June 2011 Archives

Advice for North Carolina on Gas Tax Policy: Don't Be Like Pennsylvania

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With the state’s gas tax pegged to the price of gasoline, North Carolina is scheduled to raise its gas tax rate tomorrow (July 1). This increase was entirely predictable, but is understandably controversial. Unfortunately, the debate surrounding what to do in the wake of this increase has been far too narrow, focusing on just two options: capping the maximum tax rate, or doing nothing at all.Read the ITEP Press Release.

Photo via herzogbr Creative Commons Attribution License 2.0

How Rhode Island Didn't Do the Wise Thing When It Had the Chance

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Unfortunately, Rhode Island lawmakers rejected Governor Lincoln Chafee’s balanced and reform-minded approach to closing the state’s budget shortfall for next fiscal year.

Senate members gave final approval to the House’s revised spending plan this week, both chambers choosing significant spending cuts over the governor’s sensible tax package.  Governor Chafee proposed closing half of the budget gap with a $160 million comprehensive sales tax reform package that included adding dozens of services to the state’s sales tax base, lowering the state sales tax rate from seven to six percent, and taxing more than 40 currently exempted goods at a one percent rate.  Chafee also supported mandatory combined reporting which would have helped level the corporate tax playing field for in-state businesses.

Caving to special interests who lined up in April to denounce the Governor’s plan, the final budget only adds five items to the sales tax base including non-prescription drugs and sightseeing tour packages.  Combined with a few other minor tax and fee changes, the final budget raises only $30 million in new revenue and reduces spending by more than $150 million.  According to the Providence Journal, more than half of the budget cuts impact programs for the poor, elderly, disabled and homeless.

Photo via J. Stephen Conn Creative Commons Attribution License 2.0

New Report from CTJ: U.S. One of the Least Taxed Developed Countries

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Revenue Increase the Obvious Answer to Budget Deficits

Some members of Congress are threatening to allow the U.S. to default on its debt obligations — and send financial markets into a tailspin — unless the President agrees to large, sudden cuts in the budget deficit without any increase in tax revenue. But the most recent data reveal that the U.S. is already one of the least taxed countries in the developed world. Only two OECD countries have lower taxes as a share of gross domestic product (GDP) than the United States.

Read the report.

In Minnesota Budget Standoff, Gov. Dayton Fights the Good Fight

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Minnesota state government is on the brink of shutting down.  Despite months of intense negotiations between the state’s Democratic governor, Mark Dayton, and the Republican controlled legislature, neither party seems prepared to budge from their preferred positions on balancing the budget. 

Their positions were staked out in last year’s campaign season and both sides are looking to deliver on their promises.  Governor Dayton wants to address the state’s budget shortfall with a combination of sensible spending reductions and increased taxes on Minnesota’s wealthiest households.  Republican lawmakers aim to block all tax increases and prefer to slash state spending to damaging levels.

An Institute on Taxation and Economic Policy opinion editorial on the budget predicament explains that the legislature’s approach disproportionately burdens Minnesota’s low- and moderate-income working families.  The piece goes on to say that Governor Dayton’s proposed tax increases on the richest two percent of Minnesotans is entirely reasonable.  “Asking the wealthiest to pay more simply means that the state will have more revenue to invest in the public structures and services provided now and over the long term.”

Update: The Government of Minnesota is now shutdown.

New Hampshire: Tobacco Tax Cut Will Force Deeper Budget Cuts in 2012

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New Hampshire joins the majority of states that have patched next fiscal year’s budget gaps with a cuts-only approach.  Democratic Governor John Lynch will allow the budget to go into effect Friday, July 1 without his signature, fearing a veto would only lead to a more austere budget than the one presented to him last week (the Republicans have a veto-proof majority in the House and Senate).

The budget contains a long list of spending reductions including cutting higher education funds in half (which will lead to higher tuition), state worker layoffs, and cuts to agency funds. 

The most nonsensical cut included in the New Hampshire budget is a 10 cent reduction in the state’s cigarette tax (dropping from $1.78 to $1.68) and lower taxes on other tobacco products.  Proponents of this tax change argued that a decrease in taxes on tobacco would lead to greater revenue as smokers from neighboring states would be incentivized to cross the border to purchase cigarettes. 

However, as the New Hampshire Fiscal Policy Institute (NHFPI) points out, this change is likely to reduce tax revenue by at least $14 million and as much as $30 million over the next two years.  Their analysis points to data from the state’s Department of Revenue Administration that shows even an increase in the sale of tobacco products would lead to the lower end estimated revenue loss.  NHFPI also questions whether or not a drop in taxes would lead to greater tobacco sales given that the long-term trend in cigarette sales is down.

Based in part on the flawed logic of the tax cut’s proponents and in part to the rushed process to include this provision in the final budget bill, lawmakers failed to account for any revenue loss from the tax cut.  This means that New Hampshire’s new budget is likely already out of balance before the year starts and more spending cuts are likely to come mid-year.

Oregon Bends Tax Credit Cost Curve

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It’s no secret that once enacted, tax breaks receive far too little scrutiny from state lawmakers.  Consider the debacle in Missouri, for example, where the state accidentally spent $1 billion more on tax credits beyond what lawmakers originally intended, in large part because the state's budget rules left lawmakers with very few options for properly overseeing those tax breaks.

In an attempt to encourage lawmakers to spend more time discussing the true costs and benefits of tax breaks, Oregon enacted a law in 2009 requiring the vast majority of its tax credits to sunset within two, four, or six years.  Last week, with the first batch of credits scheduled to expire at the end of this year, the Oregon legislature sent Governor Kitzhaber a bill that will scale back the size of the expiring tax breaks by some 75 percent over the next two years – from $40million to $10million.  Similarly, the credits' six-year, $500million price tag (had the legislature simply extended all the credits) will fall to roughly $136million.

Among the credits reduced by the legislation are the film tax credit, the biomass credit, and the research and development credit.  The much maligned business energy tax credit (BETC) will also be replaced with new and smaller credits designed to encourage conservation and renewable energy.

Unfortunately, there is one troubling addendum to this story.  Just days after passing these tax credit reductions, the legislature also gave approval to a costly new credit based on the federal New Markets Tax Credit (NMTC).  The NMTC is ostensibly designed to encourage business investment in low-income communities, but as our friends at the Oregon Center for Public Policy (OCPP) point out, the credit often flows straight to the pockets of wealthy investors building upscale hotels and condominiums in areas that are hardly impoverished. 

Moreover, the OCPP notes that this credit “will subsidize projects that will occur anyway,” and “despite all the talk about creating jobs, the bill does not attach job standards to receipt of the subsidy.”  Additionally, “nothing in the bill matches the rhetoric that investments will be made in small businesses. The bill has no provision limiting the investments to small businesses.”  On the bright side, there’s still time for Governor Kitzhaber to veto the NMTC, and regardless of whether or not the NMTC becomes law, Oregon’s tax credit spending will be much lower in the years ahead than would otherwise have been the case.

This success is thanks in no small part to the role Oregon’s 2009 sunset law played in pushing these costly tax breaks into the spotlight.

For more information on steps states can take to enhance the level of scrutiny applied to tax breaks, read CTJ’s report, How to Enact (and Maintain) Tax Reform.

Cuomo's Property Tax Cap is Bad News for New York

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Last Friday night (6/24/11), New York Governor Andrew Cuomo signed into law the state’s first ever property tax cap, one of the biggest legislative priorities of his administration. As Citizens for Tax Justice noted even before its final passage, however, the new property cap is one of the most extreme in the nation and widely viewed as ill-advised.

The cap limits annual growth in property tax revenues to 2 percent or the inflation rate, whichever is lower, with comparatively strict limits on exceptions to the cap: chiefly, state pension system increases above 2 percent of payroll. Voters in a given locality could also override the cap by a 60 percent vote.

Considering that property taxes are rising at about 5 percent annually, the cap will force dramatic cuts in local education, medical, and public safety services.

Many advocates argue that the enactment of a similar property tax cap in Massachusetts proves that it will not hurt the quality of education or local services, but the Center on Budget and Policy Priorities has thoroughly debunked this claim, showing how the cap has been disastrous in Massachusetts.

Compounding this, according to the Fiscal Policy Institute (FPI), New York’s cap is actually much worse than the one in Massachusetts considering that it’s 60 percent stricter in terms of reducing revenues, and, is not coupled with significant additional state funding to local governments.

Even if Cuomo’s goal is just to help low and middle income families with relief from rising property taxes, the FPI explains that a much more effective and less costly approach would be to enhance the state’s property tax circuit breaker.

Calling the tax cap “a cap on student achievement, especially for the poorest school districts” Karen Scharff, the Executive Director of Citizen Action New York points out that in reality the property tax cap is just “one more fake Albany quick fix.”

New Jersey Gov. Christie Vows to Veto Widely Popular Millionaires' Tax

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With just a few days left before the end of the fiscal year, Democratic lawmakers who control the legislature released an alternative to Governor Christie’s budget that the good people over at New Jersey Policy Perspective call a “this is what we stand for budget.”

Most notably, the budget reintroduces a tax on millionaires which the governor vetoed last year.  The proposed “millionaires' tax” would raise around $500 million and help avoid damaging cuts to public education in a way that affects only the very wealthiest taxpayers. The proposed tax -- a 10.75 percent marginal rate -- would only apply to taxpayers with taxable income above $1 million, or about .2 percent of all households.  

