second tax holiday for U.S. corporations' offshore tax profits, after having sworn that the first such holiday, enacted in 2004, would be a one-time event.

Typically, when multinational U.S. corporations bring overseas profits back to the United States (when they "repatriate" offshore profits) they have to pay U.S. corporate income taxes. The statutory tax rate for corporate income is 35 percent, although corporations of course use many breaks and loopholes to lower their effective rate.

The tax holiday that was enacted in 2004 allowed companies to repatriate their profits and pay taxes at a rate of just 5.25 percent (that is, almost nothing).

The biggest problem is that if Congress shows that it is willing to repeat this "one-time" tax holiday, then corporations will actually have an incentive to shift profits, and perhaps even operations and jobs, offshore. Corporations could then simply wait for the next "one-time" tax holiday to bring those profits back to the U.S.

One of the lawmakers pushing the proposal is the ostensibly progressive Senator Barbara Boxer of California.

The administration decided that the adults needed to intervene. Treasury Secretary Tim Geithner made a public statement this week that the administration does not support the idea. However, even Geithner's statement did include an alarming caveat when he said, "We are not going to look at a [tax] holiday outside the context of comprehensive reform." (Emphasis added.)

Proponents of a tax holiday insist that companies use the money they bring back to the U.S. to create jobs, but data from the last time Congress allowed multinationals to bring back foreign profits at a very low tax rate indicates that the cash primarily ended up in the hands of shareholders through dividends and stock redemptions.

See our earlier report explaining why the repatriation tax holiday is a terrible idea.

The Obama administration has proposed to change the way unemployment insurance is financed to avoid tax increases on businesses that will otherwise occur automatically — but Republicans in Congress are resisting the plan because it allows for the possibility that states will collect more taxes overall from employers in the future.

Unemployment insurance benefits are generally financed by state taxes on employers while the administration of the program is financed by federal taxes on employers. The state tax revenue is saved in trust funds from which benefits are paid, but these had run dry in most states at the end of 2010, so states were allowed to borrow from the federal trust fund. States must eventually pay that money back with interest, but the economic recovery act enacted in 2009 gave states a break on the interest payments for almost two years.

The federal UI taxes on employers will increase automatically, under current law, in many states this year or next year to pay for the principal on those loans from the federal trust fund. On top of that, states must start paying the interest, and for this they often levy additional state taxes on employers. All of this is scheduled to occur at a time when economists agree that the recession is far from over.

The Obama administration's plan would respond by delaying the automatic increase in federal UI taxes on employers and the due date for the interest payments from the states for two years. In 2014, the plan would more than double the tax base, from $7,000 of wages for each employee (which has not been adjusted since 1983) to $15,000. The rate of the federal tax would be reduced so that the federal tax would not be increased overall. The state taxes have the same base (at a minimum) as the federal tax, so the states could collect more revenue to shore up their programs if they did not change their tax rates.

The Center on Budget and Policy Priorities and the National Employment Law Project released a report Wednesday that spells out a very similar plan and explains its benefits.

Not for the first time, Republican leaders are putting themselves on record as preferring to allow a tax increase to take place rather than support a tax bill that is not exactly what they want.

The last place you would ever expect a discussion of tax policy is in the sea of Super Bowl commercials about beer, cars, and Doritos, yet the organization Americans Against Food Taxes spent over $3 million to change that last Sunday.

The ad, called “Give Me a Break”, features a nice woman shopping in a grocery store,  explaining how she does not want the government interfering with her personal life by attempting to place taxes on soda, juice, or even flavored water. The goal of the ad is to portray objections to soda taxes as if they are grounded in the concerns of ordinary Americans.

But Americans Against Food Taxes is anything but a grassroots organization. Its funding comes from a coalition of corporate interests including Coca-Cola, McDonalds and the U.S. Chamber of Commerce.

It is easy to understand why these groups are concerned about soda taxes, which were once considered a way to help pay for health care reform. The entire purpose of these taxes is to discourage the consumption of their products. As the Center on Budget and Policy Priorities explains in making the case for a soda tax, such a tax could be used to dramatically reduce obesity and health care costs and produce better health outcomes across the nation. Adding to this, the revenue raised could be dedicated to funding health care programs, which could further improve the general welfare.

