First it was the ill-advised TV campaign to lure new business to his state by bragging about tax cuts, and now New York  Governor Andrew Cuomo has launched his “Tax-Free NY” initiative which would turn many of the state’s public universities, private universities, and community colleges into tax-free havens. Providing a full complement of tax breaks, the Governor’s plan would exempt qualified businesses from paying any sales, property, and corporate taxes for a decade, and would exempt employees of those businesses from the personal income tax.

These no-tax zones include all state university campuses outside of New York City, some private colleges, up to 200,000 square feet in certain campus-adjacent zones, and 20 undisclosed “strategically located” state-owned properties. The Governor’s plan vaguely defines eligible businesses as companies with a relationship to the academic mission of the university and then includes: new businesses, out-of-state businesses that relocate to New York, and existing businesses that expand their New York operations.

Touting the plan as a way to revitalize the upstate economy, the Governor claims the free pass on taxes would “attract start-ups, venture capital, new business, and investments from across the world.” However, economists from across the political spectrum have their doubts (and so do we).

Professor John Yinger of Syracuse University said in response to Cuomo’s plan that: “In New York we have a dizzying array of tax breaks with no evidence they help, and now here’s a new version. You’d do much better improving our schools and infrastructure than giving tax breaks to businesses who would be in the state anyway.”

Others, such as Danny Donohue of the Civil Service Employees Association, argue the plan is another tax giveaway to businesses at the expense of local communities and the middle-class. Donohue says: “The governor doesn’t get the fact that more corporate welfare is no answer to New York’s economic challenges… it’s outrageous that the governor and legislative leaders think we can give away even more to businesses without any guarantee of benefit to taxpayers.”

In addition to creating little if any economic growth, the plan is likely to worsen the state’s already precarious fiscal situation. With the state budget office projecting (PDF) shortfalls ranging up to $3 billion per year in the coming years, removing entire companies from the tax rolls is hardly fiscally responsible.

To move the plan forward, the Governor will need legislative approval before the state’s legislative session ends on June 20^th. Quick – someone get this policy brief (PDF) up to Albany!

Wednesday, June 5, 2013 Update: The Wisconsin legislature’s Joint Finance Committee approved a budget early this morning that included an income tax cut that reduced income tax rates from 4.6%, 6.15%, 6.5%, 6.75%, and 7.75% to 4.4%, 5.84%, 6.27%, and 7.65%. The legislation also reduced the number of tax brackets from five to four. This plan stops short of Rep. Kooyenga’s plan plan described below, but is more costly than Governor Walker’s $340 million initial proposal. According to the Legislative Fiscal Bureau (PDF) these permanent tax cuts cost $632.5 million over two years and the distribution is again skewed to benefit the wealthiest Wisconsinites. Current reporting suggests this plan will pass the full legislature.

This week Wisconsin Representative Dale Kooyenga, an accountant who’s taking a lead roleon tax policy, released his plan to reform the state’s tax code. In a proposal that would more than double the tax cuts proposed by Gov. Scott Walker, Kooyenga seeks to reduce personal income tax rates and cut the number of income tax brackets from five to three. The latter would, as one report put it, put middle income earners like a secretary at a law firm in the same tax bracket as the high-earning lawyers.  Kooyenga touts simplifying the forms taxpayers file and eliminating nearly 20 tax credits.

Earlier this year, Governor Scott Walker proposed his own income tax cut ,which was slammed for mostly benefiting the wealthy (in large part because an Institute on Taxation and Economic Policy (ITEP) analysis showed that it was tilted that way). The Governor’s proposed income tax rate cuts were expected to cost the state $343 million over two years; Representative Kooyenga’s would cost $760 million in the upcoming budget and $914 million in the 2015 budget.

And it’s not just costly, it’s regressive. As the lawmaker himself concedes, “[i]t is nearly impossible to create a tax reform or tax cut that is not going to disproportionately lower taxes for upper-middle-class and rich taxpayers,” and a new ITEP analysis of Kooyenga’s plan shows his is no different. ITEP ran the numbers for the Wisconsin Budget Project (WBP) the impact of the Kooyenga income tax plan was shown to be even more skewed to the wealthy that Governor Walker’s, as WBP writes:

Here is how the tax cut would be distributed among income groups:

- The top 5% of earners alone, a group with an average income of $392,000, would receive more than 1/3 of the benefit of the income tax cuts.