Moreover, this plan would take back only a fraction of the huge federal income tax reductions accruing to these best-off taxpayers as a result of the recent extension of the Bush tax cuts.  According to an Institute on Taxation and Economic Policy analysis, these very same taxpayers are already enjoying an average $72,505 in federal tax savings in 2011.  It is entirely reasonable to ask the less than 1 percent of the state’s wealthiest households to pay more in state income taxes now, particularly as New Jersey continues to struggle with the consequences of the national recession.

Governor Christie wasted no time criticizing the alternative plan and is expected to veto any tax increase just as he did last year.

While the battle over the millionaires’ tax is in the spotlight, another tax change in the Democrats’ proposal is worthy of attention.  The alternative plan would also restore the single most effective anti-poverty tax strategy available to state lawmakers -- the Earned Income Tax Credit -- to its previous levels. The EITC provides targeted tax cuts to low-income working families, helping low-wage families to stay above the poverty line.

The decision of Governor Christie and the legislature to reduce the EITC from 25 to 20 percent of the federal credit last year directly pushed more families into the increasingly frayed safety net—a shortsighted and counterproductive decision that Democratic lawmakers are smart to propose reversing.

By law, New Jersey must have a budget in place for next fiscal year by the end of the day on Thursday, June 30th.  The alternative budget plan passed out of House and Senate committees on Monday and is expected to be approved in both chambers on Wednesday.  While it is all but certain that Governor Christie will use his line-item veto power to strike out portions of the Democrats’ plan, at this point it is unclear if the Democrats have enough Republican support to overturn the governor’s veto. Also not known is whether the governor’s allies in the legislature can afford to back him on an override vote: with 72 percent of the New Jersey voters supporting a millionaire’s tax, it won’t be easy for legislators to explain or justify their opposition.

Number of High Income Taxpayers Who Owe Nothing in Income Taxes Just Doubled

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The Internal Revenue Service (IRS) recently released new data showing that the number of individuals paying zero US income taxes on an adjusted gross income (AGI) of $200,000 or more almost doubled between 2007 and 2008.

In 2008, the number of returns declaring an AGI of over $200,000 represented about 3.1 percent of the total returns filed to the IRS. Out of these returns, as many as 18,783 had no U.S. income tax liability whatsoever in 2008; that’s nearly double the 10,465 who owed nothing in 2007.

Although this may represent only 0.43 percent of taxpayers reporting an AGI of over $200,000, it is the biggest percentage of non-payers in this category since the IRS began reporting the data in 1977.

The IRS report also revealed that the much publicized top marginal rate of 35 percent exists primarily on paper: according to the data, only 0.007 percent of ALL taxpayers pay an effective tax rate of 35 percent or higher. Put differently, nine times as many high income taxpayers pay zero in taxes than pay an effective, actual 35 percent tax rate.

Much of the explanation for the low effective rates for higher income individuals can be explained by the over $1 trillion in special tax deductions and treatment often referred to as tax expenditures. Examples of expenditures that rich taxpayers exploit would be: special treatment of capital gains, tax-exempt interest and the mortgage interest deduction.

Reducing or eliminating tax expenditures for businesses and investors would not only help reduce the deficit, it would also make the system more fair by reducing the number of higher income taxpayers who are able to avoid paying a substantial part or all of the taxes they owe.

The IRS data proves once again what Citizens for Tax Justice has said all along, our tax system is not as progressive as you think.

As Tax Repatriation Gains Steam, Important Questions Need Answering

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On June 15, 2011, think tank Third Way held the event "The Next Stimulus? Bringing Corporate Tax Dollars Home to Work in America" supporting a tax repatriation holiday. When the panel was opened up for questions, they faced tough questioning from critics of the repatriation holiday, not all of which they could answer adequately.

Listen to an excerpt of the questions and answers here:

Questioning on Repatriation Holiday by taxjustice

Question 1: Steve Wamhoff, Legislator Director, Citizens for Tax Justice (0:00)
I just want to clarify your views on some of the other research that has been done. I think what your saying is that the bipartisan Congressional Research Service was wrong in issuing it’s study that said the last time this was tried it did not create jobs. And that the non-partisan Joint Committee on Taxation was wrong recently when it put out it’s analysis saying that if we repeat this repatriation holiday it will cost $79 billion over 10 years partially because some of those profits would’ve been brought back anyway, partially because ultimately corporation will shift even more profits offshore. Meaning even if your only goal is to get more of these profits to the US, even in that limited goal you fail on that. So do I understand you correctly that you think that the Congressional Research Service and the non-partisan Joint Committee on Taxation are incorrect and that Congress should ignore these analyses?

For the Congressional Research Service Analysis click here.

For the Joint Committee on Taxation Analysis click here.

Question 2: Richard Phillips, Research Analyst, Institute on Taxation and Economic Policy (3:40)
I’d like to ask a question based on this point we’re just talking about. Wouldn’t a better alternative to a tax repatriation holiday be to end deferral of offshore profits and go to a system where all companies have to pay taxes on offshore profits?

For more information on moving to a full worldwide system and ending deferral check out Citizens for Tax Justice's report here.

Question 3: Nicole Tichon, Executive Director, Tax Justice Network USA (6:22)
I think Mr. Rogers you said that we didn’t have as much offshore [then] as we do today in your comments. Doesn’t that speak to the issue that this actually incentivizes companies to keep their money offshore if they think they can just have a holiday every 5 or 6 years?

For more information on Tax Justice Network USA's take on the repatriation holiday see their op-ed in the Huffington Post.

Question 4: Scott Klinger, Tax Policy Director, Business for Shared Prosperity (9:56)
I think one of you noted that some companies are devoting a lot of effort to accounting way of moving profits offshore, through things like regressive transfer pricing. Some of our small business members think that that’s a pretty big loophole that needs closing that’s caused this swelling of offshore assets. Would you be in favor of looking at closing some of the tax haven loopholes and tightening transfer pricing restrictions as part of this repatriation bill?

For more information on Business for Shared Prosperity's take on the repatriation holiday see their website.

Advice for North Carolina on Gas Tax Policy: Don't Be Like Pennsylvania

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Expert to North Carolina: Don’t Cap the Gas Tax

Statement from the Institute on Taxation and Economic Policy (ITEP)

June 23, 2011

Washington, DC – With the state’s gas tax pegged to the price of gasoline, North Carolina is scheduled to raise its gas tax rate on July 1. This increase was entirely predictable, but is understandably controversial. Unfortunately, the debate surrounding what to do in the wake of this increase has been far too narrow, focusing on just two options: capping the maximum tax rate, or doing nothing at all.

Carl Davis, Senior Analyst at the Institute on Taxation and Economic Policy (ITEP) and author of a major 50-state gas tax report due out late this summer, issued the following statement in response to the controversy:

“North Carolina’s gas tax is clearly in need of reform, but a simple gas tax cap is a blunt instrument that can do more harm than good. The neighboring states of Kentucky and West Virginia have gas taxes similar to North Carolina’s, and both have wisely chosen to address the problem of price-related volatility by limiting changes in their tax rates to no more than 10%. They don’t cap the tax, but they do cap the volatility.

“A cap on the variable portion of North Carolina’s gas tax, similar to the type used in Kentucky and West Virginia, would have resulted in the state’s gas tax rate rising just 1.5 cents this July 1, rather than the full 2.5 cents currently scheduled to occur. A cap above or below 10% could have resulted in a slightly larger, or smaller, increase.

“A limit of this type would produce a more stable and predictable gas tax, and one that results in fewer surprises for taxpayers, transportation officials, and state lawmakers.

“Such a limit would also allow the state’s gas tax to retain its character as a tax on the actual price of gas, while smoothing some of the jarring ups and downs seen in recent years. Gas tax caps, by contrast, run the risk of transforming North Carolina’s extremely sensible price-based tax into a stagnant, flat levy that can never keep up with the state’s transportation needs. In Pennsylvania, for example, a gas tax cap has left state’s tax rate unchanged since 2006, resulting in flatlining revenues while transportation funding needs continue to climb. Pennsylvania is the poster child for bad gas tax policy.

“The problem facing North Carolina lawmakers is not new, and not unique to North Carolina. The Tar Heel State’s neighbors to the north have already dealt with this issue, and North Carolina should learn from their experiences by implementing a similar reform.”


Founded in 1980, the Institute on Taxation and Economic Policy (ITEP) is a non-profit, non-partisan research organization, based in Washington, DC, that focuses on federal and state tax policy. ITEP's mission is to inform policymakers and the public of the effects of current and proposed tax policies on tax fairness, government budgets, and sound economic policy. ITEP’s full body of research is available at www.itepnet.org.


Chuck Schumer's Amazing Double-Somersault on the Repatriation Holiday

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Senator Schumer Supported, then Opposed, and Now Supports, Amnesty for Corporate Tax Dodgers

In 2004, Senator Charles (Chuck) Schumer of New York voted in favor of the so-called American Jobs Creation Act, a bill full of so many tax breaks for special interests that one observer called it a “bacchanalia of Caligulan proportions.” The bill, which many Democrats and Republicans supported, prompted one business lobbyist to confess to a reporter that the policy process had “risen to a new level of sleaze.” One of the most outrageous breaks in the bill was an amnesty for corporate tax dodgers, a measure called a “repatriation holiday” by its supporters.

