PetersonPyramid.org

The Center for Media and Democracy (CMD), creator of the indispensible wiki, SourceWatch, recently launched a new wiki resource allowing users to explore the funding, leadership, partner groups and lobbyists that make up the Campaign to Fix the Debt. This resource reveals Fix the Debt for what it really is: another coordinated push by large corporations and billionaire Pete Peterson to force Congress to pass large and unneeded cuts to Social Security and Medicare.

We’d be remiss if we failed to also mention Fix the Debt’s naked duplicity in pushing for massive cuts to critical programs while simultaneously pushing for additional tax breaks for its many corporate backers.  Using data from Citizens for Tax Justice (CTJ), CMD exposes the audacity of some of 151 corporate backers of Fix the Debt by showing that many of them, such as Boeing, General Electric and Verizon, are already paying less than nothing in taxes.

Biz Vizz

371 Productions, the creator of the PBS documentary, “As Goes Janesville,” has launched a corporate transparency website and iPhone app called BizVizz, which provides consumers with easy access to financial information about America’s largest corporations. BizVizz uses CTJ’s corporate tax data to reveal that our broken corporate tax system allows the makers of many of our everyday products to get away with paying little – or sometimes nothing – in income taxes. One especially cool feature of the app allows the user to snap a picture of a product logo and get instant information on how much the company paid in federal taxes.

BizVizz includes other data, too. It shows how major corporations obtain their low tax rates because it includes data from the Sunlight Foundation on how much each corporation gave to politicians in campaign contributions. The other category of data BizzVizz includes is from Good Jobs First, listing subsidies corporations get from state and local governments – subsidies that come straight out of the tax dollars the rest of us pay in.

Lawmakers looking for an excuse to cut their personal income taxes regularly claim that doing so will trigger an economic boom.  To support this claim, many cite an analysis by supply-side economist Arthur Laffer that our partner organization, the Institute on Taxation and Economic Policy (ITEP), exposes as deeply flawed.

In States with “High Rate” Income Taxes are Still Outperforming No-Tax States, ITEP explains that Laffer uses cherry-picked data and simplistic comparisons to claim that the nine states without income taxes are outperforming states with “high rate” income taxes.  He goes on to suggest that the alleged success of those no-tax states can be easily replicated in any state that simply repeals its own personal income tax.

But ITEP shows that residents living in states with income taxes—including those in states with the highest top tax rates—are experiencing economic conditions as good, if not better, than in the no-tax states.  In fact, the states with the highest top income tax rates have seen more economic growth per capita and less decline in their median income level than the nine states that do not tax income.  Unemployment rates have been nearly identical across states with and without income taxes. 

As ITEP explains, Laffer’s supply-side claims rely on blunt, aggregate measures of economic growth that are closely linked to population changes, and the unsupported assertion that tax policy is a leading force behind those changes. Laffer chooses to omit measures like median income growth and state unemployment rates in his comparisons of states with and without income taxes, even as he cites these very same measures in his other studies, when the story they tell fits his preferred narrative.

Even more fundamentally, Laffer’s work falls far short of academic standards in that it completely excludes non-tax factors that impact state growth, including variables like natural resources and federal military spending (variables that Laffer himself has admitted to be important).  In the text of his reports, Laffer concedes that “the drivers of economic growth are many faceted.”  And yet when he constructs analyses designed to show the harm of state income taxes, somehow every non-tax “facet” happens to get left out.  Of course, more careful academic studies often conclude that income tax cuts have little, if any, impact on state economic growth.

Read ITEP’s report.

Front Page Photo of Arthur Laffer and Rick Perry via Texas Governor Creative Commons Attribution License 2.0

A new talking point from tax cut snake oil salesman Arthur Laffer is making the rounds. It’s been seen in the pages of The Wall Street Journal and cited by Indiana Governor Mike Pence, Iowa House Majority Whip Chris Hagenow, and Tim Barfield, Governor Jindal’s point man for income tax elimination in Louisiana.   

As the Journal put it: A new analysis by economist Art Laffer for the American Legislative Exchange Council finds that, from 2002 to 2012, 62% of the three million net new jobs in America were created in the nine states without an income tax, though these states account for only about 20% of the national population.

But as they’ve done with many of Laffer’s previous analyses, the Institute on Taxation and Economic Policy (ITEP) explains why this talking point is all rhetoric and no substance. Laffer’s research is like a house of cards, depending on data selected and placed precisely to help reach the conclusion he wanted, as ITEP details:

1) Most of the states without income taxes contributed just one percent or less to the nation’s job growth over the period Laffer examines.  Laffer’s claim has nothing to do with the “nine states without an income tax,” and everything to do with one of those states: Texas.

2) Texas’ economy differs from that of other states in many significant ways, and comparing its job growth to the rest of the country provides no insight into the economic impact of its tax policies.  This is particularly true of the time period Laffer examines, since it includes the housing crisis that Texas largely avoided for reasons unrelated to tax policy.

3) Looking beyond the specific Recession-dominated time period chosen by Laffer, Texas’ job growth has otherwise generally been in line with its rate of population growth.

The four-page report with graphs and footnotes is here.

A new report from the Center for Law and Social Policy (CLASP) explores the shortcomings and potential reforms of tax breaks that are intended to expand access to postsecondary education. “While delivering student aid through the tax system is a ‘second best’ strategy,” the report argues, “because Congress has chosen to deliver nearly half of non-loan student aid this way, it is essential to make it work better."

It’s hard to disagree. The report notes that the confusing collection of tax breaks for postsecondary education cost $34.2 billion in 2012, almost as much as the $35.6 billion spent on Pell Grants. But, whereas Pell Grants target lower-income households that could not otherwise afford college, the tax breaks target relatively well-off families who will usually send their children to college with or without any tax incentive to do so.

As the report explains, “…the percentage of high school completers of a given year who enroll in two- or four-year colleges in the fall immediately after completing high school… was 52 percent for low-income families (bottom 20 percent), 67 percent for middle-income families (middle 60 percent) and 82 percent for high-income families (top 20 percent…).” In other words, higher-income families might send their children to college no matter what, while student aid could make the difference between going to college or not going to college for lower-income people. 

Improve and Expand the Best Education Tax Break, Ditch the Others

But not all tax breaks for postsecondary education are the same. Some are more targeted to those who really need them than others, although none are nearly as well-targeted to low-income households as Pell Grants, as illustrated in the bar graph below.

The graph shows that the most regressive of the tax breaks is the deduction for tuition and related fees, followed by the Lifetime Learning Credit (LLC) and the deduction for interest payments on student loans.

One proposal offered in the CLASP report would expand the American Opportunity Tax Credit (AOTC), represented by the blue bar above, which at least reaches low-income families not helped by the other tax breaks. The costs of the expansion would be offset by eliminating the deduction for tuition and fees, the LLC and the deduction for student loan interest.

In addition to better targeting tax breaks for postsecondary education, this reform would also reduce confusion among families as they try to figure out what aid is available for college. A 2012 report from the Government Accountability Office found that over a fourth of taxpayers eligible don't take advantage of any tax benefits for education, and those who do use them often don't use the most advantageous tax break for their situation.

Things Will Get Worse if Congress Doesn’t Act

The AOTC, the most progressive of the education tax breaks (or perhaps it’s better described as the least regressive of the education tax breaks) was signed into law by President Obama in 2009 and extended several times, but was never made permanent. The New Year’s Day deal enacted to avoid the so-called “fiscal cliff” extended the AOTC through 2017. If Congress fails to act before then, it will expire and its precursor, the less targeted Hope Credit, will come back into effect.

The biggest reason why the AOTC is better targeted to low-income families than the Hope Credit is the fact that the AOTC is partially refundable. The working families who pay payroll taxes and other types of taxes but earn too little to owe federal income taxes will benefit from an income tax credit only if it is refundable, like the Earned Income Tax Credit.

The proposals described in the CLASP report would expand the refundability of the AOTC, among several other reforms.

In 2011, Michigan lawmakers enacted a huge “tax swap” that cut taxes dramatically for businesses and raised them on individuals – especially lower-income and elderly families. Given that many of these changes went into effect at the beginning of 2012, and that many Michiganders are just now beginning to file their 2012 tax forms, the Associated Press provides a rundown of the ways in which the tax bills of typical Michiganders will look different from previous years. Our partner organization, the Institute on Taxation and Economic Policy (ITEP), estimated (PDF) that changes in the personal income tax would result in tax increases of $100 for a poor family, $300 for a middle income family and $7 from a rich one.

South Carolina is considering jumping onto a bandwagon heading the wrong way: supplementing the state’s transportation revenues by taking money away from schools and other state services. If enacted, the plan under consideration would raid $80 million from the state’s general fund every year and use it for roads instead. ITEP estimated, however, that South Carolina could raise more than $400 million for transportation every year just by updating its stagnant gasoline and diesel taxes to catch up to over two decades of inflation.

There’s some good news on the gas tax issue in Iowa. This week, an ad hoc transportation lobby will rally to support the “It’s Time for a Dime” campaign. These builders, farmers and contractors are urging lawmakers to raise the state’s gas tax to pay for needed infrastructure repairs. The Institute on Taxation and Economic Policy’s (ITEP) Building a Better Gas Tax concludes that Iowa hasn’t raised its gas tax in over two decades and has lost 43 percent of its value since the last increase.