- The top 20% of earners, a group with an average income of $183,000, would receive more than 2/3 of the benefit.

- The bottom 60% of earners – those making $60,000 a year or less – would only receive 11% of the benefit of the income tax cuts.

- The 20% of the Wisconsinites with the lowest incomes would receive just two cents out of every $100 in individual income tax cuts under this proposal.

WBP says that the Kooyenga tax plan’s expansion of Governor Walker’s proposal is a “bad idea made worse,” and they are right.  
 

The Ohio Senate is considering a fiscal 2014-15 budget that includes a $1.4 billion business tax cut. The cut – which would exempt a full $375,000 in business income from the income tax – is similar to a widely-criticized plan enacted by Kansas last year. As Policy Matters Ohio explains, however, none of the tax cuts under consideration (including the Governor's) will help Ohio’s economy: “They are bad for low- and moderate-income Ohioans, and slash revenue Ohio needs to support our economic success and improve our quality of life.”

On May 23, the Massachusetts Senate approved a fiscal 2014 budget that would generate $430 million in new tax revenues, in part by extending the sales and use tax to some computer-related services, raising the gas tax by 3 cents, and increasing tobacco excise taxes.  Differences between the Senate budget and a broadly similar plan passed by the State House will now be worked out by a six-member conference committee.

If he ever decides to leave Hollywood, Nicolas Cage might have a future ahead of him in lobbying. After Cage visited Nevada, the state Senate approved a $20 million tax break for filmmakers. Unfortunately for Nevadans, however, film tax credits have been shown time and time again to be ineffective at spurring economic growth.

The Virginia Commonwealth Institute discusses the problems with lawmakers’ recent decision to cut the state’s gas tax by roughly 6 cents per gallon.  As the Institute explains: “gas taxes are not to blame for high and volatile gas prices… [and] Virginia’s gas tax, which has been a steady 17.5 cents per gallon since 1987, was failing to produce enough resources to fuel adequate investment in our infrastructure.” The same is generally true nationwide.

At 2:00am on Monday morning, Minnesota House members passed groundbreaking tax legislation that raises $2.1 billion over two years. The Senate then approved the legislation and Governor Dayton, long a champion of progressive tax reform, signed it yesterday. The bill increases income taxes on the top two percent of earners, raises the cigarette tax to $1.60, closes some corporate tax loopholes, and extends the sales tax to a handful of services primarily used by businesses, including warehouse storage and telecommunications equipment. Wayne Cox, with Minnesota Citizens for Tax Justice expects much from the legislation: “Shifting taxes from the middle class to those with highest incomes will help the economy.”

A helpful summary of the compromise legislation is available here from the Minnesota Budget Project. Revenues from the cigarette tax will be used to help pay for a new Vikings stadium. This is round two for stadium funding because gaming revenues that were supposed to pay the state’s share of the stadium came in below revenue projections (not surprisingly, PDF). Of course, cigarette taxes (PDF) aren’t very stable revenue sources either, and are likely to decline overtime.

Nan Madden, Director of the Minnesota Budget Project, said of the legislature’s work, “In past years, the response to budget shortfalls has been deep cuts to services and use of timing shifts to kick the problem down the road. This year’s tax bill and budget take a better approach, raising the revenues needed to balance the budget and invest in the future; and reforming our tax system so that we share the responsibility for funding public services more equally.”

So, kudos to Minnesota’s elected leaders for making some difficult decisions and finding a way to balance the state’s books and still provide for quality services into the future. It’s a model other states can learn from.

Governor Terry Branstad has made “reforming” (cutting) the property taxes paid by Iowa businesses a top priority since taking office. We described the latest attempts to reduce commercial property taxes here. But Senator Joe Bolkcom (chair of the Ways and Means Committee) has repeatedly demanded that any change to corporate property taxes must be accompanied by an increase in the state’s Earned Income Tax Credit (EITC).

