This week the Supreme Court heard arguments on two cases looking at the constitutionality of same-sex marriage. Specifically, the cases were about measures that ban recognition of gay marriage by the federal government and the state of California. At the federal level, the Court heard about the Defense of Marriage Act (DOMA), which bans the recognition of a same-sex marriage and entails over 1,100 different laws that consider marriage status when determining an individual’s rights and responsibilities.  And some of those laws determine how much that individual owes in taxes.

The discriminatory effect of the DOMA, which was signed into law in 1996, in tax law is at the center of United States v. Windsor. The original petitioner in the case, Edith Windsor, was forced to pay $363,000 more in federal estate taxes because under DOMA, her same-sex marriage is not recognized for tax purposes and thus is not eligible for the “surviving spouse” estate tax exemption available to heterosexual spouses. If the Supreme Court rules in favor of Windsor and declares DOMA unconstitutional, it would mean that same-sex marriages will be recognized by the federal government for all purposes, including taxes.

While such a ruling would have a relatively small impact in terms of the estate tax since almost no one pays it, there are many other federal tax provisions that do affect most married couples. The New York Times, for example, points to the fact that DOMA prevents same-sex spousal health benefits from being treated as a tax-exempt benefit, therefore increasing the tax bill of individual same-sex couples by a few thousand dollars each year. 

Perhaps the most widespread tax impact would be on same-sex spouses who are not currently allowed to file their federal tax returns jointly. According to an analysis by CNN and tax experts, some same-sex spouses may currently be paying as much as $6,000 in extra taxes each year because of DOMA. While many same-sex spouses could receive a substantial tax benefit from filing jointly, they could also end up paying more in taxes due to the infamous marriage penalty, depending on each spouse’s level of income.

There is also a larger fiscal effect to consider. A 2004 Congressional Budget Office (CBO) report (PDF) estimated that federal recognition of same-sex marriage would actually reduce the deficit by roughly $450 million each year, through a combination of higher revenues and lower outlays. In other words, ruling DOMA unconstitutional would not only end same-sex marriage discrimination in the tax code and other parts of federal law, but would also have the bonus effect of slightly reducing the deficit.

Oklahoma Governor Mary Fallin’s proposal to repeal the state’s top personal income tax bracket is “gaining traction,” according to The Oklahoman.  The plan has already passed the House, and has the support of the state Chamber of Commerce. But the Oklahoma Policy Institute explains that this cut is stacked in favor of high-income residents: “the bottom 60 percent of Oklahomans would receive just 9 percent of the benefit from this tax cut, while the top 5 percent would receive 42 percent of the benefit.”  

Texas and Washington State are continuing to search for ways to make it easier to identify and repeal tax breaks that aren’t worth their cost.  The Texas Austin American-Statesman reports on a bill that “would put the tax code under the microscope, examining tax breaks in a six-year cycle similar to the Sunset process that evaluates whether state agencies are performing as intended.”  And the Washington Budget and Policy Center explains in a blog post how “all three branches of state government have taken, or are poised to take, actions that could greatly enhance transparency over the hundreds of special tax breaks on the books in Washington state.”

This Toledo Blade editorial gets it right about Ohio Governor Kasich’s plan to broaden the sales tax base to include more services: “There is merit, in theory, to expanding the sales tax to include more services. But the experience in states such as Florida — which broadened its tax base, then abandoned the effort as unworkable — suggests it should be done slowly and for the right reasons.” Broadening the sales tax base is good policy, but the Kasich plan is bad for Ohioans because overall the plan (according to an Institute on Taxation and Economic Policy analysis) increases taxes on those who can least afford it while cutting taxes for the wealthy.

ITEP is waiting for full details of Louisiana Governor BobbyJindal’s tax swap plan, but already clergy and ministers in the state are weighing in against the Governor’s plan to eliminate state income taxes and replace the revenue with a broader sales tax base and a higher rate. In this commentary, the Right Rev. Jacob W. Owensby, (bishop of the Episcopal Diocese of Western Louisiana), worries: “It is difficult to see how increased sales taxes will pass the test of fairness that we would all insist upon. Our tax system has lots of room for improvement. But relying on increased sales tax will not give us the fair system we need. Raising sales taxes will increase the burden on those who can least afford it.”

On Saturday, the Senate approved the budget resolution that was crafted by Budget Chairman Patty Murray of Washington State, by 50 votes. (The resolution would have received 51 votes if New Jersey Senator Frank Lautenberg not been absent due to an illness.)

The most important implication of this vote is that a majority of Senators agreed that Congress should raise $975 billion over a decade and cut spending by the same amount, rather than attempt to achieve deficit-reduction entirely through spending cuts. Indeed,  the Senate rejected several amendments that would have reduced or eliminated the revenue increase.

The description of the plan from Murray’s budget committee staff explains that revenue would be raised by “closing loopholes and cutting wasteful spending in the tax code that benefits the wealthiest Americans and biggest corporations.” But a great deal is left to be determined because, as we explained earlier, this budget resolution offers no details on which loopholes or wasteful tax expenditures might be limited.

Murray Plan in the Senate a Stark Contrast to the Ryan Plan in the House

In any event, the Senate budget resolution is so different from the resolution approved by the House (the plan crafted by House Budget Chairman Paul Ryan) that it’s difficult to imagine how a Senate-House conference committee could ever “reconcile” or “merge” the two documents.  As CTJ has already demonstrated, the Ryan plan would provide millionaires an average net tax cut of at least $200,000, and possibly much more.

Senate Would Give States the Right to Require Online Retailers to Collect Sales Taxes

The Senate approved, by a vote of 75 to 24, an amendment to allow states to require out-of-state remote retailers (like Internet retailers) to collect sales taxes from their customers. This amendment has no binding effect but it shows that there are enough votes in the Senate to pass important legislation (the Marketplace Fairness Act) that would give states this authority.

Currently, a state is allowed to require a retailer to collect sales taxes from its customers only if the retailer is “physically present” in the state. This creates an unfair advantage for a company like Amazon, which is selling its products remotely, over a company like Target, which is physically present (because of its stores) almost everywhere it does business. Even worse, states are losing more and more revenue as more commerce happens online — a trend that can only increase with time.

It’s worth repeating (as CTJ has explained before) that this proposal would not actually increase taxes, but would only facilitate the collection of taxes that are due (but rarely paid) under current law.

Many Other Amendments Have Little Meaning

Votes taken on amendments during the Senate budget debate are generally not binding. Their greatest significance is that they show whether or not enough votes can be gathered to pass a given proposal in the Senate. For example, the vote on allowing states to require remote retailers to collect sales taxes demonstrates that there are more than the 60 votes needed in the Senate to approve that proposal when it comes to the floor as an actual bill.

But other amendments are not as helpful in determining support for actual legislation, and can be best described as posturing with little real meaning.

For example, the Senate rejected a Republican-sponsored amendment to repeal the estate tax, but then approved by 80-19 an amendment sponsored by Democratic Senator Mark Warner “to repeal or reduce the estate tax, but only if done in a fiscally responsible way.”

The Senate’s approval of this amendment does not indicate that an actual bill to reduce or repeal the estate tax would get 60 votes because an actual bill would either have to include specific provisions to offset the costs, or the bill would clearly increase the deficit. There have been votes on such bills in the Senate many times and they have never received the needed 60 votes, much less 80 votes.