These taxes may spread, at least at the state level.  In its analysis of the ad, Politifact verifies the ad’s claim that politicians are planning to impose additional taxes on soda and other groceries, writing that “legislators have introduced bills to impose or raise the tax on sodas and/or snack foods in Arizona, Connecticut, Hawaii, Mississippi, New Mexico, New York, Oklahoma, Oregon, South Dakota, Vermont and West Virginia.”

It's true that taxes on food generally are regressive, and taxes on sugary drinks are no exception according to a recent study. It's a bad idea to rely on this sort of tax purely to raise revenue, but if the goal of the tax is to change behavior for health reasons, then such a tax might be a reasonable tool for social policy. We have often said the same about cigarette taxes, which are a bad way to raise revenue but a reasonable way to discourage an unhealthy behavior.

With so many states considering soda taxes and the corporate interests revving up their own campaign, the “Give Me a Break” ad may just be the opening shot in the big food tax battles to come.

Lawmakers in a handful of states are pushing tax cuts for corporations and other businesses under the guise of spurring economic growth.  Florida, Kansas, Iowa, Missouri, and Arizona all made headlines this week for proposed tax cuts of this sort.

In Florida, Governor Scott’s proposed budget plan was released on Monday, and as expected, it included enormous cuts to both corporate income taxes and property taxes.  Under Scott’s plan, which he unveiled before a crowd of tea party activists, the state’s already low corporate tax rate would fall from 5 percent to 3.5 percent.  At the same time, state spending would plummet by $4.6 billion, with pre-K through university education making up $3.1 billion of that total.  Fortunately, even the state’s conservative legislators don’t seem the least bit interested in Scott’s ultra-conservative (and exceedingly vague) ideas.

Kansas lawmakers generated similar headlines this week as bills were introduced in both the House and Senate to phase out the state’s corporate income tax.  According to the Wichita Eagle, proponents of the measure are actually claiming that phasing out this major tax would somehow increase tax revenue.  We seriously doubt it.

In Iowa, Governor Branstad’s proposal to slash the corporate income tax in half and cut business property taxes by 40 percent received renewed attention this week as the Des Moines Register attempted to summarize the absolutely massive number of tax cuts being proposed by Iowa lawmakers. 

Fortunately, Senate Majority Leader Michael Gronstal isn’t impressed, saying, “Taken as a whole, the Republican budget basically says we're going to squander the opportunities for the next generation of kids in this state — in terms of education, in terms of access to community college and training programs — we're going to push that aside and say the most important thing is to make sure corporations have tax cuts.”

Missouri lawmakers also garnered some attention this week when the state Senate endorsed legislation to repeal the state’s franchise tax on businesses over the course of the next five years.  Currently, a business must have more than $10 million in assets to be subject to the franchise tax.  The St. Louis Post-Dispatch ran an excellent editorial this week in response to the plan, noting: “Businesses were given tax breaks, tax credits, tax incentives, low corporate taxes and tort reform. So where are the jobs? Or did they just pocket the savings? … Business-friendly is one thing. Business-promiscuous is quite another.”

It probably wouldn’t change anything, but it sure would be nice if Arizona lawmakers gave the Post-Dispatch’s editorial a read before beginning debate on the business tax cut package that Governor Brewer plans to release on Monday.

Progressive tax reform ideas are getting attention in Colorado, where voters may get the opportunity to enact it by ballot, and Kentucky, where lawmakers have the opportunity to support a far-reaching reform bill. Meanwhile, Iowa may move in the opposite direction by choosing the most draconian tax proposal being debated in the state.

Supporters of progressive taxation in Colorado, led by the Colorado Center on Law and Policy, filed a mix of ballot proposals last week that would greatly enhance the adequacy and fairness of Colorado’s tax system.  (Multiple proposals were filed for technical reasons, and supporters intend to bring only one plan before the voters.) 

