March 2011 Archives



STOP THE AMNESTY FOR CORPORATE TAX DODGERS



| | Bookmark and Share

New Report from CTJ Explains the Right Way to Reform Corporate Tax – and Why the Amnesty Is the Worst Possible Change

Corporate leaders are conducting a massive campaign for what amounts to a tax amnesty for corporate profits shifted out of the United States, especially profits shifted to offshore tax havens.

In 2004, Congress approved this sort of holiday, which allowed U.S. corporations that brought offshore profits to the U.S. to pay U.S. taxes at a rate of just 5.25 percent instead of the normal 35 percent. Corporate leaders claimed they would use the money brought back to create jobs, but several empirical studies found that the holiday did not lead to job creation, and many of the companies that benefited actually reduced their U.S. employment. The money was largely put towards stock repurchases, effectively putting it in the hands of shareholders.

Washington Resists the Repatriation Holiday — But for How Long?

During the debate over the economic recovery act in early 2009, Senator Barbara Boxer offered an amendment to provide another repatriation holiday. Concluding that the 2004 holiday was a corporate giveaway that enriched shareholders without creating jobs, most Senators opposed the Boxer measure, which failed by a vote of 42-55.

The Obama administration reiterated that it opposes a repatriation holiday — unless it is part of a comprehensive corporate tax reform. In another blow to proponents of the holiday, the leading Republicans of the Congressional tax-writing committees said the same thing.

U.S. Chamber of Commerce Admits that Job-Creation Rules Attached to Tax Holiday Won't Work

Some lawmakers who support a repatriation holiday argue that the conditions attached to the 2004 measure could be strengthened in a second holiday so that companies cannot benefit without creating jobs or otherwise directly investing in their U.S. operations. 

But this argument is so weak that even the U.S. Chamber of Commerce openly rejects it. At a panel discussion organized by Tax Analysts, Martin Regalia, a senior vice president for the Chamber, said that because money is fungible, you cannot really direct a company to do any particular thing with cash it receives.

Regalia said that the case for a repatriation holiday is that it's good for America when a company brings offshore profits back to the U.S., even if the profits go directly to shareholders.

Regalia did not use the more recognizable terms that describe this type of thinking, perhaps because it is so widely discredited: Trickle-down economics, or supply-side economics.

Democratic Insiders Hired to Promote the Amnesty for Corporate Tax Dodgers

With all this going against the repatriation holiday, why do the corporations think they can win? Because this time they are far more organized and are devoting far more resources to lobbying. They have effectively bought off some highly influential Democratic insiders, as well as Republican insiders. The coalition in favor of the holiday includes Adobe, Apple, Cisco, Google, Kodak, Microsoft, Pfizer, Oracle and others. A Business Week article explains:

The team's chief communications strategist is Anita Dunn, the Democratic media consultant who served as President Barack Obama's interim communications director during his first year in office... The lead lobbyists are former Representative Jim McCrery of Louisiana, who was the ranking Republican on the House Ways and Means committee, and Jeffrey A. Forbes, the former chief of staff to Senate Finance Chairman Max Baucus (D-Mont.).  

New Report from CTJ Explains What Congress Should Do Instead

A new report from Citizens for Tax Justice explains that Congress should adopt a system that taxes all profits of U.S. corporations, no matter where they are earned. U.S. corporations would continue to get a credit, as they do now, for any taxes they pay to a foreign government, to avoid double-taxation. (The comprehensive tax reform offered last year by Senators Ron Wyden and Judd Gregg would do this.)

In this system, U.S. corporations would never have a tax-related reason not to repatriate their offshore profits because those profits would already be subject to U.S. taxes anyway.

In theory, the U.S. does have a “worldwide” tax system in which all profits of a U.S. corporation are subject to U.S. taxes, but it undermines this rule by allowing U.S. corporations to “defer” their U.S. taxes on offshore profits until those profits are brought to the United States (until those profits are “repatriated”). Deferral provides an incentive for corporations to move jobs overseas and to shift profits to offshore tax havens.

Many corporate leaders want Congress to permanently exempt offshore profits (adopt a "territorial" system, in other words) but that would only increase the incentives to shift jobs and profits offshore. So would allowing corporate leaders to believe that Congress will call off almost all of the U.S. taxes on offshore profits every few years with a repatriation holiday.

Repatriation Holiday Provides Greatest Benefits to the Worst Corporate Tax Dodgers

The CTJ report also explains that a repatriation holiday provides the greatest benefits to corporations that engage in the very worst tax avoidance. Multinational corporations that are conducting real business offshore and paying taxes to a foreign government have much less to gain from a repatriation holiday. On the other hand, a company that has shifted profits to a Cayman Islands subsidiary that conducts no real business and pays no foreign taxes would benefit enormously.



Grover Norquist Attacks Republicans for their Insufficient Extremism



| | Bookmark and Share

Grover Norquist, President of Americans for Tax Reform and leader of the anti-tax movement, is used to getting his way, at least when it comes to politicians from conservative parts of the country. Many conservative lawmakers have signed ATR's "Taxpayer Protection Pledge" which is a promise to oppose tax increases in any and all circumstances.

But these are not normal times, and Norquist's grip on conservatives may be loosening, one finger at a time. The country faces a long-term budget crisis that requires long-term solutions. But most of the debate so far has been over the GOP's proposals for immediate cuts in discretionary spending that will slow down our economic recovery without doing much to address the long-term problem. Something has to change.

In this environment, lawmakers are more willing to consider spending cuts and revenue increases than they were before. Towards the end of last year, a majority of the members of the President's fiscal commission voted in favor of a plan to slash spending and dramatically overhaul the tax system in a way that would raise some revenue. The three Republican Senators on the commission voted in favor of the plan, and Grover Norquist naturally disapproved.

In reality, the fiscal commission's plan was outrageously conservative. CTJ and other observers objected that it relied on spending cuts for two thirds of the deficit reduction while relying on increased revenue for just one third. But for Republican lawmakers, supporting even one dollar of new revenue can incite the wrath of Norquist and raise the specter of a primary challenge.

Now a "gang of six" Senators — three Republicans and three Democrats — has been meeting and talking about deficit reduction in a way that would involve reducing spending and increasing revenue. The Republicans include Mike Crapo and Tom Coburn (Senators on the fiscal commission who voted in favor of the plan) and Saxby Chambliss. It seems likely they will propose something similar to the commission's plan.

The Republican members of the gang of six certainly don't champion tax increases in the traditional sense, but are willing to consider raising revenue through eliminating tax expenditures, that is, government spending through the tax code. Senator Coburn has been especially forthcoming. He's even written OpEds about particular tax expenditures, like the subsidy for ethanol, that need to be cut.