A second “repatriation holiday” was proposed as “economic stimulus” in 2009, but Senator Schumer, like most Senators, voted against it because of data summarized by the Congressional Research Service showing that the 2004 measure did not create jobs. In fact, the research showed that the benefits went to enrich shareholders rather than to job creation.

Now Senator Schumer has switched positions again and is supporting a second repatriation holiday.

How the Repatriation Holiday Would Help Corporations

In theory, U.S. corporations pay U.S. income taxes on their profits no matter where they are generated. But they are allowed to “defer” (not pay) U.S. taxes on their offshore profits until they bring those profits back to the U.S. (until they “repatriate” the profits), which may never happen. (A separate provision ensures that these profits are not double-taxed if taxes are paid to the foreign government.)

A tax holiday for repatriated profits would allow them to bring these profits to the U.S. and pay no taxes, or pay a very low rate. (The 2004 measure taxed offshore profits repatriated during the holiday at a nominal rate of just 5.25 percent instead of the normal 35 percent corporate income tax rate.)

Another Repatriation Holiday Will Cost the U.S. $79 Billion in Tax Revenue

According to the non-partisan Joint Committee on Taxation, a repeat of the 2004 repatriation holiday would raise some revenue during the first few years, but then reduce revenue by a larger amount over the rest of the decade, resulting in a net loss of about $79 billion over ten years.

The analysis also shows that a repatriation holiday that is slightly less generous to corporations (one taxing repatriated offshore profits at 10.5 percent) would cost about $42 billion over ten years. 

Another Repatriation Holiday Will Cost the U.S. Jobs

One factor causing the $79 billion revenue loss is the way U.S. corporations will respond when Congress shows itself willing to enact a repatriation holiday more than once. Corporations will likely shift even more profits offshore in the long-run, because corporate leaders will think they can simply wait for Congress to enact the next repatriation holiday allowing them to bring those profits back to the U.S. tax-free or almost tax-free. This means more investment will be made overseas rather than here in the U.S.

Incredibly, the coalition of companies promoting the holiday argue that it will create jobs, even though the non-partisan Congressional Research Service found that the 2004 measure failed to create jobs and that the benefits went instead to corporate shareholders.

The Repatriation Holiday Is an Amnesty for Corporate Tax Dodgers

Corporations would not just shift real investments (real operations and jobs) overseas. They would also respond by increasing the amount of profits they shift to offshore tax havens through sham transactions that exist only on paper. In fact, the proposal would give the greatest benefits to the worst corporate actors, those who shift profits offshore to avoid U.S. taxes.

A U.S. company that is doing real business in another country typically will reinvest those offshore profits in factories, oil wells or other assets, making it difficult to bring those profits back to the U.S. But a company that is engaging in profit-shifting (disguising U.S. profits as “foreign” profits through transactions that exist only on paper) has likely merely shifted profits to a tax haven subsidiary that consists of little more than a post office box. It’s much easier to repatriate these offshore profits than the offshore profits from real business activities. 

Also, a U.S. corporation that is doing business in a typical foreign country is already paying some tax to the foreign government, which means they can already repatriate those profits to the U.S. without paying the full 35 percent U.S. corporate income tax rate. But a U.S. corporation that has shifted its profits to a tax haven is typically paying no taxes to the tax haven government, which means they would pay the full 35 percent U.S. rate if they repatriated those profits under current law. U.S. corporations shifting their profits to tax havens therefore stand to gain the most from a repatriation holiday.

Corporate Leaders Are Divided on the Repatriation Holiday

Some corporate leaders have banded together in an extremely well-funded campaign to promote a second repatriation holiday. But other corporate leaders have decided to lobby instead for an even bigger tax giveaway. A repatriation holiday is essentially a temporary tax exemption for corporations’ offshore profits. Some corporate leaders think they can obtain a permanent tax exemption for offshore profits — a territorial tax system, in other words — and they think that enactment of a repatriation holiday would distract from that goal.

The Republican chairman of the House Ways and Means Committee, Dave Camp, agrees with the corporate leaders who prefer a territorial system (the bigger tax giveaway) to a repatriation holiday. But he has not ruled anything out.

Photo via Pro Publica Creative Commons Attribution License 2.0

Most Extreme Balanced-Budget Amendment Ever Moves Forward in the House

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Last Wednesday, the House Judiciary Committee approved H.J.Res 1, the newest incarnation of the potentially disastrous balanced-budget amendment. As passed out of committee, the balanced-budget amendment is more extreme than versions proposed in the past, as it would not only require that government outlays equal receipts, but would also limit spending to about 16.7 percent of gross domestic product and require a 2/3’s majority for any increase in revenue.

In its comprehensive rebuke of the balanced-budget amendment, the Center on Budget and Priorities (CBPP) explains that the amendment has potential for “serious economic harm,” as it would force cuts in automatic stabilizers like unemployment insurance during recessions when they are needed most. It’s precisely for this reason that more than 1,000 economists, including 11 Nobel laureates, signed a statement in 1997 opposing the balanced-budget amendment that Congress nearly approved that year.

The spending cap would require catastrophic cuts to government services even when the country is economically prosperous. The amendment would cut spending to 18 percent of the previous year’s GDP, which is typically about 16.7 percent of the current year’s GDP.

As CBPP explains, the required cuts would go well beyond those in Rep. Paul Ryan’s plan and be more on the scale of the much more extreme Republican Study Committee’s plan, which includes cutting in half the Medicaid, Supplemental Nutrition Assistance Program (SNAP, formerly food stamps), and Supplemental Security Income programs, just to name a few, on top of dramatic cuts to Medicare and Social Security.

Fortunately, passage of the amendment is no easy task. It requires a 2/3’s majority of both chambers of Congress and ratification by 3/4’s of the states. A test vote in the Senate on a resolution expressing support of a balanced-budget amendment in March garnered only 58 of the 67 votes required, showing that proponents of the amendment may have an uphill fight. On the other hand, the 1997 amendment came within one vote of approval in the Senate.

Radical anti-tax and Tea Party groups believe they can change this equation by pushing the amendment as part of their new “Cut, Cap, Balance” plan, which calls on lawmakers to require the passage of the amendment as a condition for increasing the debt ceiling. In fact, conservative groups are pushing Congressional Republican’s to hold off having a vote on the amendment, knowing that the threat of the debt ceiling vote is their best opportunity to pass it.

Lawmakers need to stand up to these groups who are attempting to hold our economy hostage (by not raising the debt ceiling) in order to pass a radical budget amendment as a Trojan Horse for draconian service cuts.

Former Republican Senator Judd Gregg recently commented, “Lord save us from the well intentioned and those who are trying to score political points or raise money” by pursing this form of “conservative misdirection.”

Grover Norquist Maneuvers Frantically to Avoid a Tiny Deviation from Anti-Tax Ideology

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The U.S. Senate voted last Thursday to repeal a tax break for the ethanol industry that cost $5.4 billion last year. Some observers interpret the vote as an indication that the grip of anti-tax ideologue Grover Norquist over Congress is loosening. However, Republican and Democratic lawmakers who have slavishly signed and followed Norquist’s so-called “Taxpayer Protection Pledge” will have to do far more to prove they can address our revenue shortfall in a serious and honest way.

The vote brought to a climax the months of sparring between Norquist and Senator Tom Coburn of Oklahoma over the idea of repealing tax expenditures as part of a compromise to reduce the deficit. 

Norquist’s Americans for Tax Reform (ATR) stated that even though it opposes ethanol subsidies, any repeal of the tax subsidy that was not offset with tax cuts represented a “a corporate income tax increase and therefore a pledge violation.”

The pledge in question is, or course, ATR’s so-called “Taxpayer Protection Pledge” which most Republicans and some Democrats in Congress have signed, swearing to forgo any tax increase until the end of time.

Once it was clear he was going to lose the vote on the subsidies (with 34 Republicans voting for the measure), Norquist tried to save face by claiming that a vote for repeal was not a pledge violation as long as it was coupled with a vote for South Carolina Senator Jim Demint’s amendment, which would eliminate the estate tax along with ethanol subsidies. This amendment, however, never even came up for a vote, forcing Norquist to shift again, saying that the defeat of the larger bill on which the ethanol language was attached means the pledge has not been violated.

South Dakota Senator John Thune of South Dakota, certainly no progressive on tax issues, described Norquist’s maneuvers as “a tremendous amount of gymnastics.”

One GOP aide opined in an interview with the National Review that 34 Republicans voted to tell Norquist to “take a hike” and “rejected his narrow and ridiculous interpretation of what the pledge means.”

But before anyone starts patting the pledge-signers on the back for being responsible, it’s worth remembering that an awful lot of them would have voted for the repeal of the estate tax, if that came up for a vote. The Tax Policy Center has projected that the estate tax will raise $487 billion over the coming decade, far more than was saved by repealing the tax subsidy for ethanol.

Of course no one can be blamed for being hopeful that lawmakers will realize that cutting government spending should include cutting government spending that is done through the tax code. Such a shift is long overdue. Tax expenditures have ballooned to over a trillion dollars annually and are not given the scrutiny that Congress applies to direct spending.

The vote may only be a fleeting setback for Norquist. As Washington Post commentator Ezra Klein notes, the fact that raising ANY revenue from repealing even the most egregious and minor tax breaks is considered a major concession shows just how influential Norquist and his anti-tax extremism have become. 

Photo via Gage Skidmore Creative Commons Attribution License 2.0

What Is Congressman Jared Polis Thinking?