In case you missed it, here’s a great read from the New York Times about how we shouldn’t be so quick to assume that millionaires are ready to pack up their bags and move at the slightest increase in their tax bills. In “The Myth of the Rich Who Flee From Taxes,” the Times cites ITEP’s work on the Maryland millionaire tax: “a study by the Institute on Taxation and Economic Policy, a nonprofit research group in Washington, found that nearly all the decline in millionaires was the result of a drop in incomes largely attributable to the stock market plunge and recession, and not to migration — “down and not out,” as the study put it.”

UPDATE: On April 3, 2013 Governor McDonnell signed the package described below with only minor changes.  Those changes are discussed at the end of this article.

If Governor Bob McDonnell signs the transportation bill just passed by his state’s legislature, as he is expected to do, Virginia will join Wyoming as the second Republican-led state in less than a month to raise taxes to pay for transportation.  Virginia Delegate David Albo, one of Grover Norquist’s no tax pledge signers, explained his vote in favor of the bill by saying, “I looked at every single way to raise money for roads, and it is literally impossible to do without raising revenue.”

But as encouraging as it is to see opposition to taxes waning in some circles, the tax bill passed by Virginia’s legislature is far from perfect. The bill will shift the responsibility for paying for roads away from the drivers who use them most, and its reliance on sales taxes will shift Virginia’s already regressive (PDF) tax system even more heavily toward lower-income families.  Here’s a quick rundown of the bill’s major components:

Gasoline tax:  The 17.5 cent per gallon gasoline tax will be cut, at least in the short-term, by replacing it with a tax based on 3.5 percent of the wholesale price of gasoline.  At the current wholesale price of $3.30 per gallon, the new tax should be about 11.5 cents—the lowest in the country outside of Alaska—but it will rise over time as the price of gas climbs. Virginia will become the 15^th state to levy a gas tax that grows automatically over time, which allows the tax to better keep pace with the rising cost of construction.  But wholesale gas prices will have to rise to $5.00 per gallon before the tax returns the 17.5 cent level that Virginians have been paying for the last quarter century.  The bill amounts to a gas tax cut that lets frequent and long-distance drivers off the hook for paying for the transportation enhancements that benefit them the most.

Diesel tax:  Taxes on diesel fuel will increase both in the short- and long-term, as the 17.5 cent per gallon tax is replaced by a 6 percent tax based on the wholesale price of diesel.  Diesel prices are generally higher than gasoline prices, so at a wholesale price of $3.50, for example, the new tax should equal 21 cents per gallon and will grow over time as diesel prices rise. 

Remote sales tax:  The bill assumes that Congress will enact legislation empowering Virginia to require online retailers to collect the sales taxes owed by their customers (PDF), but it also puts in place a stopgap measure in case that doesn’t happen.  If Congress hasn’t acted by 2015, the wholesale gasoline tax rate will rise from 3.5 percent to 5.1 percent.  At current prices, this would bring the gas tax to16.8 cents per gallon.  Virginia should raise its wholesale gas tax rate to at least this level, regardless of the outcome of the federal debates over taxing online purchases.

Sales tax:  The largest single revenue-raiser in the bill is an increase in the state sales tax rate from 5 percent to 5.3 percent in most parts of the state. In the densely populated and congested areas of Northern Virginia and Hampton Roads, residents will see their sales tax rates rise to 6 percent, and will be forced to dedicate the additional revenue to transportation.

General fund raid:  Following the unfortunate precedent set by Michigan, Nebraska, Oklahoma, Utah, Wisconsin and the federal government, the bill also prioritizes roads over other areas of government by shifting $200 million away from the general fund every year.  The Roanoke Times previously blasted a similar proposal from Governor McDonnell by pointing out: “The highway program is starved for money because the gas tax rate has not changed since 1987. Are teachers and their students to blame? No, they are not. Did doctors and mental health workers cause the problem? Absolutely not. Did sheriff's deputies and police officers? No.”

Motor vehicle sales tax:  The sales tax break on motor vehicle purchases will be reduced, but not eliminated.  The rate will rise from 3 percent to 4.3 percent – still short of the 5.3 percent general sales tax rate.

Hybrid tax:  Hybrid and alternative fuel vehicles will have to pay an additional $100 in registration taxes every year.  So, while drivers of gas-guzzling vehicles are receiving a break in the form of a lower gas tax, fuel-efficient hybrid owners will actually pay more.

Low-income offsets: The state and local sales taxes used to raise the bulk of new road funding under this plan will hit lower- and moderate income families hardest.  And yet, the bill lacks any kind of targeted tax relief for those families.  In-state analysts urged the creation of a sales tax rebate or the enhancement of the state’s Earned Income Tax Credit (EITC), but the final bill did not include either of these measures.

UPDATE: The version of this package that was signed into law is slightly different than the one originally passed by the legislature: the motor vehicle sales tax is raised to 4.15 percent instead of 4.3 percent, the hybrid tax is $64 per year instead of $100, miscellaneous local tax increases in northern Virginia were scaled back, and technical changes were made to local taxes in order to avoid a constitutional challenge.

In his budget address this week, Wisconsin Governor Scott Walker followed through on his promise to provide middle class tax cuts. His proposal reduces the bottom three income tax rates and costs $343 million over two years. The Institute on Taxation and Economic Policy’s (ITEP) analysis of this proposal found that middle-income taxpayers do get some benefit from Governor Walker’s proposal ($43 on average), but many low-income Wisconsinites do not. In fact, those in the bottom twenty percent of the income distribution, many of whom were already dealt a blow in Wisconsin’s last budget, see an average tax cut of a mere $2. The Governor’s proposed tax cuts come on the heels of reductions to the state’s earned income tax credit and property tax homestead credit, both of which effectively raised taxes on low-income working families. A better approach would be to reverse the damage recently inflicted on the poorest Wisconsinites, by increasing the earned income tax credit and homestead credit.  

In his speech last week, the Governor also assured Wisconsinites that the state could afford his tax cuts because of a current budget surplus. That “surplus,” however, is not the result of economic growth in the state and it is not permanent, either. Instead, the Wisconsin Budget Project (WBP) offers the reality check that the surplus was created as “a result of a number of painful cuts and lapses” that were implemented to avert previous shortfalls. This year, “coupled with a rebound in revenue from the low level anticipated a year ago, state lawmakers now find themselves in the very unusual position of carrying a solid balance into the next biennial budget.” WBP also cautions that the budget surplus “isn’t an ongoing revenue stream” and that Governor Walker is wrong to assume that the state can afford his permanent tax cuts.

The Governor may be keeping a narrow political promise with his latest budget, but he is neglecting the state’s poorest residents, jeopardizing its fiscal future and potentially setting up a tax swap that middle income families will pay for in the long run.

We’ve been closely following tax proposals in Nebraska and have been especially concerned that both of Governor Heineman’s plans were of the tax swap variety – reductions in progressive taxes paid for by increases in regressive sales taxes.

This scathing op-ed in the Lincoln Journal-Star points to the tax impact of the Governor’s proposals as one strike against his policy prescription: “Strike one came with release of a study by the OpenSky Policy Institute that said 80 percent of wage earners in the state would pay more in taxes if the bill were implemented. Taxes would go up by an average of $631 a year under LB405 for people earning less than $21,000 a year. Taking the biggest hit were taxpayers earning between $37,000 to $59,999, who would pay an additional $722 a year. Taxes would go down by $4,851 for people earning more than $91,000 a year, the institute said.” CTJ’s partner organization, The Institute on Taxation and Economic Policy (ITEP), generated those numbers for OpenSky. The editors said the “second strike” against the governor’s plan was business groups’ opposition. (Evidently they want tax rates cut but don’t want to lose their own exemptions to pay for it.)

We learned this week that Nebraska tax policy debates don’t follow the rules of baseball, fortunately, and that two strikes were enough to send the Governor back to the dugout. Now he and legislators seem to be taking a more cautious approach and potentially forming a tax commission to better understand the state’s tax structure and get more expert input on modernizing it.

After a year in which tax issues dominated national policy debates, President Barack Obama has signaled that immigration issues will be at the forefront of his legislative agenda in 2013. With immigration reform evidently gaining momentum, some old tax-related bugaboos are sure to resurface as the debate gets underway: in particular, some have argued that undocumented immigrants pay no taxes to states or to the federal government.

A couple of years ago, the Institute on Taxation and Economic Policy (ITEP) worked with the Immigration Policy Center to assess the truth of this claim. Our finding? Far from being tax avoiders, undocumented families pay many of the same regressive taxes that hit all low-income families at the state and local level. We estimated that nationwide, undocumented families paid about $11 billion in state and local taxes in 2010.

The main reason for this is that the sales and excise taxes that fall most heavily on low-income taxpayers don't depend on your citizenship status. Anytime you buy a cup of coffee, a pair of jeans or fill up your tank up with gas, you're paying state and local sales and excise taxes. There are also property taxes, including for renters, who pay them indirectly because landlords frequently pass some of their property tax bills on to their tenants in the form of higher rents. And, many undocumented taxpayers have state income taxes withheld from their paychecks each year.

The bottom line? Even if there were 47 percent of the population paying no taxes (and there isn’t), undocumented immigrants would not be among them. In fact, to find people who don’t pay taxes, take a closer look at the wealthiest among us.

The only thing worse than giving Amazon an unfair advantage over local businesses is creating that advantage by facilitating tax evasion.