Now a compromise bill has passed the Iowa Senate and is on its way to Governor Branstad’s desk. And, as tends to happen with compromise, nobody is completely happy with the final product.

If signed into law by the Governor, here is what that legislation would do: assess commercial and Industrial property at 90 percent of its value (down from 100 percent); introduce a new assessment cap of 3 percent for residential and agricultural property; introduce a new nonrefundable income tax credit if the Taxpayers Trust Fund exceeds $30 million; and double the EITC from 7 to 14 percent.

The Governor would have prefered  that commercial and industrial property be assessed lower, at 80 percent of its value, but said this of the compromise: “I’m hopeful maybe we can do more in future years. But I think this is the art of what was possible with this General Assembly. I’m pleased with the compromise bill that we’ve got tentative agreement on.”

Peter Fisher of the Iowa Fiscal Partnership pointed out, however, “It’s Christmas for Walmart and McDonald’s, which will happily receive property-tax breaks that they don’t need, while their low-wage employees receive a better Earned Income Tax Credit. This Christmas tree will grow bigger with each passing year, leaving less room in local budgets to respond to needs.”

Of course we applaud any increase in the EITC, and doubling that credit is a meaningful tax cut for low and middle income workers. But as the Iowa Fiscal Partnership reminds us, “If there is any question as to who benefits, Iowans should note that the EITC boost will be $35 million when fully phased in, compared to about 10 times that for property owners.”  The pricetag for these property tax changes is likely to increase in future years, and will become a constant strain on local government budgets.

Kentucky’s Blue Ribbon Commission on Tax Reform released its very useful findings in December, but regrettably little action has resulted from the comprehensive document. Many of the Commission’s recommendations were bold and forward-looking, like the proposal to expand the sales tax base to services  (PDF) and simultaneously institute an earned income tax credit (PDF). But Commissioners themselves aren’t confident that anything will come from their hard work developing those recommendations. Commissioner Sheila Schuster recently said, “I haven’t heard anything since the end of the (legislative) session that would suggest that it’s got legs... So it’s pretty discouraging.”

Legislators in many states are putting the cart before the horse when it comes to budgeting for the next fiscal year. This article (subscription required) from the Wall Street Journal tells of states like Maryland and Virginia who have already passed spending bills that assume new revenues from online Internet sales tax collections when Congress passes the Main Street Fairness Act. Of course, the Act has actually only passed the Senate, and by all accounts the bill faces an unclear future in the House.

This November, Colorado voters will vote on raising their state’s income tax to better fund education. The details of that increase have yet to be worked out, but former state representative Don Marostica has taken to the pages of the Denver Post to argue in favor of his preferred alternative: ditching the state’s flat income tax in favor of a more progressive, graduated income tax used by most states. Marostica explains that “businesses and middle-class Coloradans alike would be better off with a two-step income tax to provide the resources for top teachers and great facilities. The No. 1 priority for businesses seeking a new location is a well-educated, fully prepared workforce. … Yet we're under-investing in education, in part because we've prioritized low taxes ahead of everything else.”

Bad tax ideas are in the news in the District of Columbia.  Mayor Vincent Gray recently reiterated that he wants to cut taxes for DC investors who do their investing outside of the District.  But it’s Councilwoman Anita Bonds’ idea that recently made headlines. Bonds wants to give a super-sized tax break to most people over 80 years old: a full exemption from property taxes, provided their income is below $150,000 per year and they’ve lived in the District for 25 years or more.  But property tax relief should be distributed based on income, not age. Rather than cutting taxes for the well-off elderly, DC lawmakers would be wise to follow the advice of the DC Fiscal Policy Institute and expand the city’s low-income property tax credit for DC residents of all ages.