To take another example, the Senate voted 79-20 to repeal a tax on medical device manufacturers that was enacted as part of health care reform. This was one of the taxes enacted with the idea that companies that would benefit from health care reform should share in its costs. The budget amendment says that legislation should be passed to repeal the tax “provided that such legislation would not increase the deficit.”

An actual bill to repeal this tax would require some sort of provisions to offset the cost, or it would increase the deficit, and Senators voting in favor would have to be ready to support those offsetting provisions or the increase in the deficit. It’s not obvious that any such bill would get 60 votes.

There are many other examples of amendments that were mostly about posturing, and many would be terrible policy if they were enacted as actual legislation. The estate tax, for example, has been gutted in recent years even though it’s the one tax that addresses concerns about income inequality and the richest one percent pulling away from everyone else. And the medical device tax was part of the intricate compromise that was necessary to enact virtually universal health coverage without increasing the budget deficit. It’s unfortunate that so many Senators feel a need to pander to the special interests who want to repeal these taxes.

Actor John Cleese, most famous for his central role in the British comedy group Monty Python, has decided to move back to Great Britain from Monaco, after concluding that the tax benefits of moving to the tax haven last year were not worth it after all. The actor’s return to Great Britain provides a high profile counterpoint to the false narrative that “high” taxes are driving wealthy people to migrate to low-tax jurisdictions, like Florida in the United States, or like Monaco, Russia or Bermuda for the globe trotting set.

The quest for a lower tax rate has not proven to be as much of a factor for wealthy individuals as anti-tax advocates would have you believe. Several studies confirm this, including a recent academic analysis based on actual tax returns that concludes the effect of tax rates on migration is “negligible” between the different tax jurisdictions in the United States.

What anti-tax advocates ignore is the fact that taxes actually play a very small role in an individual’s decision where to live, especially compared to factors like employment opportunities, family and friends, housing and even weather. In addition, lower taxes may actually discourage migration if they result in lower quality government services (a well-funded Ministry of Silly Walks  maybe especially close to John Cleese’s heart for example). What wealthy person wants to move to a jurisdiction with poor public schools, dirty streets and parks, and inadequate law enforcement?

The real lesson is that non-tax benefits of living in a location usually outweigh higher taxes, even in cases where the individual could save substantial sums of money by moving elsewhere. A recent case in point? The billionaire hedge-fund manager John Paulson’s decision not to move to Puerto Rico, despite the fact that doing so would have allowed him to avoid billions of dollars in capital gains taxes. In other words, Paulson has indicated that he’d just as soon keep paying billions more in taxes for the advantages of living in New York City. Colorful anecdotes and threats aside, the holy grail of tax codes ends up being the one that allows for a quality of life worthy of millionaires – and everybody else.

New Mexico lawmakers recently approved a cut in the corporate income tax rate and special tax breaks for manufacturers and filmmakers. State officials estimate that the bill will eventually cost (PDF) the state about $55 million in lost revenue per year, but they admit that they’re not especially confident in their estimates.  The Santa Fe New Mexican explains how the vote in the House literally came down to the final seconds of the legislative session, and says that House Speaker Kenny Martinez “acknowledged that some [House] members may not have been familiar with [the bill] at all.”

The largest single tax cut contained in the bill is a reduction in the corporate income tax rate from 7.6 to 5.9 percent, phased-in over five years.  Our partner organization, the Institute on Taxation and Economic Policy (ITEP), recently found that the corporate income tax is one of New Mexico’s few progressive taxes in a tax system that is sharply regressive overall.  On top of this cut, lawmakers voted to give manufacturers the option to use a tax break known as single sales factor (PDF) that only benefits businesses selling most of their products out-of-state.  The package also expanded tax giveaways for filmmakers that are widely understood to offer little economic benefit.

To pay for a portion of the cost of these cuts, the bill raises sales taxes on manufacturers, cuts aid to local governments (though it lets them raise their own sales taxes), trims some existing tax credits, and limits the tax avoidance opportunities available to some “big box” retailers through the adoption of mandatory “combined reporting” (PDF) for those companies.

Overall, however, the corporate tax rate cut represents a case of misplaced priorities in a state whose tax system is fundamentally unfair and where funding for things like higher education has been slashed in recent years.

There’s a lot of talk in the halls of Congress about reforming the federal tax code, but few people think about how that might impact state and local governments and their ability to raise enough revenue to fund the services their residents use on a daily basis.

As the tax-writing committee in the House of Representatives examined this issue on Tuesday, CTJ’s partner organization ITEP submitted written testimony to clear up some little-understood points.

The federal tax system accommodates the taxing authority of state and local governments in a few different ways, which could be altered for better or worse, depending on what Congress does.

The Deductions for State and Local Taxes

For example, the federal personal income tax allows a deduction for taxes one pays to state and local governments. ITEP’s testimony points out that in many ways this is one of the most justified of the federal tax deductions and therefore should not be eliminated. Most deductions are for spending that the taxpayer has control of — like home mortgage interest or charitable giving — but this is not true of state and local taxes. It makes more sense to think of state and local taxes as reducing the amount of income a taxpayer has to pay federal taxes.

Perhaps more importantly, eliminating the deduction would make state and local governments more hesitant to tax the incomes of wealthy residents (who know that the deduction offsets part of those taxes). This tax revenue is badly needed as the U.S. has underinvested in infrastructure, education and other goods that are largely funded with state and local taxes.

State and Local Bonds

Another accommodation made by the federal tax system is its exclusion of state and local bond interest from taxable income. State and local governments can borrow at lower interest rates, because the interest payments they make are not taxable for the bondholders (who are thus willing to accept lower rates than are paid on ordinary bonds).

But, as ITEP’s testimony explains, the current tax subsidy is inefficient because some of the revenue given up by the federal government falls into the hands of very high-income bond-holders rather than the state and local governments that the exclusion is ostensibly supposed to help.

The Obama administration has a proposal that would remedy this by reviving Build America Bonds. These bonds were available for two years under the economic recovery act Obama signed into law in 2009, and are designed differently so that they support state and local government projects without creating a windfall for the wealthy.

Marketplace Fairness Act

Congress has additional opportunities to accommodate state and local governments’ taxing authority. For example, we have written recently that anyone who lives in a state with a sales tax and purchases something online owes sales tax on that purchase. But states and local governments are not allowed to require remote sellers to collect these sales taxes, which they can and do require of retailers who are physically present in the state. The Marketplace Fairness Act (MFA) is a bill in Congress that would fix this.  

The MFA is a common sense bill. It would not even increase taxes but only facilitate the collection of the sales taxes that people already owe but usually fail to pay.

A story in the Arkansas News show why all citizens should be concerned about the bad design (PDF) of state gasoline taxes. Arkansas’ gas tax hasn’t been raised in over a decade, during which time it has lost about a quarter of its value due to rising construction costs alone. In order to offset those losses, lawmakers are debating a bill that would transfer $2.3 billion away from other areas of the state budget in order to pay for roads and bridges over the next 10 years.  At a rally protesting the idea, Rich Huddleston of Arkansas Advocates for Children and Families ticked off just some of the state services that would have to be cut: “education, higher education, Medicaid and health services for vulnerable populations, services for abused and neglected children, juvenile justice services for kids … public safety and corrections and pre-K and child care for our youngest populations.”