And that’s exactly what the Supreme Court did in the early 1990s when it decided that the Commerce Clause of the Constitution barred state and local governments from requiring out-of-state retailers to collect sales taxes from their customers. Essentially, the court decided that a business without a “physical presence” in the state could not be required to collect sales taxes from customers the way that a company with a physical store in your state is required to collect sales taxes on whatever you buy there.

If you live in a state with a sales tax and you buy a product online from a company that has no physical presence in your state, you do owe sales tax on that purchase — but the state cannot make the online retailer collect it from you. You are supposed to pay the tax directly to the state (technically this tax is called a “use tax”). But this rule is obviously unenforceable and as a result most online buyers never pay that tax.

The Solution: The Marketplace Fairness Act of 2013

The Supreme Court’s decision does allow for Congress to explicitly authorize states to require these retailers (retailers with no physical presence in the state) to collect sales taxes, and this is the goal of a bill introduced in the House and Senate last week, the Marketplace Fairness Act (MFA) of 2013.

The MFA would essentially undo the effect of the Supreme Court decision for those states that adopt a minimal set of common rules (which mostly involve harmonizing sales tax rules for taxing jurisdictions within the state's borders). Twenty-four states have already joined what is called the Streamlined Sales and Use Tax Agreement (SSUTA), which includes a common set of sales tax rules, and would be authorized to require sales tax collection immediately under the MFA. Other states would be authorized if they meet the minimal standards set out in the bill.

Who Can Defend Tax Evasion?

The legislation has Republican and Democratic cosponsors in the House and Senate. This is not as surprising as it seems, given that the bill would not raise taxes but merely allow states to require retailers to collect the sales taxes that are already due.

It is difficult for opponents of the law to defend the current situation, which would basically be a defense of tax evasion. Opponents usually resort to claiming that it’s simply too difficult for online retailers to figure out what taxes would apply in the many different taxing jurisdictions where their customers are located.

But, as the Institute on Taxation and Economic Policy (ITEP) has explained, new technology, combined with the harmonized sales tax rules under SSUTA, would make it relatively easy for internet retailers to determine what sale taxes apply in a customer’s jurisdiction. We know this because major retailers that have a “physical presence” in numerous states, like Best Buy and Barnes and Noble, already collect sales taxes on sales made over the Internet, in addition to those made inside their physical stores. Similarly, Amazon collects sales tax on behalf of certain merchants located all around the country that sell via its website, though it mostly refuses to do so on items it sells directly.

Netflix’s CEO summed up the reality of the alleged tax complexity problem when he said, “We collect and provide to each of the states the correct sales tax. There are vendors that specialize in this... It’s not very hard.”

Increased Chances for Passage

The MFA has been introduced in various forms in previous Congresses, but there is reason to think that its chances of passage are greater than before. One reason is that sponsors have settled on a high exemption level — $1 million. While it seems ridiculous that a retailer could make $950,000 in sales in a year without being required to collect sales taxes from its online customers, this change will placate those concerned about the bill’s effect on “small businesses.”

Another reason the chances for passage are increasing is the changing nature of retail business. As we continue to charge ahead into the digital age, it’s becoming undeniable that a sales tax based only on retailers with a physical presence is simply not adequate for the 21^st century.

Note to Readers: This is the fifth of a six part series on tax reform trends in the states, written by The Institute on Taxation and Economic Policy (ITEP).  Previous posts in this series have provided an overview of current trends and looked in detail at “tax swaps,” personal income tax cuts and progressive tax reforms under consideration in the states.  This post focuses on one of the most debated tax issues of 2013: raising state gasoline taxes to pay for transportation infrastructure improvements.

States don’t tend to increase their gas tax rates very often, mostly because lawmakers are afraid of being wrongly blamed for high gas prices.  The result of this rampant procrastination is that state gas tax revenues are lagging far behind what’s needed to pay for our transportation infrastructure.  Until last week, the last time a state gas tax increase was signed into law was three and a half years ago—in the summer of 2009—when lawmakers in North Carolina, Oregon, Rhode Island, Vermont, and the District of Columbia all agreed that their gas tax rates needed to go up, albeit modestly in some cases.  (Since then, some state gas taxes have also risen due to provisions automatically tying the tax to gas prices or inflation.)

But Wyoming was the state that ended the drought when Governor Matt Mead signed into law a 10 cent gas tax increase passed by the state’s legislature.  And Wyoming is not alone.  In total, lawmakers in nine states are seriously considering raising (or have already raised) their gas tax in 2013: Iowa, Maryland, Massachusetts, Michigan, New Hampshire, Pennsylvania, Vermont, Washington, and Wyoming. And until recently, Virginia appeared poised to increase its gas tax, too.In addition to Governor Mead, Republican governors in Pennsylvania and Michigan and Democratic governors in Massachusetts and Vermont have proposed raising their state gas taxes despite the predictable political pushback that such proposals seem to elicit.  The plans under discussion in these four states are especially reform-minded since they would not just raise the gas tax rate today, but also allow it to grow over time as the cost of asphalt, concrete, machinery, and everything else the gas tax pays for grows too.

In New Hampshire, meanwhile, Governor Hassan has said that the state needs more funding for transportation and is open to the idea of raising the gasoline tax, among other options.  The state House is debating just such a bill right now.  The situation is similar in Maryland where Governor O’Malley, who pushed for a long-overdue gasoline tax increase last year, recently met with legislators to discuss a gas tax increase proposed this year by Senate President Mike Miller.  Washington State Governor Jay Inslee has also not ruled out an increase in the gas tax—an idea backed by the state Senate majority leader and the House Transportation Committee chair.  And in the Hawkeye State, Governor Branstad once described 2013 as “the year” to raise Iowa’s gas tax (which happens to be at an all-time low, adjusted for inflation), although he has since said that he would support doing so only after lawmakers cut the property tax.

Other states where gas tax increases have gotten a foothold so far this year include Minnesota, Texas, West Virginia, and Wisconsin, though it’s not yet clear how far those states’ debates will progress in 2013.

Across the country, no state has received more attention this year for its transportation debates than Virginia, where Governor Bob McDonnell kicked off the discussion by actually proposing to repeal the state’s gasoline tax.  But while Governor McDonnell’s idea was certainly attention-grabbing, it also failed to gain traction with most lawmakers, and the Virginia Senate responded by passing a bill actually increasing the state gasoline tax and tying it to inflation.  Since then, the preliminary details of an agreement being negotiated between House and Senate leaders are just now emerging, but early indications are that the legislature will try to cut the gas tax in the short-term, but allow the tax to rise alongside gas prices in the future.  The size of the cut will also depend on whether Congress enacts legislation empowering Virginia to collect the sales taxes owed on online purchases.

It’s good to see Virginia lawmakers looking toward the long-term with reforms that will allow the gas tax to grow over time.  But asking less of drivers through the gas tax today—when the state is facing such serious congestion problems—is fundamentally bad tax policy.  For more on the merits of the gas tax and the reforms that are needed to improve its fairness and sustainability, see Building a Better Gas Tax from the Institute on Taxation and Economic Policy (ITEP).

Former White House chief of staff Erskine Bowles and former Senator Alan Simpson, co-chairs of President Obama’s ill-fated fiscal commission, have a new proposal for a “grand bargain” to reduce the budget deficit. Their newest idea is to raise less revenue than they suggested in their original proposal and rely more on cuts in public services and public investments. They have absolutely no policy rationale for this whatsoever, but state quite explicitly that they are proposing a new plan to adjust for the political positions of President Obama and House Speaker John Boehner.

This might come as a surprise to the many observers of Bowles and Simpson, including many of their admirers in Congress, who believed the original Bowles-Simpson plan was based on policy rationales developed by technocrats who weren’t weighed down by the political baggage that hinders our elected officials.

The original Bowles-Simpson plan, approved by a majority of the commission members in 2010 but not by the super-majority that was needed under its rules to refer it to Congress, would have raised $2.6 trillion in revenue over a decade to reduce the deficit. It also would have cut spending by $2.9 trillion to reduce the deficit.

The new Bowles-Simpson plan would raise just $1.2 trillion to reduce the deficit, including revenue saved in the time that has passed between the two plans. (This includes roughly half a trillion dollars saved in the New Year’s deal from allowing tax cuts for the rich to expire plus additional revenue that Congress would need to raise.)

In a Washington Post interview, Erskine Bowles reminded the reporter that President Obama called for raising just $1.4 trillion in new revenue during debates over the fiscal cliff, and then explained, “being far out front of the president on revenues wasn’t something I wanted to do again.”

This all begs a question: If politicians feel they need leadership from an unelected panel (like the President’s Commission or the “super committee”) to address the budget in a technical way, but the technocrats leading those panels are simply finding the middle-ground between the positions of the politicians, then who exactly is leading? 

Background: The Misunderstood (Original) Bowles-Simpson Plan

The original Bowles-Simpson plan was often said to achieve one-third of its deficit-reduction from revenue increases, mostly from a tax reform that would raise $80 billion in 2015 alone and $180 billion in 2020 alone.

But, as the Center on Budget and Policy Priorities explains, the original Bowles-Simpson plan raises much more revenue if you hold it to the same accounting standards used for most budget plans in Washington today — including savings from allowing tax cuts for the rich to expire and measuring revenue impacts over a full decade. By this standard, the original Bowles-Simpson plan raises about $2.6 trillion in new revenue and achieves almost half of its deficit-reduction goal through new revenue rather than spending cuts.

You might think that achieving half of a given deficit-reduction goal through spending cuts and another half through revenue increases is a centrist position. But with the President continuously compromising in his efforts woo Congressional Republicans to make a deal, and the latter refusing any increase in revenue at all, Bowles and Simpson now perceive the “middle-ground” to be somewhere entirely different.