Earlier this spring, Alabama lawmakers approved a bill establishing a state income tax credit (up to $3,500) to reimburse parents for the cost of sending children to private school or transferring them to a better performing public school.  The legislation also created a tax credit for corporations and individuals who contribute to scholarship funds. These kinds of credits are often referred to as back-door or neo-vouchers as they divert taxpayer money away from public schools, indirectly via the tax code.  Due in part to concern over the unknown cost of the credits and seemingly in part due to public displeasure with the new program, Alabama Governor Robert Bentley (who had been a supporter of the bill) attempted to delay the implementation of the school tax credits last week.  He told lawmakers they “had better be listening to the people” who he says are not supportive of using public tax dollars to fund private school education.  However, the House decided this week to ignore the Governor’s request; they rejected his suggested amendment and took a vote to show they could override any veto attempts.

 What Rand Paul Fails to Understand about Apple’s Tax Dodging

During the May 21 Senate hearing on Apple’s tax practices, Senator Rand Paul (R-KY) said lawmakers should apologize for “bullying” the company and holding a “show trial,” and says he’s “offended by the tone” of the hearing. Senator Paul, who took the opportunity to call for a “repatriation holiday,” claims that the debate over tax reform should not include a discussion of the tax avoidance practices of a corporation like Apple.

As CTJ has explained, the hearing uncovered how Apple is shifting profits out of the U.S. and out of other countries and into Irish subsidiaries that are not taxed by any government. Senator Paul’s response is a non-sequitur: What Apple is doing is legal, therefore Congress should not debate whether or not its practices ought to be legal. 

Tax Reform Will Go Nowhere Unless We Know How Specific Companies Like Apple Avoid Taxes

Senators Carl Levin (D-MI) and John McCain (R-AZ), the chairman and ranking Republican of the subcommittee that investigated Apple, understand three basic facts that escape Senator Paul. First, our corporate tax system is failing to do its job of taxing corporate profits. Second, virtually no one in America can understand this until someone explains how individual corporations are dodging their taxes. Third, the corporations themselves will, quite naturally, lobby Congress to defend and even expand the loopholes that facilitate their tax dodging.

Once you understand these three facts, it becomes clear that the only path to tax reform is to explain to the public how certain big, well-known corporations are avoiding taxes.

An abstract debate about corporate tax dodging — a debate that doesn’t mention any specific corporations — is not likely to result in reform. Just look at President Obama’s approach. He first made his proposals to tighten the international corporate tax rules in May of 2009. The proposals made barely a ripple in the media at that time, and no one in Congress even bothered to put them in legislation.

On the other hand, the New York Times expose on GE’s tax dodging in March of 2011 was discussed by everyone from the halls of Congress to the Daily Show. CTJ’s big study of Fortune 500 companies’ taxes — including 30 companies identified as paying nothing over three years — was published in November of that year and is still cited today in debates over our broken tax code.

Senator Levin has legislation to crack down on corporate offshore tax avoidance — which includes several of the President’s proposals. Levin’s bill includes an Obama proposal — reform of the “check-the-box” rules — that Obama himself backed away from under pressure from corporations. (CTJ’s explanation of Levin’s hearing and report on Apple explains how the company took advantage of the current “check-the-box” rules.)

Senator Paul’s Solution: Facilitate More Tax Avoidance with a “Repatriation Holiday”

As CTJ explained last week, Senator Paul proposes a tax amnesty for offshore corporate profits, which proponents like to call a “repatriation holiday.” We explained that Congress tried this in 2004, and the result was simply to enrich shareholders and executives while encouraging corporations to shift even more profits offshore in the hope that Congress will enact more “repatriation holidays” in the future.

Senator Paul’s slight of hand during the hearing was impressive. He argued that instead of targeting Apple, the discussion should be about how to fix the tax system (assuming away the possibility that an explanation of Apple’s practices would facilitate that discussion), and then moved on to argue that the necessary fix is a repatriation holiday. In other words, leave Apple alone because its tax avoidance practices are legal, and instead let’s legalize even more tax avoidance.

This has generally been the position of Apple, which has lobbied for a repatriation holiday. Apple CEO Time Cook argued at the hearing that Apple would like a more permanent change to the tax code, one that would slash taxes (if not eliminate taxes) on offshore profits that are repatriated.

The truth is that corporations like Apple lobby for as many tax loopholes and breaks as they can get. We may see them as morally culpable. Or we may think it’s natural for people to ask for the very best deal they can get — just as children naturally argue for the latest bedtime possible and the largest quantity of ice cream possible. Either way, Senator Paul’s claim that America’s interests can be served by simply giving corporations what they ask for is absurd.