Girl Scouts in Idaho are seeking out a special sales tax loophole for selling their cookies so that they can keep an extra 22 cents on every box sold. There is no tax policy reason to exempt Girl Scout cookies from the sales tax. If enacted, this break would be a true “tax expenditure” -- a state spending program grafted onto the tax code (PDF) in a way that exempts it from the normal processes used to manage state spending year in and year out.

Minnesota Governor Mark Dayton is traveling the state on a “Meetings with Mark” tour to discuss his budget and tax plans with voters. Last week the Governor unveiled a revised tax plan, but minus the sales tax base expansion from his original proposal.  Wayne Cox of Minnesota Citizens for Tax Justice supports the new proposal as it retains two crucial pieces of the original – an income tax hikes for wealthy Minnesotans and a cigarette tax hike. “Gov. Mark Dayton’s new budget is a blueprint for fairer taxes and a brighter future for Minnesota families.  His reforms pave the way for new jobs, healthier lives and a better-educated workforce. Education and health experts around the state have praised Gov. Dayton’s reforms. Future economic growth depends on these changes.”

In response to Ohio Governor John Kasich’s regressive proposal to expand the state sales tax base and lower income taxes, Policy Matters Ohio (using ITEP data) released a paper reminding Ohioans how beneficial an Earned Income Tax Credit (PDF) could be to low-income families hit hardest by an increased sales tax.

Here’s a powerful column from the Atlanta Journal Constitution citing ITEP data. Advocating against a state Senator’s proposal to raise the Georgia sales tax and freeze revenues into the future, Jay Bookman writes: [h]e has proposed two amendments to the state constitution that, if approved by voters, would lead to significantly higher taxes on the vast majority of Georgia households, while sharply reducing taxes on the wealthiest. That ought to be controversial under any circumstances. As it is, lower- and middle-income Georgia households already pay a significantly higher percentage of their income in state and local taxes than do the wealthy. The Shafer amendments would make that disparity considerably worse.”

UPDATE: As of March 29, 2013 this plan has passed both the House and Senate and is expected to be signed into law by the Governor.

This week, the Maryland House will vote on a plan to raise and reform the state’s gasoline tax. The plan is very similar to one proposed by Governor Martin O’Malley that our partner organization, the Institute on Taxation and Economic Policy (ITEP), analyzed when it was released two weeks ago.

An updated chart from ITEP shows that Maryland’s flat gas tax has long been declining as inflation has chipped away at its value.  If the legislature does not raise the gas tax, ITEP projects that by 2014 Maryland’s gas tax rate will reach its lowest (inflation adjusted) level in 91 years. Only in 1922 and 1923 did Maryland levy a lower gas tax.

Moreover, the gas tax increase under consideration in the House, like the one proposed by the Governor, is actually very modest. The plan (which would tie the gas tax to both inflation and gas prices) would result in roughly a 12 cent increase by 2015. That’s significantly less than the nearly 16 cent increase that ITEP found would be needed to return Maryland’s gas tax to its purchasing power as of 1992, when it was last raised. Taking an even longer-term perspective, ITEP finds that Maryland’s inflation-adjusted gas tax rate has historically averaged 41.1 cents per gallon.  If the House plan is enacted, the inflation-adjusted rate over the next decade would average just 32.8 cents.

This week, members of Congress will receive a visit from the tax vice presidents of major corporations that have come together in the so-called Reforming America’s Taxes Equitably (RATE) Coalition, a corporate lobbying group pressing lawmakers to reduce the corporate tax rate.

U.S. Corporate Tax Is Actually Lower than What Multinational Corporations Pay Abroad

The first thing you should know about the RATE Coalition is that their rhetoric about the U.S. having a high corporate tax is nonsense. The U.S. statutory corporate income tax rate of 35 percent, which RATE wants to reduce, is not as important as the effective corporate tax rate — the percentage of profits that corporations actually pay in taxes after accounting for all the loopholes and breaks that lower their tax bills.

This is explained in a CTJ report appropriately titled, “The U.S. Has a Low Corporate Tax.” The report also explains that CTJ examined most of the Fortune 500 companies that were consistently profitable from 2008 through 2010 and found that two-thirds of those with significant offshore profits actually paid a higher effective tax rate in the other countries where they did business than they paid in the U.S.

RATE Agrees with CTJ on Closing Tax Loopholes, Disagrees about What To Do with the Savings

The second thing you should know about the RATE Coalition is that they agree with all of the findings of CTJ’s studies documenting corporate tax avoidance due to corporate tax loopholes. They simply disagree with us about what should be done with the revenue savings if Congress ever closes those loopholes.

The RATE Coalition cites CTJ at length in a recent post on its website:

"Because of these reductions [due to corporate tax breaks], the effective tax rate is closer to 18.5 percent on average, according to Washington, D.C. think tank Citizens for Tax Justice (CTJ), making the rate one of the lowest of any developed country…

A 2011 report on 280 corporations conducted by CTJ found that nearly a third paid no federal income tax in at least one of the three previous years, while 30 of those surveyed recouped more federal dollars than they paid in taxes in one of the previous three years…"

The RATE Coalition’s website admits that “corporate tax base-broadeners [provisions to close corporate tax loopholes] should be on the table.” But they seem to believe that all of the revenue saved from such loophole-closing should be given right back to corporations in the form of a reduction of their corporate income tax rate.

Citizens for Tax Justice has explained (in this fact sheet, for example) that most, if not all, of the revenue savings from closing tax loopholes should be used to fund the public investments that build the American economy and the American middle-class.

CTJ is not alone in holding this position. For example, in May of 2011, U.S. Senators and Representatives received a letter from 250 organizations, including organizations in every state, calling on Congress to close corporate tax loopholes and use the revenue saved to address the budget deficit and fund public investments. The 250 non-profits, consumer groups, labor unions and faith-based groups called for a corporate tax reform that raises revenue. In December of 2012, over 500 organizations from around the country joined a similar letter that was sent to each member of Congress.

Tax-Dodging Corporations like Boeing Extremely Influential in Washington

Despite polling showing that most Americans want our corporations to pay more in taxes and despite the evidence that these companies are not paying very much now, Congress and the administration are taking seriously proponents of a “revenue-neutral” reform of the corporate income tax.

Lawmakers of both parties and even President Obama have shown an alarming level of deference to these companies.

For example, CTJ’s figures show that Boeing, one of the corporations that is a member of the RATE Coalition, paid nothing in net federal income taxes from 2002 through 2011, despite $32 billion in pre-tax U.S. profits. In fact, Boeing has actually reported more than $2 billion in negative total federal taxes over that period.

Amazingly, this did not stop President Obama from telling a crowd at a Boeing plant in Washington State that revenue saved from closing offshore tax loopholes “should go towards lowering taxes for companies like Boeing that choose to stay and hire here in the United States of America.”

President Obama has also signed onto the overall goal of the RATE Coalition, a “revenue-neutral” reform of the corporate tax, which CTJ has criticized in detail.

It’s hard to know how much longer members of Congress and the President can ignore the opinions of the majority of Americans who want corporations to pay more in taxes. Perhaps as more people feel the effects of the sequester and other service cuts supposedly necessary to balance they budget, the more they’ll demand to know why their elected leaders are allowing so much corporate tax revenue to go uncollected.