Each proposal would transition away from Colorado’s flat rate income tax in favor of a graduated rate system.  The tax rate on taxable incomes below $50,000 would fall from 4.63% to 4.2%, while progressively higher rates would apply to higher levels of income.  Incomes above $1 million would be taxed at 9.5%. 

The majority of Colorado residents would see tax cuts, or no change in their income tax liability, under this plan.  Some of the proposals would also raise the state’s corporate income tax rate, while others would institute a new corporate minimum tax.  The state’s EITC would also be made permanent under some of the proposals.  By reforming Colorado’s tax system in this manner, approximately $1.5 billion in sorely needed revenue could be raised each year in order to improve the state’s struggling school system and other public services.

In Kentucky, Representative Jim Wayne held a press conference last week to discuss his bill, HB 318, which would modernize and increase the progressivity of Kentucky’s tax structure. The bill would expand the sales tax base to include a variety of services, introduce an Earned Income Tax Credit, and change the personal income tax rates and brackets.

ITEP estimates were used to show that, overall, the state would have a more progressive tax structure if the Wayne bill became law. Representative Wayne should be applauded for continuing to beat the progressive drum and arguing year after year that a tax system “should be equitable, it should be buoyant, it should be flexible, and it should grow with the economy.”

In less cheerful news, the Iowa House will have the opportunity to vote on a bill that passed through committee that, if approved, would reduce the state’s income tax rates across the board by 20 percent. This bill is one of the most expensive tax cut proposals currently on the table and threatens Iowa’s ability to provide public services over the long term.

In fact, the leader of the Democratic minority in the House recently said, "I'm not sure where the House ship is sailing. On one hand, we have all kinds of tax-cut bills moving through the process. ... It's about $2 billion over the next few years that would be eliminated from the state of Iowa's budget. How is that even remotely fiscally responsible?"

Of course, it's the opposite of fiscally responsible, as noted in a recent Iowa Policy Project brief finding that “[t]o develop long-term sustainability in the budget, it is important to examine what has given rise to current budget imbalances. Iowa’s long-term structural budget deficit has occurred in significant measure because lawmakers have adopted various tax breaks and reductions, not because they have expanded programs and services.”

Ohio Governor Kasich, an advocate of repealing the state's personal income tax, now apparently thinks that if the full income tax can’t be repealed, then he should make the tax as generous as possible to wealthy Ohioans. There are reports that the Governor wants to introduce a tax break for capital gains income. He said recently, “We can't tax ourselves to prosperity. We need to get the mojo back.”

Kasich should read ITEP’s report on capital gains taxation, which explains that tax breaks for capital gains are an ineffective strategy for economic development.

The battle pitting Michigan’s low-income families against big business is heating up.  Governor Rick Snyder is unabashedly supporting an elimination of the state’s Earned Income Tax Credit (EITC) to help pay for his $1.5 billion annual cut in state business taxes.  Snyder wants to replace the Michigan Business Tax with a 6 percent corporate income tax which will exempt most small businesses from paying any business taxes.   

Michigan, however, is not flush with cash to pay for such a cut. It has a $1.8 billion budget gap to close this year.  So, Snyder and other state lawmakers have turned to their state’s most vulnerable residents and are asking them to “share in the pain” to help plug the even larger budget gap that would result if the business tax cut plan is enacted. 

This week, State Senator Roger Kahn officially introduced a bill to eliminate the EITC because, he says, state residents "don't need it."

Michigan’s EITC costs around $350 million a year, which is around 20 percent of the cost of the business tax cut, and provides affordable, effective, and targeted assistance to more than 700,000 low- and moderate-income Michiganders.   These are the working families hit hardest by the economic downturn and who are also feeling the impact of several years of budget cuts to education and health services. 

The Michigan League of Human Services’ CEO released a statement on the proposal saying, “While we recognize the desire for everybody in the state to share in the sacrifice, poor people are being asked to be the sacrificial lambs. The Michigan Earned Income Tax Credit, which helps low- and moderate-income working households, should not be the first credit considered among Michigan’s $34 billion list of tax expenditures, including tax breaks for big corporations.”