On May 21, top executives of Apple Inc attempted but failed to explain to a Senate committee why Congress should maintain or expand the tax loopholes that allow them to avoid U.S. taxes on billions of dollars in profits.

The Senate Homeland Security and Government Affairs Permanent Subcommittee on Investigations (PSI) issued a report on Apple’s tax practices and held a hearing to ask Apple executives and tax experts about the findings. (PSI has the power to subpoena companies to provide information that would otherwise not become public.)

A CTJ report published the day before the hearing explains how Apple’s public documents indicate that its offshore profits are in tax havens. PSI’s report and hearing have uncovered how Apple pulls this off.

Thanks to PSI’s efforts, we now know that Apple shifts U.S. profits to one of its non-taxable Irish subsidiaries through a “cost-sharing agreement” that gives the subsidiary the right to 60 percent of profits from its intellectual property, and that Apple also shifts profits from other foreign countries where it sells its product to its non-taxable Irish subsidiaries.

The Irish subsidiaries have few if any employees and don’t do much of anything, but Apple Inc has a huge incentive to claim that a lot of its profits are generated by these subsidiaries because Ireland is not taxing them. So, Apple uses the “cost-sharing agreement” to convert U.S. profits to non-taxable Irish profits for tax purposes, and likewise manipulates transfer-pricing rules and other tax provisions to turn profits from other countries into untaxed Irish profits.

Avoiding U.S. Corporate Taxes Through “Cost-Sharing Agreement”

Under the cost-sharing agreement, an Irish subsidiary that had no employees until 2012 (it now has about 250) has the rights to the majority of profits from Apple’s intellectual property, even though virtually all of that intellectual property is developed by Apple Inc (the parent company) in the United States. Since almost all of the actual manufacturing of Apple’s physical products is outsourced to other companies, this intellectual property is the real source of Apple’s profits.

It’s absurd to think of the so-called “cost-sharing” as an “agreement,” because the parties are Apple Inc and a subsidiary that it owns and controls — in other words, an agreement between Apple and itself. As the tax experts testifying at the hearing explained, there is no way that Apple would enter into such an “agreement” with an entity that it did not completely control.

Because the Irish subsidiary is controlled and managed by Apple Inc in the United States, Irish tax law treats it as a U.S. corporation not subject to Irish tax. But because the Irish subsidiary is technically incorporated in Ireland, the U.S. treats it as an Irish corporation, on which U.S. taxes are indefinitely “deferred.” Thus, neither nation taxes the profits that Apple has shifted to its Irish subsidiary.

So despite the fact that Apple does virtually all of the work responsible for its global profits in the U.S., it gets to tell the IRS that the majority of its profits are in Ireland, where they are not subject to Irish tax, while indefinitely “deferring” U.S. taxes on those profits.

Avoiding Taxes Outside the Americas by Manipulating Transfer Pricing Rules

The end of PSI’s report informs us that in 2011, Apple’s tax-planning “resulted in 84% of Apple’s non-U.S. operating income being booked in ASI,” which is one of Apple’s Irish subsidiaries. That’s because Apple also shifts potentially taxable profits from other countries into Ireland.

All the Apple products sold outside North and South America are sold by Apple subsidiaries that purchase them, apparently at inflated prices, from the Irish subsidiaries. This aggressive use of “transfer pricing” (on paper) means that Apple’s subsidiaries in these other countries reported only tiny taxable profits to their governments. That explains why Apple reports foreign effective tax rates in the single digits.

Of course, transactions between different Apple subsidiaries are all really transfers within a single company. Transfer pricing rules are supposed to make Apple and other multinational corporations conduct these paper transfers as if they were transactions between unrelated companies. But the tax authorities clearly find these complicated rules impossible to enforce.

The Bottom Line

So despite the fact that almost all of Apple’s profits ought to be taxable in the United States, most of its profits are not taxable anywhere.