Note to Readers: This is the last in a six part series on tax reform in the states. Over the past several weeks CTJ’s partner organization, The Institute on Taxation and Economic Policy (ITEP) has highlighted tax reform proposals and looked at the policy trends that are gaining momentum in states across the country.

Lawmakers in at least six states have proposed effectively cutting taxes for moderate- and low-income working families through expanding, restoring or enacting new state Earned Income Tax Credits (EITC) (PDF). Unfortunately, state EITCs are also under attack in a handful of states where lawmakers are looking to reduce their benefit or even eliminate the credit altogether.

The federal EITC is widely recognized by experts and lawmakers across the political spectrum as an effective anti-poverty strategy. It was introduced in 1975 to provide targeted tax reductions to low-income workers and supplement low wages. Twenty-four states plus the District of Columbia provide EITCs modeled on the federal credit. At the state level, EITCs play an important role in offsetting the regressive effects of state and local tax systems.

Positive Developments

• Last week, the Iowa Senate Ways and Means Committee approved legislation to increase the state’s EITC from 7 to 20 percent. Committee Chairman Joe Bolkcom said, “This bill is what tax relief looks like. The tax relief is going to people who pay more than their fair share.”

• The Honolulu Star-Advertiser recently reported on the push to create an EITC and a poverty tax credit (PDF) in Hawaii. The story cites data from ITEP showing that Hawaii has the fourth highest taxes on the poor in the country and describes the work being done in support of low-income tax relief by the Hawaii Appleseed Center.  The poverty tax credit would help end Hawaii’s distinction as one of just 15 states that taxes its working poor deeper into poverty through the income tax.

• In Michigan, lawmakers are looking to reverse a recent 70 percent cut in the state’s EITC.  That change raised taxes on some 800,000 low-income families in order to pay for a package of business tax cuts.  Lawmakers have introduced legislation to restore the EITC to its previous value of 20 percent of the federal credit, and advocates are supporting the idea through the “Save Michigan’s Earned Income Tax Credit” campaign. 

• Pushing back against New Jersey Governor Christie’s reduction of the EITC from 25 to 20 percent, last month the Senate Budget and Appropriations Committee approved a bill to restore the credit to 25 percent. Senator Shirley Turner, the bill’s sponsor, said there was no reason to delay its passage as some have suggested because low-income New Jersey families need the credit now.  "People would put this money into their pockets immediately. I think they would be able to buy food, clothing and pay their rent and their utility bills. Those are the things people are struggling to do."

• Oregon’s EITC is set to expire at the end of this year, but Governor Kitzhaber views it as a way to help “working families keep more of what they earn and move up the income ladder” so his budget extends and increases the EITC by $22 million. Chuck Sheketoff with the Oregon Center for Public Policy argues in this op-ed, “[t]he Oregon Earned Income Tax credit is a small investment that can make a large difference in the lives of working families. These families have earned the credit through work. Lawmakers should renew and strengthen the credit now, not later.”

• In Utah, a legislator sponsored a bill to introduce a five percent EITC in the state. The bipartisan legislation is unlikely to pass because of funding concerns, but the fact that the EITC is on the radar there is a good development. Rep. Eric Hutchings said that offering a refundable credit to working families “sends the message that if you work and are trying to climb out of that hole, we will drop a ladder in."

Negative Developments

• Last week, North Carolina Governor McCrory signed legislation that reduces the state’s EITC to 4.5 percent. The future looks grim for even this scaled down credit, though, since it is allowed to sunset after 2013 and it’s unlikely the credit will be reintroduced. It’s worth noting that the state just reduced taxes on the wealthiest .2 percent of North Carolinians by eliminating the state’s estate tax, at a cost of more than $60 million a year. Additionally, by cutting the EITC the legislature recently increased taxes on low-income working families, saving a mere $11 million in revenues.

• Just two years after signing legislation introducing an EITC, Connecticut Governor Dannel Malloy is recommending it be temporarily reduced “from the current 30 percent of the federal EITC to 25 percent next year, 27.5 percent the year after that, and then restoring it to 30 percent in 2015.” In an op-ed published in the Hartford Courant, Jim Horan with the Connecticut Association for Human Services asks, “But do we really want to raise taxes on hard-working parents earning only $18,000 a year?”

• Last week in the Kansas Senate, a bill (PDF) was introduced to cut the state’s EITC from 17 to 9 percent of its federal counterpart. This would be on top of the radical changes signed into law last year by Governor Sam Brownback which eliminated two credits targeted to low-income families including the Food Sales Tax Rebate.

• Vermont Governor Shumlin wants to cut the EITC and redirect the revenue to child care subsidy programs, a move described as taking from the poor to give to the poor. A recent op-ed by Jack Hoffman at Vermont’s Public Assets Institute cites ITEP Who Pays data to make the case for maintaining the EITC.  Calling the Governor’s idea a “nonstarter,” House and Senate legislators are exploring their own ideas for funding mechanisms to pay for the EITC at its current level.

Our report on Paul Ryan’s most recent budget notes that it includes a package of specific tax cuts but claims to maintain current law revenue levels, without specifying how. Our report assumes tax expenditures would have to be limited, as all of Ryan’s previous budget plans propose explicitly, to offset the costs of his tax cuts.

It is possible that Ryan doesn’t believe he would have to make up all of those costs, because he might believe that at least some of his tax cuts pay for themselves. In other words, Ryan might rely, at least partly, on “supply-side” economics.

One of the main ideas behind supply-side economics is that reducing tax rates will unleash so much productivity and investment and so much growth in incomes and profits that the tax collected on those increased incomes and profits will make up for the revenue loss from the reduction in tax rates.

The section of Ryan’s budget plan on tax reform cites, and is nearly identical to, a letter from Ways and Means Chairman Dave Camp and the Republican members of his committee explaining that they seek a tax reform that would “lead to a stronger economy, which would create more American jobs and higher wages. More employment and higher wages would lead to higher tax revenues which would simultaneously address both the nation's economic and fiscal reforms.” The letter goes on to say that they “will continue to oppose any and all efforts to increase tax revenue by any means other than through economic growth.”

Having Failed to Win the Argument Over the Income Tax Cuts and Capital Gains Tax Cuts, Supply-Siders Now Turn to Corporate Tax Cuts

Of course, if there was any possibility that we could actually get more revenue by paying less in taxes, we would all support that. The idea is so appealing that many lawmakers cling to it despite overwhelming evidence that it’s wrong.

Anti-tax lawmakers and pundits have tried to use the supply-side argument for several different types of tax cuts.

For example, the George W. Bush administration had the Treasury investigate whether or not the Bush income tax cuts would pay for themselves, and the Treasury reported back that, sadly, they would not.

To take another example, the editorial board of the Wall Street Journal has been obsessed for several years with the idea that income tax breaks for capital gains (if not other types of personal income tax cuts) pay for themselves. But the evidence shows that revenue from taxing capital gains rises and falls with the stock market and the overall economy, not changes in tax policy.