There's been a lot of talk lately about how much U.S. corporations actually pay in federal income taxes, and a lot of it has been wrong. This is not surprising, since corporations go to a lot of trouble to obscure what they pay in the financial reports that they must file with the Securities and Exchange Commission (SEC) each year.

For example, the New York Times recently reported that General Electric paid 14.3 percent of its profits in taxes over the 2005-2009 period. While this is surprisingly low (compared to the statutory corporate income tax rate of 35 percent) it is incorrect, and the real effective rate is much lower.

GE's effective tax rate for its U.S. profits was actually just 3.4 percent over that period. Our figure is based on what GE says that it paid in U.S. corporate income taxes (called "current" taxes) divided by what GE says its pretax U.S. profits were (all from GE's annual 10K reports to shareholders, filed with the SEC).

There are several reasons for confusion over the effective tax rates paid by corporations. First, the U.S. only taxes corporate profits generated in the U.S. (or repatriated to the U.S.) so that it is mostly up to foreign countries to tax the profits these corporations generate offshore, and yet some people are referring to worldwide taxes U.S. corporations pay on their worldwide profits when they discuss the U.S. corporate tax system. The worldwide effective tax rate includes taxes that a corporation pays to all governments in the world. But to understand how the U.S. corporate income tax is working, one must focus on U.S. taxes paid on U.S. profits. No one expects Congress to do much about taxes that U.S. corporations pay to the governments of France, Germany, or Japan!

Second, to get a sense of what a corporation pays each year, we should include the current U.S. taxes paid, but not the deferred U.S. taxes. "Deferred" is a euphemism for "not paid." Corporations can defer (delay) paying taxes if, for example, they enjoy tax breaks for accelerated depreciation, which allow them to take deductions for capital investments sooner than they would if the rules were simply based on the actual life of the investment. A company could eventually pay taxes that it has "deferred." But that doesn't happen very often.

A post on the New York Times Economix blog, which received a lot of recent attention, uses data that includes the worldwide taxes, both current and deferred, paid by U.S. corporations on their worldwide profits, and tries to use this to make a point about the U.S. corporate tax system.

(The NYU scholar who created this data set recently introduced another measure which rightly focuses only on profitable corporations, but the problems identified above still remain.)

The point the New York Times article was trying to make is that effective corporate tax rates vary widely among companies and industries, which is true (and is a bad thing). But the worldwide tax information cited doesn't shed much light on the U.S. corporate tax system's role in these disparities.
 
More important, as our lawmakers contemplate reforming the corporate income tax, the place to start is to have an accurate understanding of the effective tax rates that companies pay to the U.S. government. Mistakenly mixing in foreign data just muddies the waters.

In some states, huge budget gaps are making it somewhat difficult to enact the types of large, immediate tax cuts that many lawmakers promised during their political campaigns last year.  Partially as a result, anti-tax lawmakers are increasingly looking toward the longer-term with proposals to cap state spending, cap property tax growth, and mandate a supermajority legislative vote in order to raise taxes.  Four states in particular generated headlines for proposals of this sort over the past week: New York, Wisconsin, Virginia, and North Dakota.

As we mentioned two weeks ago, New York’s Republican-led Senate has already passed constitutional amendments that would impose a TABOR-style spending cap, and a supermajority requirement for raising taxes.  This week, the Senate added to that list by enthusiastically passing Governor Andrew Cuomo’s property tax cap, which would limit property tax growth to 2 percent per year.  As the New York Times pointed out, property tax caps in general are extremely blunt instruments, and this one is particularly worrisome given the lack of exemptions for things like health care, pensions, debt service, or increased enrollment.  Fortunately, all three of these proposals will be less welcome in the state Assembly, though the Assembly’s speaker has expressed an interest in coming to a “common ground with the governor and the Senate on an appropriate property tax cap.”

In Wisconsin, the state’s newly elected Republican governor and Republican legislators have enacted relatively minor business tax cuts that some lawmakers have described as merely symbolic.  Not content with these small victories, Republican lawmakers are now turning to the slightly longer-term, as the state Assembly last week passed a bill that would require a supermajority vote in order to raise taxes during the next two years.  Of much more concern, however, is a proposed constitutional amendment that would permanently impose the same restriction on Wisconsin residents’ elected representatives. That amendment has yet to come up for a vote.