Policy Solutions

Ending the rule that allows a U.S. corporation like Apple to indefinitely defer U.S. taxes on offshore profits would mean that none of Apple’s schemes to avoid taxes would be successful. We have argued before that the only way to completely end the incentives for corporations to shift profits into tax havens is to repeal deferral.

Short of full repeal of deferral, Congress could close some important tax loopholes that Apple and other multinational corporations use to make their schemes work. For example, PSI explains how Apple uses a tax regulation known as “check-the-box” to simply tell the IRS to disregard many of its offshore subsidiaries. This allows Apple to continue deferring U.S. tax on the payments made from one subsidiary to another, which circumvents a general rule that deferral is not supposed to be allowed for such “passive,” easily moved income.

One of the recommendations of the committee is to reform the “check-the-box” rules, which was also a proposal in President Obama’s first budget. (This proposal was left out of subsequent White House budgets, apparently in response to corporate lobbying). 

PSI also suggests that the U.S. tax foreign corporations that are controlled and managed in the U.S. (like Apple’s Irish subsidiaries), that Congress strengthen rules governing transfer pricing, and makes several other recommendations to block the type of tax avoidance techniques used by Apple.

More than a month after Louisiana Governor Bobby Jindal “parked” his widely-panned proposal to repeal the state’s income tax, state policymakers now are returning to what should be a more straightforward tax reform issue. A new report (PDF) from the Louisiana Legislative Auditor critically evaluates the workings of the state’s film tax credit, which gives Louisiana-based film productions a tax credit to offset part of their expenses when they hire Louisiana workers or spend money on production expenses locally.

From a cost perspective alone, it makes sense to take a hard look at this provision: the state has spent over $1 billion on these Hollywood handouts in the past decade.

But the Auditor’s report is also a good reminder of just how little the state is getting in return for this massive outlay. The report estimates that after doling out almost $200 million in film tax breaks in 2010, the state enjoyed just $27 million in increased tax revenue from the film-related economic activity supposedly encouraged by this tax break.

This means a net loss to the state of about $170 million in just one year.

It’s hardly news that film tax credits offer little bang for the buck: last year the Louisiana Budget Project reported (PDF) that each new job created by the film tax credit is costing the state $60,000, and a recent report (PDF) from the Massachusetts Department of Revenue found that a huge chunk of that state’s film tax credits were going to wealthy taxpayers living in other states. Even when these credits create in-state jobs (and they do generate some economic activity), the transitory nature of film productions means those jobs probably will be gone when the production leaves town. And it’s virtually impossible for lawmakers to know whether they’re really attracting film productions to the state—or just rewarding moviemakers for doing what they would have done anyway (as “incentives” often do). Either way, Louisiana taxpayers are still doling out more than they are getting back.

But it’s not all bad, according to the Auditor’s report: the Louisiana credit does appear to be going largely to film productions that are technically eligible for it. So, as far as the Auditor can tell us, the film tax credit is simply ineffective and not an outright scam. Or at least, it wasn’t until this guy pleaded guilty to fraudulently claiming the credit, which is similar to what happened repeatedly in Iowa after that state’s disastrous experiment with Hollywood tax breaks.

After surviving the three-month train wreck that was the rollout of Governor Jindal’s tax plan, Louisiana lawmakers should find the film tax credit an easy problem to solve since they know how much it costs and just how little they’re getting in return. Right now they’re just tinkering around the edges, but pulling the plug on handouts to Hollywood should be high on policymakers’ to-do list.

Virtually None of Its $102 Billion Offshore Stash Has Been Taxed By Any Government

Apple Inc. CEO Tim Cook is scheduled to testify on May 21 before a Congressional committee on the $102 billion in profits that the company holds offshore. Citizens for Tax Justice has a new analysis of Apple’s financial reports that makes clear that Apple has paid almost no income taxes to any country on this offshore cash.

That means that this cash hoard reflects profits that were shifted, on paper, out of countries where the profits were actually earned into foreign tax havens — countries where such profits are not subject to any tax.

As CTJ explains, the data in Apple’s latest annual report show that the company would pay almost the full 35 percent U.S. tax rate on its offshore income if repatriated. That means that virtually no tax has been paid on those profits to any government.