And yet another example is the apparent campaign underway now to convince Congress and the public that cuts in the corporate tax rate pay for themselves. On the same day as Ryan released his budget plan, the Tax Foundation released a report claiming that reductions in corporate tax rates pay for themselves. Two days earlier, Arthur Laffer, the leading proponent of “supply-side” economics, made the same argument in a U.S.A. Today column. (See ITEP's critiques of Laffer's other work as junk economics.)

The Tax Foundation report is particularly telling. The Tax Foundation explains that their “dynamic” estimates assume that changing the corporate tax rate affects the economy. But stop and think about what this means exactly. They are essentially feeding assumptions into a model and then reporting the result.

The effect of taxes on the economy is complicated, especially when you consider that taxes fund public investments (like infrastructure and education) that enhance economic growth by enabling businesses to profit.

The Tax Foundation has fed their model assumptions about the effects of taxes on the economy and assumptions about how significant those effects are. If they assumed that cutting corporate tax rates had a negative impact or only a small positive impact on the economy, then their model would conclude that these tax cuts do not pay for themselves. But they assume a large positive impact on the economy, and their model therefore concludes that such tax cuts do pay for themselves.   

Some Members of Congress Seek “Dynamic Scoring” for Tax Proposals

It is unclear that proponents of supply-side economics will be any more successful with corporate income tax cuts than they have been with other types of tax cuts. But there is a real danger because anti-tax lawmakers often demand that Congress’s process of estimating the revenue effects of tax proposals be altered to take supply-side economics into account.

In other words, some lawmakers demand that the revenue estimating process assume that tax cuts cause economic growth, which can in turn offset at least part of the revenue loss — meaning tax cuts can at least partially pay for themselves.

Using this type of “dynamic scoring,” as it is often called, would be particularly manipulative. For one thing, even if we believed that tax cuts putting money into the economy boosts growth enough to partially offset the costs, then it’s equally logical to assume that spending cuts taking money out of the economy would reduce growth enough to limit the amount of deficit reduction they achieve.

But of course Paul Ryan and Dave Camp, who are championing a budget plan that includes massive spending cuts, do not suggest that the estimating process be altered to assume that such effects on the economy limit the amount of savings achieved. These are not the type of “dynamic” effects they have in mind.

Louisiana Governor Bobby Jindal today announced some details of his long-awaited “tax swap” plan. He proposes to repeal the state’s personal and corporate income taxes in a “revenue-neutral” way—that is, the revenue loss from repealing these taxes would have to be entirely offset by tax hikes in other areas.

We know the Governor’s so-called reform plan would increase the state sales tax rate from 4 to 5.88 percent—which in local-tax-heavy Louisiana means the average combined state and local sales tax rate statewide would shoot up from about 8.75 percent to a whopping 10.6 percent.

Since the sales tax rate hike would only pay for about a third of the revenue lost from repealing the income and corporate taxes, Jindal’s plan also relies heavily on expanding the state sales tax base to make up the remaining difference. Acccording to the Governor, he’d do it by eliminating close to 200 currently-existing sales tax exemptions. Jindal would also raise the cigarette tax by over $1 per pack.

There’s a lot we still don’t know about the plan (which was the case with his earlier plan, too). Jindal has said he will provide tax relief to seniors and low-income families to offset the impact of these potentially huge sales tax hikes. But how that would be implemented—and, critically, how much it would cost—remains unknown.

Still, the specific details we’ve heard so far are enough to raise several important concerns about the plan’s plausibility—and its impact on tax fairness and sustainability if it is enacted.

Eliminating sales tax exemptions is perhaps the most politically difficult tax reform challenge for state lawmakers – as Minnesota Governor Mark Dayton is the most recent to discover. Sure, every state tax commission for decades has identified expanding the sales tax base, mainly to services that account for more consumer dollars every year, as a way of making the sales tax a more sustainable revenue source for the long haul. But the fact is that the potentially devastating impact of this move on low-income families, coupled with the entrenched opposition of lobbyists for the many industries that would be newly taxed under these proposals, have generally meant that these proposals die a quick death in legislatures.

And even if the Louisiana Legislature could achieve what virtually no other state has ever done—wiping the slate clean by broadly erasing sales tax exemptions from the books—it seems inevitable that the plan as a whole would result in a massive tax shift onto middle- and low-income families—and a giant tax cut for the best-off Louisianans. Unless, that is, Louisiana is prepared to enact a low-income tax credit, one so generous it would dwarf anything offered by other states. But it appears that Governor Jindal's plan would only provide a tax rebate only to families earning less than $20,000, which does nothing to offset the sales tax increases facing a large group of middle-income Louisianans.

In recent months, Jindal has also made it clear that his motivation for this tax plan is to be more “competitive” and more like Texas and other “low tax” states. (Never mind that Texas is a high tax state for its poorest residents.)  Jindal has bought into a talking point crafted by Arthur Laffer (and disseminated by groups like ALEC and the Tax Foundation) about job growth resulting from low taxes.  But Laffer’s argument is a house of cards, entirely unsupported by the evidence, as ITEP has shown.  Early news reports of Jindal’s plan are that anti-tax groups love it and it boosts his odds of getting the Republican presidential nomination. But unless a tax plan is well received by ordinary constituents and boosts the state’s odds of economic success, it isn’t worthy of the word “reform.”

The bottom line on the revenue proposals in the three budget plans in Congress today can be stated simply: The Congressional Progressive Caucus’s plan (for which CTJ provided some estimates) is sensible. House Budget Chairman Paul Ryan’s plan is absurd, and Senate Budget Chairman Patty Murray’s plan is in the middle.

As our new report explains, Paul Ryan promises a specific set of tax cuts but promises to maintain current law revenue levels, meaning some unspecified reduction or elimination of tax expenditures must take place. Our report explains that the richest Americans would see a net tax decrease under this plan even if they must give up all the tax expenditures that Ryan has put on the table. And if the richest Americans pay less, then obviously someone else must pay more, in order to meet Ryan’s goal of revenue-neutrality.

The other two budget plans at least recognize the need for more revenue. Some have suggested that Ryan is softening his stance on revenue because he accepts the overall revenue level projected under current law, which is more than he accepted in the past. But the current law revenue level is entirely inadequate and untenable.

Here’s why. Ryan’s plan notes that under current law, federal revenue will equal 19.1 percent of GDP (19.1 percent of the overall economy) in 2023, and observers have noted that this is more than his previous budgets would have allowed. But this level of revenue would not have balanced the budget even during the Reagan administration, when federal spending ranged from 21.3 percent to 23.5 percent of GDP.

Chairman Murray’s plan would raise revenue by $975 billion over a decade, so that federal revenue will equal 19.8 percent of GDP in 2023. The plan from the Congressional Progressive Caucus (CPC) would raise revenue by $5.7 trillion, so that revenue will reach 21.8 percent in 2023. In other words, only the Progressives would come close to funding the type of spending that Reagan presided over.

It’s helpful to think about a given budget plan’s projected revenue as a percentage of GDP for the purpose of comparison, but one should not overstate the usefulness of this number. Chairman Ryan has often talked as though the goal of the budget process is hitting a certain percentage, rather than fairly raising enough revenue to pay for the public investments that actually build the middle-class and the country.

Most Americans probably don’t care what revenue is as a percentage of GDP as long as the revenue collected is enough to adequately fund the schools they send their kids to, maintain the highways they drive to work on, and keep their health care costs from bankrupting them.

