On Wednesday, May 25, Senator Kent Conrad, chairman of the Senate Budget Committee, delivered comments on the Senate floor about the budget, the deficit and why he rejects the House budget plan from Rep. Paul Ryan.

Senator Conrad cited new figures from Citizens for Tax Justice showing that taxpayers with income exceeding a million dollars would enjoy an average tax cut of at least $192,500 in 2013 if Congressman Paul Ryan's budget plan was enacted. Taxpayers with income exceeding $10 million in 2013 would get an average tax cut of at least $1,450,650 under the Ryan plan.

Conrad explains the obvious math that a deficit problem isn't solved by reducing revenues, and that it especially makes no sense to reduce revenues by cutting taxes for the super rich. His graphic illustrates the analysis CTJ provided. The Senate ulitmately voted against the House plan 57-40.

Watch Senator Conrad's remarks below:

 Two states — Nebraska and Utah — recently enacted new laws diverting a sizeable chunk of their state sales taxes to transportation.  Education, human services, and other vital programs are expected to suffer as a result of this diversion.  Instead of siphoning off much-needed revenues from other areas of the state budget, these states should have boosted their traditional transportation revenue sources, most notably the gas tax.

In Nebraska, Governor Heineman reluctantly signed a bill last week that will divert 0.25 percentage points of the state’s 5.5 percent sales tax to road repair and construction.  Just two months ago, Heineman had called the same proposal “risky” and “unwise,” though the state’s improved revenue picture apparently caused him to abandon this position. 

A wide range of people, including both opponents of the bill and the bill’s sponsor, have pointed out that the inadequacy of Nebraska’s gas tax is to blame for the state’s unmet transportation needs. 

However, given the lack of real interest in raising the gas tax, lawmakers ultimately decided to meet those needs by simply prioritizing roads over education, public safety, and other services.

In Utah, a very similar law was enacted earlier this month when the state’s legislature narrowly overrode Governor Herbert’s veto of a measure redirecting up to $60 million in sales tax revenue to transportation each year.  Herbert had vetoed the bill out of concern for its impact on education funding, and on the state’s ability to be flexible in dealing with future budgetary challenges. 

An increase in Utah’s gas tax, which hasn’t been raised in fifteen years despite rising transportation costs, could have precluded the need to redirect such a substantial sum of money away from vital public services.

Making matters worse, an analysis from Utah Voices for Children points out that a significant amount of general fund revenues in Utah are already earmarked for transportation.  These earmarks, as well as additional borrowing, have allowed transportation spending to swallow up an increasing share of the state budget over the last five years, with spending on education, health, and environmental quality suffering as a result.

Unfortunately, this decline in other areas of the budget may not be an accident.  The Utah bill’s original sponsor, Sen. Stuart Adams, has reportedly touted the siphoning-off of revenue from other areas of the state budget as a major benefit, since it shrinks the size of programs he tends to dislike. 

Given that basically every state levies a gas tax that won’t keep pace with transportation cost growth unless its rate is periodically raised, this argument (whether made explicitly or not) will no doubt remain powerful among conservative lawmakers for years to come. 

Raising transportation-specific taxes and fees, while not always the most progressive solution, is no doubt preferable to allowing other areas of state budgets to be gutted in order to fund road repair and construction.

*MAY 28 UPDATE* Wisconsin Republicans are also working hard to redirect revenue away from schools and toward transportation.  The legislature's budget committee recently voted, along party lines, to redirect $125 million in sales and income tax revenue to transportation in 2012, and to redirect 0.25% of such revenue to transportation in 2013 and each year thereafter.  It's important to note that Wisconsin's gas tax used to be indexed to inflation — which allowed it to grow alongside increases in transportation infrastructure costs.  Inflation indexing was eliminated in 2006.

Last week, ITEP testified in front of the Rhode Island House Finance committee on two bills.  One would close down some of the most egregious tax avoidance schemes available to multi-state corporations by mandating “combined reporting.”  The other would ramp up the level of scrutiny applied to Rhode Island’s tax code by requiring that new tax breaks (or “tax expenditures”) be created with a seven-year expiration date, and a specific plan for gathering vital performance data.

The first bill, H5738, would level the playing field between large corporations and mom-and-pop businesses by greatly reducing the ability of multi-state corporations to avoid taxes by artificially shifting income (on paper) to low-tax or no-tax states.  Specifically, H5738 would mandate what’s known as combined reporting, an accounting procedure that’s already required in a majority of states with corporate taxes or similar taxes. 

As ITEP points out in its testimony, combined reporting is already very common in New England.  Massachusetts, New York, and Vermont were each part of a larger wave of states that recently implemented this reform, while two other nearby states—Maine and New Hampshire—have required combined reporting for over two decades.

The other bill, H5737, would require that legislation creating a new tax break include four things: a statement of purpose, detailed performance indicators, data collection requirements, and a provision forcing the tax break to sunset within seven years.  According to ITEP’s testimony, this bill combines a variety of tax expenditure best practices already in use elsewhere around the country. 

For example, Washington State is particularly good about analyzing its tax expenditures in order to judge their efficiency and effectiveness.  Oregon and Nevada, on the other hand, now make use of sunset provisions in order to ensure that tax expenditures are not allowed to continue indefinitely without reconsideration by elected officials.  H5737 combines these two approaches, and in doing so has the potential to produce a framework for scrutinizing tax expenditures more closely than in any other state.

Read ITEP’s testimony on combined reporting in Rhode Island.

Read ITEP’s testimony on tax expenditure procedural reform in Rhode Island.

The ongoing recession, the expiration of two temporary taxes, and the end of federal recovery aid have left North Carolina with a $2.4 billion gap for next fiscal year.  The state’s Democratic governor, Bev Perdue, and the Republican-led legislature have taken very different approaches to plugging the gap. 

Governor Perdue’s budget plan, released earlier in the spring, balanced spending reductions (around $1.4 billion) with about $1 billion of additional revenue.  The primary means for raising revenue in her budget included extending three fourths of a temporary sales tax increase enacted in 2009 and set to expire this summer.  She also proposed reducing the state’s corporate income tax rate from 6.9 percent to 4.9 percent, a move Republican leaders have, surprisingly, not yet embraced.
 
Republican House and Senate leaders have adamantly opposed extending either the temporary sales tax or personal income tax surcharge, taking a cuts-only approach to the state’s fiscal problems.  In fact, they have proposed new tax cuts that would force them to reduce state spending beyond the $2.4 billion budget gap and far beyond the governor’s proposal.
 
The North Carolina Senate released its budget plan this week.  It includes around $550 million in tax cuts, once it's fully phased-in, resulting in deeper cuts to education, public safety, and health care. 

Billed as a ‘Jobs Package’, it would cut personal income tax rates by 0.25 percentage points in each bracket and exempt the first $50,000 of small business income from the personal income tax for businesses with gross receipts under $850,000, at a cost of around $485 million.  The Senate would also eliminate the state’s estate tax for an additional loss of $72 million. 

The plan raises small amounts of revenue by eliminating a handful of random state tax expenditures such as the credit for oyster recycling and the sales tax holiday for Energy Star appliances. 

The House GOP’s budget plan, released earlier in the month, was short on tax package details other than sticking to the promise to allow the temporary taxes to expire.  However, rumors are swirling that their plan will be released soon and will likely closely mirror the Senate’s proposal. 

If these rumors are true, their plan would not only cut taxes for wealthy taxpayer and businesses, but would also increase taxes on working families by eliminating the state’s Earned Income Tax, Child Tax, and Child and Dependent Care credits.

House and Senate GOP leaders had made veiled promises to reform the state’s outdated and inadequate tax code this year.  Both hinted they would start by broadening the personal income tax base, moving from federal taxable income to federal adjusted gross income (AGI).  This move would eliminate costly tax breaks for the best-off taxpayers. 