Of course, anti-tax crusader Norquist has criticized the negotiations as a "transparent attempt to hike taxes," which he says violates the taxpayer protection pledge that the three Republicans have signed.  In a thoughtful and carefully-worded letter, the three responded to Norquist that they were working to "protect taxpayers, not special interests."

An article in Politico went so far as to say Norquist's threat has been "a nonfactor" inside the bipartisan talks. That's not a good sign for someone in the business of scaring politicians into an extreme and rigid ideology.



Tom Cruise: Actor, Producer, Farmer



| | Bookmark and Share

Every year around this time, lots of cutesy articles begin to appear listing a few bizarre tax breaks that you might be able to claim.  We don’t necessarily want to jump on that bandwagon… but we just can’t help ourselves.  If you live in Colorado, here’s one tax break you need to know about!  See how this break is already saving Tom Cruise, Kurt Russell, and Goldie Hawn boatloads of money!

Lots of states and localities offer property tax breaks for farmland, and in Colorado, as it turns out, it’s pretty easy to become a farmer for tax purposes.  According to The Denver Post, actor Tom Cruise pays a paltry $400 in tax on an $18 million, 248 acre tract of land because he lets “sheep graze around the mansions for brief periods each year.”  Now, it’s certainly nice of Mr. Cruise to feed those sheep, but it sounds like Colorado may have gone a little overboard in attempting to encourage that behavior.

Rep. Tom Massey, a Republican, apparently agrees.  Massey recently broke from his party by proposing a bill that would stop granting agricultural exemptions to residences unless the residence is integral to an agricultural operation.  Farmers like Mr. Cruise could still enjoy the agricultural break on the portion of their land used for “farming,” but they would have to pay property taxes on their homes at the same rate as everyone else.  If anything, it sounds like the bill doesn’t go far enough since it would still allow an enormous tax break on the vast majority of Mr. Cruise’s 248 acres, but most Republicans have lined up against the proposal anyway.

Frankly, the arguments in opposition to the bill have been almost as strange as the tax break itself.  Rep. Chris Holbert, for example, complained that the bill would “change the rules and take more money out of [Coloradans’ pockets.]”  Well, yeah, that’s what usually happens when a tax loophole is closed.  But another group of lawmakers are claiming the bill is unnecessary because county assessors are already allowed to decide whether property should be classified as agricultural or residential.

So which is it?  Is this bill “changing the rules” too much, or not at all?  More than likely, the opposition has a lot more to do with politics than policy.  In addition to Tom Cruise, Kurt Russell, and Goldie Hawn, The Denver Post’s (very incomplete) survey of questionable “farm owners” included a state senator, the state’s treasurer, an energy industry billionaire, a media mogul, and the chairman of Discovery Communications.  Clearly, this is an issue that many lawmakers just don’t want to deal with.



Tax Cutting Mania: Iowa and Kansas



| | Bookmark and Share

The Iowa Fiscal Partnership has issued a policy brief about the destructive tax cuts that are being proposed in the state legislature. The cuts being debated carry a hefty price tag, $1.6 billion, most of which is from a proposal to cut income tax rates by 20 percent across the board.

As we’ve previously noted, these income tax cuts are very regressive. ITEP found that the wealthiest 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.

According to IFP, the revenue picture in Iowa is improving and the budget can be balanced without drastic cuts to spending and without raising taxes. But it’s mind boggling that legislators would want to cut taxes as they're just barely crawling out of a fiscal crisis.

Charles Bruner, Executive Director of the Child and Family Policy Center, recently said, "Nobody is saying we're flush with revenues, but the picture has improved and we can get through without major cuts. But that assumes we don't dig a bigger hole with unnecessary and unwise cuts in revenues." For more on the tax cut proposals and why they are shortsighted, read IFP’s report.

In more disturbing tax cut news, the Kansas House has passed legislation that would link the state’s personal and corporate income tax rates to changes in revenue. If revenues increase, the rates for the state’s two major progressive taxes will decrease. Eventually the income tax could even be phased out altogether. 

Supporters of the legislation say that this proposal will increase the likelihood that businesses will locate in the state. But a more thoughtful critique was offered by two state Representatives in explaining their vote against the proposal. "When it (the income tax) is gone, our three-legged stool is cut to two — and the worst two we can choose. [The] sales tax is a regressive tax that impacts low-wage earners most.” The legislation now goes to the state Senate.



California Republicans Won't Allow Voters a Say on Tax Hikes



| | Bookmark and Share

California Governor Jerry Brown’s proposal to raise $9.3 billion in sorely needed revenue to help close a $26 billion budget gap through 2013 is in jeopardy.  In January, he pitched the idea of allowing voters to decide whether or not to extend temporary tax increases (first enacted in 2009 and set to expire this year) for another five years. 

Governor Brown needs a two-thirds majority of state lawmakers to place such a measure on the ballot, and to date, the governor has failed to garner support from a single Republican lawmaker (he needs four to vote with him).  

California’s constitutional deadline for passing a budget is June 15th.  Originally, Governor Brown had set a self-imposed deadline of March 10th to gain approval for his tax extension plan to ensure time to get the question on the ballot by early June.  That date has come and gone with no avail, so Brown is now seeking ways around the Republican blockade and still hoping something can be worked out in time for June. 

One alternative under consideration is a November vote on the measure which would be placed on the ballot through a petition drive rather than the legislative process.  But, that would mean the vote would come long after the budget deadline forcing lawmakers to cut billions of dollars more from an already depleted state budget. 

All eyes are on California and its popular governor to see if he can work things out in time for a June vote on the tax extension, but time is certainly running out.



Mining and Oil Lobbyists Extracting Major Benefits from States



| | Bookmark and Share

We've noted before that lobbyists for extractive industries extract billions of dollars out of taxpayer pockets through special tax loopholes and subsidies at the federal level. Unfortunately, this is true at the state level as well. Even when states face unprecedented budget shortfalls and are considering harsh spending cuts, petroleum and mining lobbyists are working hard to preserve and expand their tax subsidies.

One particularly egregious example is Nevada's Barrick and Newmont mining companies, which produce 90 percent of the gold in Nevada, worth over $500 million dollars. Recently, neither company reported any taxable income from their mines.

Interestingly, a Nevada State Tax Director recently admitted that the state has not even audited the industry for at least two years — and then entered into an ‘abrupt’ retirement.

Some legislators are proposing to limit tax deductions for mines to raise hundreds of millions of dollars. But Governor Brian Sandoval opposes the measure and it looks like proponents will not be able to overcome his veto.