Ryan’s budget clearly slashes funding for anything that would address any of those issues. That’s what happens if you balance the budget in a decade without raising any revenue.

The Murray Plan

There are many good things to say about Senator Murray’s plan, in that it calls for badly needed tax increases and better-designed spending cuts to replace the sequestration (the scheduled cuts of over $1.2 trillion over the decade).

The Murray plan also makes the case for more revenue, explaining that the projected current law revenue is lower, as a percentage of GDP, than it was during the last five times the budget was balanced (going all the way back to 1969). It also explains that the level of revenue it envisions is still less than was proposed in the Simpson-Bowles plan and the other plans that lawmakers calling themselves “centrists” claim to admire.

But the Murray plan does not specify what tax increases or spending cuts would be acceptable. The plan says it would raise revenue by “closing loopholes and cutting wasteful spending in the tax code that benefits the wealthiest Americans and biggest corporations,” which is certainly moving in the right direction for those of us who believe that the overall tax system is not asking very much from wealthy individuals or from corporations.

The Murray budget plan would use the reconciliation process (the process that avoids filibusters in the Senate) to pass legislation raising the promised $975 billion, and it does specify that the progressivity of the tax code must be maintained. But the plan does not specify what the tax increases would be. The plan explains how tax expenditures like deductions and exclusions benefit the rich, but fails to mention the most regressive tax expenditure of all, the preferential rate for capitals gains and dividends. The plan explains how corporations avoid taxes through offshore tax havens, but does not suggest fixing the problem by ending the rule allowing U.S. corporations to “defer” their offshore taxes, and does not even suggest rejecting proposals for a “territorial” system that would exacerbate the problem.

The Congressional Progressive Caucus (CPC) Plan

The CPC plan addresses all of these issues, repealing the enormously regressive capital gains tax preference and closing several loopholes used to avoid taxes on capital gains, repealing “deferral” and explicitly rejecting a territorial system, introducing new tax brackets for high-income individuals and many very specific proposals that have been championed by Citizens for Tax Justice. No one will agree with every provision in the CPC budget plan, but it is certainly a plan for people who want to have substantive discussions about what Congress should actually do.

The plan’s list of tax provisions range from huge (raising over a trillion dollars by ending far more of the Bush tax cuts than were allowed to expire under the fiscal cliff deal) to small (ending the Facebook stock options loophole) to very small (eliminating write-offs for corporate jets).

Even supporters of Murray’s plan should find the CPC plan useful because it provides a list of proposals that can be used to fill in some of the blank spots in the Murray plan.

The nation is watching Indiana’s tax debate, according to Tim Phillips, national president of the anti-tax group Americans for Prosperity.  But the outcome that Phillips is looking for —a regressive cut in the state’s personal income tax—is facing an uphill battle. The Indiana House, under supermajority Republican control, chose not to include Governor Pence’s proposed tax cut in its budget. Senate leadership has yet to embrace the tax cut either, and the state’s largest newspaper recently editorialized against the plan, explaining: “What holds back faster economic growth now is less about taxes than the lack of a well-educated workforce and higher than average business costs associated with Hoosiers’ poor health.”

But despite all this resistance, Americans for Prosperity is determined to gin up some interest in cutting Indiana’s income tax rate. The Indiana chapter of the group announced that it will spearhead a major TV, radio, online advertising, and door-to-door campaign.  As Phillips explained, “In Washington, it’s gridlock and really that’s not where the action is.” 

There's reason to hope this campaign doesn’t pressure lawmakers into enacting a tax cut against their better judgment, though. In a letter to state GOP officials, House Speaker Brian Bosma recently made a compelling case against the cut and offered a warning about the dire consequences that could arise from following Kansas as it staggers and stumbles down its own tax-cutting path (excerpt below):

“With respect to the Income Tax cut proposal, legislative leaders have expressed caution on this issue for a variety of reasons, which I want you to understand.  First, in 1998, the last time the state had a $2 billion surplus, a series of Income Tax and Property Tax cuts coupled with an unexpected downturn in the economy turned that surplus into a $1.3 billion deficit in a short six year period.  When Republicans regained the majority in 2004, our first order of business was to fill that hole through cuts (and not tax increases), and we did it.  It was painful and difficult, but we knew that the most important job of state government is to be lean, efficient, and most importantly, sustainable in the long run, avoiding wild shifts in one direction or another.  That uncertainty of big shifts leads to uncertainty for business investment and family security.  With pending sequestration, looming federal mandates and an uncertain national economy on the horizon, caution is certainly advisable.

“Finally, the Governor cites the recent experience of Kansas in cutting income taxes last year under the leadership of Governor Sam Brownback.  I would encourage you to get online and see what is going on in Kansas right now, as news reports abound of projected deficits, delays in proposed tax cuts, and lawsuits for underfunding public education.  This is just the type of economic unpredictability and unsustainability that we hope to avoid here in Indiana.”

Read CTJ's new report on the latest budget plan from House Budget Chairman Paul Ryan.

Paul Ryan’s budget plan for fiscal year 2014 and beyond includes a specific package of tax cuts (including reducing income tax rates to 25 percent and 10 percent) and no details on how Congress would offset their costs, all the while proposing to maintain the level of revenue that will be collected by the federal government under current law.

The revenue loss would presumably be offset by reducing or eliminating tax expenditures (tax breaks targeted to certain activities or groups), as in his previous budget plans.

CTJ's new report find that for taxpayers with income exceeding $1 million, the benefit of Ryan’s tax rate reductions and other proposed tax cuts would far exceed the loss of any tax expenditures. In fact, under Ryan’s plan taxpayers with income exceeding $1 million in 2014 would receive an average net tax decrease of over $200,000 that year even if they had to give up all of their tax expenditures.

Because these very high-income taxpayers would pay less than they do today in either scenario, the average net impact of Ryan’s plan on some taxpayers at lower income levels would necessarily be a tax increase in order to fulfill Ryan’s goal of collecting the same amount of revenue as expected under current law.

Need further proof that the poor are often taxed more heavily than wealthier folks? Take a look at this recent New York Times piece by sociologist Katherine Newman based on her book. She writes that “tax policy is particularly regressive in the South and West, and more progressive in the Northeast and Midwest. When it comes to state and local taxation, we are not one nation under God. In 2008, the difference between a working mother in Mississippi and one in Vermont — each with two dependent children, poverty-level wages and identical spending patterns — was $2,300.” Newman concludes with suggestions for offsetting the regressive impact of state taxes.

The Atlanta Journal Constitution is doing an investigative series on tax breaks and incentives, and here’s their latest article – a look into “the Georgia Agricultural Tax exemption program, [designed] to allow farmers and companies that produce $2,500 in agricultural services or products a year to receive sales tax breaks on equipment and production purchases.” What they found, however, is that construction firms, mineral companies, horse ranches and even dog kennels have applied for the breaks, along with hundreds of out-of-state businesses, with addresses as far afield as Texas and Colorado.” The newspaper found very few requests for this tax break were being rejected, and the governor is imploring businesses to police themselves. The newspaper concludes that it was the absence of clear criteria and lack of resources for screening and evaluating applications that’s resulted in the fiscal and logistical chaos.