The Senate’s plan does indeed move the starting point for calculating North Carolina income taxes to federal AGI, but the move is completely revenue-neutral and only meant as a way to simplify tax forms. This would do nothing to truly reform its narrow tax base.  Rather than walking through a series of calculations to add back the difference between the state and federal amounts for the standard deduction and personal exemption, under the plan, taxpayers would simply subtract the state amounts from federal AGI and still be allowed to take all of their federal itemized deductions (with the exception being the deduction for state income taxes).  Social Security income would also continue to be exempt from state taxation.

The North Carolina Budget and Tax Center said in a statement about the Senate budget plan that “these measures will do nothing to improve the upside-down nature of the state’s revenue system. North Carolina’s revenue system must provide adequate revenue for critical investments and must be fair and equitable.”

The Louisiana Senate is expected to debate a bill this week which would eliminate the state’s personal and corporate income taxes over a five-year period. By the time it’s fully phased in, the proposal would cost the state $4 billion annually.

The House Ways and Means Committee already approved separate measures to eliminate these same taxes. None of the legislation being discussed replaces the revenue that would be lost as result. Note that the state is already grappling with a $1.6 billion shortfall for the next fiscal year.

One might think that Governor Bobby Jindal, who signed into law several significant tax cuts and also signed Grover Norquist's "no new taxes" pledge, is the driving force behind the proposals.

But the plan to eventually create a $4 billion dollar hole in the state’s budget is apparently too radical even for Jindal. The Governor’s spokesman said of the proposal, “We're not going to take it seriously if they don't put together a spending plan.”

Some critics of Jindal on the right argue that some of the tax cuts he signed into law were measures that he initially opposed but then took credit for after he caved in to pressure to support them. Let's just hope that this time, anti-tax lawmakers really have found the limit of Jindal's fiscal irresponsibility.

Republican Governor Sam Brownback and many conservative Republicans in Kansas are attempting to use the term "tax reform" to describe their efforts to reduce the equity and sustainability of Kansas’s tax system.  

Brownback has begun studying tax proposals with the ultimate goal of putting out a plan for a large tax overhaul. Brownback has stated that the goal of "reform" should be reducing income taxes.

This would mean cutting the only progressive tax in Kansas, which would further exacerbate Kansas’s already regressive tax system.

Brownback’s emphasis on income tax reductions comes after the Kansas State House of Representatives passed legislation which would have gradually repealed the state's personal income tax and cut the corporate income tax in half. That effort stalled in the Kansas Senate, as even Republican lawmakers balked at its $739.4 million price tag over the next 2 years, before the reductions would even be fully in effect.

As has been widely noted, Kansas Republicans are divided on whether to take such a regressive and revenue-hemorrhaging approach. Republican State Senator Pete Brungardt, for instance, argued that the income tax is not the problem at all and that the state should consider reforming its sales tax.

Instead of focusing singularly on the income tax as Brownback desires, the Kansas Economic Progress Council argues that lawmakers should carefully evaluate the entire system of state and local business taxes with a special emphasis on the sales tax, which is frequently ignored in such discussions.

Recent articles in the New York Times and the Fiscal Times entertain the notion that President Obama's income tax plan will result in unaffordable tax increases for families who make $250,000 a year. One theme of these articles is that in some parts of the country, $250,000 is really not very much to raise a family on.

A new report from CTJ explains that this is wrong on several levels:

1. If enacted in 2011, 84 percent of the revenue savings from Obama’s plan to partially end the Bush income tax cuts would come from people whose income exceeds $1 million annually.

2. A married couple whose income is exactly $250,000 would see no change in their income taxes under Obama’s plan. In fact, most married couples with incomes between $250,000 and $300,000 would see no change in their income taxes. On average, married couples in this group would lose just one percent of their Bush income tax cuts, under Obama’s plan.

3. Only 2.6 percent of taxpayers will even have adjusted gross income above $250,000 (or above $200,000 for unmarried taxpayers) in 2013. Congress should target this group for higher taxes.

4. The attempts to show that $250,000 is really not very much to live on prove nothing, other than how wildly out of touch reporters and opinion-makers are with the rest of America.

Read the report.

"I'm here to tell you that the sky is not falling," began CTJ Senior Counsel for Federal Tax Policy Rebecca Wilkins as she testified Wednesday before Treasury and IRS officials in favor of new bank regulations to prevent tax evasion by foreigners.

Ten of the twelve witnesses were opposed to the regulations and predicted far-fetched consequences if the regulations are finalized, including massive outflows of capital from the U.S., failing banks, lost jobs, and even murder, extortion, and kidnapping.

The hearing was on proposed regulations that would require banks to report the interest income earned on deposit accounts held by nonresident alien individuals to the IRS in the same way that they report on U.S. customers.

The purpose of the new rules is to allow the IRS to collect information that may be turned over to foreign governments if requested under a Tax Information Exchange Agreement.

Although Wilkins addressed all of the arguments of the opponents, she concluded by saying, "This is really about tax evasion. Those who are opposed to the proposed rules have a vested interest in facilitating tax cheating. The stakes in tax evasion are very high and the forces in favor of maintaining the status quo are well-financed and very politically connected. But it's the money of honest, tax-paying citizens of all countries that the tax cheats are stealing."

See the complete testimony and our earlier report.

A minority of 48 Senators, including three Democrats, blocked passage of a bill on Tuesday that would have repealed several of the tax breaks for oil and gas companies that CTJ described in its recent report on energy and taxes. The Senate bill would have repealed the breaks for the "Big Five" oil companies.

The argument made by the companies has always been that these tax subsidies encourage exploration and extraction in the U.S. CTJ's report explains that the resulting increase in profits goes towards paying shareholders, not towards exploration for oil and gas.

Read CTJ's report on oil and gas tax breaks.

Should Tax Hikes on these Americans Be “Off the Table?”

As House Speaker John Boehner and other Republican leaders in Congress continue to assert that tax increases even on the very wealthiest Americans are “off the table,” one rationale sometimes advanced for this view is that Americans who work hard and become successful have to pay over a third of their income in federal income taxes.

A new CTJ report describes data recently released from the IRS showing that this is not remotely true. The IRS data show that the federal income tax rates paid by the highest-income Americans have dropped substantially since 2000, largely due to cuts in the tax rates on capital gains and dividends pushed through by the Bush Administration.

Read the report.

California, Delaware, Michigan, New Jersey, Oregon, and Wisconsin have all experienced better than expected revenue growth over the past few months.  This is unambiguously good news, but for many lawmakers it’s unfortunately an excuse to ditch any restraint on tax-cutting.

California

In California, stronger-than-expected revenue growth has made the GOP even more vocal in opposing efforts to extend a variety of temporary income, sales, and vehicle tax increases.  Governor Jerry Brown’s continued push to extend these tax hikes is very sensible given that the unanticipated revenue boost was still quite small compared to the state’s total budget.  

Brown has behaved much less sensibly, however, in deciding to abandon efforts to end a variety of business tax credits.  As Jean Ross of the California Budget Project points out, “One of the virtues of the original budget was that there was some level of shared sacrifice.  But now, some businesses are going to come out ahead of where they were last year.”

Delaware

In Delaware, a surprise bump in revenue collections has inspired the state’s Democratic Governor, and a number of Republican legislators, to begin pushing for tax cuts.  

Specifically, the Governor has proposed cutting taxes for banks, businesses, and individuals with taxable incomes of over $60,000.  

In reference to the windfall that banks would receive under the Governor’s plan, Rep. John Kowalko argues that "They do pretty damn well with the federal handouts … I want to see a return on the investment before I will blindly vote on that."

Michigan

In Michigan, better-than-expected revenue growth in the current fiscal year may be used to reduce cuts in school spending that are currently under consideration.  

Any unexpected revenue growth in subsequent fiscal years, however, will be swallowed up by the massive business tax cuts that Michigan’s legislature passed last week.

New Jersey

In New Jersey, unanticipated revenue growth is expected to be used by Governor Chris Christie as yet another excuse for doling out billions in corporate tax breaks.
 