In Virginia, two troubling constitutional amendments made it out of committee last week. One would mandate a supermajority vote to raise taxes and another would impose a TABOR spending cap equal to inflation plus population growth.  Both are being pushed by Del. Mark Cole, and both were the subject of a highly critical editorial in the Roanoke Times this week.

Finally, in North Dakota, a proposal to cap property tax revenue growth at 3 percent per year received a committee hearing this week and will eventually move to the full House for a vote.  Similar proposals have been rejected in each of the last two sessions, though the fate of this one remains unclear.

Hopefully, lawmakers in each of these states will eventually decide against reducing their ability to deal with the difficult and often unforeseen challenges that state and local governments must inevitably confront.

It looks very likely that the question of whether or not to extend a temporary income tax surcharge on New York’s wealthiest households will be a contentious issue as the budget process moves forward in the state.

New York Governor Andrew Cuomo released his budget plan this week.  Sticking to his “no tax increase” campaign promise, Cuomo did not include any significant revenue-raisers and instead chose to close a $10 billion budget gap primarily with massive cuts to education and Medicaid spending.

As a New York Times editorial stated, “without additional revenue… the state’s most vulnerable citizens — the poor, the sick, the elderly and schoolchildren — will inevitably bear the largest burden.”  The editorial endorsed extending the temporary personal income tax surcharge on the state’s wealthiest households, a move also supported by Democratic Assembly members and many advocacy groups who want to lessen the magnitude of proposed spending cuts.  

The temporary high-income tax surcharge was enacted in 2009 to help address New York’s budget crisis at the time and is set to expire at the end of 2011.  But, clearly, the budget crisis is not behind the state and the $2 billion the temporary tax would raise for the coming fiscal year and $4 billion in the following year could go a long way to protecting core state services.  The surcharge applies only to married couples with taxable incomes over $300,000 a year ($200,000 for single taxpayers).  These very same taxpayers will receive a significant federal benefit from the extension of the Bush tax cuts. 

For the sake of ensuring all New Yorkers have access to affordable health care, quality education, and safe communities, let’s hope the state’s lawmakers can agree that their wealthiest residents can afford to pay a little more this year.

In a recent op-ed in the Atlanta Journal Constitution, Sarah Beth Gehl of the Georgia Budget and Policy Institute makes the case that the Special Council on Tax Reform and Fairness hit a triple when they came out with their policy recommendations for modernizing the state’s tax structure. The Council emphasized sales tax base expansion to include more services and broadening the state’s income tax base. 

Triples are good, but home runs are better and Gehl makes the case that the Council missed out on a homerun because they overlooked a key tax policy principle when devising its recommendations — tax fairness.  Citing ITEP data, she writes, “The best-off 1 percent of Georgians, those making more than $389,000 in 2010, would receive an almost $7,800 average yearly tax decrease. In the case of a Georgian making around $40,000, taxes would rise by about $400 a year.” 

Gehl identifies several sensible alternatives that the legislature could tack onto the Council’s recommendations that would take into account tax fairness, including more generous low-income tax relief and exempting groceries from the sales tax base.

There seems to be a contingent that is steering away from the debate and instead focusing on what Grover Norquist would approve of. In fact, to appease Norquist and his group, Americans for Tax Reform, the Council actually reconvened earlier this week to vote on a resolution which claimed that the intent of the Council’s recommendations was that they were to be “revenue-neutral.” Because, of course, Norquist’s group would never give the thumbs up to a proposal that actually raised revenue to meet the needs of Georgians.

The Special Joint Committee on Georgia Revenue Structure met this week to debate the Council’s recommendations. We’ll be watching their actions closely and it sounds like Grover will be too.

Low-income tax credits and rebates are one of the most effective ways that lawmakers can reduce poverty through the tax code. The proliferation of state Earned Income Tax Credits attests to policymakers' growing awareness of this. But these rebates can be meaningless if lawmakers don't make at least minimal outreach efforts to ensure that eligible taxpayers claim the credits.