Washington State lawmakers are trying to get a better handle on the numerous special tax breaks (PDF) being added to the state’s tax code every year. Under a bill that passed the state senate unanimously, new tax breaks would have to include a statement of purpose against which to judge their subsequent success, and an expiration date that would force lawmakers to vote on them again after a certain number of years.  Both of those reforms (along with others) have been recommended by our partner organization, the Institute on Taxation and Economic Policy (ITEP).

Massachusetts Governor Deval Patrick cited a recent report from ITEP’s “Debunking Laffer” series while testifying in favor of his proposed income tax increase: “Last month, the non-partisan Institute on Taxation and Economic Policy issued a report evaluating the economic growth per capita of several states. The report compared nine states with relatively high income taxes to nine states with low or no income tax. The analysis made clear that the nine states with “higher” income taxes actually saw considerably more economic growth per capita than the nine states with low or no income tax. The states with no income tax have seen a decline in median income.”

The Missouri Senate preliminarily approved legislation that would slash the state’s revenues because it is stacked with tax cuts. Though a preliminary legislative step, it’s worth noting that if the law does get implemented, restoring the lost revenues would be nearly impossible given Missouri’s constitutional amendment restricting tax increases. The bill, originating in the state Senate, cuts the top personal income tax rate, reduces corporate income taxes, offers a tax deduction for pass-through business income and increases the personal exemption. The only tax increase is in the sales tax, which is any state’s most regressive revenue source.  

This package is billed as Missouri’s answer to the radical tax package passed last year by Kansas Governor Brownback. Its sponsor explained, “I’m trying to stop the bleeding. I’m trying to stop the businesses from fleeing into Kansas,” and then invokes the kind of magical thinking that almost always results in a deficit. According to the Associated Press, State Senator Kraus predicted his plan would “create an economic engine in our state” that would generate enough new tax revenues to make up for the losses.”

But the revenue losses -- which are certain -- are not justified. A report from the Missouri Budget Project, Racing to the Bottom: Senate Gives Initial Approval to Extreme Tax Cut Bill Which Would Devastate Missouri Services, Infrastructure, and the State’s Economy, using Institute on Taxation and Economic Policy (ITEP) data helps show that the biggest beneficiaries of this tax package are the wealthiest 1 percent who have an average income of over $1 million, and who will see an average tax cut of $8,253 if the legislation becomes law. Middle income families would generally break even, but lower income Missourians would experience a tax increase.  

The Missouri Budget Project points out the obvious: “To truly compete with Kansas and other states, Missouri must invest in its quality of life and what families and businesses need to thrive: strong schools to educate our children and provide a skilled workforce, quality transportation to get to school and work and bring companies’ products to market, and safe, stable communities.”

The “sequester” that went into effect on March 1^st is another clear indication of the stranglehold that anti-tax zealots still have over Washington. While lawmakers across the political spectrum (and particularly those outside the Beltway) oppose the sequester’s $85 billion in across-the-board cuts, the failure to reach a deal to replace these cuts rests entirely with anti-tax lawmakers who have blocked any agreement that would include any revenue increases at all.

The primary argument made to justify this anti-tax position is that the fiscal cliff deal already raised a substantial amount of revenue; they’re saying the President "already got" his tax increase.  According to the official scorekeepers at the Congressional Budget Office however, the fiscal cliff deal actually reduces revenue by almost $4 trillion over the next decade because it made most of the Bush tax cuts permanent, renewed a slew of special interest tax breaks for a year, and extended some expanded refundable tax credits for five years.

Even if you accept that the Fiscal Cliff “raised” $620 billion in revenue (measured against what would have happened if Congress had extended all the tax cuts instead of 85 percent of them), the reality is that having anything close to a balanced approach to deficit reduction should include raising a whole lot more revenue. This may be news to Republican House Speaker John Boehner, who recently asked “When is the president going to address the spending side of this?” But Congress has already enacted $3 in spending cuts for every $1 in revenue raised by the fiscal cliff deal. If the sequester is allowed to stay in effect, or is replaced entirely by spending cuts, the ratio of spending cuts to revenue increases will rise to as high as 5-to-1.

For his part, President Obama has offered a plan that would replace the sequester with $1.8 trillion in deficit reduction, including $1,130 billion in spending cuts and $680 billion in revenue increases. The President is proposing to raise about $583 billion of the $680 billion in revenue by limiting the tax savings of each dollar of certain deductions and exclusions to 28 cents.

President Obama’s plan, however, does not ask for nearly enough revenue to replace the trillions lost by making the Bush tax cuts permanent, or to even make the level of revenue increases equal to the level of spending cuts enacted during his first term. In fact, if Congress enacted President Obama’s plan as is, it would still mean that well over $2 in spending cuts will have been enacted for every $1 in revenue increases. 

The fairest approach would be to replace the entirety of the sequester cuts with new revenue. To accomplish this, lawmakers should not only limit deductions and exclusions as President Obama is proposing, but should also consider raising hundreds of billions of dollars more by eliminating the tax breaks and loopholes that allow wealthy individuals and corporations to shelter their income from taxation.

Taking a step back, it’s simply unjustifiable to proceed with devastating spending cuts that would reduce already meager unemployment benefits by eleven percent, or deny aid to as many as 750,000 women and children, just to preserve exorbitant, unwarranted tax breaks for the wealthiest individuals and profitable corporations.

A group of so far undisclosed corporations are forming a lobbying coalition called Let’s Invest for Tomorrow (LIFT) to press Congress to enact a “territorial” tax system. The coalition should be named Let’s Invest Elsewhere (LIE), because that’s exactly what American multinational corporations would be encouraged to do under a territorial tax system.

A “territorial” tax system is a euphemism to describe a tax system that exempts offshore corporate profits from the U.S. corporate tax.

U.S. corporations are already allowed to “defer” (delay indefinitely) paying U.S. taxes on their offshore profits until those profits are brought back to the U.S. This creates an incentive for U.S. corporations to shift operations (and jobs) offshore or just disguise their U.S. profits as offshore profits so that U.S. taxes can be deferred. Completely exempting those offshore profits from U.S. taxes would obviously increase the incentives to shift jobs and profits offshore.

A CTJ report from 2011 explains these problems in detail and concludes that Congress should move in the opposite direction by ending “deferral” rather than adopting a territorial tax system. The stakes are getting higher each year as U.S. corporations hold larger and larger stashes of profits offshore. (A recent CTJ paper finds that 290 of the Fortune 500 have reported their profits held offshore, which collectively reached $1.6 trillion at the end of 2011.)

The Public Opposes Territorial Tax Proposals – But Will Congress Listen?

In a world where politicians actually did what voters wanted, we would not have to worry that this coalition might actually succeed in its goal of bringing about a territorial tax system, which the public would clearly oppose.

For example, a survey taken in January of 2013 asked respondents, “Do you approve or disapprove of allowing corporations to not pay any U.S. taxes on profits that they earn in foreign countries?” 73 percent of respondents said they “disapprove” and 57 percent said they “strongly disapprove.” The same survey found that 83 percent of respondents approved (including 59 percent who strongly approved) of a proposal to “Increase tax on U.S. corporations’ overseas profits to ensure it is as much as tax on their U.S. profits.”

And yet, it’s unclear that lawmakers are paying attention to the interests or opinions of ordinary Americans.