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The latest idea from Congressman Jared Polis (D-CO) is to protect the ability of tax professionals who have thought up creative tax avoidance schemes to get as much profit from these schemes as they possibly can.

Rep. Polis first made a name for himself in the tax world during the health care reform debate, when he drafted and circulated a letter that was signed by several freshmen House Democrats who opposed the surcharge that the Democratic caucus was considering to help finance health care reform.

Recently, Polis joined a group of five lawmakers in cosponsoring an amnesty for corporate tax dodgers, which he and other proponents call a “repatriation holiday.”

Now Rep. Polis is going to bat for lawyers and accountants who want to patent the creative tax avoidance schemes they have dreamed up. Tax strategy patents have to be one of the worst ideas of the last couple of decades. These patents allow tax professionals to obtain a patent on a particular tax planning strategy and charge royalties to taxpayers to allow them to use it.

The Senate has passed a major patent bill (H.R. 1249, the America Invest Act) that includes a provision banning the issuance of patents for tax strategies. Colorado representative Jared Polis has offered an amendment changing the effective date of the ban to allow patents to be issued in cases where the applications have already been filed. About 160 tax strategy patent applications are pending. A spokesman for the congressman said that it was a matter of protecting applicants that had already revealed their strategies.

No one should be able to have a monopoly over part of the tax code and taxpayers shouldn't have to pay royalties or defend themselves against lawsuits for legally using the tax laws. None of these types of patents should ever have been issued and there's no good reason to allow the patent office to issue any more.

Photo via Studio08Denver Creative Commons Attribution License 2.0

Tar Heel State Could Become Tax Free Haven for Multistate Corporations

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If a multistate corporation doing business in North Carolina shows signs of shifting income around to avoid paying state taxes, the state’s Department of Revenue has authority to require additional information to be sure the company’s not simply offshoring its profits. But that may be about to change.

In the last hours of North Carolina’s legislative session this year, the House and Senate passed a two-pronged bill that will legally allow multistate corporations doing business in North Carolina to avoid paying corporate income taxes rightfully owed to the state.

First, the bill limits the Department of Revenue’s power to demand companies “combined reporting,”  i.e., fully disclose income for all of a company’s subsidiaries, regardless of their location.

Under the new law, the Secretary of Revenue could only force a combined report if transactions between subsidiaries have no "reasonable business purposes" other than reducing the corporation’s tax liability. As the NC Budget and Tax Center noted, “corporate accountants could easily restructure tax shelters and give them the appearance of "business purposes," even if the primary purpose was to, in fact, reduce corporate taxes.”

Second, the bill reopens the egregious “royalties and trademark loophole” closed by legislators ten years ago.  Multistate corporations operating in North Carolina with headquarters out of state will now be allowed to charge their North Carolina entities for the right to use the corporations’ trademarks.  There is no limit to the ‘charge’ for this privilege and as such, it can (and will) be used to offset profits made in North Carolina for any given tax year resulting in zero state tax liability. 

Speaking out against the amendment, House member Jennifer Weiss said, "We are telling multistate corporations, 'Come on over, rip us off, we won't charge you any taxes, but we're going to tax the little guy…Go ahead, cheat us, it's legal."

House Majority Leader Paul Stam argued that affording corporations the confidence that they can, in fact, avoid taxes if they move to the state was “extremely important to the economy of North Carolina.”  He added that “of all the bills we've had this session, this is the jobs bill."

The bill now awaits the signature of Governor Bev Perdue.

Earlier last week, the Republican led legislature overrode the governor’s veto of the damaging state budget they crafted.  News of this last minute move to support corporate interests over the public interest is even more disturbing in light of the fact the state already has a budget in place that severely underfunds all levels of education, eliminates thousands of state workers  and limits access to health care.

Photo via Jimmy Wayne Creative Commons Attribution License 2.0

Maine's New Budget Gives to the Rich and Takes from the Poor, Literally

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Maine Governor Paul LePage signed a $6.1 billion two-year budget into law this week. The budget includes reductions to the state’s personal income and estate taxes in addition to other tax changes that will cost the state $153 million in FY12-13 and $400 million in FY14-15. 

The new tax changes are both expensive (and force spending cuts elsewhere) and incredibly unfair. A reduction in the top income tax rate and increase in the state estate tax exemption primarily benefit the state’s wealthiest residents.  According to an Institute on Taxation and Economic Policy analysis conducted for the Maine Center for Economic Policy (MECEP), more than half of the benefits of the new personal income tax reductions will go to the wealthiest 20 percent of Maine taxpayers. 

Not only do the richest Mainers benefit most from this budget, 75,000 low, moderate and middle income families are likely see their taxes increase by as much as $400 annually because of cuts to the state’s property tax circuit breaker program that protects homeowners from paying too large a portion of their family income in local property taxes. (See our fact sheet on circuit breakers.) Whatever modest tax reductions these moderate and low income filers get from the new personal income tax cuts will be offset by the increase they’ll face in property taxes.

The major tax changes enacted in Maine this session are:

  • A reduction of the top marginal personal income tax rate from 8.5 to 7.95 percent;
  • A restructuring of the personal income tax rates, collapsing from four to three brackets replacing current rates with  0, 6.5, and 7.95 percent;
  • Increasing the standard deduction and personal exemption to the federal amounts;
  • Eliminating the state’s alternative minimum tax, which is designed to ensure that upper-income taxpayers pay at least some income tax;
  • Raising the estate tax exemption threshold from $1 million to $2 million;
  • Limiting the value of the property tax circuit breaker to 80 percent of the total benefit;
  • Eliminating the annual indexing of the state’s motor fuels tax to inflation, a move that would make the gas tax less sustainable over time.

Photo via Jimmy Wayne Creative Commons Attribution License 2.0

DC Council Passes Budget with Progressive Tax Increases

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The DC City Council passed a budget last week that DC Council Chairman at Job with Just Eventincludes a variety of smart tax policy changes.  Among them are a reform designed to limit tax avoidance by multi-state corporations, and a provision curtailing some of the generous tax breaks enjoyed by the city’s wealthiest residents.

One of the more notable tax changes contained in the Council’s budget is a provision implementing the "combined reporting"  of income by corporations with income from more than one state.  This reform will greatly reduce the ability of corporations to shelter their DC profits from tax by shifting them, on paper, to low- or no-tax states.  Corporations paying little or no DC taxes will also be subject to a slightly higher corporate minimum tax under the Council’s plan. 

Unfortunately, the Council also decided to return some of the revenue generated by these changes to multi-state corporations in the form of a new deduction, scheduled to take effect in five years (outside the city’s four year budget window).

Another positive provision in the budget limits the value of itemized deductions for taxpayers earning over $200,000 per year.  This limitation closely resembles a recommendation The Institute on Taxation and Economic Policy made in a pair of recent reports.

Under the Council’s budget, DC’s income tax code will also be amended to eliminate the deduction for income earned on out-of-state bonds.  No state offers such an exemption today, and the DC Fiscal Policy Institute has pointed out  that the impact of this change will be generally progressive, since most out-of-state bonds are held by individuals with over $100,000 in annual income.

Finally, the DC budget also contains a number of less progressive revenue measures to help the city weather the lingering economic downturn.  Among those changes are the permanent extension of a recent 0.25 percentage point sales tax increase, and an increase in the parking garage tax.

DC’s budget awaits the signature of Mayor Gray.  Once signed by the Mayor, the budget can only be prevented from becoming law if the U.S. House, the U.S. Senate and President Obama all three agree to block it within 30 days.

Photo via Allison_DC Creative Commons Attribution License 2.0

Rhode Island Sunset Law Would Shore Up Tax Reform

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Last year, Rhode Island’s lawmakers very wisely chose to close a large number of loopholes in the state’s Swiss cheese tax code.  Now Ocean State lawmakers have an opportunity to shore up that newly reformed code against the inevitable flood of special interest tax breaks that’s sure to come.

Read the article.

In Wisconsin, Governor Walker Chooses Corporations Over Kids

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In signing a new two-year budget, Wisconsin governor Scott Walker fattened corporate welfare programs while making cuts to just about every public service the working poor depend on, including healthcare, child care, higher education and transportation.  The Center on Wisconsin Strategy has correctly labeled the new budget a “Betrayal of Wisconsin Values.”

According to a release from the Center:

  • Funding for Medicaid and BadgerCare, the programs that ensure that all children have access to healthcare, will be cut by $500 million;
  • Funding for Child Care, the service that low-income workers depend on to take care of their children so they can go to work, will be cut by $15 million;
  • Funding for the Property Tax Circuit breaker, the program that reduces property tax payments for low-income families (many elderly), will no longer be indexed to inflation and will be worth $13.6 million less;
  • Funding for technical colleges, education that provides skills for new workers and retraining for displaced ones, will lose $71.6 million, or 25% of its total funding;
  • Funding for Public Transportation, for many low-income workers the sole mean of getting to and from their job, will be cut by $9.2 million;
  • Funding for the Earned Income Tax Credit (EITC), which provides the working poor with a tax credit to offset regressive payroll taxes, will be scaled back by $56.2 million.  The EITC has been championed by economists across the political spectrum for its significant work incentive and capacity to help the working poor pull themselves out of poverty. 