Case in point: South Dakota, where last week the House Taxation Committee met to consider HB 1131, a bill that would have eliminated the state’s sales tax on food and replaced the lost revenue by increasing the sales tax rate on other items.

Data generated by ITEP and presented in testimony by the South Dakota Budget and Policy Project showed that this revenue-neutral tax change would actually result in a tax cut for 99 percent of South Dakotans. Yet, the bill was defeated in committee.

Certainly, the debate about whether or not to tax food is worth having. It’s important to note that in states that tax food, most offer some type of low-income tax relief to help offset the regressive nature of sales taxes levied on necessities. South Dakota offers a rebate, but it’s ineffective at best. The current rebate was only claimed by 726 families in all of fiscal year 2010. Qualifying for the program is difficult and there’s little effort by the state to even make sure families know about the refund.

Maddeningly, some of the lawmakers who rejected HB 1121 cited the existence of the rebate as a reason why a grocery tax cut is unnecessary. South Dakota’s tax structure is plenty flawed already (it’s a state that doesn’t levy an income tax) and taxing food without offering an effective refund simply doesn’t help.

Some Americans respond positively to the anti-tax message of the Tea Party, but is anyone willing to accept the cuts in public services that must logically follow? The Tea Party has been specific about cutting taxes but vague about what programs must be slashed in order to balance the government's books. So what will happen if the Tea Party takes power? The recent experience of Nassau County, New York, shows us that the result will be a disaster.

When Tea Party-backed Edward Mangano won his election for the Nassau County Executive as a member of the Tax Revolt Party, it was on a platform of vague promises to cut spending and to repeal a $40 million dollar energy tax.

The voters of Nassau County got what they asked for. Mangano immediately repealed the energy tax, but failed to actually pass any of the substantial spending cuts that he had promised. In doing so, he may have stayed true to his Tea Party roots, but he also drove the second richest county in the nation into fiscal disaster.

With a $175 million dollar gap in the $2.6 billion budget plan, the Nassau County Interim Finance Authority (NIFA), a New York State oversight board, was forced to take control of the county’s finances. NIFA is tasked with stepping in to correct the county’s finances whenever there is a gap of larger than 1 percent, which the current gap dwarfs by almost 7 times.

The situation is so dire that Moody’s is putting the county’s municipal securities on watch for a downgrade, a move that portfolio managers said is rare considering how safe these investments are usually considered.

Despite this, Mangano has refused to yield and in recent days filed suit to stop the takeover, citing his worries that NIFA may force him to raise taxes.

The consensus against Mangano even transcends normal ideological lines, with the New York Times and New York Post editorial pages finding themselves in rare agreement over the irresponsibility of his actions.

In a comprehensive special report, Reuter’s called Nassau County’s experience a “cautionary tale,” saying that the fiscal collapse in Nassau and the subsequent takeover represents a “black eye for the Tea Party.”

As one observer put it, "A lot of people who got elected on this type of anti-tax platform are running into the brick wall of fiscal reality."

A new website, Oregon Open for Business, was launched this week to help dismiss claims that Oregon's recent voter-approved tax increases are driving corporations away from the state.  The website tracks the numerous businesses, including Google, Facebook, Genentech, IBM and Subaru, that have moved to or expanded their presence in Oregon in the past year.

The Pennsylvania Budget and Policy Center and Keystone Research Center introduced a  joint blog this week called Third and State.  The new progressive blog will present "sharp and timely commentary" on Pennsylvania's economy and help explain how the state budget and other policies impact the lives of Pennsylvanians.

The Institute on Taxation and Economic Policy and Citizens for Tax Justice are seeking an experienced and mission-driven Communications Director to help us articulate and amplify our voice on federal and state tax issues.  The CTJ/ITEP Communications Director will develop and implement a communications strategy that will deliver regular and consistent messages to the media, lawmakers, national and state partners, and the community at large across a wide range of media.   Interested candidates should send a cover letter and resume to Matt Gardner at mattg@itepnet.org.