It is true that Vice President Biden went out of his way at the Democratic National Convention to criticize the territorial system proposed by Mitt Romney. And it’s also true that the “framework” for corporate tax reform released by the White House in February of 2012 refused to endorse a territorial system.

But the framework only rejected a “pure territorial system.” CTJ pointed out that the time that probably no country has a “pure territorial system,” so this does not provide much assurance or guidance.

Meanwhile, it has long been rumored that many of the Democratic members of the Senate Finance Committee (the Senate’s tax-writing committee) favor a territorial system.

Republican lawmakers, for their part, have long fully endorsed a territorial system. House Ways and Means Committee Chairman Dave Camp made public his proposals for a territorial system in October 2011. That very day, CTJ released a letter signed by several national labor unions, small business associations and good government groups opposing Camp’s move, but the response from lawmakers was relatively muted.

Perhaps more disturbing, at his recent confirmation hearings, the new Treasury Secretary, Jack Lew, appeared open to the idea of a territorial system.

Similar Corporate Lobbying Coalition Failed to Get a Temporary Exemption for Offshore Profits (Repatriation Holiday)

Some readers will remember that during 2011 and 2012 a group of corporations calling itself WIN America pushed for an tax amnesty for offshore profits (which they preferred to call a “repatriation holiday.”) The coalition was made up of companies who believed that Congress might not be naïve enough to give them the much bigger prize, a territorial system. As explained in a CTJ fact sheet, a repatriation holiday would temporarily exempt offshore profits from U.S. taxes, while a territorial system would permanently exempt those offshore profits from U.S. taxes, and would therefore cause even greater problems.

WIN America did give up and disband. But that could be largely because influential lawmakers like Ways and Means Chairman Dave Camp are indicating that the bigger prize, a territorial system, is within reach.

Complexity Helps the Lobbyists and Lawmakers Who Hope the Public Does Not Catch On

It may be that politicians remain open to tax proposals that the public hates because the issues involved are so complicated that they believe no one is paying attention. This makes it vital to call attention to the effects a territorial system would have on ordinary Americans.

The issues are admittedly complicated. For example, Americans have been presented over and over with a very simple story about how the U.S. has a corporate tax that is more burdensome than the corporate taxes of other countries, and that our companies need new rules that make them “competitive” with global competitors.

The reality is very different and much more complicated. While the U.S. has a relatively high statutory tax rate for corporations, the U.S. corporate tax has so many loopholes that most major multinational corporations seem to be paying a lower effective tax rate in the U.S. than they pay in the other countries where they have operations. CTJ’s major 2011 report on corporate taxes studied most of the profitable Fortune 500 companies and found (on pages 10-11) that among those with significant offshore profits (making up a tenth or more of their overall profits) two-thirds actually paid a lower effective tax rate in the U.S. than in the other countries where they operated.

On the other hand, there are a number of countries that have extremely low corporate tax rates or no corporate tax at all – mostly very small countries with little actual business activity – where U.S. companies like to claim their profits are generated, in order to avoid U.S. taxes. These are the offshore tax havens that exploit the rule allowing U.S. corporations to “defer” U.S. taxes on their offshore profits. If the U.S. completely exempts these profits from U.S. taxes (in other words, enacts a territorial system) these incentives will be greatly increased.

This is confirmed by a recent report from the Congressional Research Service finding that in 2008, American multinational companies reported earning 43 percent of their $940 billion in overseas profits in the five very small tax-haven countries, even though only four percent of their foreign workforce and seven percent of their foreign investments were in these countries. In contrast, the five “traditional economies,” where American companies had 40 percent of their foreign workers and 34 percent of their foreign investments, accounted for only 14 percent of American multinationals’ reported overseas’ profits.

These statistics are outrageous and demonstrate that U.S. corporations are engaging in various accounting tricks in order to make it appear (for tax purposes) that their profits are generated in countries where they won’t be taxed. The LIFT coalition will count on the fact that this is simply too difficult for ordinary people to understand – which makes educating the public about this more important than ever.

Conspicuously absent from New Jersey Governor Chris Christie’s new 2014 fiscal year spending plan were the across-the-board personal income tax cuts he defended so vehemently just last year.  Governor Christie now wants Garden State residents to believe Democrats in the legislature are to blame for the lack of promised tax relief.  But, the facts are that the state cannot afford a tax cut this year any more than it could last year, the Governor’s overly optimistic revenue growth projections notwithstanding.  

A new editorial from the New Jersey Star Ledger calls Governor Christie’s rhetoric “pure fantasy” and lays out the facts:

“Gov. Chris Christie knows that New Jersey can’t afford a tax cut right now, so he didn’t include one in his budget plan.

But he also knows he can’t admit this if he wants to win a Republican presidential primary in 2016. So he made clear during his budget address Tuesday that he intends to campaign on the merits of an income tax cut this year anyway.

“I am content to let the voters decide this in November,” he warned Democratic legislators.

Here we go again. The governor even promised Democrats that if they agree to cut taxes this year, he will find a way to pay for it.

That’s a remarkable claim. Because he says he can’t afford to rescind the tax hike he imposed on the working poor, or restore the funding for the six Planned Parenthood clinics he shut down. He can’t afford to restore property tax rebates, as promised. He can’t afford to provide adequate funding for state colleges and universities, among the most starved in the nation. And he can’t replenish the fund for open-space purchases…

So the governor’s suggestion that he has a secret vault with enough money to finance a tax cut is pure fantasy. The income-tax cut he proposed would cost $1.4 billion a year when phased in, with the wealthiest 1 percent claiming almost half the benefit.

If the governor really campaigns on this, understand that is pure show. It is a pitch designed for national TV, where gullible hosts who don’t know New Jersey will no doubt bobble their heads some more. It is an act for the national audience, and New Jersey is his prop…”

If an unexpected revenue bump does come along, Christie’s tax cuts for the wealthiest cannot be where it gets spent. Instead, it should be used to reverse the Governor’s previous cuts to the Earned Income Tax Credit, to restore property tax rebates he gutted and generally reinvest in programs that have been revenue starved since the Great Recession began.

Maryland Governor Martin O’Malley recently unveiled his plan to raise and reform his state’s gasoline tax.  Local TV stations predictably responded by interviewing drivers unhappy with the high price of gas, while (also predictably) failing to explain that Maryland’s gas taxes are not to blame for those high prices.

A new chart from our partner organization, the Institute on Taxation and Economic Policy (ITEP) shows that Maryland’s flat gas tax has long been declining as inflation has chipped away at its value.  If the legislature does not act on the Governor’s recommendation, ITEP projects that by 2014 Maryland’s gas tax rate will reach its lowest (inflation adjusted) level in 91 years.  Only in 1922 and 1923 did Maryland levy a lower gas tax.

Moreover, the gas tax increase proposed by the Governor is actually very modest.  The plan (which would tie the gas tax to both inflation and gas prices) would result in roughly a 9 cent increase by 2014.  That’s significantly less than the nearly 16 cent increase that ITEP found would be needed to return Maryland’s gas tax to its purchasing power as of 1992, when it was last raised.  Taking an even longer-term perspective, ITEP finds that Maryland’s inflation-adjusted gas tax rate has historically averaged 41.1 cents per gallon.  If the Governor’s plan is enacted, the inflation-adjusted rate over the next decade would average just 31 cents.