None of this is to say that the original Bowles-Simpson plan was great policy. It would have (by some mechanism that was never entirely clear) capped revenue at 21 percent of GDP, even though government spending had reached 22 percent of GDP even back in the Reagan years.

The President, meanwhile, is calling for one-half of the remaining deficit reduction to come from increased revenues — and that’s not enough. When you add up all the deficit reduction that has occurred since Bowles and Simpson first failed in their attempt to bring Washington together, and the remaining deficit reduction Obama proposes, only about a third of it would take the form of increased revenue. The rest would come from spending cuts. That’s not balanced at all.

Front Page Photo of Barack Obama meeting with Alan Simpson and Erskine Bowles via Cal Almond Creative Commons Attribution License 2.0

A new report from the Center on Budget and Policy Priorities (CBPP) outlines the anti-tax agenda of the American Legislative Exchange Council (ALEC) and ALEC scholar and economist, Arthur Laffer.  It explains the multitude of problems with their policy recommendations and the so-called research they produce to make the case for those recommendations.  The CBPP report builds on the Institute on Taxation and Economic Policy’s (ITEP) work debunking Arthur Laffer as it examines the “weak foundation of questionable economic and fiscal assumptions and faulty analysis promoted by ALEC and its allies.”

The DC Fiscal Policy Institute explains how closing corporate tax shelters has significantly improved the District of Columbia’s finances.  The city saw its strongest growth in corporate income tax collections in almost two decades, due in part to a reform called “combined reporting” (PDF) that makes it more difficult for companies to disguise their profits as being earned in other states, particularly those with low or no corporate income tax.

This Columbus Dispatch article cites academic research, policy experts and the Congressional Budget Office to examine Ohio Governor Kasich’s repeated assertion that tax cuts lead to jobs, including critiques that “when one dives deeper into the numbers, the correlation between income-tax cuts for small-business owners and more jobs is strained at best.”  The story also covers that larger supply-side economics debate, which the Institute on Taxation and Economic Policy (ITEP) has engaged with here and elsewhere.

Tax hikes on low- and moderate-income working families are under debate in both Vermont and North Carolina where lawmakers have proposed reducing the benefit of their states’ Earned Income Tax Credits (EITCs) (see this PDF on state EITC policy). Vermont’s Governor Shumlin wants to cut the EITC and redirect the revenue to child care subsidy programs. In North Carolina, lawmakers are advancing a bill that would cut the EITC from 5 to 4.5 percent of the federal credit and potentially let it expire altogether – a rejection of Washington’s recent five-year extension of a more robust federal EITC. A recent op-ed by Jack Hoffman at Vermont’s Public Assets Institute as well as a new brief from the North Carolina Budget and Tax Center both cite ITEP’s Who Pays data to make a case for why each state should maintain its EITC.

North Carolina’s newly-elected Governor, Pat McCrory, is keeping everyone guessing about his plans for tax reform in the Tarheel State.  During his state of the state address this week, McCrory said tax reform would be a priority of his administration but was short on specifics, saying only that he wants to lower rates, close loopholes and make North Carolina’s tax code more business friendly. The state’s Senate leadership has been touting a plan to eliminate the personal and corporate income taxes and replace the lost revenue with a higher sales tax and new business license fee.  It remains to be seen whether the Governor will follow the Senate’s lead or puts forth his own version of reform.

With the fiscal cliff deal passed and with lawmakers looking to replace the sequester, the Congressional Budget Office’s (CBO) newest budget and economic outlook provides the clearest picture yet of our new fiscal landscape. Here are the most important things you need to know from this wonky 77 page report:

1. The Fiscal Cliff Deal will increase the deficit by $4.6 trillion.

The media often portrayed the Fiscal Cliff deal as an effort to reduce the deficit and increase revenues, yet the CBO notes that the deal actually caused the projected deficit to rise from approximately $2.3 to over $6.9 trillion over the next decade. The fiscal cliff deal included about $4 trillion in tax cuts (compared to what was then “current law”).

2. The Fiscal Deal included $54 billion in corporate tax breaks.

According the CBO, the one-year extension of accelerated depreciation and a two-year extension of the so-called “tax extenders” for businesses reduced taxes on corporations by as much as $54 billion over the next decade. The decrease in corporate tax revenues (and even larger increase in the deficit as a result) could be far higher over the next decade if lawmakers do not allow these breaks to expire, but instead choose to keep extending them every year or two.

3. The level of federal debt will remain relatively stable over the next decade if lawmakers do nothing.

Despite the continued howls for more deficit reduction, the CBO projects that under current law the level of the federal debt will remain relatively stable over the next decade, with the debt actually dropping from 76.3 percent of GDP in 2013 to 76 percent of GDP in 2022. The increase in the deficit in past years was largely driven by the Bush tax cuts, weaker revenues from the economic downturn, economy recovery measures, and spending on the wars in Iraq and Afghanistan, rather than some unsustainable and permanent increase in government spending. 

While the debt is projected to be stable over the next decade, the CBO warns this assumes that lawmakers do not step in and increase the deficit by $2.5 trillion by extending the corporate tax provisions set to expire, repealing the sequester, or by holding constant Medicare payment rates without offsetting policies.

4. Job and economic growth are still well below where they could be.

The CBO estimates that the US unemployment rate will remain at the abysmal level of 8 percent throughout 2013 and that our economy will keep producing well below its potential until as late as 2017. Lawmakers could counteract the weak economic recovery, while staying fiscally responsible, if they were to repeal spending cuts or enact new stimulus programs and then pay for them by closing tax loopholes. Increasing government spending is much more stimulative to the economy than continuing expensive tax cuts for businesses, so this would have the effect increasing economic growth while making our tax code fairer and economically efficient.

If confirmed, Jack Lew, the President’s nominee for Treasury Secretary, will oversee IRS enforcement of tax laws and will oversee the development and analysis of tax proposals, among other things. It would therefore be reassuring if Lew did not seem unaware of what is going on in tax havens, and unaware of the problems with proposals to exempt corporations’ offshore profits from U.S. taxes.

Much has been made of the fact that Lew, who worked at Citigroup before serving as chief of staff to the President, had an investment in a fund registered in the Cayman Islands, a notorious offshore tax haven.

Lew told the Senate Finance Committee on Wednesday that the fund was set up by Citigroup, that he didn’t know where it was based, and that he lost money on it in any event.

Lew “Unaware of Ugland House” in the Cayman Islands

What’s actually alarming about Lew’s comments before the committee is that he didn’t even seem to understand the crisis in our tax system that the Cayman Islands and other tax havens are taking advantage of.

For example, Republicans on the committee told of how the fund in question was registered in Ugland House, a small five-story building in the Cayman Islands where over 18,000 companies are officially headquartered. Obviously, most of these “companies” consist of little more than a post office box. Profits are shifted from real business activities in countries like the U.S. into these “companies” in Ugland House. The profits can then be designated as Cayman Island profits, because the Cayman Islands has no corporate income tax.

Those of us who follow tax issues know that Ugland House has been discussed for years at Congressional hearings — although Wednesday’s hearing may be the first time that it was brought up by Republicans.

The Washington Post describes the back-and-forth during the hearing on this topic:

Lew argued that “the tax code should be constructed to encourage investment in the United States.”

“Ugland House ought to be shut down?” Grassley asked.

“Senator, I am actually not familiar with Ugland House,” the witness pleaded. “I understand there are a lot of things that happen there.”

Lew Unaware that Offshore Tax Avoidance, Not Just Tax Evasion, Is a Problem

Equally troublesome is Lew’s defense. “I reported all income that I earned. I paid all taxes due.”

This completely misses the point and misses the point of the debate over tax reform. No one has suggested that Lew committed tax evasion — the criminal act of hiding income from the IRS. The Cayman Islands and other tax havens are certainly used for tax evasion, but that’s not the issue here.

The much larger problem is that our tax system allows massive tax avoidance — practices that reduce taxes that are mostly legal, but in many cases should not be legal — and that tax havens like the Cayman Islands are exploiting this weakness.

Lew probably did pay all the taxes that were due under the tax laws as they’re currently written. The same is true of General Electric, Boeing, Pepco, Verizon, Wells Fargo and the dozens of corporations that paid nothing over several years because the tax laws allowed it. The scandal is not that laws were broken, but that the laws actually allowed this.

Is Lew Unaware that the Administration Has Rejected a “Territorial” Tax System — Or Does He Know Something We Don’t?

One Senator at the hearing asked Lew about the possibility of the U.S. shifting to a “territorial” tax system — which is a euphemism for a tax system that exempts the offshore profits of corporations.

Lew said “there is room to work together.” He said [subscription required] “We actually have a debate between whether we go one way or the other [towards a territorial system or a worldwide system], and we have a hybrid system now. It’s a question of where we set the dial.”

This is alarming for those who thought that the administration had already wisely rejected moving to a territorial system. As CTJ has explained in a report and fact sheet, U.S. companies now can “defer” (delay indefinitely) paying U.S. taxes on their offshore profits, which creates an incentive to use accounting gimmicks to make their U.S. profits appear to be “foreign” profits generated in a tax haven like the Cayman Islands. Under a territorial system, they would never have to pay U.S. taxes on offshore profits, which would logically increase the incentive to engage in such tax dodges.