Read the report.

First it was Mitt Romney, and now two more aspiring public servants are in the spotlight for questionable tax maneuvers – Penny Pritzker, President Obama’s Commerce Secretary Nominee, and Massachusetts Republican Senate candidate, Gabriel Gomez.  The complex tax avoidance strategies exercised by both these two candidates for federal office demonstrate the stunning extent to which wealthy individuals of all stripes can play by a different set of tax rules than everyone else.

Avoiding Every Last Penny of Taxes

While many wealthy families go to great lengths to avoid taxes, the Pritzker family (most famous for it’s ownership of the Hyatt hotel chain) is unique in its role as “pioneers” in the use of offshore tax shelters. Many of its existing offshore trusts were set up as long as five decades ago, and some have allowed the family to continue benefitting from tax loopholes that have long since been closed.

As the graphic below from a 2003 Forbes story details, one of the primary ways the Pritzker family uses offshore trusts to avoid taxes is by having income from their businesses funneled into offshore trusts. Those trusts then pay debt service to a bank, owned by the family trust, that loans that money right back to the business. The upshot is that all the taxable profits disappear and the family wealth accumulates unabated. A more recent Forbes article looking at the Pritzker family fortune notes that these trusts were not at the margin but rather “played a substantial role in the growth of the Pritzker fortune.” The same article notes that this fortune makes up the vast majority of Pritzker’s $1.85 billion empire and has allowed 10 members of the Pritzker family to earn a spot on the list of Forbes 400 richest people in America.

When the New York Times asked Penny Pritzker for her thoughts on the ethical implications of her family’s use of offshore trusts, she remarked that the trust was set up when she was only a child, after all, and that she does not control how the offshore trusts are administered. Her continued vagueness on these issues makes it likely that she will face more questions about her views of offshore tax avoidance more generally next week when she goes before the Senate for her confirmation hearing.

While Pritzker’s personal involvement with her family’s most infamous tax avoidance legacy is unclear, it is clear that she has actively used tax avoidance strategies in her own professional and private life. For example, a family member in this Bloomberg News profile from 2008 recounts one of her very first assignments working for Hyatt, which was to set up a like-kind property exchange to help avoid taxes on a property owned by Hyatt.

It turned out Penny was a natural at this particular tax avoidance scheme, in which a company takes deductions for the purported depreciation of their property and then sells the property at an appreciated price, but avoids paying capital gains tax by swapping the property for another like-kind property. (Originally created for use by farmers trading acreage, this tax break is a perfect example of a loophole in the tax code that is abused by companies and should be eliminated (PDF).)

In her personal finances, Penny Pritzker has run into criticism for making 10 appeals to lower the property tax assessment for her mansion in Chicago’s Lincoln Park. Like many wealthy taxpayers, Pritzker is able to retain lawyers who, through repeated appeals, have been able to save her an estimated $175,905 (PDF), even though their appeals have only succeeded half the time.

Gabriel Gomez and the Façade of Charitable Donations

While not on the same scale, according to the Boston Globe, U.S. Senate candidate Gabriel Gomez claimed a $281,500 income tax deduction in 2005 for “pledging not to make any visible changes to the façade of his 112-year-old Cohasset home” because the value of such an agreement is considered a charitable deduction by federal law. The only problem is that local laws already prohibit he and his wife from making any changes to the exterior of their home, meaning that his “agreement” to leave the façade alone is more like complying with local laws rather than a choice, so it may not have an actual “value” that is deductible.

In fact, just five weeks after Gomez claimed this deduction, the IRS listed the abuse of historic façade easements as one of its “Dirty Dozen” tax scams. Moreover, the organization with which Gomez made the agreement, the Trust for Architectural Easements, has been criticized by the IRS, Department of Justice, and Congress for encouraging tax avoidance. Altogether the IRS estimates that the Trust cost American taxpayers $250 million in lost revenue.

Fortunately for Gomez, the IRS did not challenge his use of this deduction, as it has with hundreds of others. If they had done so, they likely would have rejected the deduction and Gomez would have had to pay thousands in back taxes and an additional penalty. For his part, Gomez’s lawyer argues that the restrictiveness of the agreement goes further than local zoning laws, but it appears unlikely that the additional restrictions are so great as to justify such a substantial deduction.