In Alaska, oil industry lobbyists have found a friend in Republican Governor Sean Parnell, who is seeking to cut oil taxes and increase subsidies by at least $1.8 billion a year.

Governor Parnell says this will spur "investment" in the state. But the whole point of the tax is to ensure that oil profits result in investment in the state. As Democratic State Senator Bill Wielechowski explains, without the oil taxes, companies would take the billions in profits produced in Alaska and invest them in places like Venezuela or Ecuador. 

The new oil tax cuts do not come as a surprise to Democratic State Representative Les Gara, who contends that petroleum company representatives played a direct role in crafting the Governor’s legislation.

North Dakota seemed to have resisted extraction lobbyists when the State House rejected a measure strongly promoted by the energy industry. The state's current oil extraction tax is automatically reduced when the price of oil falls below $50 a barrel. The proposed measure would scrap that rule and instead reduce the tax as production increases.

Republican Majority Leader Al Carlson tried to ressurect the measure by sneaking the language into another oil bill without a proper hearing.

The Grand Forks Herald editorialized that the legislature must study the effect of the measure through a “neutral source” rather than relying on the “self-interested arguments from the oil industry.” Fortunately, the measure is being held up in the Senate, which will likely guarantee that the public will get to review the changes the energy industry is proposing.



G.E. EXPOSED AS WORLD CLASS TAX DODGER



| | Bookmark and Share

A New York Times article explains how General Electric has obtained a negative corporate income tax rate on its U.S. profits. Its public filings show that it had $26 billion in U.S. profits over the last five years. Instead of paying federal corporate income taxes, G.E. actually received a net benefit of $4.1 billion from the IRS over that period.

The article quotes CTJ's director:

“'Cracking down on offshore profit-shifting by financial companies like G.E. was one of the important achievements of President Reagan’s 1986 Tax Reform Act,' said Robert S. McIntyre, director of the liberal group Citizens for Tax Justice, who played a key role in those changes. 'The fact that Congress was snookered into undermining that reform at the behest of companies like G.E. is an insult not just to Reagan, but to all the ordinary American taxpayers who have to foot the bill for G.E.’s rampant tax sheltering.'”

Here are some other highlights:

- President Obama has "designated G.E.’s chief executive, Jeffrey R. Immelt, as his liaison to the business community and as the chairman of the President’s Council on Jobs and Competitiveness, and it is expected to discuss corporate taxes."

- G.E.'s tax department includes nearly 1,000 people who are instructed to "divide their time evenly between ensuring compliance with the law and 'looking to exploit opportunities to reduce tax.'”

- G.E.'s tax avoidance played a starring role in convincing Reagan to adopt tax reform in the 1980s. “'I didn’t realize things had gotten that far out of line,' Mr. Reagan told the Treasury secretary, Donald T. Regan, according to Mr. Regan’s 1988 memoir. The president supported a change that closed loopholes and required G.E. to pay a far higher effective rate, up to 32.5 percent."

- "That pendulum began to swing back in the late 1990s" when Congress enacted a tax break for "active financing."

- G.E.'s tax department's director, a former Treasury official, literally "dropped to his knee" when begging Ways and Means Committee staff, then under the leadership of Congressman Charles Rangel, to extend the tax break for "active financing."

- Rangel reversed his opposition to extending the "active financing" tax break that day, after G.E.'s lobbying and after Congressman Crowley of Queens argued that it would help banks in his district.

- Provisions of President George W. Bush's huge corporate tax cut bill in 2004 were "so tailored to G.E. and a handful of other companies — that staff members on the House Ways and Means Committee publicly complained..."

- "Since 2002, the company has eliminated a fifth of its work force in the United States while increasing overseas employment. In that time, G.E.’s accumulated offshore profits have risen to $92 billion from $15 billion."



CTJ Op-Ed: Sorry, Newt. You Never Balanced the Budget



| | Bookmark and Share

An op-ed by CTJ director Bob McIntyre that ran in several newspapers this week refutes Newt Gingrich's recent claim that the government shutdown of 1995 led to a balanced budget. McIntyre writes:

In a Feb. 27 article in the Washington Post, Gingrich argues (a) that Republicans did not cause the government shutdown and (b) that the shutdown was a brilliant tactical move by Republicans. The shutdown, he says, led inexorably to the 1997 "Balanced Budget Act," which he claims produced the federal budget surpluses we enjoyed from fiscal 1998 to 2001.

Gingrich's insistence that he deserves none of the blame, but all of the (supposed) credit for the 1995 government shutdown is humorous, and I thank him for the laugh. Not so funny is Gingrich's cockamamie theory that the so-called 1997 "Balanced Budget Act" and its companion bill, the "Taxpayer Relief Act," led to the budget surpluses that began in 1998...

Read the op-ed



Congresswoman Schakowsky Proposes Millionaires Tax as Alternative to Cutting Education, Health and Other Programs



| | Bookmark and Share

On Wednesday, Rep. Jan Schakowsky introduced legislation to add additional brackets to the federal income tax so that millionaires and billionaires would be taxed at higher rates than they are today.

A rate of 45 percent would apply to taxable income starting at $1 million and rates would increase up to 49 percent for taxable incomes over $1 billion. Citizens for Tax Justice found that the bill would raise at least $78.9 billion if enacted for 2011. This is a little more than the $61 billion that Republicans would like to cut for the rest of this fiscal year from Pell Grants, nutrition, housing and other programs that struggling families rely on, particularly during this recession.

Millionaires make up about 0.2 percent (that's the richest one fifth of one percent) of taxpayers, and yet they received about 17.6 percent of the income tax cuts that were extended at the end of last year. (And millionaires certainly benefitted disproportionately from the estate tax cut that was part of that compromise.) And yet, none of the Republican spending proposals would require this group of taxpayers to share in the sacrifice that they claim is needed to reduce the budget deficit. Congresswoman Schakowsky's proposal demonstrates that there is a fairer way to reduce the deficit.

Ultimately, of course, we need fundamental tax reform that eliminates loopholes, raises revenue and makes the system fairer and simpler. Until that happens, the only fair alternative is to require the best off Americans to contribute at a higher rate than they do today.



Missouri: Good, Bad, and the Really Ugly



| | Bookmark and Share

There’s a lot happening lately in the world of tax justice (or injustice as the case may be) in Missouri. Here’s a quick roundup:

The Good: Anti-Poverty Tax Policy

This week a bill to introduce a 20 percent refundable Earned Income Tax Credit (EITC) was heard before the House Committee on Tax Reform.  Representative Jeanette Mott Oxford and her thirty-five cosponsors should be congratulated for presenting this bill. 