A year ago, the Obama administration stated that it opposes a “pure territorial system.” CTJ pointed out at the time that a little more clarity is needed because probably no country has a “pure” territorial system, and the “impure” ones are facilitating widely reported tax avoidance in Europe and across the world.

That clarification seemed to arrive when Vice President Joe Biden went out of his way to criticize the idea of a territorial tax system at the 2012 Democratic convention, referring to a study concluding that it could cost the U.S. hundreds of thousands of jobs.

We hope that this is simply another case of Lew being uninformed, and not an indication that the administration may shift towards favoring a territorial system.

Last year at this time, CTJ predicted, based on Facebook’s IPO paperwork, the company would get a federal tax refund in 2012 approaching $500 million, and the company’s SEC filing this month tells us we were right: Facebook is reporting a $429 million net tax refund from the federal and state treasuries. And it’s not because they weren’t profitable. Indeed, Mark Zuckerburg’s little company earned nearly $1.1 billion in profits.

CTJ’s new 2-pager on what Facebook’s February 2013 SEC filing means is here.

Facebook’s income tax refunds stem from the company’s use of a single tax break, that is the tax deductibility of executive stock options. That tax break reduced Facebook’s federal and state income taxes by $1,033 million in 2012, including refunds of earlier years’ taxes of $451 million.

Of course, Facebook is not the only corporation that benefits from stock option tax breaks.  Many big corporations give their executives (and sometimes other employees) options to buy the company’s stock at a favorable price in the future. When those options are exercised, corporations can take a tax deduction for the difference between what the employees pay for the stock and what it’s worth (while employees report this difference as taxable wages).  On page 12 of our 2011 Corporate Taxpayers and Corporate Tax Dodgers report, we discuss how 185 other large, profitable companies have exploited the stock option loophole.

Note to Readers: This is the fourth of a six part series on tax reform in the states. Over the coming weeks, The Institute on Taxation and Economic Policy (ITEP) will highlight tax reform proposals and look at the policy trends that are gaining momentum in states across the country. Previous posts in this series have provided an overview of current trends and looked in detail at “tax swap” and personal income tax cut proposals.  This post focuses on progressive, comprehensive and sustainable reform proposals under consideration in the states.

State tax reform proposals are not all bad news this year.  There are some good faith efforts underway that would fix the structural problems with state tax codes, rather than simply dismantling or eliminating entire revenue sources and calling it “reform.”  Proposals in Minnesota, Kentucky, Utah, and Massachusetts would improve the fairness, adequacy and sustainability of those states’ tax systems through various combinations of base broadening, tax breaks for low- and moderate-income families, and increases in the share of taxes paid by wealthy households. Other states to watch include Nevada, California, New York and Hawaii, though the specific proposals that will be considered in these states have yet to be fully fleshed out.

Minnesota Governor Mark Dayton recognizes that his state’s tax structure is in need of an overhaul and is looking at long-term solutions that will set the state’s revenues on a sustainable path now and in the future.  As he sees it, the current system is fraught with problems. It does not reflect the modern economy in many ways. It has shifted the responsibility for funding government to those with the least ability to pay. It is out of balance due to its heavy reliance on property taxes.  And, it is riddled with expensive and ineffective tax breaks that make the state’s revenues less sustainable.  Out of all the high-profile state tax reform plans unveiled this year, Governor Dayton has put forth the best example of a comprehensive and progressive tax reform proposal.  It will make Minnesota’s tax code more fair, adequate, and sustainable.  The Governor’s plan includes: broadening the sales tax base to services and using some of the additional revenue to lower the state’s sales tax rate; reducing property taxes; adding a new personal income tax bracket for the state’s wealthiest taxpayers; and closing corporate tax loopholes.  The plan also raises more than $1 billion a year to boost investments in public education and restore structural balance to the state’s budget.

Kentucky Governor Steve Beshear signaled his support for overhauling the Bluegrass State’s tax code in his State of the State address in early February and indicated he would be looking to the recommendations from his appointed Blue Ribbon Tax Commission as a starting point for a proposal.  With a few exceptions, the Commission’s recommendations (released in December) were courageous and forward-looking, including a proposal to expand the sales tax base to services (PDF) while simultaneously adopting an Earned Income Tax Credit (EITC) (PDF) to offset the impact on low-income working families.  The recommendations also included broadening the personal income tax base by limiting itemized deductions for wealthy households, lowering the very large exclusion for pension income (and phasing it out for high wealth retirees), and lowering personal income tax rates.  Like the Minnesota plan, if taken as a whole, the Kentucky Tax Commission’s recommendations would shore up state revenues over the long term and more immediately raise revenue for current needs.

Utah lawmakers are looking at a proposal to raise the sales tax rate applied to groceries and couple that change with two new refundable credits to offset the impact on low- and moderate-income families: a food credit (PDF) and a state EITC (PDF).  While less comprehensive than the proposals under consideration in Minnesota and Kentucky, an ITEP analysis found that the Utah plan would reduce the regressivity of Utah’s tax code (PDF).  In other words, low-income working families would ultimately pay less of their income in taxes while upper-income families would pay slightly more.  Simply exempting food from state sales taxes (or taxing it at a lower rate) is a poorly targeted and costly policy that narrows the tax base and extends the break to wealthier taxpayers who don’t need it. Therefore, refundable credits of the kind Utah is considering are a smart, less costly alternative that can be designed to reduce taxes for specific groups of taxpayers in need of relief.

Massachusetts Governor Deval Patrick’s FY14 budget included a tax package that will boost revenues now and in the future and make slight improvements to the fairness of the state’s tax system. While many governors this year are looking to replace progressive income taxes with regressive sales taxes, Governor Patrick wants the Bay State to do the reverse and rely more on the personal income tax and less on the sales tax.  His plan would raise the state’s flat personal income tax rate from 5.25 to 6.25 percent, double the personal exemption, and eliminate more than 40 personal income tax breaks that tend to benefit the wealthiest families.  The sales tax rate would drop from 6.25 to 4.5 percent and computer software, soda, and candy would be newly subject to the tax.  He also recommends a $1 increase to the cigarette tax. Governor Patrick’s plan would raise close to $2 billion when fully phased in. The Campaign for Our Communities coalition praised the proposal, saying that it “creates growth and opportunity through long-term investments in education, transportation and innovation funded by making our tax system simpler and fairer.”

During his State of the Union Address, President Barack Obama reiterated the principle that the United States must prioritize getting rid of tax loopholes for the wealthiest individuals and most profitable corporations in order to ensure that everyone is paying their “fair share” to reduce the deficit. While in principle it’s hard to argue with this approach, the tax policy agenda the President laid out during his speech does not go nearly as far as it should both in terms of deficit reduction and correcting the inequities in our tax code.

Buffett Rule Not Enough to Ensure Fairness
For example, during the speech President Obama called for a tax code that would ensure that “billionaires with high-powered accountants” do not pay a lower tax rate that their “hard-working secretaries.” His proposal to accompany this principle has been the so-called “Buffett Rule,” which would require everyone making over a million dollars to pay a minimum effective tax rate over at least 30 percent.

But this would still leave in place the preferential rate on capital gains and dividends that is the primary reason that wealthy investors like Warren Buffett have such low effective tax rates. A better approach would be to end the special treatment of capital gains and dividends, which would both raise more revenue and deal with the core issue of fairness.

Truly Ending Offshore Corporate Tax Dodging Requires More
Turning to corporate taxes, President Obama said that we need a tax code that “lowers incentives to move jobs overseas and lowers tax rates for businesses and manufacturers that are creating jobs right here in the United States of America.”

To start, rather than calling for a measure that simply “lowers incentives,” Obama should address the problem at its root, by repealing the rule allowing corporations to defer – indefinitely – taxes on their offshore profits.  (Those profits, of course, are often artificially shifted offshore with the goal of avoiding taxes.) This exact reform was recently introduced in both the House and Senate in the “Corporate Tax Dodging Prevention Act.”

Corporate Tax Reform Must Raise Revenue

In addition, while it’s great that President Obama is proposing to get rid of a myriad of corporate tax breaks, it is not entirely clear that he intends to wisely use the revenues it would generate. His 2012 corporate tax framework, for example, calls for the revenue generated by closing loopholes to be spent on lowering the overall corporate tax rate and even expanding some of the breaks for manufacturers (which really don’t warrant the special treatment); this proposal to keep corporate tax reform revenue-neutral meant that corporations would continue to pay a low effective corporate tax rate overall and have no positive impact on the budget.

In his State of the Union Speech, however, he implied that corporate tax reform should also result in revenues to help bring down the deficit, and this more recent rhetoric about using the revenues for deficit reduction is certainly promising. What should come next is a clear rejection of revenue-neutral corporate tax reform and an explicit commitment to boosting corporate tax revenues in order to fund investments that benefit all Americans, including the consumers that keep corporations profitable.

Balanced Approach? Spending Cuts for Deficit-Reduction Have Already Been Enacted

Addressing the sequestration cuts scheduled to kick in March 1, President Obama used the State of the Union address to reiterate his commitment to include a mix of revenues and spending cuts as part of a “balanced approach” to deficit reduction, saying we should not “make deeper cuts to education and Medicare just to protect special interest tax breaks." Citizens for Tax Justice has noted (as did the President in his speech) that the last several rounds of deficit reduction have already relied primarily on spending cuts.  Logically, then, to achieve true “balance” in reducing the deficit, the sequester should be replaced almost entirely by revenue increases.  That makes the President’s offer of more cuts unwarranted.