As New Jersey Policy Perspective points out, however, “the state remains stuck in a very deep hole … even with that growth, the state’s revenue collections would still be $3.4 billion less than was collected in FY2008, the year prior to the recession … the state must choose to invest these revenues wisely, using the money to restore the devastating cuts made to services and to pay into the state pension system.”

Oregon

In Oregon, unexpected revenue growth will likely be used to restore cuts to human services and public safety, at least in the short term.  By 2013, however, the state’s “kicker” law will probably require that some amount of revenue growth be dedicated to tax cuts.  

As Rep. Phil Barnhart points out, "Because this budget is so bad, we don't take care of schoolchildren, basic health issues and maintaining prisons — and we have a kicker at the end … We are stuck with this kicker law when we really need to spend some of this money on the budget."

Wisconsin

Finally, in Wisconsin, Governor Scott Walker has stubbornly refused to adapt to changing conditions on the ground.   If Walker gets his way, $1 billion will still be slashed from public schools, despite the state’s recently improved revenue picture.

Less than a month ago, Florida Governor Rick Scott was still pushing his campaign proposal to repeal the state's corporate income tax. Yet his "Tea Party"-inspired promise never lit a fire under the Republican leadership in the state legislature. Republican Senate president Mike Haridopolos even noted that "I'm in my 11th session now and I've had very few people come to me and say the reason they didn't come to Florida was because of the corporate tax rate."

An Orlando Sentinel article by Scott Maxwell suggests one sensible reason why the otherwise-anti-tax GOP leadership couldn't get behind this idea: hardly anyone is paying the corporate tax to begin with.

Maxwell requested unpublished data from Florida's Department of Revenue on the number of companies that paid any corporate tax in the last decade, and found that in fiscal year 2010 just 24,112 companies paid even a dime of corporate tax. Since 218,000 companies filed corporate income tax returns in the state of Florida in that year, this means just over 10 percent of companies filing returns actually owed any tax.

It's important to recognize that there can be perfectly good reasons for this. Many of the 218,000 companies were likely unprofitable in 2010, which means they have no income to tax. But it's also likely that many of these no-tax corporations were quite profitable in reality, and managed to reduce their Florida taxable income to zero by artificially shifting profits to other states.

As a 2009 report from the Florida Center for Fiscal and Economic Policy notes, Florida lawmakers interested in fixing this problem could productively enact "combined reporting" along with a number of other reforms to make the corporate tax fairer and more sustainable.

But in the short-run, the most sensible reform option for Florida lawmakers might be to enact legislation mandating basic disclosure of which profitable companies pay no income tax, which tax breaks they use to achieve this result, and how many Florida-based jobs were created as a result of these tax breaks.

And one important lesson for advocates seeking to inform corporate tax reform debates in other states is that sometimes the only way to get this vital data is to ask state government officials, as Maxwell did.

In his recent budget address, Wisconsin Governor Scott Walker said, “The facts are clear: Wisconsin is broke and it’s time to start paying our bills today.” Perhaps the “facts” aren’t entirely clear for the Governor, given new improved revenue forecasts as well as more balanced revenue options that are available to lawmakers and described in a new report.

The Wisconsin Budget Project is reporting that the state’s revenue forecast has improved. The Legislative Fiscal Bureau released an updated revenue estimate saying that the state is likely to have an additional $636 million in revenue before the end of the 2013 fiscal year compared to earlier estimates. This breaks down into $233 million above current projections for the current fiscal year and $200 million more in each of the next two years.  

Even without this revenue boost, of course, there are ways to address budget gaps that don’t include union busting, cutting recycling programs, and massive cuts to education. The Institute on Wisconsin’s Future (IWF) recently released their updated Catalog of Reform Options for Wisconsin, which outlines a set of options for reforming the sales tax, business taxes, and personal income tax.

Wisconsin lawmakers will certainly find more useful ideas in IWF’s catalog than in Governor Walker’s proposals.

Late last week, the Kansas Legislature adjourned a dramatic session that ended at 3 a.m. Friday morning, when a controversial budget that slashed spending for schools, social services, and the arts was finally approved. In total, 2,000 state positions were eliminated. And the cuts could have been even worse.

Early in the session, conservative groups like Americans for Prosperity Kansas urged the legislature to repeal last year’s temporary sales tax increase, which raised the state sales tax from 5.3 to 6.3 percent. Thankfully this extreme policy didn’t receive the votes necessary to pass out of the House. In fact, repealing the sales tax hike was dismissed by moderate Republicans and even Republican Governor Sam Brownback.

Shortly after he was elected Governor, he understood that the state’s dire fiscal situation meant that the temporary sales tax hike would need to stay. When asked whether the sales tax increase should be repealed he said, “We're short of resources for the state, and I don't think it's something that we should be doing at this time. Our fiscal situation is not stable.”

One key sticking point for the Senate and House during the budget negotiations was whether or not the state should beef up its cash reserves. Conservatives in the House wanted to put money aside for a rainy day while the Republican-controlled Senate wanted to use that reserve money to curb some of the dramatic spending cuts.

The $14 billion budget cuts overall spending between 5 and 6 percent. But the cutting spree isn’t enough for some conservatives, who say that the budget as passed isn’t one that the state can afford. Conservative Representative John Rubin said, “I'm a fiscal conservative. I encourage our governor to liberally use his line-item veto.”

In Missouri and Minnesota, property tax “circuit breakers” ensure that property taxes do not take more than a limited percentage of income from taxpayers of modest means. As ITEP has explained, it is widely accepted that property taxes are passed on by landlords to renters in the form of higher rents, which is why these circuit breakers are usually available to renters, as well as homeowners. However, lawmakers in these two states have tried to change that.

Effort to Take Credit from Renters Fails in Missouri

In Missouri, a victory for tax fairness came in the form of inaction. The Missouri legislature ended its session on May 13th without passing legislation that would have eliminated the property tax credit for renters. Making the property tax “circuit breaker” unavailable for renters would have left thousands of low-income families and individuals unable to claim the credit.

The measure would have cut off $57 million in critical tax relief for individuals making less than $27,500 a year, in the name of budget austerity.

Supporters of the circuit breaker tax credit questioned the legislature’s priorities, as it sought to end this benefit for low-income individuals while showering a single air freight facility with as much as $33.4 million annually in tax credits.

New Proposal in Minnesota

Even as a temporary victory was won in Missouri, the Minnesota’s legislative tax conference committee is proposing to cut the state’s renter’s credit by a proposed $186 million next year.

According to the Minnesota Budget Project, under the proposal, seniors and people with disabilities would face an average reduction in their credit of $190, while all other families would face an average reduction of $335. In fact, about 72,500 households would lose their refund entirely.

The move to eliminate the renter’s credit will be especially harmful in Minnesota, which already ranks dead last in rental affordability among low-wage workers.

Circuit breaker property tax credits are one of the most effective ways to use the tax system to reduce poverty. During a recession, states should be considering ways to enact or expand these credits, rather than scaling them back.

On Wednesday, U.S. Senators and Representatives received a letter from 250 organizations, including organizations in every state, calling on Congress to close corporate tax loopholes and use the revenue saved to address the budget deficit and fund public investments.

The 250 non-profits, consumer groups, labor unions and faith-based groups call for a corporate tax reform that raises revenue. This differs sharply from calls by President Obama and Treasury Secretary Geithner for “revenue-neutral” corporate tax reform. The Obama administration is expected to release a plan for “revenue-neutral” corporate tax reform sometime in the near future.

As the letter explains, “Some lawmakers have proposed to eliminate corporate tax subsidies and use all of the resulting revenue savings to pay for a reduction in the corporate income tax rate. In contrast, we strongly believe most, if not all, of the revenue saved from eliminating corporate tax subsidies should go towards deficit reduction and towards creating the healthy, educated workforce and sound infrastructure that will make our nation more competitive.”

Read the letter.

Citizens for Tax Justice has called for revenue-positive tax reform in a recent op-ed in USA Today, a report explaining why Congress can raise more revenue from corporations, and in CTJ director Bob McIntyre's recent testimony before the Senate Budget Committee.