ITEP’s written testimony on behalf of the bill made it clear that “eighty percent of the benefits would go to the poorest forty percent of Missourians — exactly the income groups who pay the largest share of their income in Missouri taxes under current law.”

In their testimony, the Missouri Budget Project said, “A state EITC could benefit as many as 440,000 Missouri families and is also proven to be a valuable economic stimulus, generating economic activity that would reach every corner of Missouri.”

State tax structures illustrate state priorities. If Missouri's legislators prioritize generating economic activity and making the tax system fair for working families, they should pass HB581.

The Bad: Ballot Measures to Starve Local Governments

Early next month voters in Kansas City and St. Louis will be asked to decide if their cities should continue to have an earnings tax. If the voters in Kansas City reject their 1 percent tax on earnings levied on those who live or work in Kansas City, the city will lose approximately $200 million a year by the time the earnings tax is fully repealed, a staggering 40 percent of the city’s general fund revenue.

Last year, Missouri voters approved a law that bars Kansas City and St. Louis from continuing to have these earnings taxes unless they are approved by the cities' voters. (The measure also blocked other local governments from adopting an earnings tax.) The ballot measure was largely bankrolled by Rex Sinquefield, an ideological, wealthy financier known for supporting conservative causes.

Now, the groups battling for and against these major city revenue sources are entering the final push. The Kansas City Star recently explained that the anti-earnings tax folks aren’t being honest. “Earnings tax opponents continue to highlight this statement on their website: 'Cutting the e-tax would only require an annual 1.5 percent cut out of the budget over the next 10 years.' We’ve been over this before, but it bears repeating: This statement is misleading and, worse, the critics know it but refuse to acknowledge the truth.”

The Ugly: Income Tax Repeal

In even worse news, Missouri’s Mega Tax Bill, HJR 8, passed both the House Tax Reform and Rules Committees and is expected to be debated on the floor of the House any day. The legislation would create a constitutional amendment to eliminate the state’s individual and corporate income taxes as well as corporation and bank franchise taxes, and replace the revenue with an expanded sales tax.

There are currently nine ballot initiatives that, if enacted, would make a similar radical change to the state’s tax structure. In a previous analysis of similar legislation, ITEP found that the bottom 95 percent of the income distribution would see a tax hike if the Mega Tax Bill were to become law, while the richest five percent would see tax cuts. It's hard to get any uglier than that.



Trouble Brewing in Ohio



| | Bookmark and Share

Capital gains income, which disproportionately flows to the wealthiest taxpayers, is taxed at lower rates than "ordinary" income like wages under the federal income tax. This is unfair for all sorts of reasons, and the unfairness is amplified in the eight states that provide additional, substantial breaks for capital gains. Ohio could soon add itself to this ignominious list.

Ohio Governor John Kasich said this week, “We should not be taxing our capital gains as regular income." Meanwhile, a new proposal in the legislature (House Bill 98) would offer a tax break for elderly Ohioans with unearned income. Policy Matters Ohio (PMO) and the Institute on Taxation and Economic Policy (ITEP) worked together to analyze the impact of changing how capital gains are taxed and the impact that passing HB 98 would have on Ohio’s tax structure.

Policy Matters Ohio concluded, “Cutting the Ohio income tax on capital gains would be costly and most of the gains would go to the most affluent Ohioans, while 92 percent of Ohio taxpayers would get nothing at all.” ITEP found that the cost of HB 98 would be staggering — about $325 million annually.

Though no tax break on unearned income was included in the budget plan presented earlier this week by Governor Kasich, his statement suggests that he supports legislation like HB 98. His budget does, however, make significant cuts to K-12 and higher education, which, coupled with a possible break for capital gains income, would result in a significant shift of priorities away from ordinary Ohioans in favor of the well-off.



Minnesota: This is What Effective Incidence Analysis Looks Like



| | Bookmark and Share

A recent Republican proposal in the Minnesota Legislature would cut the state’s bottom two income tax rates over three years. Thanks to Minnesota’s ability to provide tax incidence analysis (an examination of how different income groups are impacted by policy changes) the public can be informed about the real consequences of this proposal.

After analyzing the plan, the state's Revenue Department and the House Research Department reached the same conclusion: these tax reductions would be regressive and benefit upper income families disproportionately.

Governor Dayton’s response to the Republican’s plan will warm the heart of any tax justice advocate. "It bothers me," he said, "the Republicans would present this as a tax cut targeted for lower and middle-income families when the facts are the opposite. The greatest benefit goes to upper-income Minnesota families. Once again they just have shown their values, their priorities are to benefit the richest Minnesotans at the expense of the rest of Minnesota."

While we are giving kudos to Minnesota and that state’s ability to conduct timely analyses, we should note that the Department of Revenue recently released their 2011 Minnesota Tax Incidence Study. Other states interested in improving their analytical capacity should look to Minnesota.



Are Amazon.com's Sales Tax Avoidance Days Coming to an End?



| | Bookmark and Share

Last week Illinois joined New York, North Carolina, and Rhode Island by enacting legislation requiring Amazon.com and other online retailers working with in-state affiliates to collect sales taxes.  Arkansas’s Senate and Vermont’s House recently passed similar legislation, and Arizona, California, Connecticut, Hawaii, Minnesota, Mississippi, and New Mexico are considering doing the same.  Interestingly, lawmakers in each of these states are being spurred to do the right thing by major retailers like Wal-Mart, Sears, and Barnes & Noble.

In most states, Amazon and other online retailers are not currently required to collect sales taxes unless they have a “physical presence” in the state, though consumers are still required to remit the tax themselves.  Unfortunately, very few consumers actually pay the sales taxes they owe on online purchases — in California, for example, unpaid taxes on internet and catalog sales are estimated to cost the state as much as $1.15 billion per year.

The so-called “Amazon laws” recently adopted in Illinois, New York, North Carolina, and Rhode Island are all designed to limit this form of tax evasion by broadening the class of online retailers that must pay sales taxes.  Specifically, under these new laws, any retailer partnering with in-state affiliate merchants is required to pay sales taxes on purchases made by residents of that state.

Up until recently, the reaction to these laws has been mostly hostile.  Grover Norquist has branded them a (gasp) “tax increase,” despite the fact that they’re designed only to reduce illegal tax evasion.  More importantly, Amazon has challenged the New York law in court, and has ended relationships with affiliates in North Carolina and Rhode Island in order to avoid having to pay sales taxes on sales made within those states.  Amazon has also promised to severe ties with its Illinois affiliates, and has threatened to do the same in California if a similar law is adopted there.  These tactics mirror a recent decision by Amazon to shut down a Texas-based distribution center in order to avoid having to remit taxes in that state as well.