If enacted as is, the tax ideas President Obama outlined in his State of the Union address would be important steps towards reducing the deficit and improving the fairness of our tax system. If enacted following legislative compromise, they would likely be much smaller steps. But in any event, the President’s articulated goals would still leave gaping inequities in our tax code, and not do enough to ensure that we have the resources to make critical investments in our long term economic health. 

For months, Idaho lawmakers have been seriously considering repealing the personal property tax on business equipment.  If enacted, repeal would cost local governments and public schools over $140 million a year, and would likely force cuts in public services and increases in property taxes on other taxpayers.

The single biggest winner under repeal would be Idaho Power, held by IDACorp, which will reportedly see its taxes fall by $10.5 to $15.3 million per year if repeal is enacted.  A new report from our partner organization, the Institute on Taxation and Economic Policy (ITEP), helps put this costly tax proposal into perspective by looking at the state income taxes being paid (or not) by the plan’s largest beneficiary.

According to IDACorp’s financial disclosures, the company earned $623 million in U.S. profits over the last five years (2007-11) but paid nothing in state income taxes to the states in which it operates.  In fact, the company’s effective state income tax rate across all states was actually negative.  IDACorp received $7 million in tax rebates from the states between 2007 and 2011, giving it an effective tax rate of negative 1.1 percent for the five year period as a whole.

The proposed repeal of the personal property tax in Idaho would leave the state corporate income tax as the main means by which companies like IDACorp contribute to the public investments that allow them to do business and generate profits. Before lawmakers take such a step, they should at least know whether the state corporate tax is working to begin with. In Idaho and virtually every other state, however, neither elected officials nor the tax-paying public have access to this kind of information. Obviously, they should (PDF).

Read the report

We can probably expect the President’s first State of the Union address since being re-elected to include yet another plea to his Congressional adversaries to just be reasonable and meet him somewhere between his already compromised position and their Tea Party-enforced ideology.

We can probably expect the President to continue his calls for legislation that replaces all or part of the automatic spending cuts (sequestration) scheduled to begin March 1 with a mix of both revenue increases and spending cuts.  He calls this mix a “balanced approach” in spite of the fact that spending cuts have already been the main source of deficit reduction over the past two years, meaning that the only truly “balanced” way to replace sequestration at this point would be almost entirely by revenue increases.

We can also expect more talk of sacrifice from all Americans, and for the President to reiterate his openness to cutting programs that low- and middle-income Americans rely on – so long as the opposition agrees to some modest tax increases, on those who will hardly notice them.

A new working paper from Citizens for Tax Justice (CTJ) shows that all of this lopsided compromising is unnecessary and that Congress could raise enough new revenues to replace the entire scheduled sequestration and avoid the cuts everyone agrees will weaken our economy.  Sequestration, remember, was supposed to be a poison pill because of its unnecessarily blunt, across-the-board cuts of $85 billion from every program and agency this year, and $1.2 trillion over the next decade.

CTJ’s paper shows that such revenue increases can be achieved without affecting low- and middle-income Americans by instead asking profitable corporations, wealthy individuals – particularly those wealthy individuals sheltering their investment income – to pay their fair share in taxes.

For example, Congress could raise around $600 billion over a decade by ending “deferral” of U.S. taxes on offshore corporate profits.

In other words, Congress would repeal the rule allowing U.S. corporations to “defer” (delay indefinitely) paying U.S. taxes on their offshore profits until they bring those profits to the U.S.

Even if Congress didn’t need the revenue, there are still extremely important reasons to end deferral, as a new proposal from Senator Bernie Sanders and Congresswoman Jan Schakowsky would do. In some cases, for example, deferral encourages corporations to shift operations (and jobs) offshore; in other cases, it encourages corporations to use accounting gimmicks to disguise their U.S. profits as “foreign” profits generated in a tax haven like the Cayman Islands or Bermuda.

Another revenue raising option is taxing capital gains at death.

Under the current rules, income that takes the form of capital gains on assets that are not sold during the owner’s lifetime escape taxation entirely. The rationale for this special treatment seems to be that it would be difficult to determine exactly how much an asset has appreciated if it’s been held for many years, but that’s a red herring because the current break applies to assets that have been held for even just a couple years.

It is not known exactly how much revenue would be raised by ending this break, but the Joint Committee on Taxation has estimated that this break will cost the Treasury over $250 billion in just the next five years.

Another option is the President’s own proposal to limit the tax savings that wealthy individuals get from each dollar of deductions and certain exclusions to 28 cents.

The tax code is filled with deductions and exclusions that effectively subsidize certain activities and behaviors, like buying a home, giving to charity, obtaining health care and many others. But providing subsidies through the tax code in this way means that the wealthiest people, those in the top, 39.6 percent tax bracket, are saving almost 40 cents for each dollar they spend on home mortgage interest, charitable giving and health care.  Middle-income people, on the other hand, might (if they’re lucky) be in the 25 percent bracket and save just 25 cents for each dollar spent on these things.

Limiting the tax savings to 28 percent would at least reduce that unfairness and it would raise over half a trillion dollars over a decade. Sadly, there is talk that the President, responding to misinformation about how it would impact charitable giving, is open to diluting his proposal so that the charitable deduction is not much affected.

The President can champion policies that large majorities of Americans support.

New polling shows the public is on board with the proposals outlined above. About two-thirds of Americans say corporations should pay more in taxes and two-thirds say the rich should pay more than they pay today. Significantly, this poll was taken more than two weeks after the New Year’s Day deal that allowed tax cuts to expire for the rich, aka “raised taxes” on the wealthiest Americans.

The only thing standing in the way of progressive tax reforms that raise enough revenue to replace the sequestration is the same thing that always stands in the way: the interests of powerful corporations and wealthy investors.  Those special interest groups aside, the vast majority of Americans would support the President in a more progressive approach to tax reform.

The Cleveland Plain Dealer published a new analysis of Ohio Governor Kasich’s “tax swap” plan that “suggests lower and middle income families would not do as well as higher earners under the new system.”  The Plain Dealer notes that its findings bolster a new report by Policy Matters Ohio and our partner organization, the Institute on Taxation and Economic Policy (ITEP).

Online retailer Amazon.com just struck a deal with yet another state to begin collecting sales taxes.  The new agreement with Connecticut will go into effect in November, just in time for the holiday shopping season.  The company also announced that it plans to build an order-fulfillment center in the state – a move which would have clearly established a “physical presence” (PDF) and therefore required the company to begin collecting sales taxes anyway.

The Atlanta Journal-Constitution reports that Georgia may soon join Connecticut on the long list of states that have struck deals with Amazon.  According to the paper, “the world’s largest online retailer has not collected the tax [this year], despite a new state law requiring online retailers to charge it at the start of the year.”  But the Georgia Retail Association expects that Amazon will build a distribution center in the state soon, which would make it impossible for the company to continue ignoring this legal requirement.

Minnesota Governor Mark Dayton reaffirmed his support for progressive, comprehensive and revenue-raising tax reform in his State of the State address last week and mentioned our partner organization, the Institute on Taxation and Economic Policy (ITEP) when referring to the upside down nature of his state’s tax structure:

“Thanks to the excellent work of Minnesota 2020, I recently became aware of a new study, by the Institute on Taxation and Economic Policy, which confirms the Department of Revenue’s analysis. It found that middle-class Minnesotans pay 26 percent more state and local taxes per dollar of income than do the top one percent of our state’s income earners. When people who have the most pay the least, this state and nation are in trouble. When lobbyists protect tax favors for special interests at the cost of everyone else’s best interests, this state and nation are in trouble. My goal is to get us out of trouble.”

In recent months, Google, Inc. has come under fire by Britain’s parliament for its alleged use of “immoral” offshore tax dodges as well as by French authorities (Google’s history of shifting income to offshore jurisdictions, aka tax havens, is well documented). But none of this criticism seems to have changed the minds of Google’s executives: the company’s 2012 annual financial reports were released last week, and in them, the company admits to having shifted $9.5 billion in profits overseas in just the past year.

To put this in context, a recent CTJ report identified all 290 of the Fortune 500 corporations that have admitted holding cash indefinitely overseas; this report ranked Google as having the 15^th largest offshore cash hoard, with $24.8 billion of offshore cash in 2011. CTJ’s report also showed that the offshore cash holdings of big corporations are highly concentrated in the hands of just a few companies, and the biggest 20 among these 290 corporations represented a little over half of the $1.6 trillion in offshore income we documented.  And while we can’t precisely predict the revenue loss this represents, we did calculate that it could be as much as $433 billion in unpaid taxes.

So this fierce debate over whether to offer US multinationals a “tax holiday” for bringing their overseas stash back to the US, or to give them a permanent exemption by adopting a “territorial” tax system, is largely about whether a small number of large companies, including Google, should be rewarded for shipping their cash to low-tax jurisdictions. Given that most of us pay taxes on the money we earn in this country, only seems reasonable that colossally profitable corporations should do the same.

Wisconsin Governor Scott Walker’s Secretary of Administration, Mike Huebsch, caused a kerfuffle recently when he said that the Governor “is considering” eliminating the state’s income tax and replacing the revenue with a larger sales tax. This is not a new concept, but to say it’s a flawed approach to tax reform is an understatement.  “For the first time in, I would say the last 20 years,” said Huebsch, “this is getting much more discussion across the nation. And I think it’s being led by governors like Bobby Jindal in Louisiana who are trying to figure out ways that they can eliminate their income tax. That’s really the motivation here. They want to eliminate the income tax.”  