Republican House Ways and Means Committee Chairman Dave Camp called the Chief Financial Officers of four different corporations to testify in favor of a “territorial” tax system on Thursday.

A territorial system exempts offshore profits of U.S. corporations from U.S. taxes. American corporations can already “defer” their U.S. taxes on offshore profits until those profits are repatriated (brought back to the U.S.). This creates incentives to move operations (and jobs) offshore and also creates incentives to shift profits offshore by disguising U.S. profits as “foreign” profits.

A territorial system would increase these incentives because U.S. taxes on offshore profits would be eliminated (not just deferred).

The hearing occurred just days after Republican House Speaker John Boehner spoke in favor of a territorial tax system. Boehner’s comment came at the same event where he announced that he would prefer the U.S. to default on its debt obligations unless trillions of dollars are cut from spending.

The Problems with a PERMANENT Exemption for Offshore Profits

Among the tax experts who testified before the Ways and Means Committee was Jane Gravelle with the Congressional Research Service. She explained that a territorial tax system is not efficient because it encourages investment to flow to any countries that have lower tax rates rather than creating an even playing field. Reduced investment in the U.S. would result in fewer jobs and lower wages.

A territorial system would also, she argued, worsen the problem of offshore profit-shifting by corporations.

Our tax system can either be “residence-based,” meaning U.S. taxes are paid by any taxpayer (including corporations) that resides in the U.S., or it can be “source-based,” meaning a taxpayer pays U.S. taxes only to the extent that the U.S. is the source of its income.

Gravelle argued that it’s much easier for a company to move its profits to another country (change the “source” of its income) than it is to move its headquarters to another country (change its “residence.”) That means a “source-based” system (a territorial tax system) makes it much easier for U.S. corporations to change their behavior in ways to avoid U.S. taxes than a “residence-based” system would.

The U.S.’s corporate tax system right now is a hybrid between a “residence-based” system and a “source-based” system. To adopt a true residence-based system, Congress would need to repeal the rule allowing U.S. corporations to “defer” U.S. taxes on their offshore profits. This is a reform that has been endorsed by Citizens for Tax Justice, and Gravelle said that it would be simpler to administer.

The Problems with a TEMPORARY Exemption for Offshore Profits

Some corporate leaders have argued that if Congress does not permanently exempt their offshore profits, then lawmakers should temporarily exempt them with the sort of tax holiday for repatriated corporate profits that Congress enacted in 2004.

Several studies of the 2004 effort showed that the repatriated profits went to shareholders and not to job-creation, despite the promises made by corporate lobbyists. An economist with the U.S. Chamber of Commerce recently admitted that any attempt by Congress to attach job-creation requirements to the tax holiday simply will not work.

Rep. Kevin Brady (R-TX) introduced a bill (H.R. 1834) on Wednesday to provide another repatriation holiday. (See related story.)

Not all corporate leaders are willing to give up the fight for a territorial system and settle for a repatriation holiday. The CFO's testifying Thursday said that they did NOT support a repatriation holiday, because they feel that it would distract corporate America from a larger tax policy goal of enacting a territorial system.

On Wednesday, Rep. Kevin Brady (R-TX) introduced a bill (H.R. 1834) to provide a tax holiday for corporations that repatriate offshore profits, similar to the widely panned repatriation holiday enacted in 2004. The holiday is essentially a temporary tax exemption for corporate offshore profits, which some corporate leaders see as a second best alternative to a permanent exemption. (See related story.)

Brady’s bill, like the 2004 measure, would reduce the federal corporate income tax rate on repatriated offshore profits from 35 percent to a token 5.25 percent.

Most companies with offshore profits would not actually have to pay 35 percent even under current law if they repatriated them, because they receive a credit for any foreign taxes that they have already paid. The final section of CTJ’s recent report explains that the repatriation holiday therefore provides the greatest benefits to those corporations that shift their profits to countries with no corporate income tax (tax havens).

A recent report from the Center on Budget and Policy Priorities summarizes the various studies concluding that profits repatriated under the 2004 measure largely went to shareholders in the form of increased dividends or stock buybacks rather than job creation.

Rehashed Trickle-Down Economics

Some business leaders say that increased dividends is itself a positive result because it means increased income in the U.S.

The problem is that this tax cut comes at a huge cost and is funneled to wealthy shareholders. Congress’s Joint Committee on Taxation recently found that a repeat of the 2004 repatriation holiday would cost over $78 billion over the course of a decade.  In other words, the argument in favor of a repatriation holiday that boosts dividends is simply a rehash of trickle-down economics.

Encouraging Companies to Shift More Profits and Jobs Offshore

But even if Congress wanted to encourage corporations to repatriate their offshore profits (regardless of what those profits are used for) the repatriation holiday fails at that goal in the long-run.

Enacting a second repatriation holiday will send a signal that Congress is willing to call off almost the entire corporate income tax on offshore profits every few years. This would actually encourage companies to shift even more profits offshore to countries where they are not taxed very much (tax havens) and then simply wait for the next repatriation holiday.  

Democrats Supporting Repatriation Holiday Have Long History of Opposing Fair and Responsible Taxes

Brady’s bill has five co-sponsors, and the three Democrats among them are likely to receive the most attention.

One is Jared Polis (D-CO) who famously drafted and circulated a letter in 2009 that was signed by several freshmen House Democrats who opposed the surcharge that the Democratic caucus was considering to help finance health care reform.

The letter, which included factual inaccuracies, argued that higher taxes on the rich hurt small businesses. The Democrats changed their surcharge so that it would only affect millionaires, as a result of this letter.

The other two Democratic co-sponsors are Jim Cooper (D-TN) and Jim Matheson (D-UT). Both signed a letter last year calling for the extension of the Bush tax cuts even for the richest taxpayers. Both also signed a letter calling specifically for the extension of the special low rate of 15 percent on capital gains and dividends, perhaps the most indefensible provision among the Bush tax cuts.

Microsoft’s purchase of Skype for $8.5 billion provides a perfect illustration of why adopting a true worldwide corporate income tax system is critical to our economic future.  

According to the Wall Street Journal, the cash for Microsoft’s purchase of Skype (a Luxembourg-based company) will come out of its $42 billion in liquid assets held in foreign subsidiaries.

Because it is purchasing a foreign company with its overseas assets, Microsoft can avoid paying any U.S. tax that would be due if it had repatriated foreign earnings in order to purchase a US company for the same amount. Based on the company's effective foreign income tax rate disclosed in their most recent SEC filings, a repatriation of $8.5 billion dollars would cost Microsoft somewhere in the neighborhood of $1.1 billion in U.S. tax.

As a Forbes commentator opines, the Microsoft-Skype deal demonstrates the harmful incentive created in our current system that encourages companies to invest in overseas companies rather than domestic ones. The fear is that this deal may just be “a harbinger of things to come.”

How can the US stop encouraging companies to invest abroad rather than at home?

By adopting a pure worldwide tax system.

Under a pure worldwide system, any US company's foreign profits would be immediately subject to the US tax rate with a credit for any foreign taxes paid. This is similar to the current system except that the company would not be allowed to "defer," or delay indefinitely, its U.S. taxes by keeping its foreign profits offshore.

A pure worldwide system would mean that Microsoft would face the same tax rate regardless of where it earned its profits. This would remove any incentive for shifting profits offshore and remove any obstacles to repatriating foreign profits.

Spinning the Truth

Never missing an opportunity to toe the line of corporate leaders and their shareholders, the business press tried to spin the news as proof that the US needs to enact corporate tax cuts and a repatriation holiday. They argue that high rates in the US are the cause of US companies like Microsoft holding billions in profits overseas rather than investing them domestically.

They could not be more mistaken in their solution.

First, tax repatriation holidays may actually worsen the situation by encouraging companies to hoard profits abroad in order to wait for the next holiday or even to use them as a hostage in demanding another repatriation holiday.

In fact, Microsoft is part of a coalition lobbying for a repatriation holiday so that it can bring some of its $42 billion in overseas liquid assets back to the U.S. and pay little or no tax.