But Amazon may not be able to bully state lawmakers for much longer.  Since New York passed its so-called “Amazon law” in 2008, North Carolina, Rhode Island, and now Illinois have already followed suit despite all the threats.  And it appears that Arkansas and Vermont may very well do the same — as proposals to enact Amazon laws in each of those states have already made it through one legislative chamber.  In addition, at least seven other states (listed in the opening paragraph) have similar legislation pending.

According to State Tax Notes (subscription required), Wal-Mart, Sears, and Barnes & Noble are each attempting to partner with affiliate merchants recently dropped by Amazon.  Even more importantly, several of the large retail companies (like Wal-Mart, Target and Home Depot) are joining forces to lobby in favor of Amazon laws. These companies’ interest is in large part due to the fact that they already have to remit sales taxes in the vast majority of states because of the “physical presence” created by their large networks of “brick and mortar” stores.  If more traditional retailers begin to voice support for Amazon laws, the progress already being made on this issue is likely to accelerate.

For more background information on the Amazon.com tax controversy, check out this helpful report from the Center on Budget and Policy Priorities.



Request a Printed Copy of the ITEP Guide



| | Bookmark and Share

Due to a technical error, we were unable to process requests for printed copies of the newly released ITEP Guide to Fair State and Local Taxes that were made prior to this Thursday (March 17).  If you would like a printed copy, please submit (or re-submit) your information using this request form.  We sincerely apologize for this inconvenience.

 

Robert McIntyre, director of Citizens for Tax Justice, testified on March 9 before the Senate Budget Committee on tax subsidies for businesses. He explained that these tax breaks for business (1) are hugely expensive, (2) are often economically harmful, and (3) conflict with fundamental tax fairness.

Eliminating or reducing these tax subsidies can result in revenue that would help us address our long-term budget crisis. McIntyre said that "President Obama is seriously off track in proposing to devote all the savings that can be gained from curbing business tax subsidies not to deficit reduction, but rather to lowering the statutory corporate tax rate."

Here's an excerpt of the testimony:

...Today is the first day of Lent, and I’d like to suggest that members of Congress consider giving something up, not just until Easter, but perhaps until the federal budget is balanced (and even thereafter). What I hope you’ll give up is your enthusiasm for providing subsidies to those who don’t need them, in  particular, for business subsidies administered by what seems to have become Congress’s favorite agency, the Internal Revenue Service.

A quarter of a century ago, President Ronald Reagan took on business tax subsidies in the Tax Reform Act of 1986. Among other things, Reagan’s tax act curbed offshore corporate profit shifting, leasing tax shelters and numerous industry-specific tax breaks, and despite a reduction in the statutory corporate tax rate, increased corporate tax payments by 34 percent. Reagan also equalized the personal income tax treatment of wages and realized capital gains, and he made the tax system more progressive overall.

But lobbyists for corporations and wealthy individuals didn’t give up after 1986. They worked hard to regain and expand the tax subsidies that Reagan had taken away. In the 1990s, the lobbyists persuaded the Clinton administration and the Congress to eviscerate the corporate Alternative Minimum Tax (designed to curb the huge tax advantages that go to highly-leveraged activities such as equipment leasing), adopt the so-called “check the box” and “active-financing” rules that vastly expanded offshore corporate tax-sheltering opportunities, and reestablish preferential tax rates on realized capital gains. During the George W. Bush administration, business and investment tax breaks were expanded considerably further. Both political parties are at fault in this sad repudiation of President Reagan’s tax legacy.

By the early 2000s, corporate subsidies had risen so much that the average effective U.S. federal corporate tax rate paid by America’s largest and most profitable corporations on their U.S. profits had fallen to only 18.4 percent — barely over half the 35 percent statutory rate. Those tax subsidies have grown even larger since then.

Our complaints about business tax subsidies fall into three categories. (1) They are hugely expensive. (2) They are often economically harmful. And (3) they conflict with fundamental tax fairness...

Read the full testimony



New ITEP Analysis: Michigan Business Tax Cuts Would Be Paid for with Sharply Regressive Tax Hikes



| | Bookmark and Share

Last week we told you about Michigan Governor Rick Snyder’s plan to cut Michigan business taxes by nearly $2 billion annually, and to pay for it on the backs of seniors and low-income families.  In an update to that story, ITEP crunched the numbers on the tax fairness impact of Snyder's proposed income tax hikes earlier this week, and unfortunately, the results weren’t very surprising.

The ITEP analysis was first published by the Michigan League for Human Services (MILHS), and was later picked up by the Associated Press, among others.  That analysis shows that the personal income tax increases contained in Snyder’s plan would require low-income families to pay 1.1 percent more of their income in tax, while requiring the state’s wealthiest taxpayers to pay less than one-tenth that amount, relative to their income.  The most notable components of Snyder’s plan include eliminating the state Earned Income Tax Credit (EITC) and fully taxing pensions and other retirement income.

Snyder’s plan is particularly objectionable because none of the additional revenue raised via the personal income tax would be used to save vital state services from the budget axe.  Rather, all of the money would be channeled into massive tax cuts for Michigan businesses.  It seems odd, to say the least, that Snyder would prioritize large business tax cuts so highly despite Michigan’s sizeable budget gap.  But even if Snyder refuses to give up on his quest to slash business taxes, the ITEP analysis at least makes clear that he needs to find a better way of paying for those cuts.



New ITEP Report: Five Reasons to Reinstate Maryland's "Millionaires' Tax"



| | Bookmark and Share

Yesterday the Maryland House Ways & Means Committee held a hearing on a bill that would reinstate and make permanent the state’s recently expired 6.25% tax bracket on taxable incomes over $1 million.  In advance of that hearing, ITEP released a new report offering five arguments in support of the millionaires’ tax.

Read the Report



New Hampshire Hops on Supermajority Bandwagon



| | Bookmark and Share

A few weeks back, we surveyed efforts to impose new restrictions mandating that a supermajority of legislators vote in favor of a tax increase before it can become law.   The good news is that most of these efforts appear to have made little progress so far (though Wisconsin did pass a temporary version of this requirement in February).  The bad news, however, is that this idea has now surfaced in New Hampshire.

As we’ve argued before, supermajority requirements are anti-democratic, as they empower a small minority of legislators to block the will of the majority.  These requirements also reduce the ability of elected officials to deal with new challenges as they arise — such as a massive revenue shortfall caused by an economic recession, or an increase in government health care costs.  