These and other cuts amount to $2 billion worth of support yanked out from underneath the working poor.  Yet, in his frenzy of service cuts, Governor Walker somehow found room for $2.3 billion in tax breaks over the next decade, in the form of a domestic productio

n activities credit, two different capital gains tax breaks, and a variety of new sales tax exemptions for priorities like snowmaking and snow grooming equipment.

Of all the factors that stimulate a state’s economy by attracting private sector business, corporate taxes are among the least significant.  A skilled workforce capable of getting to job sites is a much higher priority for virtually any smart business owner. Unfortunately, Governor Walker’s budget just put that asset in serious jeopardy.

Photo via Blue Robot Creative Commons Attribution License 2.0

Getting Taxes Wrong: Fact-Checking the Republican Primary Debate

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With the Iowa Caucuses almost 8 months away, the Republican primary was in full swing on Monday night as 7 of the Republican contenders battled it out during a debate on CNN. Tax policy took center stage as every single one of the Republican contenders promoted lower taxes as central to their economic platform.

Predictably however, the candidates stayed relatively vague about their specific tax plans.

Former Minnesota governor Tim Pawlenty is the only candidate so far to release an official tax plan, which, among other things, proposes to eliminate the capital gains tax, create only two income tax brackets, and reduce the corporate income tax rate from 35 to 15%. Citizens for Tax Justice estimates that the plan would result in a 73% income tax cut for the Top 400 Taxpayers and cut taxes 41% for millionaires generally.

Even without getting into too many specific plans, the Republican contenders made a few curious claims about tax policy that are in dire need of fact checking:

Representative Michele Bachmann, Minnesota: “What we need to do is today the United States has the second highest corporate tax rate in the world…We've got to bring that tax rate down substantially so that we're among the lowest in the industrialized world.”

While Bachmann would be correct in claiming the United States' statutory tax rate of 39% (the federal income tax rate is 35 percent and the average state corporate income tax rate is about 4 percent) is on paper the second highest in the industrialized world, she fails to take into account the effect of special tax breaks and loopholes which make the effective rate paid by companies relatively low. According to a 2007 study by the Bush Treasury Department, between 2000-2005 US corporations paid only 13.4% of their profits in corporate income taxes, well below the Organization of Economic Cooperation and Development (OECD) average of 16.1%. The OECD is what Bachmann means by "industrialized world."

Demonstrating how big the difference between statutory and effective rates can be, a recent CTJ study showed that 12 US corporations together paid an effective corporate income tax rate of (negative) -1.5%, while earning $171 billion in profits over 3 years.

Former House Speaker Newt Gingrich: “The Reagan recovery, which I participated in passing…raised federal revenue by $800 billion a year in terms of the current economy, and clearly it worked. It's a historic fact.”

Rather than telling a ‘historic fact’, Gingrich is weaving a complete fiction. In claiming that Reagan’s tax cut efforts raised federal revenue $800 billion, Gingrich is assuming that all economic growth was due to Reagan’s efforts, while simultaneously ignoring the effect of inflation and population growth.

Citizens for Tax Justice’s internal estimates put the real cost of lost revenue due to the Reagan tax cuts at 3.97% of GDP or the equivalent of $581.2 billion today. Even former Reagan White House Senior Policy Analyst Bruce Bartlett admits that the Reagan tax cuts DECREASED revenue, adjusting for inflation, by $473.7 billion. In addition, it’s odd that Gingrich would point to the Reagan era to establish his fiscal credentials considering that the national debt tripled during Reagan’s two terms.

This is not Gingrich’s first foray into rewriting historic fiscal realities and it probably will not be his last.

Herman Cain, Godfather Pizza CEO: “We need an engine called the private sector. That means lower taxes…suspend taxes on repatriated profits, then make them permanent.”

Herman Cain’s call for an end to taxing repatriated profits puts him in good company with Republican establishment figures like Republican Speaker of the House John Boehner, who believe that moving the United States toward a territorial system of taxation would stimulate the economy by bringing home offshore capital.

In reality however, such a move would be disastrous for the US economy. Rather than encouraging investment in the United States, US corporations would have a much greater incentive to shift actual operations and jobs offshore because they would not have to pay US taxes on these profits. A better approach would be to end deferral, which would stop these current tax incentives pushing jobs offshore while also encouraging companies to bring more than a trillion dollars in offshore capital back to the US.

How much is enough? On top of the close to $500 million in corporate tax breaks Illinois doles out each year, Governor Pat Quinn now finds himself confronted by a growing crowd of CEO’s demanding even more. In the wake of tax-break lobbying efforts by Motorola, Sears and Caterpillar, the latest corporation seeking preferential tax treatment is CME, owner of the Chicago Mercantile Exchange and the Chicago Board of Trade.  These companies claim that the temporary corporate tax rate hike enacted by Illinois lawmakers earlier this year might force them to pull up stakes and leave if the Governor doesn’t bend the tax code to accommodate their specific industry.  This tactic is widely viewed as an empty threat, but the Governor has said his door is open.

Matt Gardner, author of Balancing Act: Tax Reform Options for Illinois and Executive Director of the Institute on Taxation and Economic Policy, issued the following statement in response to the controversy:

"The real problem with the Illinois corporate income tax rules isn’t the rates, it’s the way the state has lavished industry-specific and even company-specific tax breaks and loopholes over the years.

“CME recognizes the inequities created by these corporate tax giveaways, but ironically, the solution put forward by CME and other highly profitable corporations is to create even more holes in the corporate tax code, further shifting the burden of the corporate tax to those companies not blessed with high-paid lobbying teams. For example, over the last three years, CME paid an effective state income tax rate of 7.7 percent, while Deere & Company  has been paying only 2.2 percent, and Wells Fargo a mere 0.7 percent.

“Capitulating to big businesses’ aggressive lobbying is what got Illinois in this mess in the first place.  The “single sales factor” tax break that lawmakers enacted a decade ago was designed to please manufacturing companies. This single tax break now costs the state close to $100 million a year—and shifts the cost of funding public services away from manufacturers and onto every other Illinois business – with no demonstrable impact on the size of Illinois’ manufacturing sector. Combined with nearly $400 million in other corporate tax giveaways annually, the single sales factor increases the pressure on state lawmakers to hike tax rates in order to preserve a minimal level of growth in the corporate tax.  Repealing the single sales factor is the first thing the governor and legislature can do to make the Illinois corporate tax system more equitable; creating more exceptions for corporations now lining up to renew their expiring deals will create even more instability in the state’s revenues.

“Taxes are part of the cost of doing business, and corporations get a big bang for those bucks: educated workers, reliable energy sources, roads and tracks that get them to work and their product to market, the list goes on.  If CME and other corporations want a stable, predictable economic environment, they should be asking for fewer loopholes, not more.”

Founded in 1980, the Institute on Taxation and Economic Policy (ITEP) is a non-profit, non-partisan research organization, based in Washington, DC, that focuses on federal and state tax policy. ITEP's mission is to inform policymakers and the public of the effects of current and proposed tax policies on tax fairness, government budgets, and sound economic policy. ITEP’s full body of research is available at www.itepnet.org.

New from CTJ: Pawlenty Plan Would Cut Income Taxes for Richest 400 Americans by 73 Percent

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Plan Would Cut Personal Income Taxes by at Least 41 Percent for Millionaires Generally

Former Minnesota governor and presidential candidate Tim Pawlenty has released his proposed tax plan, including very specific rate cuts and exemptions for investment income, and vague promises to eliminate tax loopholes. Even if he eliminates all itemized deductions and credits, millionaires would still receive an enormous income tax break under the plan.

Read the report.

CTJ and others have noted that the cost of the Bush tax cuts from 2001 through 2010 was about two and a half trillion dollars. The recent “compromise” that extended them for another two years, through the end of 2012, cost $571.5 billion. But this is only the beginning. If Congress makes permanent the Bush tax cuts or extends them for another decade, the cost will be $5.4 trillion.

Read the fact sheet.

Mercatus Center Misses the Mark with "Simple" Tax Index

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The Mercatus Center, a think tank run by “America’s Hottest Economist,” has attempted to quantify the level of “freedom” enjoyed within each state.  If this sounds impossible, that’s because it is.  A quick look at the “taxes” component of each state’s “freedom score” should make this very clear.

According to the Center, freedom requires that “individuals should be allowed to dispose of their lives, liberties, and properties as they see fit, as long as they do not infringe on the rights of others.”  This, according to the study, requires “a deep distrust of taxation.”

In order to measure the impact of taxes on freedom, the Center does what it correctly describes as a “simple” calculation: it tallies up the size of all tax revenues (with a few exceptions) as a share of the state’s economy.  Basically, more tax revenue means less freedom under the authors’ assumptions — and taxes account for about 10 percent of each state’s overall “freedom score.”  But as everybody outside the Mercatus Center knows, taxes are never this simple.

For starters, states routinely use their tax codes to encourage (and discourage) a huge range of decisions that affect our day-to-day lives.  Most states, for example, offer strings-attached tax incentives designed to spur specific companies into building factories within their borders.  Under the Mercatus Center’s assumptions, a state that uses its tax code to subsidize private sector construction will actually score better on the “freedom” index than an otherwise identical state, simply because the subsidy cuts into its revenue collections.  In reality, however, a state without the subsidy offers a freer and more level playing field with “unhampered markets,” as the authors put it.

Of course, factory construction isn’t the only area where the government tries to manipulate behavior with special breaks.  States offer special tax breaks for everything from competing in a livestock show to purchasing binoculars — each of which the Mercatus Center’s calculations would classify as “freedom enhancing.”