Second, as CTJ’s Director Bob McIntyre explained in his testimony to the Senate Budget Committee, simply lowering corporate taxes is unlikely to be effective and would encourage a race to the bottom as other countries feel pressure to respond by further reducing their rates.

Finally, lower corporate income taxes would of course deprive us of revenue that we need to reduce our budget deficit.   

We hope that the Microsoft-Skype deal can be seen for what it is: another reason for the adoption of a pure worldwide corporate income tax system.

Last week the Hawaii legislature sent Governor Neil Abercrombie a package of tax changes designed to help close the state’s yawning budget gap.  Among its most notable components are the partial repeal of the state’s nonsensical deduction for state income taxes paid, and a new limitation on itemized deductions taken by wealthy taxpayers.  Both of these changes will help mitigate the upside-down, regressive nature of Hawaii’s itemized deductions — a move that ITEP has urged many states to consider.

If Governor Abercrombie signs the legislature’s tax package into law — as he is expected to do — Hawaii will become the first state in the nation to place a cap on the overall size of itemized deductions. 

Married taxpayers earning over $200,000 per year will be prevented from sheltering more than $50,000 of their income from tax via itemized deductions, while single taxpayers earning over $100,000 will be limited to a $25,000 deduction. 

ITEP recommended a similar option in its August 2010 “Writing Off Tax Giveaways” report, and the Hawaii legislature actually passed a cap of this type last year that was eventually vetoed by then-Governor Linda Lingle.

If this bill becomes law, itemizers will still be able to take a deduction much larger than the $2,000 per-spouse “standard deduction” enjoyed by many Hawaii residents.  Nonetheless, the cap will go a long way toward reducing tax regressivity while also raising much-needed revenue for the state.

Hawaii’s legislature chose to collect additional revenue from itemized deduction reform by partially repealing the deduction for state income taxes paid.  Hawaii residents earning over $200,000 per year (or $100,000 in the case of a single filer) will be unable to take this deduction, while taxpayers earning under that amount will continue to benefit. 

Allowing taxpayers to deduct their state taxes on their state tax forms is a bizarre policy with no real rationale.  Instead, it exists only because Hawaii has “coupled” its itemized deduction laws too closely to federal rules, where the state tax deduction is used as a form of revenue-sharing. 

Gov. Neil Abercrombie rightly called the state tax deduction an “absurdity” in his State of the State address.  The vast majority of states have already abandoned the state income tax deduction — most recently in New Mexico and Rhode Island, both of which repealed the deduction in 2010.

In addition to these progressive reforms, the legislature’s plan also raises significant revenue by temporarily suspending various sales tax exemptions for business activities, and by delaying a scheduled increase in the state’s standard deduction and personal exemption.  Rental car taxes, vehicle registration fees, and the vehicle weight tax are also slated to rise under the legislature’s plan.

Perhaps the most disappointing part of the final package is that it does not include the Governor’s proposal to eliminate the pension exemption for middle- and high-income retirees.  This already costly tax break is almost certain to grow rapidly in size as Hawaii’s population advances in age.  Moreover, this break creates inequities between Hawaii residents with different forms of income, offering nothing to low-income, elderly residents that must continue to work in order to make ends meet.

But while the legislature deserves some criticism for failing to rein-in costly retiree tax breaks, it also deserves much praise for including revenues as part of its budget solution, and in particular for using itemized deduction reform as tool for enhancing the fairness and adequacy of Hawaii’s tax system.

For months, Governor Rick Snyder has been trying desperately to enact massive business tax cuts paid for with new taxes on pension income and the elimination of the Earned Income Tax Credit (EITC).  Unfortunately, a modified version of Snyder’s plan passed both houses of the state legislature yesterday and is now on its way to the Governor’s desk, where it will soon be signed into law.  In a bit of good news, however, the excellent advocacy work done by the Michigan League for Human Services (MLHS) and others ultimately resulted in the EITC being spared from complete elimination — though it has been scaled back by some seventy percent.

The stated purpose of Gov. Snyder’s plan is to slash taxes on businesses by some 80 percent (or $1.7 billion per year) in order to create jobs in Michigan.  There are many reasons to be skeptical of the true job-creation potential of these tax cuts, and even Gov. Snyder confessed that “I can’t guarantee results." But most lawmakers internalized this line of argument so thoroughly that it had not been debated in quite some time.

Rather, the majority of the debate focused on how to pay for Gov. Snyder’s "job creation plan."  The Governor proposed doing this through a package of income tax increases that critics rightly pointed out would fall most heavily on the poor and the elderly. 

The House quickly recognized that passing the Governor’s proposal as-is would have been political suicide, and responded by scaling back the tax increases on the elderly, and by offering an extremely small, token tax cut to low-income working families as a replacement for the EITC.  These changes did little to alter to overall distribution of the Governor’s plan, but they did add just enough window dressing for the plan to gain passage in the House by the slimmest of margins, 56-53.

After passing the House, the bill faced a tough uphill fight in the Senate where many Republicans were very excited about showering the state’s business community with tax cuts, but much less excited about the personal income tax hikes that would be needed to make this happen. 

In the end, the most notable change to occur in the Senate was the reintroduction of the EITC, set at a level equal to 6 percent of the federal credit.  Given that Michigan’s current EITC is equal to 20 percent of the federal credit, this change will still result in a steep tax hike on low-income families. 

Nonetheless, the 6 percent credit is an enormous improvement over the measly, $25 per-kid credit that the House proposed as a replacement to the EITC.  And perhaps most importantly, it leaves Michigan’s progressive community with a great starting point to begin rebuilding the state’s tattered safety net when the political climate eventually becomes more favorable.

Ultimately, the Senate vote was even closer than in the House.  The legislation passed out of the Senate only when a 19-19 tie was broken by Lt. Gov. Brian Calley.  Clearly, there are a lot of people that are very unhappy the massive tax shift currently underway in the state of Michigan.  For the meantime, however, it appears that the state’s elderly and poor residents will just have to get used to paying a lot more, so that the business community can pay a lot less.

The agricultural property tax loophole we first told you about in March was closed on Monday when Gov. John Hickenlooper signed HB1146.  Tom Cruise was among the most famous beneficiaries of the loophole, saving thousands of dollars in taxes because of his decision to allow sheep to “graze around the mansions for brief periods each year.” 

At this point, it remains unclear whether this new law will cause farmer Cruise to put away his shears and focus on his acting career.

Prior to the enactment of HB1146, property owners in Colorado were eligible for hefty agricultural tax breaks if they could prove that they tried to make a profit through agriculture.  As the Denver Post points out, “that's a standard so lenient that some property owners qualify by letting cattle [or sheep] graze a few days out of the year.” 

Unsurprisingly, many very influential people jumped at the chance to exploit this obvious flaw in the state’s tax code.  In addition to Tom Cruise, the Denver Post reported that Kurt Russell, Goldie Hawn, a state senator, the state’s treasurer, an energy industry billionaire, a media mogul, and the chairman of Discovery Communications all benefited from this loophole.  Countless other well-off of landowners in Colorado undoubtedly benefited as well.

The new law mostly fixes this problem by allowing county assessors to apply the normal, residential tax rate to up to two acres of land inside an agricultural parcel, including the land located underneath a residence. 

In order to protect real farmers, assessors will not be allowed to apply the residential rate to any part of the land if the actual residence is “integral” to a farming operation.  Pseudo-farmers like Tom Cruise, however, will almost certainly see their homes taxed at the residential rate, assuming they don’t fill their mansions with farming equipment in the very near future. 

A state task force reportedly found that most taxpayers affected by the change live in Colorado’s resort areas.

Unfortunately, this new law left another glaring agricultural tax loophole intact.  Developers and big businesses are still allowed to save millions in property taxes by conducting a similar style of “farming” on large swaths of vacant land.  Assessors in the state are continuing to push for the closure of this loophole as well.