Supermajority requirements also make it much more difficult to enact meaningful tax reform since they prevent a majority of legislators from closing a tax loophole unless they either enlarge another loophole, or find a way to reduce tax rates in order to offset the revenue gain.  Simply put, these requirements expand on the already enormous incentives lawmakers have to stuff state tax codes full of special interest goodies.

At the end of the day, voters have the ability to remove their representatives from office if they’re unhappy with their decision to raise taxes.  Lawmakers considering supermajority requirements in New Hampshire, Wisconsin, and other states should put some trust in democracy, and forgo enacting cumbersome limitations on the power of future elected officials.



Wisconsin: Aren't There Better Ways to Spend $36 Million?



| | Bookmark and Share

On Sunday the Milwaukee Journal Sentinel published an interesting article about the capital gains tax breaks that Governor Scott Walker is proposing in his biennial budget. The article’s title “Walker’s proposed capital gains tax break gets lukewarm backing” says it all. Capital gains tax breaks are costly and are extremely regressive because most capital gains income is received by the richest taxpayers.

Wisconsin already allows a tremendously generous 30 percent exclusion for capital gains income, which ITEP estimates cost more than $150 million in 2010. The Governor is proposing two changes to how capital gains are currently taxed: “a 100 percent exclusion for capital gains realized on Wisconsin-based capital assets held for five or more years and a 100 percent capital gains tax deferral for gains reinvested in Wisconsin-based businesses.”

If implemented, these changes would cost the state about $36 million over the next two fiscal years. At a time when the state is facing a $3.6 billion dollar shortfall, surely there are better ways that $36 million could be used.

For more on the ongoing budget debate, check out the Wisconsin Budget Project’s blog and the Institute for Wisconsin’s Future (IWF).



Debates Heating Up Over Broadening the Income Tax Base to Include Retirement Income



| | Bookmark and Share

We've written before that state governments provide a wide array of tax breaks for their elderly residents. Almost every state levying an income tax now allows some form of exemption or credit for its over-65 citizens that is unavailable to non-elderly taxpayers. But many states have enacted poorly-targeted, unnecessarily expensive elderly tax breaks that make state tax systems less sustainable and less fair. These breaks are being reconsidered in Illinois, Michigan, and Hawaii.

One of the most egregious examples of the special treatment retirees receive is the Illinois income tax exemption for all retirement income. But this exemption is getting more and more attention. Senate President John Cullerton recently said, “It would just be a matter of fairness” to tax this income.

The Chicago Tribune joins us in applauding Cullerton for raising this issue. “Illinois needs a talk about revising tax policies and rethinking exemptions," the Tribune editorializes. "Not to grab more from taxpayers, but to broaden the tax base as a matter of fairness. Why should the working family making $50,000 a year pay a tax that the retiree getting $100,000 a year avoids? Credit Cullerton for thinking creatively — and out loud. ”

Eliminating senior tax preferences is also receiving attention in Michigan, where Governor Rick Snyder has proposed scrapping the state’s generous exemptions for pensions, annuities, and various other types of retirement income.  Unfortunately, Snyder has paired this change with an elimination of the state’s EITC — a proposal that has contributed greatly to the overall regressivity of Snyder’s personal income tax changes.  Retaining the EITC and means-testing Michigan’s pension breaks, rather than eliminating them entirely, could greatly reduce the regressivity of Snyder’s plan. 
 
Finally, in Hawaii, a proposal to tax pensions earned by taxpayers with incomes over $100,000 (or $200,000 for married filers) recently passed the House.  Unlike in Michigan, this plan both includes protections for low-income retirees, and uses the revenue it would generate in order to close the state’s budget gap.



North Carolina Republicans Propose Tax Increase on the Poor



| | Bookmark and Share

Add North Carolina to the list of states considering increasing taxes on the low-income working families hit hardest by the economic downturn.  Republican lawmakers in North Carolina recently filed a bill to convert the state’s refundable 5 percent Earned Income Tax Credit (EITC) to a nonrefundable credit, essentially eliminating the benefit of the program for the lowest income households. 

An op-ed this week by Lucy Gorham, director of the EITC Carolinas Initiative, put it this way: “The Republican leaders won their seats, in part, by pledging not to raise taxes and to represent those North Carolinians who work hard to provide for their families in the face of one of the worst economic downturns most of us have ever lived through. Strange, then, that in one of their first moves in the current legislative session, the leadership proposes to increase taxes on low- and moderate-income working families by eliminating the refundable portion of the state's Earned Income Tax Credit (EITC).”

North Carolina’s House Finance Committee heard the bill on Wednesday.  Only two lawmakers spoke out in favor of the proposed change to the credit.  Representative Edgar Starnes, the bill's sponsor, delivered an endorsement of the credit even while he moved to destroy its value.  He said he recognizes the EITC is an extremely good program, but given North Carolina's large budget shortfall, he claims the state can no longer afford the cost and lawmakers must look to every program for savings, including the EITC. 

Naturally, the opponents of the proposal turned the committee debate into a question of why the majority party was starting with the EITC — an attack on the state’s most vulnerable residents — and suggested they should look elsewhere for the $50 million saved by the regressive change.  

House and Senate Democrats also held a press conference this week to show support for the EITC.  They argued that the refundability is a means to reimburse low-income families for other taxes they pay and pointed out that low-income workers pay a much larger share of their incomes in state and local taxes than wealthier households.  North Carolina’s governor, Bev Perdue, also weighed into the debate via Twitter: “Concerned that EITC bill hurts working families: waitresses, construction wrkrs, store clerks -- the backbone of our communities. #NCGA”

The North Carolina Budget and Tax Center has argued that “working class, tax-paying families could no longer benefit from the credit’s ability to help them cover the substantial share of their income they pay in sales and property taxes” if refundability was eliminated.  An ITEP analysis found that eliminating the refundability of North Carolina’s EITC would result in a tax increase for 1 in 10 households.  The Budget and Tax Center also released an interactive map this week that demonstrates the wide-ranging and deep benefits of the North Carolina’s Earned Income Tax Credit.

North Carolina lawmakers will continue to grapple with significant budget dilemmas in 2011 and beyond.  But balancing their budget on the backs of those families hit hardest by the recession should be a non-starter.



Rhode Island Governor Would Improve Tax System, But Could Do Better



| | Bookmark and Share

This week, Rhode Island Governor Lincoln Chafee joined the very short list of governors supporting a balanced approach to addressing significant revenue shortfalls.  Like governors in Connecticut, Minnesota, Illinois, Hawaii, and North Carolina, Chafee included new revenue in his budget proposal, which will help mitigate the impact of otherwise devastating spending cuts. 