Taxes can also affect freedom in unintentional ways.  For example, a handful of states have placed caps on the rate at which a homeowner’s property tax bill can grow each year.  These tax caps result in huge tax cuts for many homeowners, especially those that have lived in their homes for many years.  Obviously, under the Mercatus Center’s assumptions, these caps are big freedom enhancers.  In reality, however, the opposite is true.

An article in the March 2011 edition of the National Tax Journal showed what anecdotes from homeowners have always suggested: these caps result in a “lock-in effect” where residents are either unable or unwilling to leave their homes, out of fear of losing the tax savings they’ve accumulated over many years.  “Locking” residents into their homes with convoluted property tax breaks is hardly the definition of a free society.  But don’t count on the Mercatus Center’s “freedom index” being able to capture these types of nuanced, but vitally important implications of state tax policies.

Finally, it’s worth noting that the Mercatus index also falls short in its failure to examine who pays taxes.   This is most obvious in the 48th and 49th place fiscal policy rankings received by Hawaii and Alaska, respectively. 

Hawaii’s sales and excise tax revenues are very robust, in large part because of the huge quantities of hotel rooms, car rentals, tours, and souvenirs that are sold to out-of-state tourists.  Similarly, a significant amount of Alaska’s tax revenue (even excluding severance taxes, which the study omits) comes from multinational oil companies. 

In each of these states, many tax dollars flow into state coffers from outside the state — and while every one of those dollars sinks the state lower in the Mercatus “freedom index,” it has little if any impact on the freedom of anybody living within those states’ borders.  For this reason alone, readers should hesitate before taking the authors’ advice that “individuals can use the data to plan a move or retirement.”

At the end of the day, how taxes are collected is equally if not more important than how much taxes are collected.  Economists recognized this a long time ago when they discovered the tax policy principle of “neutrality,”  which basically means that tax systems should interfere with our decisions as little as possible.  A tax system that doesn’t generate much revenue can still reduce our freedom in important ways if it’s applied in a narrow and discriminatory fashion.  Anybody interested in enhancing freedom through tax reform should be focused on the plethora of special breaks contained in state systems — not the overall revenue yield of those systems.

State Tax Battles with Amazon.com Continue to Make Headlines

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Sales tax laws would be essentially meaningless if retailers were not required to collect the tax every time a purchase is made.  The opportunities for customers to evade the sales tax (either on accident, or on purpose) would be overwhelming.  Every state with a sales tax knows this — and as a result, the vast majority of retailers are legally required to collect and remit sales taxes.

Amazon.com and many other online retailers, however, are the major exception to this broad rule.  A 1992 Supreme Court case carved out a special exemption for any “remote sellers” that don’t have a “physical presence” in a state — like a store or warehouse.  The ruling has allowed the Internet to become an open highway for tax evasion. While customers shopping online owe the same sales tax they would if they shopped in a store, very few actually take the time and effort necessary to pay that tax.

This week, four states (California, Louisiana, Texas, and Vermont) made headlines for their attempts to limit the amount of sales tax evasion occurring through “remote sellers,” while a fifth state (Illinois) will soon have to defend its efforts to do the same in court.  By contrast, South Carolina lawmakers were recently bullied into granting Amazon an exemption from having to collect sales taxes for five years, despite the fact that it will soon have a “physical presence” in the state.

In Vermont, Governor Shumlin recently signed a so-called “Amazon law” that will eventually require all remote sellers partnered with affiliate companies physically based in the state to collect and remit sales taxes (see this ITEP report for more on “Amazon laws”).  Unfortunately, the bill was written so that it won’t take effect until 15 other states have enacted similar laws. 

Six states — Arkansas, Connecticut, Illinois, New York, North Carolina, and Rhode Island — have enacted such laws so far, and many more have given the issue serious consideration.  In the meantime, remote sellers like Amazon will be required to notify Vermont residents of the taxes they owe when making a purchase.

The California Assembly easily passed an Amazon law last week.  That legislation now goes back to the Senate, where a similar bill gained narrow passage last month.  Even if the Senate approves the Assembly’s version of the bill, however, it’s unclear whether Governor Brown will sign the measure.

Louisiana can now be added to the long list of states giving serious consideration to enacting an Amazon law.  The House Ways and Means Committee unanimously passed such a law in late-May, though opposition by Gov. Jindal makes it unlikely that it will be enacted any time soon.

In Texas, Gov. Perry recently vetoed a measure that would have required Amazon.com to collect sales taxes in the state, though the legislature may still try to enact the measure by inserting it into a larger bill that Perry is unlikely to veto. 

Unlike the true “Amazon laws” discussed above, the measure in Texas was designed to prevent Amazon from continuing to skirt its sales tax responsibilities by claiming that its Texas distribution center is actually owned by a subsidiary, and therefore does not amount to a “physical presence.”  The nearby photo is the actual sign in front of the Texas-based distribution center that Amazon claims it does not own.  

In Illinois, the Performance Marketing Association (PMA) has filed a lawsuit challenging the constitutionality of the state’s Amazon law.  The lawsuit is similar to one being pursued by Amazon against New York State.

And in South Carolina, Amazon.com has demanded, and received, a five year exemption from having to collect sales taxes on purchases made by South Carolinians, despite the fact that it plans to open a distribution center in the state (and will therefore meet the Supreme Court’s definition of having a “physical presence”). 

The granting of this exemption represents a stark reversal from just one month ago, when it was soundly defeated 71-47 in the House. 

Brian Flynn of the South Carolina Alliance for Main Street Fairness accurately summed up the unfortunate reality of this situation when he said that “with this economy, [Amazon was] in a good position to strong-arm legislators.”  Fortunately, the exemption is only supposed to last five years — though judging from Amazon’s past behavior, it’s reasonable to expect that the company will undertake an aggressive campaign to extend that five-year window.

Florida Governor Gives Mickey Mouse and Friends a Tax Break

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When Florida governor Rick Scott took office, he set out to dramatically slash both taxes and public services.  While his most radical proposals were very wisely rejected by the state’s slightly more reasonable legislature, he has unfortunately been partially successful in his crusade.  One of Scott's biggest tax breaks to date, SB 2142, orders the state’s five water management districts to cut property taxes by $210 million.

But it’s not the average Floridian who’s seeing a big reduction in their tax bill.  Rather it’s large corporations that are getting the big payout.  

According to the Palm Beach Post, the owner of a median priced home in Palm Beach County, for example, will receive a property tax cut of about $28 under the plan.  But some corporations, who own very large and valuable tracts of land, are due to get a tax break of hundreds of thousands of dollars, with a few even breaching the million dollar mark.

Coincidentally, or perhaps not, the biggest corporate benefactors of SB 2142 also happened to be the biggest contributors to Scott and the GOP’s 2010 election campaigns.  Florida Light & Power (FLP) and Walt Disney World were the big winners in Scott’s latest package of corporate giveaways.

FLP made contributions to the Florida GOP in the last election cycle of $1.1 million, while Disney contributed $854,364.  Now these companies are slated to receive an estimated $1.8 million and $1.3 million, respectively, worth of tax breaks each year, which is a pretty good return on investment.

This is just the latest in a string of tax cuts backed by Scott with questionable benefits, and questionable motives as well.  

Scott and the GOP would argue that tax cuts for corporations are necessary to jumpstart the economy, but the numbers don’t back that up.  In fact, a recent Ocala.com article says that Scott’s budget will lose thousands of jobs due to the steep cuts in state spending it requires.

And the public is starting to notice.  Rachel Weiner of the Washington Post noted that 6 out of 10 people surveyed in a Quinnipiac poll disapprove of the job Rick Scott is doing and 54% of respondents said the Florida budget was “unfair” to them.  The article goes on to suggest that Scott may be the most unpopular governor in the country.
Floridians have a clear message for Governor Rick Scott:  Mickey Mouse is doing just fine on his own.


North Carolina's Other Choice

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Last weekend, North Carolina’s General Assembly gave final approval to a state spending plan for next year that significantly cuts spending, allows temporary taxes to expire, and offers small businesses a new tax break.  The budget now sits on Governor Bev Perdue’s desk and observers are watching closely to see if she will keep her promise to veto a budget that moves the state backwards in education spending.

New North Carolina Speaker of the House Thom Tillis penned an op-ed describing his party’s approach to the Tarheel state’s $2 billion shortfall as a “new choice for North Carolina.”  This choice includes sticking to a campaign pledge not to raise taxes. It slashes funding to the state’s early childhood education programs, K-12 schools, community colleges, universities, Medicaid, court and prison systems, and substance abuse and mental health services resulting in the loss of thousands of government jobs. 

But, there are alternatives to rolling back North Carolina spending to unprecedented levels, laying off government workers, and securing the economic recovery the state’s new leaders seek.  

As the North Carolina Budget and Tax Center points out, the most damaging cuts in the final legislative budget agreement could be altogether avoided if lawmakers would extend two temporary taxes and close other major tax loopholes in the state. 

First, Governor Perdue included an extension of ¾ of the 1 cent sales tax increase in her budget plan.  Second, advocates have also called on state leaders to extend a temporary personal income tax surcharge for the state’s wealthiest taxpayers as well as a surcharge for profitable corporations. Finally, tax loopholes abound and for years lawmakers have talked about, but failed to act on, comprehensive tax reform that would ensure more fair and adequate revenues in the short- and long-term.