Earlier this week, the Institute on Taxation and Economic Policy released a new report highlighting the key tax components of Connecticut’s recently enacted budget, which raised more than $1.4 billion in new taxes to mitigate cuts to core services.

 
The mostly progressive tax package includes increases in personal income taxes for the state’s best-off residents, a new 30 percent refundable state Earned Income Tax Credit, a reduction in the state’s property tax credit, an increase and expansion of the sales tax, a new ‘Amazon’ tax, a corporate income tax surcharge, a lowered threshold for the estate tax, and increases in cigarette and alcohol taxes.

In a year when most state leaders across the country have embraced an anti-tax, cuts-only approach to addressing short- and long-term budget woes, Connecticut lawmakers boldly took a stand for the vital role of government and for progressive tax policy.  Connecticut’s approach addresses current fiscal challenges and is forward-looking, putting the state on a path towards fiscal and economic recovery.

State policymakers and advocates still in the throes of crafting their state spending plans for next year should look to Connecticut as a guide for a sensible approach to addressing ongoing fiscal woes.

Rhode Island remains one of a handful of states seriously considering revenue increases to help address significant state budget shortfalls. 

In March, Governor Lincoln Chafee put forth a plan that would expand the state’s sales tax base to several dozen services currently not taxed and lower the state sales tax rate from 7 to 6 percent.  He also proposed a new 1 percent sales tax on some currently exempted goods and a variety of changes to business taxes.  Altogether, his revenue plan would have closed around half of a $331 million budget gap.

At legislative hearings in April, dozens of special interests lined up in opposition to Chafee’s sales tax expansion plan, which has since stalled in the legislature. 

Last week, an alternative revenue-raising plan emerged.  Representative Larry Valencia filed a bill for a temporary personal income tax surcharge of 4.1 percent on the state’s wealthiest residents, which would raise around $130 million. 

Rhode Island’s top marginal tax rate of 5.99 percent currently applies to taxable income of $125,000 and above for all taxpayers.  Under Rep. Valencia’s plan, a fourth bracket would be created.  Married couples with taxable income of $250,000 and single people with taxable income more than $200,000 would pay 10.09 percent on their incomes above those amounts.  

An Institute on Taxation and Economic Policy analysis of the proposal found that only 2 percent of the state’s taxpayers would be impacted by the tax increase.  More than 90 percent of the increase would be paid by the wealthiest 1 percent of Rhode Islanders, who have average incomes of close to $1 million.

Representative Valencia considers his bill a reversal or ‘recapture’ of the federal tax cut wealthy Rhode Islanders will receive as a result of the extension of the Bush tax cuts Congress enacted last December.

Just weeks after a six-month effort by Georgia lawmakers to enact ambitious tax reform legislation fell apart, Governor Nathan Deal is signaling that lawmakers may be asked to continue their deliberations on this issue when they return for a special legislative session on redistricting this August.

But if Deal's views on the shape of "tax reform" are any indicator, a special session could run into the same difficulties encountered during this year's tumultuous regular legislative session.

The failure of this year's tax reform effort was due to an inexorable rule of tax accounting: when you design a tax plan that is revenue-neutral overall and gives big tax cuts to the wealthiest families, someone else has to pay higher taxes.

But Deal's stated goal of shifting to a "consumption-based approach" to revenue-raising would necessarily reserve the biggest tax cuts for the very best-off Georgians, and the Republican leadership's Grover Norquist-inspired refusal to raise any new revenues through tax reform means inevitably that middle- and low-income families will foot the bill for these high-end tax cuts.

Lawmakers who correctly found this "Robin Hood in reverse" swap unpalatable this spring will presumably feel the same way come August.

The sad part of the story is that this year's tax battles began as an honest discussion of important tax reform principles. When an appointed Georgia tax reform commission issued its recommendations in January, the focus of the plan was on achieving a more sustainable Georgia tax system by eliminating unwarranted tax loopholes — and the original proposal would have done a decent job of achieving this important goal.

But in the hands of Republican leaders in the state legislature, the plan's loophole-closing provisions gradually fell by the wayside under pressure from special interests, which meant that this formerly revenue-neutral plan ended up being a revenue loser that missed important opportunities to modernize the state's tax system.

In their zeal to satisfy Grover Norquist and his no-new-taxes acolytes by removing provisions that would have hiked taxes on anyone at all, legislative leaders lost sight of the broad tax-reform principles that had motivated the reform commission in the first place.

More than anything, this outcome shows the utter incompatibility of the "no new taxes" mantra with the type of sustainable tax reforms that are needed at both the federal and state level. If lawmakers insist that tax reform can't involve tax hikes on anyone, but must include substantial tax cuts for the best-off Americans, sustainable tax reform simply can't happen.

Recognizing the dire fiscal straits faced by the state, Democratic lawmakers in Nevada are pushing for a $1.5 billion plan to reform the sales tax to raise revenue and avoid harsh cuts in public services.

One of the smartest parts of the plan would raise roughly $600 million in new revenues by expanding the state’s sales tax base to include services. Half of the revenue raised from sales tax base expansion would be used to pay for a reduction in the overall sales tax rate. The other half of the revenue would go towards addressing the state's budget gap. 

As the Institute on Taxation and Economic policy explains, applying the sales tax to services increases revenue and also makes the sales tax less economically distortionary.

A coalition of the Retail Association of Nevada and the Nevada Resort Association are looking to improve Nevada’s sales tax base in another way. They call for legislation requiring Amazon.com and other e-commerce companies to collect sales taxes on items sold to Nevadans. The measure could generate at least $16 million in much-needed revenue.

Bryan Wachter, the President of the Nevada Retailers Association, points out that the biggest victims of the failure to collect these taxes are the “mom-and-pop retail establishments” that face an “uneven playing field” as they have to collect sales taxes that e-commerce sites do not.

These proposals would be major steps in the right direction, but they're no panacea for Nevada. Even if the Democratic plan and e-commerce legislation is adopted, Nevada’s tax system will remain highly regressive and incapable of meeting the state's fiscal needs in the years to come.

To meet the long-term challenge of creating a more equitable and adequate tax system, the Progressive Leadership Alliance of Nevada (PLAN) recently released a plan entitled “Bridging the Gap”, which includes a state individual and corporate income tax, changes to the state’s extraction tax system and other key reforms.

Addressing the Economic Club of New York on Monday, Republican House Speaker John Boehner told reporters that Congress should be “looking seriously at a territorial tax code,” according to CQ Today.

Under a territorial system, the offshore profits of a U.S. corporation would be exempt from U.S. taxes.

A recent report from Citizens for Tax Justice explained that this would cause serious problems.

First, corporations would have a greater incentive to engage in profit-shifting, meaning practices used to disguise U.S. profits as foreign profits. A common example is the manipulation of transfer pricing to shift corporate profits into tax havens (countries that do not tax, or that barely tax, certain types of profits).

Second, corporations would have a greater incentive to shift actual operations — and jobs — to other countries.

Our current system already encourages these practices because U.S. corporations are allowed to “defer” their U.S. taxes on their offshore profits. But the incentives would be even greater under a territorial system, in which corporations would NEVER pay U.S. taxes on their offshore profits.

Other countries that have adopted territorial tax systems are experiencing these problems, and the European Union is considering adoption of a different system to allocate profits among EU member states.

As CTJ’s report explains, the best alternative would be for Congress to repeal the rule allowing U.S. corporations to “defer” their U.S. taxes on offshore profits. Corporations could continue to get a credit for any taxes paid to a foreign government (just as they do now) which prevents any profits from being taxed more than once.

Possible Amnesty for Corporate Tax Dodgers

Some corporate leaders have argued that if Congress does not permanently exempt their offshore profits, then lawmakers should temporarily exempt them with the sort of tax holiday for repatriated corporate profits that Congress enacted in 2004. Boehner expressed openness to this idea on Monday.

Several studies of the 2004 effort showed the repatriated profits went to shareholders and not to job-creation, despite the promises made by corporate lobbyists. An economist with the U.S. Chamber of Commerce recently admitted that any attempt by Congress to attach job-creation requirements to the tax holiday simply will not work.