Significant changes to Rhode Island’s sales tax would raise enough revenue to close roughly half of the state’s $331 million budget gap.  Chafee proposes a two-tier sales tax rate structure, a 6 percent rate on most goods and some services and a 1 percent rate on certain additional items currently not taxed. 

The 6 percent sales tax would be a broader version of the existing tax. Chafee would expand the base of the sales tax to include an array of services currently not taxed as well as some goods that are legislatively exempt from the sales tax, including newspapers, live entertainment, car washes, and dry cleaning services.  The main sales tax rate would be lowered from 7 percent to 6 percent and the combined change would raise around $78 million for next fiscal year.

Chafee’s plan would also apply a new 1 percent sales tax to more than 40 goods currently exempt from the sales tax including clothing, boats, flags and farm equipment. 

Under the plan, food, prescription drugs, durable medical products and gasoline would continue to be exempt from state sales taxes. 

Chafee’s budget proposal also included an overhaul of business taxation, including enacting combined reporting, phasing down the corporate income tax rate from 9 to 7.5 percent, and restructuring the corporate minimum tax so that corporations pay differing amounts based on their total sales in Rhode Island.  These combined changes would result in a net revenue loss of $14.5 million once fully implemented in FY16, but Chafee champions the package as one that will make the state more business-friendly and competitive with neighboring states.

Kate Brewster, Executive Director of the Poverty Institute, commented on the governor’s budget proposal to GoLocalProv: “We are pleased that our Governor has taken a balanced approach to balancing the budget that includes revenue raising proposals rather than relying on a cuts-only strategy… His proposals to close corporate loopholes through combined reporting and bring our sales tax into the 21st century are responsible tax policies.”

While we agree Governor Chafee should be applauded for embracing a balanced approach to the budget that includes important tax modernization changes, relying solely on the sales tax to raise revenue inevitably means that the state’s poorest residents will shoulder the largest share of the tax increase.  An ITEP analysis found that the bottom 20 percent of taxpayers will pay on average an additional 0.8 percent of their incomes in sales taxes while the top 1 percent on average will only pay an additional 0.2 percent. 

In order to lessen the impact of the sales tax changes on low- and moderate-income households, Rhode Island lawmakers should consider increasing their state Earned Income Tax Credit (EITC).  Rhode Island currently allows for a 15 percent refundable EITC or an optional 25 percent non-refundable EITC.  According to ITEP analysis, eliminating the optional non-refundable EITC and increasing the refundable credit to 25 percent (in other words, all eligible taxpayers would receive a refundable EITC that is 25 percent of their federal credit), would offset the impact of the sales tax changes on the poorest 40 percent of households.  This change would cost an estimated $26 million, which could be paid for by scaling back the governor’s corporate income tax rate reduction.

It is also curious that Governor Chafee chose a two-tiered sales tax rate structure rather than simply applying his entire list of currently exempt items to the higher sales tax rate.  If Rhode Island had one sales tax base, the main sales tax rate could be reduced even lower than 6 percent while still raising a significant amount of revenue.



New ITEP Report Released This Week Offers Tax Reform Guidance to Cash-Strapped States



| | Bookmark and Share

State governments face a budget crisis of historic proportions, and in recent months policymakers have responded with unpopular and frequently myopic spending cuts to close budget gaps. But there are alternatives. A new report, The ITEP Guide to Fair State and Local Taxes, explains that policymakers in virtually every state have sensible tax policy tools at their disposal to help reform their underperforming tax systems.

With the scheduled end of temporary federal aid to state governments later this year, state lawmakers will face even more pressure to find real, long-term solutions. The report is designed to help policymakers to approach both the short-term and long-term fiscal challenges they face.

The ITEP Guide takes a hard look at why state taxes have underperformed in the recent economic downturn, and recommends strategies for reforming these taxes to make them better able to fund public investments in the future.

The report includes separate chapters discussing each of the major revenue sources on which state and local governments rely, including personal income taxes, sales taxes, property taxes and corporate taxes. A common theme in ITEP’s analysis of each of these is that unwarranted loopholes make these taxes less fair, and less sustainable, than they should be.  

The report also recommends a variety of procedural tax reforms that would make it much easier for state policymakers to identify and evaluate these harmful tax giveaways in the future. These reforms include regularly publishing detailed “tax expenditure reports,” which list the cost and rationale for every tax break currently weighing down state tax codes, and “tax incidence analyses” to help measure the tax fairness impact of proposed tax changes.

To view the report or request a copy be mailed to you, please visit: http://www.itepnet.org/state_reports/guide2011.php.



Michigan Governor Wants the Elderly and Poor to Pay Much More, so that Businesses Can Pay Much Less



| | Bookmark and Share

Michigan Governor Rick Snyder has taken a lot of heat for his budget plan over the last week or so, and for very good reason.  Snyder is currently seeking to raise individual income taxes — primarily on elderly and poor Michiganders — by some $1.7 billion per year.  Rather than using this money to help close the state’s budget deficit, Snyder is asking some of Michigan’s most vulnerable families to hand all this money over to businesses, in the form of a roughly $1.8 billion business tax cut.

Snyder would like to replace the state’s much maligned Michigan Business Tax (MBT) — a sort of hybrid between a corporate income tax and a sales tax — with a true corporate income tax.  The basic idea isn’t necessarily a bad one, but the corporate income tax Snyder has in mind is much too modest.  Overall, the swap would raise $1.8 billion less per year than current law.

In order to make up this difference during such tight budgetary times, Snyder has proposed a variety of personal income tax increases on Michigan families.  The most notable increases include eliminating the state’s generous pension tax breaks (a change opposed by 53% of state residents) and scrapping the state’s Earned Income Tax Credit (EITC) (a change opposed by 58% of the state).  Snyder is also seeking to eliminate extra exemptions available to elderly taxpayers and families with children.

Overall, the Michigan League for Human Services (MILHS) found that individual income tax bills would rise by 31% under Snyder’s plan, while the state’s businesses would receive a staggering 86% tax cut.  So much for shared sacrifice.



South Carolina Considers Turning its Property Tax into Something Else Entirely



| | Bookmark and Share

Under any reasonable property tax system, a property’s tax bill should be tied fairly closely to the actual value of that property.  Sure, some modest exemptions and credits can (and should) be used to reduce the property tax’s regressivity, but the basis for the tax should remain the property’s actual market value.  Oddly, a proposal currently being considered in South Carolina would depart drastically from this fundamental principle.