Emulating Governor Jindal would be misguided. An Institute on Taxation and Economic Policy (ITEP) analysis found that Jindal’s proposal to eliminate income taxes and replace the revenue with higher sales taxes would actually increase taxes on the bottom 80 percent of Louisianans. Specifically, the poorest 20 percent of taxpayers, those with an average income of $12,000, would see an average tax increase of $395, or 3.4 percent of their income. The largest beneficiaries of his tax proposal would be the top one percent, with an average income of well over $1 million, who'd see an average tax cut of $25,423.

Since Secretary Huebsch’s comments, the Governor’s office has responded saying that Walker will propose a “middle class tax cut,” but not the complete elimination of the state’s income tax. For now, anyway.

The Governor’s spokesman did open the door to future, potentially more radical tax proposals when he said, “Governor Walker will propose a middle class income tax cut in the 2013-15 state budget. He considers this to be a down payment on continuing to drop the overall tax burden in Wisconsin in future years. He will review the impact of tax policy on job growth in other states as he considers future reforms."

Wisconsinites should know that a middle class tax cut is, like a Unicorn, commonly mentioned but rarely seen. While there are tax credits (like the making work pay credit and property tax circuit breakers(PDF)) that are genuinely targeted towards middle income families, a tax rate cut for middle income groups is almost always also a tax cut – and a bigger one, at that – for high income groups. That’s just how marginal tax rates work (and the reason across-the-board income tax cuts are such budget busters).

Income tax cuts and even elimination are practically epidemic this year. We’ll be watching to see if Governor Walker catches the bug, too. Meantime, he can already “review the impact of tax policy on job growth in other states” right here, and see that cuts do not, in fact, lead to growth.

A bill introduced in Congress today called the Corporate Tax Dodging Prevention Act would end “deferral,” the most problematic break in the U.S corporate income tax.

The bill would repeal the rule allowing U.S. corporations to “defer” (delay indefinitely) paying U.S. corporate income taxes on their offshore profits until those profits are “repatriated” (brought to the U.S.).

At an event announcing the proposal this morning, CTJ director Bob McIntyre spoke in favor of the legislation. McIntyre explained:

Because of “deferral,” companies like Apple, Microsoft, Dell and Eli Lilly can shift their U.S. profits, on paper, to foreign tax havens and avoid billions of dollars in taxes that they should be paying. At the end of 2010, just 10 companies, including those just mentioned, report that they had stashed $210 billion offshore, almost all of it in tax havens, and thereby avoided $69 billion in U.S. income taxes.

A recent CRS report found that in 2008, American multinational companies reported earning 43 percent of their $940 billion in  overseas profits in five little tax-haven countries, even though only 4 percent of their foreign workforce and 7 percent of their foreign investments were in these countries.

In total, the JCT [Joint Committee on Taxation] estimates that repealing deferral would add $600 billion to federal revenues over the next decade.

The bill was introduced today in the Senate by Bernie Sanders of Vermont and in the House by Jan Schakowsky of Illinois.

CTJ’s recent working paper on tax reform options explains in detail how ending deferral would improve the corporate income tax. It also explains that President Obama has offered several proposals that would address some of the worst abuses of deferral, but would not be as effective or straightforward as simply repealing deferral.

CTJ has published previous reports and fact sheets explaining why Congress should repeal deferral and should also reject proposals to adopt a “territorial” tax system, which would make matters worse.

Senator Carl Levin of Michigan has introduced bills to limit some of the worst abuses of deferral, and has been discussing similar proposals with other Senators as a way to raise revenue to replace or delay the automatic spending sequestration that is scheduled to go into effect in March.

The bills introduced by Senator Levin also include provisions targeting offshore tax evasion by individuals, in addition to the offshore tax avoidance by corporations. Offshore tax evasion involves hiding income from the IRS in offshore tax havens in ways that are criminal offenses, whereas the offshore tax avoidance by corporations generally involve practices that are not illegal — but that ought to be.

(Senator Levin’s legislation would also address other tax issues, like the “Facebook” loophole for stock options and the “carried interest” loophole.)

Ending deferral has become increasingly important as corporations hold more profits than ever offshore. A recent CTJ report finds that public information from 290 of the Fortunate 500 companies indicate that they hold $1.6 trillion in profits offshore. For many of these corporations, the majority of their “offshore” profits are actually U.S. profits that have been artificially shifted to offshore tax havens and then reported as “foreign” profits.  

Citizens for Tax Justice has a new online calculator that will tell you what you’d pay in federal taxes in 2013 under three different hypothetical scenarios:

1) Congress did nothing during the New Year and allowed the “fiscal cliff” to take effect.

2) Congress extended all tax cuts in effect in 2012 and delayed all tax increases that were scheduled to go into effect.

3) Congress enacted the American Taxpayer Relief Act, which extended most, but not all tax cuts. This is what actually happened.

Use CTJ’s online tax calculator.

The calculator illustrates the impact of the changes in personal income taxes (the expiration of some of the Bush tax cuts for the very rich and the extension of some 2009 provisions expanding the EITC and Child Tax Credit) as well as the health reform-related change to the Medicare tax and the expiration of the Social Security tax holiday.

The calculator demonstrates to the vast majority Americans that their personal income taxes are no different than they would be if all the Bush tax cuts were extended. (A CTJ fact sheet explains that less than one percent of Americans lost any part of the Bush tax cuts under the fiscal cliff deal that was enacted.)

But the calculator also demonstrates that the expiration of the payroll tax holiday — which lawmakers of both parties barely bothered to debate at all — affects middle-income people.

For more information, see CTJ’s fact sheet detailing the provisions in the fiscal cliff deal, as well as CTJ’s reports on the distributional effects and revenue impacts of the deal.

Photo of Calculators via Dave Dugdale (of Learning DSLR Video) and 401 K 2013 Creative Commons Attribution License 2.0

Note to Readers: This is the third of a six part series on tax reform in the states. Over the coming weeks, The Institute on Taxation and Economic Policy (ITEP) will highlight tax reform proposals and look at the policy trends that are gaining momentum in states across the country. Previous posts in this series have provided an overview of current trends and looked in detail at “tax swap” proposals.  This post focuses on personal income tax cuts under consideration in the states.

While not as dramatic as wholesale repeal of the income tax, five states this year are likely to consider regressive income tax cuts that will compromise their ability to adequately fund public services now and in the future.

In Indiana, Governor Pence campaigned last fall on cutting the state’s already low, flat personal income tax rate from 3.4 to 3.06 percent, and has shoehorned that idea into a budget proposal that also fails to help schools that are “still reeling from the cuts” enacted during the recent recession. The Institute on Taxation and Economic Policy (ITEP) found that Pence’s tax plan would primarily benefit the state’s most affluent residents: 56 percent of the benefits would go to the best-off 20 percent of Indiana residents, while one in three of the state’s poorest residents would see no tax cut at all.  The South Bend Tribune, among others, has urged lawmakers to “pass on this tax cut” because of its high revenue cost and the way in which it would add to the unfairness (PDF) already present in Indiana’s tax code.

In Oklahoma, Governor Fallin has significantly scaled back her tax cut ambitions from last year.  Rather than aiming for a fundamental restructuring of the income tax, the Governor has proposed simply repealing the state’s top personal income tax bracket, thereby cutting the state’s top rate from 5.25 to 5.0 percent.  The Oklahoma Policy Institute explains that this proposal “would take $106 million from Oklahoma schools, public safety, and other core state services without offering any way to pay for it.”  And ITEP’s new Who Pays? report shows that last time Oklahoma cut its top income tax rate, in 2012, the vast majority of the benefits (PDF) went to the highest-income taxpayers in the state.  Meanwhile, State Senator Anderson has once again proposed a dramatic flattening of the income tax that would actually raise taxes on most of the state’s lower- and moderate income residents.

In Montana, two different proposals for cutting personal income tax rates have been floated in recent weeks.  A House proposal to cut the bottom income tax bracket has already been defeated, with Democrats opposing it because of its revenue cost and some Republicans opposing the idea of tax relief for the poor, despite the disproportionate impact (PDF) the state’s tax system currently has on low-income families.  Meanwhile, a Senate bill to repeal the top personal income tax bracket and cut the next tax rate is still alive.  A small portion of the bill would be paid for through scaling back the state’s regressive preference for capital gains income and hiking the state’s corporate income tax rate.  Overall, however, the bill would reduce both the fairness of Montana’s tax system and the revenue it generates.

In Arkansas, the debate over the income tax has yet to heat up, but the House Revenue and Taxation Committee Chairman says he’s “very bullish” about the possibility of enacting a large tax cut, and other Republicans in the legislature are reportedly discussing options for cutting the income tax. 

Finally, in Wisconsin, rumors briefly swirled that there may be a push to eliminate the state’s income tax and replace it with a much larger sales tax, akin to what’s been proposed in Louisiana, Nebraska, and North Carolina.  Governor Walker, however, responded by saying that he will wait and see how those debates play out in other states before deciding whether to advocate for such a change in 2015.  In the meantime, the Governor says he will propose what he claims will be a “middle-class” tax cut of about $340 million.  Assembly Speaker Robin Vos is hoping for a proposal of at least that size.  The Governor’s budget proposal is due out on February 20, and by then we should have a better idea of whether the plan will actually be aimed at middle-income Wisconsinites, as well as its true price tag.