Read more about the proposed repatriation tax holiday.


Calls for Slashing Public Services, But No Revenue Increase from Profitable Corporations

Speaker Boehner also said that the corporate tax should be reformed but should not raise any more revenue than it does today. This came during a speech in which Boehner demanded that “trillions” be cut from public services — a goal that would be impossible without sharply cutting Social Security, Medicare, and Medicaid — but refused to consider any revenue increases.

A recent report from CTJ explains why corporate tax reform should be “revenue-positive,” meaning we should raise more tax revenue from corporations than we do today.

Almost two-hundred organizations have signed onto a letter urging Congress to adopt a revenue-positive corporate tax reform.  

The letter notes that a 2007 report from President Bush’s Treasury Department found that the share of profits paid in taxes is lower for U.S. corporations than the average for OECD countries.

Sign your organization onto the letter urging Congress to raise revenue by reforming the corporate tax. (Deadline: End of Friday)

Send a letter on your own behalf urging Congress to raise revenue by reforming the corporate tax.

Lawmakers and officials in the Obama administration are discussing plans to reform the corporate tax in a way that is "revenue-neutral," meaning we would not collect any more tax revenue from corporations overall than we do today. In other words, while Congress is debating cuts in public services that working families rely on, there would be no attempt to get corporations to contribute more.

Organizations are invited to sign a letter urging Congress to take a very different approach. Congress should repeal corporate tax subsidies as a way to help reduce our budget deficit and protect public investments that create the healthy, educated workforce and sound infrastructure that will make our nation competitive.

See a PDF of the letter with the list of organizations currently signed on.

The deadline to join the letter is May 16, 5:00 p.m. EST.

Sign Letter on Behalf of Your Organization (do not sign if you are not authorized to do so on behalf of an organization)
Send Your Lawmakers a Letter on Your Own Behalf

For more detailed information, see the following:

CTJ's op-ed in USA Today calling for corporate tax reform that raises revenue

CTJ's report explaining why Congress should enact corporate tax reform that raises revenue

CTJ Director Bob McIntyre's testimony on business tax subsidies before the Senate Budget Committee

This week CTJ wrote to ask the House Judiciary Committee to reject the so-called "Business Activity Tax Simplification Act" (BATSA). This legislation would make state and local taxes on businesses dramatically more complex, increase litigation related to business taxes, increase government interference in the market and reduce revenue to state and local governments by billions of dollars each year.

Read CTJ's letter opposing BATSA.

A recent report from the Center on Budget and Policy Priorities goes into more detail about why BATSA is so problematic.

New York Times' Headline, "Americans Favor Budget Cuts Over Raising Corporate Tax" Based on Misleading Poll

People who follow polling have known for some time that Americans tend to support cutting government spending in the abstract but are likely to respond very differently to proposals to cut specific programs. In fact, when faced with a choice between cuts in a particular government program or tax increases, Americans often prefer tax increases.

Sadly, this basic point was lost on the New York Times this week as it sought to gauge public support for increasing corporate taxes as a way to reduce the budget deficit.

Americans Love Cutting Government in the Abstract, Hate Cutting Specific Programs

An Ipsos/Reuters survey in early March demonstrates some of the common problems with polls on this topic. It included the following question: "The two main ways of reducing the budget deficit are to cut existing programs and to raise taxes. If you had to choose, which approach would you prefer?" Fifty-six percent responded that they would prefer to cut programs, while only 30 percent preferred raising taxes.

Of course, Congress does not have to choose between cutting spending or increasing taxes. It can (and is likely to) do both. This question presents a ridiculous hypothetical situation that no lawmaker will actually face. Only three percent of respondents said "both" in answer to this question, which is unsurprising given that "both" was not offered as an option. We know from other surveys that if the options include a mix of spending cuts and tax increases, a majority will choose that option.

The Ipsos/Reuters poll suggests that many of those respondents who chose spending reductions are not comfortable with many specific cuts that Congress could actually make. Those who said they preferred reduced government spending were given various options for programs to cut, and the only one garnering a majority was defense (at 51 percent). Only 28 percent wanted to cut Medicare and Medicaid, just 18 percent wanted to cut Social Security, and four percent chose "Other." (Respondents were allowed to choose multiple options.)

When confronted with a specific proposal to raise taxes and specific proposals to cut any of the significant government programs, people tend to choose tax increases.

For example, an ABC News/Washington Post poll gave respondents several options for addressing the budget deficit. Seventy-two percent supported "Raising taxes on Americans with incomes over 250 thousand dollars a year." Forty-two percent supported "Cutting military spending." Only 30 percent supported "Cutting spending on Medicaid, which is the government health insurance program for the poor." Only 21 percent supported "Cutting spending on Medicare, which is the government health insurance program for the elderly."

The same ABC News/Washington Post poll also asked "Overall, what do you think is the best way to reduce the federal budget deficit — by cutting federal spending, by increasing taxes, or by a combination of both?"

About three-fifths of respondents chose a combination of both.

New York Times' Misleading Article on Corporate Taxes and Public Opinion

None of this should come as any surprise to pollsters and people who write about public opinion and politics. So it's disappointing to see The New York Times publish a distorted story under an even more distorted headline, based on faulty polling about the federal corporate income tax.

Some of the questions were straight-forward. For example, one of the poll questions reads, "Do you think American corporations pay more than their fair share in federal income taxes, less than their fair share, or is the amount American corporations pay about right?" A majority, 56 percent, said they're paying less than their fair share, while only 11 percent said they were paying more. Twenty-two percent said "About right," and 11 percent said "Don't know."

(Other surveys, such as the Gallup Poll, have found that an even larger number of Americans believe that corporations pay "too little.")

Unfortunately, the Times survey also includes questions worded so poorly that they tell us virtually nothing about how Americans would feel about the real trade-offs that lawmakers must make when confronting the budget.

For example, one survey question reads "If you HAD to choose ONE, which would you prefer in order to reduce the federal budget deficit — raising taxes on corporations or cutting government spending?"

Unsurprisingly, survey respondents did what Americans always do — they chose unspecified spending cuts over tax increases.

Thirty-two percent chose "raising taxes on corporations," while 64 percent chose "cutting government spending."

Of course, as noted above, Congress does not have to "choose one" of these options, and we know from other surveys that most people prefer a mix of spending cuts and tax increases of some sort. 

The more interesting question, the question not asked in this survey, is whether respondents would favor cuts in Medicare and Medicaid over corporate tax increases, or perhaps cuts in nutrition programs or education programs over corporate tax increases.

Given that most people believe (according to this very survey) that corporations pay less than their fair share, it's very hard to imagine that corporate tax increases would not be more popular than cuts in health care, nutrition or education.

Unfortunately, The Times made this misleading survey question the subject of the article's headline, "Americans Favor Budget Cuts Over Raising Corporate Tax."

Another survey question is quite blatantly a leading question. It reads, "Some people say the taxes on corporate profits should be increased to help reduce the federal budget deficit. Other people say taxes on corporate profits should be decreased to encourage American companies to create jobs and help them to compete globally. What do you think? Do you think taxes on corporate profits should be increased, decreased, or kept about the same?"

This wording presents a choice between increasing corporate taxes to "reduce the federal budget deficit" and decreasing corporate taxes to "create jobs." Of course, Americans care more about creating jobs than they do about reducing the deficit, so the result is predictably skewed. Thirty-seven percent said corporate taxes should be increased (a surprisingly high figure given that the question was leading respondents to the opposite conclusion). Twenty-six percent said corporate taxes should be decreased, and 32 percent said they should stay the same.

We could imagine a question worded in a way that would achieve very different results. For example, a survey question might read, "Some corporate leaders say that reducing corporate taxes will help America's corporations generate profits. Others say that the corporate tax loopholes in place today encourage corporations to shift their profits and jobs offshore and that closing these loopholes can help American workers while also reducing the deficit. What do you think?"