Back in 2006, South Carolina raised its state sales tax rate in order to pay for a property tax cap that limits growth in a home’s taxable assessed value to no greater than 15% every 5 years — or a little under 3% per year, on average.  Under this arrangement, changes in one’s property tax bill have very little to do with changes in the value of one’s property, and are instead driven by the artificially imposed 15% limitation.  Over time, the impact of the 15% limit can add up, and South Carolinians often end up paying property taxes at an assessed value far below what their home is actually worth.  In other words, for these families the term “property tax” has very little meaning, as their tax bill is only loosely tied to their property as it currently exists.

As strange and shortsighted as this policy may be, the law as currently structured does have one bright spot: whenever a property changes hands, the 15% limitation is reset.  This means that — at least for a short time — the property tax is once again applied to the home’s actual value.  These “resets” play an important role in ensuring that South Carolina’s property tax retains some of its character as a tax on actual property values.

Unfortunately, some state legislators would like to eliminate this feature of the law, claiming that the “reset” results in unaffordable tax bills for people looking to change residences.  In a way, it’s a legitimate complaint.  The South Carolina tax cap (like those in California, Florida, and many other states) results in vastly different property tax bills for different taxpayers, based solely on how long they’ve chosen to remain at their current address.

But the “cure” lawmakers are considering in this case is worse than the disease.  Ending the reset feature would essentially divorce South Carolina’s residential property tax system from present day reality.  Rather than having anything to do with actual property values, a tax cap system without a reset feature would forever base each property’s tax bill on its 2006 value, and then grow it artificially based on the 15% formula.  Sure, when the real estate market is weak the 15% formula might not kick in, but given enough time, many residences will accumulate massive tax cap savings and will be subject to tax bills with almost no basis in present reality.

Ultimately, if the goal of state lawmakers is to ensure that property taxes don’t grow faster than South Carolinians’ ability to pay them, the best relief option is an income-tested circuit breaker credit.  Property tax caps, circuit breakers, and many other related topics are discussed in the property tax chapter of the newly released ITEP Guide to Fair State and Local Taxes.



New York Governor Cuomo Near to Killing Millionaires Tax



| | Bookmark and Share

New York Governor Andrew Cuomo is at odds with his fellow Democrats, who control the state's Assembly, over tax policy.

The focal point of this conflict is a proposed extension of the temporary income tax surcharge on individuals with taxable incomes over $200,000 (or $300,000 from joint filers), known as the ‘millionaires’ tax because most of it is paid by millionaires. If extended, the measure would raise $1 billion dollars over the next year.     

There is no doubt that New York’s fiscal situation is dire. But the governor’s budget relies almost entirely on dramatic spending cuts, including cuts to K-12 education aid to the state’s poorest children.

Some of the opposition to the ‘millionaires tax’ has been driven by initial reporting that such taxation drives wealthy individuals out of the state, though this claim has since been thoroughly discredited.

In January, Gov. Cuomo explained his personal opposition to extending the millionaires' tax, saying absurdly that “the working families of New York cannot afford tax increases.”  

Frank Mauro, Executive Director of the Fiscal Policy Institute, responded, “It is unfathomable that those who have profited so tremendously from New York’s economic growth over the past two decades are not in a position to aid poor and working New Yorkers in this time of need.”
    
Gov. Cuomo is united with New York's Senate Republicans in opposing extending the tax, but is facing increasingly vocal protests and polls showing that nearly two thirds of New Yorkers are in favor of extending it.

 



Wisconsin's Historic Budget Debate Is About More than Collective Bargaining



| | Bookmark and Share

Last month, Wisconsin Governor Scott Walker introduced his budget plan to help balance Wisconsin’s books for the remainder of the current fiscal year. The most controversial piece of the budget repair bill calls for a reduction in benefits for public employees and the end of their collective bargaining rights.

However, the Wisconsin Budget Project reminds us that public employees in Wisconsin actually aren’t overcompensated for their work.  The New York Times opines, “Like many governors, he wants to cut the benefits of state workers. But he also decided a budget crisis was a good time to advance an ideological goal dear to his fellow Republicans: eliminating most collective bargaining rights for public employees.”

It’s worth noting that shortly after taking office, Governor Walker pushed through his own tax cuts, which will cost the state $117 million in the next biennium. This begs the question: If the Governor was really serious about balancing the state’s books, why is he passing more tax cuts that will need to be paid for in the future?  Governor Walker would likely say that passing these tax cuts are proof that he is fulfilling his campaign promise that “Wisconsin is open for business.” But we know that companies look for more than lower tax rates or special tax credits when deciding where to locate.

The debate about the budget repair bill rages on. Democratic Senators remain outside the state to prevent a quorum, and protestors are gathering in Madison every day.  With the unveiling of Governor Walker’s biennial budget Tuesday night, the debate is only going to heat up. The Governor's budget includes no fee or tax increases and reduces aid to local governments by over a billion dollars. In fact, overall spending is reduced by $4.2 billion under the Governor's plan.

The Governor’s proposed budget creates distinct winners and losers. In terms of tax policy, low-income folks are likely to be hit the hardest by this budget, but certain Wisconsin investors will come out ahead. 

For example, the Governor proposes to also eliminate indexing of the state’s homestead credit, which offers property tax relief specifically targeted to low-income Wisconsinites. Despite the Earned Income Tax Credit’s impressive track record of lifting people from poverty, the proposed budget will reduce the percentage of the federal credit that Wisconsin currently allows.

On the other hand, Wisconsin allows one of the most generous capital gains tax breaks, and the Governor is proposing to add a 100 percent capital gains exclusion for investors who invest in Wisconsin businesses and keep those investments for at least five years. 

The Governor is not making draconian cuts and moving against collective bargaining because it's necessary to balance the budget. He's making choices that reflect the priorities of businesses and anti-government activists. He could make other choices.

For example, instead of creating a new giveaway for investors, he could move in the opposite direction by reducing or eliminating the state's existing break for capital gains. Wisconsin is just one of eight states that offer special treatment for capital gains income. ITEP estimates that eliminating this regressive and costly exclusion could bring in more than $151 million.  Given the concentration of capital gains income among the very wealthiest taxpayers, the benefits of capital gains tax preferences are, of course, focused on the well-to-do. In fact, virtually all — 95 percent — of the tax reductions arising from Wisconsin’s 30 percent capital gains exclusion are realized by the richest 20 percent of taxpayers in the state. The remaining 80 percent of taxpayers collectively receive just 5 percent of the overall capital gains tax break.

This fierce budget debate presents a historic opportunity for all Wisconsinites to take a closer look at their state’s budget, tax structure, and tax credits and ensure that these important fiscal structures reflect the state’s values.

Archives

Categories