Last month, Kansas Governor Sam Brownback proposed, for the second straight year, major tax changes during his State of the State speech. These new changes include lowering the state’s two tax bracket rates to 1.9 and 3.5 percent, eliminating itemized deductions for mortgage interest and property taxes paid, and raising the sales tax. The Institute on Taxation and Economic Policy (ITEP) analyzed the impact of the Governor’s proposal on Kansans and found that his plan is quite costly and raises taxes on the poorest Kansans. Read the full analysis here.

The ITEP analysis found that if fully implemented in 2012, Brownback’s latest proposal would have reduced state revenues by close to $340 million and the poorest 20 percent of Kansas taxpayers would pay 0.2 percent more of their income in taxes each year, or an average increase of $22. However, upper-income families would reap the greatest benefit from his plan, with the richest one percent, those with an average income of over a million dollars, saving an average of $6,528 a year, which is about 0.6 percent of their income. Taxpayers in the middle income groups would see a more modest tax cut, up to $200 on average, amounting to roughly 0.3 percent of their income. When combined with the cuts from last year, wealthy Kansans benefit overwhelmingly – to the tune of an average tax cut of nearly $28,000. And the only group who’d pay higher taxes are the lowest earners.

In his Kansas City Star op-ed, ITEP’s director notes that the first rule of tax reform ought to be to first do no harm, but it seems pretty clear Governor Brownback’s plan would harm low-income Kansans. At the same time, it’s a second round of cuts for Kansans who don’t need them, and when the state can’t afford them.

Earlier this week, a district court in Texas ruled for a second time that the state’s system of paying for schools is unconstitutional, both because it fails to provide enough revenue to deliver an adequate education for Texas children and because it creates huge inequities in the quality of education enjoyed by richer versus poorer districts. The lawsuit prompting this decision was brought by hundreds of school districts in the wake of a 2011 decision by the state legislature to dramatically cut state aid to local schools. The state of Texas is expected to appeal, in which case it goes to the Texas Supreme Court.

As the Texas Center for Public Policy Priorities (CPPP) notes (PDF), the 2011 spending cuts came after a misguided decision by the 2006 legislature to replace local property tax revenue with revenues from cigarette taxes (of all things) and a new, untested approach to taxing business income. CPPP finds that the tax hikes in that 2006 “tax swap” have paid for only about a third of the lost property tax revenue, leaving a gaping $10 billion hole in the state’s 2011 budget. This probably also helps account for what the 600 school districts in the lawsuit say is a $43,000 gap between rich and poor classrooms, too.

The choice to pay for the growing cost of education using a flat-lining tax such as the cigarette tax (whose returns are famously diminishing, PDF) reflects the limited options available in a state that refuses to levy a tax on personal income.

Texas is one of only a handful of states with no income tax, and its current Governor has made a big show of his intention to keep it that way. At a time when a number of states’ elected officials are expressing a desire to restructure their tax systems to more closely resemble the Texas tax system (usually by simply repealing their personal income tax), this week’s court decision is a harsh reminder that the short term politics of tax cuts has long term consequences for citizens. Texas, for example, has abysmal numbers on education and its poverty rate continues to rise.

So when someone like Kansas Governor Sam Brownback crows “Look out Texas. Here comes Kansas!” it might be he didn’t read the brochure before planning this particular trip. It’s not the first time he – like other political leaders – has talked up the Texas tax structure.  But given the Lone Star State’s track record, and the budget havoc tax cuts are causing in Kansas, all lawmakers should think twice before embarking on the no-income-tax path.

Photo courtesy Texas Tribune.

A new short report from Citizens for Tax Justice explains that House Ways and Means Committee Chairman Dave Camp has put forward an intriguing proposal to reform the tax treatment of derivatives — the complex financial instruments that played a starring role in the financial collapse. As the report explains, Camp unfortunately proposes to use any revenue saved from his reforms to pay for reductions in tax rates.

Derivatives can create huge opportunities for tax avoidance. To take just one example explained in the report, Ronald S. Lauder, heir to the Estée Lauder fortune, used a derivative called a “variable prepaid forward contract” to sell stock without paying taxes on the capital gains for a long time. Lauder entered into a contract to lend $72 million worth of stock to an investment bank and promised to sell the stock to the bank at a future date at a discounted price, in return for an immediate payment of cash. The contract also hedged against any loss in the value of the stock.

The contract put Lauder in a position that is economically the same as having sold the stock — he received cash for the stock and did not bear the risk of the stock losing value — and yet he does not have to pay tax on the capital gains until several years later, when the sale of the stock technically occurs under the contact.

The most significant of Chairman Camp’s proposals would subject most derivatives to what is called “mark-to-market” taxation. At the end of each year, gains and losses from derivatives would be included in income, even if the derivatives were not sold.

Assuming the mark-to-market system is implemented properly without loopholes or special exemptions for those with lobbying clout, the result would be that the types of tax dodges described above would no longer provide any benefit. The taxpayers would not bother to enter into those contracts because they would be taxed at the end of the year on the value of the contracts (meaning they are unable to defer taxes on capital gains) and the gains would be taxed at ordinary income tax rates.

The reform could be key to blocking the sort of tax dodges available only to the very rich.

Over the weekend, President Obama and Senate Majority Leader Harry Reid both stated that closing tax loopholes is part of the solution to replacing the coming sequestration of federal spending.

CTJ’s recently updated working paper on tax reform options identifies three categories of reforms that would accomplish this. They include ending tax breaks and loopholes that allow wealthy individuals to shelter their investment income from taxation, ending breaks and loopholes that allow large, profitable corporations to shift their profits offshore to avoid U.S. taxes, and limiting the ability of wealthy individuals to use itemized deductions and exclusions to lower their taxes.

Sequestration: Spending Cuts No One Seems to Want

In 2011, President Obama and Congress agreed to across-the-board sequestration (automatic spending cuts) that they hoped to replace with more targeted, thought-out deficit-reduction measures.

Under the law they enacted, the Budget Control Act of 2011 (the BCA), the sequester was supposed to take effect in the beginning of this year. But the recent deal addressing the “fiscal cliff” replaced the first two months of sequester savings with some arcane accounting gimmicks, so now the sequester begins March 1 if Congress does not act. Between then and the end of the year, it would cut spending by $85 billion. Over a decade, the sequester will cut spending by $1.2 trillion.   

Those cuts are spread evenly across defense and non-defense spending, affecting the programs favored by politicians of every ideological stripe. Lawmakers agree that they do not like the scheduled sequester. Congressional Republican leaders argue that it should be replaced entirely with spending cuts while Democratic leaders in Congress and President Obama insist that revenue increases must be involved.

Revenue Is the Answer

The Center on Budget and Policy Priorities points out that if the sequester is averted with spending cuts and no revenue increases, that will mean that the combination of all the deficit-reduction measures, which began in 2011, would include five times as much in spending cuts as revenue increases. The President is calling for any deficit reduction from this point on to include an equal share of spending cuts and revenue increases. But even this would mean that the combination of all these deficit-reduction measures would include twice as much in spending cuts as revenue increases.

A fair approach would be for Congress to replace the sequester entirely with new revenue. There are several reform options described in CTJ’s working paper that would raise hundreds of billions of dollars over the coming decade.

Some of these reform options could be enacted on their own, like President Obama’s proposal to limit the tax savings of each dollar of deductions and exclusions to 28 cents. Others are more likely to be part of a larger tax reform, like ending the rule allowing corporations to “defer” (not pay) U.S. taxes on their offshore profits or ending the provision in the personal income tax exempting capital gains at death. All of these reforms would end or cut back tax breaks that are hugely beneficial to extremely wealthy families and large corporations but not to low- and middle-income families.

Our partner organization, the Institute on Taxation and Economic Policy (ITEP) is continuing to generate a lot of publicity in the states for its recent Who Pays? report examining the fairness (or lack thereof) of every state’s tax system.  The Tennessean explains, for example, that: “Tennessee is often championed as a low-tax state. But for struggling families, it might not be among the fairest.”

In Pennsylvania, meanwhile, Sharon Ward of the Pennsylvania Budget and Policy Center explained ITEP’s report to CBS Philly by saying that: “We are in a club we don’t want to be in — one of the ‘Terrible Ten States’ that has the most regressive tax systems. And really, we got here for a very important reason: we have a flat income tax that fails to offset the more regressive taxes: sales and property taxes.”

And in Wyoming, the Equality State Policy Center (ESPC) is using ITEP’s new Who Pays? data to make the case for enacting a state Earned Income Tax Credit (EITC).  ESPC explains that the credit could make a long-overdue increase in the state’s gasoline tax much fairer by mitigating its impact on low-income families.

We recently profiled the four states looking most seriously at “tax swaps” that would offset big income tax cuts with a regressive sales tax hike -- Kansas, Louisiana, Nebraska, and North Carolina.  New Mexico can now be added to that list.  Two lawmakers there say they would like to expand the sales tax to apply to "virtually everything that happens" in the state and then repeal the personal and corporate income taxes.  But economists in New Mexico say that the plan is “pretty much guaranteed to be regressive and shift the tax burden.”

Bipartisan legislation in Texas would remedy the state’s “astounding deficit of knowledge when it comes to tax expenditures” -- or special tax breaks (PDF). The report proposes a number of smart reforms recommended by ITEP.  Those reforms include rigorous reviews aimed at determining whether tax breaks have fulfilled their goals, and “sunset provisions” designed to force a vote on special tax breaks that would otherwise continue on autopilot for years or decades on end.