Indeed, respondents' answers to another question in this survey suggest that they would need very little prodding to support raising taxes on corporations. The question reads "As far as you know, when corporations receive tax cuts, do you think the corporations use the savings mostly to create new jobs for American workers, mostly as dividends for shareholders and bonuses for executives, OR do they mostly reinvest it back into the corporation?"

Sixty-one percent said they go to dividends and bonuses, while just 4 percent said new jobs, 23 percent said it's reinvested, and just 3 percent said it goes to a combination of these things.

Given that most people think corporations pay less than their fair share and spend most of their tax breaks on dividends and bonuses, a proposal to raise revenue from corporations by eliminating corporate tax loopholes would likely be popular, New York Times headlines notwithstanding.

Bucking the anti-tax, anti-government, cuts-only approach to state budget shortfalls embraced by most state leaders across the nation this year, Connecticut governor Dan Malloy signed a two-year state spending plan this week that raises $1.4 billion in new taxes to mitigate cuts to core services.
 
The tax package includes increases in personal income taxes for the state’s best-off residents, a new 30 percent refundable state Earned Income Tax Credit, a reduction in the state’s property tax credit, an increase and expansion of the sales tax, a new ‘Amazon’ tax, a corporate income tax surcharge, a lowered threshold for the estate tax, and increases in cigarette and alcohol taxes.

What makes Connecticut truly unique among the states in its revenue-raising approach this year was the care given to make the tax changes progressive and reform-minded rather than simply relying on quick or one-time fixes that postpone fundamental decisions and ignore the more significant structural and fairness flaws in state and local tax systems.

Very few businesses allow taxes to shape their business strategy as much as Amazon.com.  Amazon has shuttered a Texas warehouse, ended partnerships with businesses in at least three states, and sued the state of New York — all because of state tax laws it doesn’t like.  When the South Carolina House rejected a massive tax break package designed to lure Amazon.com within its borders last week, that state became just the latest victim of one of Amazon’s tax-induced temper tantrums.  

The drama in South Carolina all started when former Governor Mark Sanford and his Commerce Department told Amazon that they would try to score the company a lucrative tax break package in return for Amazon’s promise to build a distribution center in the state.  The most important component of that proposed package was an agreement that, despite having a physical presence in the state, Amazon.com would not be required to collect sales taxes on purchases made by South Carolina residents. 

Unsurprisingly, this proposal angered virtually every other retailer in the state, from “mom and pop” shops to Wal-Mart, all of which are quite sensibly required to assist South Carolina in collecting the sales tax owed on each sale they make.  

Last week, these retailers, working in combination with Tea Party activists (who, for once, actually recognized that “big government” can indeed extend its influence through new tax breaks), were able to defeat the legislation in the House in a lopsided 71-47 vote.  Gov. Nikki Haley helped contribute to the proposal’s defeat, rightly announcing that its passage would be “a slap in the face to every small business we have.”

Amazon responded by canceling millions in procurement contracts, removing South Carolina job postings from its website, and announcing that the million-square-foot distribution center currently under construction will probably be “put into mothballs” after its completion. 

Reaction to news of Amazon’s departure in the Palmetto State has understandably been mixed.  But South Carolina’s largest newspaper, The State, did run a nice editorial pointing out that “this doesn’t have to be a loss for our state in the long or even medium term.”  The editorial rightly argues that lawmakers should build on this development by limiting narrow tax giveaways, evaluating existing economic development programs, and investing in a skilled workforce and other broad-based quality-of-life initiatives that employers value.

South Carolina might get the last laugh if it follows the advice contained in this editorial.  Amazon is currently pursuing a business strategy that is far more concerned with state tax law than logic would dictate.  The vast majority of businesses very sensibly do not regard taxes as the be-all and end-all of a good business climate.  Many other factors, like the quality of a state’s workforce, roads, and public safety measures, are often much more important to a company’s bottom line. 

With more states growing tired of Amazon’s bullying and temper tantrums, it appears unlikely that a business strategy that regards taxes as an unbearable burden with no upside will remain profitable for long.

You may have heard of the "no new taxes" pledge, which is promoted by the extreme anti-government organization, Americans for Tax Reform (ATR), and its leader, Grover Norquist. What you may not know is that the pledge bars lawmakers from allowing voters to choose for themselves whether or not to raise taxes. At least that's the latest word from Norquist, who is apparently the sole adjudicator of the meaning of the pledge.

In Arkansas, four legislators who signed the pledge are defending their vote to allow Arkansans to decide whether to increase the state’s diesel fuel tax by five cents per gallon. There's an argument to be made that legislators really ought to make these types of decisions on their own. After all, isn't that what they're paid to do? But this is not the sort of criticism that Arkansas lawmakers are hearing these days.

Instead, the criticism is coming from Grover Norquist and ATR. Business Week reports that several legislators actually voted against HB 1902 because they feared the wrath of Norquist.

What many lawmakers probably thought was a political gimmick when they signed onto it has clearly become a ridiculous obstacle to rational, representative government, as lawmakers become fixated with the opinions of Norquist rather than the opinions of their constituents.

And it hardly helps policymaking when lawmakers are tied to simple, black-or-white dogmas that they feel forced to carry to any and all extremes. Elected officials are put in office so they can, in the words of one of the legislators taking heat, “consider all bills based upon their individual merits.”

Oklahomans are asking questions about the “no new taxes pledge” as well. Recently Grover Norquist said that Oklahoma policymakers supporting a hospital provider fee would violate the “no new taxes” pledge.

A recent blog post from the Oklahoma Policy Institute (OPI) asks simple, yet important questions. “When lawmakers sign a pledge, who are they working for?... Should they adhere to the dictates of outside groups that always take the most simplistic and extreme stance on their particular issue, regardless of the context for Oklahomans?”

OPI also discusses members of Congress and their controversies concerning ATR's pledge. When Senator Tom Coburn said that he was in favor of eliminating ethanol tax subsidies and using the revenue to pay down the national deficit, Norquist said that this position was in violation of the tax pledge.

Coburn responded, “The pledge to uphold your oath to the Constitution of the United States? Or a pledge from a special interest group who claims to speak for all of American conservatives, when in fact they really don’t?”

As OPI puts it, “Leaders now have a choice: do they represent Grover Norquist, or do they represent Oklahoma?”

While almost every state faces revenue shortfalls due to the recession, North Dakota is one of the few to escape relatively unscathed, as a result of its oil revenue. In fact, North Dakota’s recently passed budget includes nearly half a billion dollars in tax breaks and increases general fund spending by more than 20 percent over the next two years.

The $489 million in tax reductions includes $341.8 million in local property tax relief, $120 million in personal income tax reductions, and $25 million in corporate income tax reductions.

Unfortunately, the $120 million in personal income tax reductions will not benefit those most in need. According to an analysis by the Institute on Taxation and Economic Policy, two-thirds of the income tax reduction will go to those making over $96,000, while only 5 percent will go to those making under $40,000.

The average tax cut for the richest one percent, those with incomes over $414,000, would be nearly $4,700. Only a third of those making under $24,000 will see any tax cut at all, and those who do will only receive about $18 over one year.

Republican lawmakers favored this regressive approach, even though North Dakota already has an extremely regressive tax system. As ITEP has noted before, taxpayers in North Dakota making less than $21,000 pay an average of 9.4 percent of their income in taxes, while those making over $406,000 pay only 4.3 percent of their income in taxes.

The North Dakota Economic Policy Project argues that a better approach to income tax reduction would have been for the state to enact a refundable state Earned Income Tax Credit (EITC). A state EITC equal to 10 percent of the federal EITC would only cost $17 million and would be specifically targeted to North Dakota’s low-income working families.

Ryan Taylor, the Democratic Minority Leader of the North Dakota Senate, also takes issue with cutting corporate income taxes by $25 million while many public services did not receive significant increases. In an op-ed for the Grand Folks Herald, Taylor asked, “Do we want to be a state that gives $25 million to corporations and countless more millions in the future by ignoring loopholes for oil companies, while leaving our children uninsured?”