Unfortunately, unless a minimum of 2 of the 5 democratic House members who voted in support of the budget are convinced to change their minds, it appears a veto from the governor could be overturned and the ‘new choice’ for North Carolina will be in effect for at least a year in the state.

Grover Norquist Loses Nevada

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Bucking his repeated "no new taxes" pledge, Republican Governor Brian Sandoval worked with Republicans and Democrats alike in Nevada to pass a $6.2 billion budget deal,  including the extension of $620 million in temporary tax hikes.

Sandoval is part of a growing trend of state leaders forced to renege on "no new taxes" pledges after hitting the brick wall of fiscal reality.  Lawmakers in other states have been similarly forced to reconsider irresponsible no new tax pledges after taking a more sober look at their state’s fiscal conditions.

What brought Sandoval back to reality was a Nevada Supreme Court decision, which ruled that the state government could not siphon off $62 million in funding from the southern Nevada sewer district. The ruling, which Sandoval called a “game changer,” created a new budget hole of about $656 million, since the budget counted on hundreds of millions of dollars from similar unconstitutional revenue grabs from local governments. This revenue hole could not be responsibly filled without the tax extensions. Nevada is actually one of many states where courts have played a critical role in upending the budget debate.

Sandoval's reversal represents a big loss for movement conservatives in Nevada, who lost their chance to dramatically cut Nevada’s services while making the governor they opposed look reasonable by comparison.

Unfortunately, even with the additional revenue, the final deal still included significant cuts such as the elimination of a $5.7 million property tax rebate program for low-income seniors.  In addition, the deal regrettably did not include the comprehensive sales tax reform proposal pushed by Democratic lawmakers.

On the plus side, Nevada’s legislative session also included two modest breakthroughs in the effort to increase the level of scrutiny and taxation of the state’s extraction industries. Despite the powerful influence of mining in the state, both houses of the Nevada legislature repealed constitutional provisions limiting taxes on mines to 5 percent of the net proceeds of minerals and raised $24 million in additional revenue by having the mining companies give up health care tax deductions.

On Saturday, the organization U.S. Uncut demonstrated at Apple Stores in several cities in protest against the company's lobbying for an amnesty for offshore tax dodging by corporations, also known as a "repatriation holiday."

This video shows what happened in the Apple Store in Washington, DC. U.S. Uncut has more information about the protests that took place in Boston, San Francisco, Chicago and other cities.

U.S. corporations, in theory, pay U.S. corporate income taxes on all of their profits, regardless of where they are earned. But they are allowed to "defer" (to indefinitely delay) those U.S. taxes on foreign profits until those profits are "repatriated" (brought back to the U.S.).

Some corporate leaders have called for a permanent exemption of U.S. taxes on offshore profits (a "territorial" tax system) while others have called for a temporary exemption, which is essentially what the "repatriation holiday" is.

As CTJ has explained before, the "repatriation holiday" is an amnesty for corporate tax dodgers rather than a break for companies doing real business abroad.

Multinational corporations that are conducting real business offshore and paying taxes to a foreign government have much less to gain from a repatriation holiday. Their offshore profits are tied up in offshore investments, making it much less likely that they would bring those profits home in response to a tax holiday. And when they do bring those profits back to the U.S., they can do so under current law without paying the full 35 percent tax rate, because they are likely paying taxes to the government of the foreign country in which they are operating. (The U.S. taxes are reduced for each dollar paid to the foreign government to avoid double-taxation.)

On the other hand, a U.S. corporation that shifts its profits to a post office box in the Cayman Islands or another tax haven is likely to benefit enormously from a repatriation holiday. These profits may not be taxed at all by the foreign government, meaning they would be subject to the full 35 percent rate under current law.

So it's entirely fair for U.S. Uncut and others to be outraged that Apple and other companies are lobbying for a repatriation holiday and claiming that it will help the U.S. economy. Congress tried this in 2004 and it failed to lead to any job creation. In fact, many companies that benefited actually reduced their U.S. workforce.

Congress's official revenue estimators recently concluded that a repeat of the repatriation holiday would cost $79 billion over ten years. That's partly because U.S. corporations are likely to respond to a second repatriation holiday by shifting even more of their profits to offshore tax havens since they will have concluded that Congress is willing to call off almost all U.S. taxes on those profits every few years.

The Bush Tax Cuts After Ten Years

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bush tax cuts signing.jpgWill Nearly Double Budget Deficit if Continued, Mostly Benefit the Rich

State-by-State Fact Sheets

Ten years ago, on June 7, 2001, President George W. Bush signed into law the first of several tax cuts that drove the balanced budget he inherited from President Clinton deep into the red. Last year, Congressional supporters of Bush’s policies pushed through an extension of these tax cuts through the end of 2012.

  • Many lawmakers want to extend the Bush tax cuts again into 2013 and beyond, which would almost double the federal budget deficit.
  • 47.2 percent of the benefits of this tax cut extension would go to the richest five percent of the nation’s taxpayers.
  • The richest one percent would receive an average tax cut of $68,079 in 2013.
  • The poorest 60 percent of taxpayers would receive an average tax cut of just $487 in 2013.

See the national data and state-by-state fact sheets.

Attorneys, Accountants, Brokers Convicted in $7 Billion Tax Shelter Case

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Last week, former partners in the law firm of Jenkens & Gilchrist, the former head of accounting firm BDO Seidman, and a former Deutsche Bank broker, were convicted on criminal charges related to a tax shelter scheme that reportedly generated fake tax losses of more than $7 billion. The case illustrates the sort of tax cheating that often goes undetected and which would become less common under a proposal supported by Citizens for Tax Justice.

In December, Deutsche Bank entered into a related non-prosecution agreement with the Department of Justice, admitting criminal wrongdoing and agreeing to pay a $554 million fine in connection to its involvement in tax shelter cases that generated $29.3 billion in bogus tax benefits for their clients.

Five other defendants, former partners at the law firm or the accounting firm, previously pled guilty to criminal charges in the case.

The charges of tax evasion and conspiracy carry possible prison terms of more than 20 years and multi-million dollar fines. DOJ Tax Division attorney John A. DiCicco said that the verdict "sends a loud and clear message that dishonest tax professionals will be held accountable for their crimes."

In the next few weeks, Senator Carl Levin is expected to introduce a new version of the Stop Tax Haven Abuse bill, which would increase civil penalties for promoting tax shelters. The maximum penalty for knowingly aiding or abetting a taxpayer in understating their tax liability would be 150 percent of the aider-abettor's gross income from the activity.

That kind of civil penalty, and the possibility of a criminal conviction, should give tax shelter promoters reason to think twice about helping the wealthy dodge their taxes.

"Sunset" provisions (or expiration dates) recently played a big role in allowing Washington State lawmakers to eliminate special tax breaks for filmmakers, computer server farms, and newspapers.  Unfortunately, a tax break for out-of-state banks was spared from the chopping block, due in no small part to its lack of a sunset provision.

Washington does a much better job than most states in making information available about the plethora of special breaks contained within its tax code.  Oddly, however, Washington also makes it much more difficult than most states to modify or repeal any of those breaks, since it requires supermajority support in the state legislature in order to raise tax rates or repeal tax breaks.

The unfortunate effects of this supermajority requirement were recently on full display in the Washington State House of Representatives. Last week, a minority of lawmakers was able to block the repeal of a tax break for out-of-state banks, while education and health care were slashed in order to balance the state’s budget. 

The Washington Budget and Policy Center (WBPC) points out that this problem could have been eliminated going forward had voters been allowed to decide this November on a proposal that would have given a simple majority of legislators the ability to repeal narrow tax breaks.

But in Washington and other states, a different method of addressing the unwarranted bias in favor of tax breaks is continuing to garner significant attention.  Specifically, Washington was able to get three narrow tax breaks off its books — for filmmakers, computer server farms, and newspapers — by simply allowing them to sunset (or expire) as scheduled. 

In Washington’s case, the value of sunsets is particularly pronounced, since tax breaks would otherwise continue to be in effect even after a majority of lawmakers decided they were ineffective.

Even in states without such supermajority rules, sunsets can be incredibly useful in forcing action. They require lawmakers to explicitly debate and vote, every few years or so, on tax breaks that otherwise would remain safely tucked away deep in the state’s tax code.

But sunset provisions are not the norm in Washington.  According to a recent WBPC analysis, only 37 of Washington’s 301 tax breaks include an expiration date.  That’s why Senator Jeanne Kohl-Welles has proposed legislation that would sunset all tax breaks in the state.  The proposal is similar to requirements that already exist in Nevada and Oregon, and to a bill that ITEP recently testified on in Rhode Island.

Using more effective sunset provisions in Washington, and elsewhere around the country, would provide lawmakers with an extremely valuable tool for slowing the proliferation of tax breaks that are too often ineffective, unfair, or both.

Minnesota Governor Dayton Vetoes Budget Bills that Would Harm Working Families

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Early last week, Governor Mark Dayton vetoed nine budget bills passed by the Republican-led legislature and lawmakers adjourned with no spending plan for the upcoming fiscal year. Since releasing his initial budget plan in February, the Governor has called for a balanced approach to handle the state’s $5 billion shortfall.

Many Republicans in the legislature believe that the only way to fix the state’s books is to cut spending, including tax credits for low-income families.

“I chose a balanced approach to our budget," Governor Dayton said, "one that included both significant cuts, but asked the top two percent of Minnesotans to pay more to ensure our quality of life and the services millions of Minnesotans depend on.  My approach chooses not to balance the budget on the backs of the other ninety-eight percent of Minnesotans.”

The budget presented to the Governor, by contrast, included proposals that would slash aid to local governments and the state’s renters' credit, which is an important anti-poverty tool.

Dayton sent a letter, along with his veto, to the Speaker of the House stating, “Your tax proposal would require most Minnesota property owners and renters to pay higher property taxes," because the massive cuts to local governments “would result in significant property tax increases.” 

Dayton’s veto letter goes on to say, “...your bill then directs over $200 million from those cuts to expanded tax expenditures for corporations and others.”

Since the legislature adjourned without a budget, it will need to meet in a special session. What is not at all clear is how the Governor and legislature will come to some sort of compromise. The Governor has said, “I’m in the middle, and they haven’t moved.” Read more about what to expect from the Minnesota Budget Project.

New York Property Taxes: Cap on Common Sense

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Last week, New York Governor Andrew Cuomo announced a deal with state lawmakers over pending legislation to enact a property tax cap in the state.

If the deal passes, the cap would be one of the strictest in the nation, capping annual growth in property tax revenues at 2 percent or the inflation rate, whichever is lower. The proposed cap would allow exceptions in limited circumstances, such as public pension shortfalls. Voters in a given locality could also override the cap by a 60 percent vote.

Even with the exceptions, the 2 percent cap is guaranteed to have a deleterious effect on New York local governments' ability to provide core services.  Funding for schools, which depends heavily on property tax revenues, will bear the brunt of the tax cap.

According to Gov. Cuomo’s own numbers, property taxes have had to rise well above 5 percent each year to keep up with demand for critical services, so the 2 percent cap would inevitably force harsh cuts.

According to Richard C. Iannuzzi, president of New York State United Teachers, the state’s education system will be “devastated” by the cap just as it’s already suffered three years of the “toughest cuts” to education.”

Democratic lawmakers had attempted to stop some of these cuts by extending a popular surcharge on upper-income taxpayers, but Gov. Cuomo favored cuts to education instead and stopped the effort in its tracks.

The New York Times lashed out at Gov. Cuomo, arguing that the “tax cap is nothing more than a political crutch for politicians who don’t have the courage to argue the case for more taxes or for spending cuts.”

The Wall Street Journal, on the other hand, has trotted out its usual misinformation campaign in support of the cap, claiming that high property tax rates are causing New Yorkers to move out of the state.

In the same editorial, the Wall Street Journal also claimed that the tax cap in Massachusetts should be a model for New York, a notion that the Center on Budget and Policy Priorities thoroughly deconstructed a few years ago.

“Tax caps are not a novel or new approach. They are a tired gimmick with a history of failure,” writes Kevin Hart for the National Education Association, pointing to the devastating effect similar caps have had Massachusetts, Illinois, California and Colorado.

None of this is to say that New York’s property tax and education funding mechanisms are not in need of change. In fact, the Institute on Taxation and Economic Policy (ITEP) has documented in detail the ways in which New York should pursue systematic reform to improve the fairness and adequacy of its revenue system.

Even if Gov. Cuomo’s goal was simply to provide New York residents with a property tax break rather than enact fundamental reform, ITEP points out that property tax "circuit breakers", rather than property tax caps, provide the most effective and well-targeted relief to those most in need, without damaging education funding overall.

Advocates in New York are also making the case for a property tax circuit breaker as a more targeted alternative.  At a press conference this week, school board members, county and local government officials and advocacy organizations joined with some Assembly members to speak out against the tax cap, calling it a "punitive, misguided approach to public concerns about property taxes."

Ohio Estate Tax in Peril

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Public services provided by state governments help some families accumulate great wealth, and Ohio has recognized this for a century by levying an estate tax on well-off residents. This tradition may soon come to an end, as Governor John Kasich has promised to sign legislation repealing Ohio's estate tax if it's included in the General Assembly's final budget.

Last month, Ohio’s House of Representatives voted to repeal the tax, and this week the Senate included the repeal in its revamped budget proposal. 

Since the vast majority of Ohio’s estate tax revenue (80 percent) goes directly to local governments, eliminating this tax would mean a loss of more than $200 million annually for local coffers. 

Opponents of the estate tax repeal have argued that the scope of the revenue loss at the local level will lead to deep cuts in services, local tax increases, and lowered bond ratings.
Supporters of the repeal claim that the estate tax harms middle class families, but the numbers tell a different story. 

Each year, less than 10 percent of all decedents' estates in Ohio are subject to the tax.  In fiscal year 2010, a quarter of the estates taxed had values of more than $1 million and paid more than 75 percent of the total estate tax collected in the state. 

Furthermore, even though Ohio’s estate tax threshold is relatively low compared to other states, the tax rates are also low, particularly for large estates.

In the end, state policymakers are simply passing the buck to local officials who will have to enact spending cuts or tax increases to make up for the lost revenue. 

Those measures will be probably be hugely regressive compared to the estate tax, which is among the most progressive taxes levied in Ohio.

The debate over corporate tax reform is not just about whether corporations overall should pay more, less, or the same as they do now. There is also a debate over how the offshore profits of U.S. corporations should be treated.

Corporate leaders want their offshore profits to be exempt from U.S. taxes. Some corporate leaders hope for a permanent exemption (which would turn our tax system into a "territorial" tax system).

Other corporate leaders, perhaps realizing that the American public would not be receptive to this idea, are hoping they can prod Congress to exempt their offshore profits on a temporary basis. This is basically the goal of a "repatriation holiday," a temporary tax break for offshore corporate profits that are brought back to the U.S.

I can sync my iPhone to my MacBook. Why can't I sync it to my Values?

One corporation lobbying in favor of a repatriation holiday is Apple, which is being targeted by protests in major cities around the U.S. on June 4. The demonstrations, organized by US Uncut, will ask Apple to leave the coalition lobbying for a repatriation holiday.

Find Apple protests in your city, or the information you need to organize your own protest against Apple, on US Uncut's Apple page.


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Citizens for Tax Justice  has released a preview of its forthcoming major study of Fortune 500 companies and the taxes they paid — or failed to pay — over the 2008-10 period.

The preview details the pretax U.S. profits, federal taxes paid and effective tax rates of (in alphabetical order): American Electric Power, Boeing, Dupont, Exxon Mobil, FedEx, General Electric, Honeywell International, IBM, United Technologies, Verizon Communications, Wells Fargo and Yahoo. CTJ’s full corporate report is scheduled for release this summer.

From 2008 through 2010, these 12 companies reported $171 billion in pretax U.S. profits. But as a group, their federal income taxes were negative: –$2.5 billion.

Read the report in pdf
Read the report in your web browser

Previous CTJ Reports Resulted in Higher Taxes on Corporations Overall

CTJ's reports on corporate taxes have a history of changing the debate in Washington concerning tax reform. One of the news reports published this week puts it this way:

"As a liberal tax-code activist, Robert McIntyre shocked Washington in 1984 when he revealed that General Electric was one of 17 companies that paid no U.S. corporate taxes for three straight years. The finding by McIntyre's organization, Citizens for Tax Justice, sparked national outrage that helped pave the way for The Tax Reform Act of 1986. That landmark legislation eliminated tax loopholes to broaden the tax base while also lowering the corporate tax rate. It also increased corporate tax revenue flowing into the Treasury by 34 percent."

Increasing Clamor for Revenue-Positive Corporate Tax Reform

Meanwhile, 250 organizations, including organizations from every state, have signed a statement calling on Congress to enact 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 at some point after the debate over the debt ceiling is resolved.

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.”

Corporations Attempt to Explain Away Their Tax Avoidance

Corporate leaders are expected to defend the low or negative tax liability of the companies they lead.

When CTJ identified Honeywell as a tax dodger in April, the company wrote to CTJ explaining that its tax avoidance was legal. CTJ replied that this is our point entirely: The laws allowing corporations to avoid tax liability are outrageous and must be fixed by Congress.

Other attempts by corporate leaders to defend their tax avoidance are equally weak. GE, for example, says that its federal taxes are so low because its financing division, GE Capital, lost billions of dollars in recent years.

Of course, this answer is no answer at all. If GE as a whole has profits, why should it pay no taxes because one division had losses?

As one Congressional staffer recently commented to us, "Saying GE would have positive tax liability if we didn't count GE Capital is like saying AIG would be perfectly sound if we didn't count AIGFP." (AIG Financial Products is the subsidiary that brought down AIG by gambling on credit default swaps, trigging the first bailout by the Bush administration.)

What makes GE's explanation even more ridiculous is that GE Capital is the subsidiary that engages in leasing schemes that have the main purpose of lowering GE's overall tax liability.

Influence of Corporate Leaders on Obama Administration Questioned

Tax avoidance by these corporations is bad enough, but it's particularly alarming when the CEOs of the companies in question have such an outsized influence on federal policy.

For example, GE's CEO, Jeffrey Immelt, is the chair of the President’s Council on Jobs and Competitiveness, which is to advise the White House on economic policy.

Honeywell's CEO, Dave Cote, was a member of the National Commission on Fiscal Responsibility and Reform. The plan supported by Cote and a majority of the commission members would reform the tax system but the corporate tax component of the plan is, at best, revenue-neutral.

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