It’s a remarkable thing to see somebody propose $2.3 billion in state and local tax cuts in a single press conference, with absolutely no ideas for paying for them.  That’s exactly what Virginia’s Attorney General, Ken Cuccinelli, recently did at a Richmond yogurt shop as part of his campaign to become his state’s next governor.

Under Cuccinelli’s 163-word plan, a commission would be appointed to identify any “loopholes that promote crony capitalism,” and the savings from eliminating those loopholes would be funneled toward cuts in the state corporate income tax and three local business taxes.  The single largest component of Cuccinelli’s tax plan, however, is eliminating the state’s top personal income tax bracket.  This change would lower Virginia’s top rate from 5.75 to 5.0 percent, and would dramatically flatten the state’s income tax structure; for example, the new top rate would kick-in at taxable income of just $5,000.

Our partner organization, the Institute on Taxation and Economic Policy (ITEP), recently analyzed the personal income tax cut in the Attorney General’s plan in a report just published by the Virginia-based Commonwealth Institute.  Unsurprisingly, ITEP found that this flattening of the income tax would overwhelmingly benefit Virginia’s most affluent residents, even as Virginia’s wealthiest taxpayers already pay far less of their income in state and local taxes than their less well-off neighbors. More specifically, ITEP found that:

• Almost 4 in 10 Virginians (39 percent) would see no change in their income tax bill.

• Lower and moderate income families are the groups least likely to benefit from this cut: nobody among the poorest 20 percent of Virginia families would receive a tax cut, and only half of all families among the next 20 percent would see their taxes reduced. 

• In fact, the Cuccinelli plan runs the risk of actually raising taxes on a significant number of Virginians because “loopholes” of the non-crony-capitalism kind  that benefit moderate income families would likely have to be scaled-back or eliminated to pay for the larger rate cut.

• Among the middle 20 percent of taxpayers, a majority (71 percent) would see their state income taxes fall, but by an average of just $98 per year.

• The state’s wealthiest taxpayers would receive the largest tax benefits by far.  Three-fourths (76 percent) of the benefits from repealing Virginia’s top personal income tax bracket would go to the wealthiest 20 percent of households.  The top 1 percent of earners alone would take home a full 27 percent of the benefits, for an average state tax cut of over $8,000 per household.

Read the report.

Colorado lawmakers recently decided to enact a pair of poverty-fighting tax policies: an Earned Income Tax Credit (EITC) and a Child Tax Credit (CTC). Both had been on the state’s books at some point but had either been eliminated or were often unavailable. The EITC, equal to 10 percent of the federal credit, will become a permanent feature of Colorado’s tax code once state revenue growth improves – likely not until 2016. Similarly, the CTC will not take effect until the federal government enacts legislation empowering Colorado to collect the sales taxes due on online shopping.

Kansas legislative leadership and Governor Brownback are in the midst of secret meetings to discuss how the House and Senate will reconcile their varying tax plans. The largest sticking point is whether or not to allow a temporary increase in the state’s sales tax rate to expire. But the larger issue, that is getting less attention, is that (as ITEP’s recent analysis points out) both the House and Senate plans could eventually phase out the state’s income tax altogether.

The Rockefeller Institute is warning (PDF) states and the federal government not to get too excited about the recent “surge” in income tax revenues. Rather than indicating an economic recovery, the surge is likely a result of investors realizing their capital gains a few months earlier than usual in order to avoid the higher federal tax rates that went into effect on January 1st. As the Institute points out: “over the longer term, this could be bad news — it could mean that accelerated money received now, used to pay current bills, will not be there to pay for services in the future.”

California is one state enjoying a sizeable revenue surplus this year. The state’s Legislative Analyst’s Office understands that a good portion of the bump is thanks to rich Californians cashing in on capital gains in 2012 to avoid higher federal tax rates in 2013. Yet as budget season kicks off, lawmakers are sure to be at odds over exactly what to do with the more than $4 billion in unanticipated revenues they will have to either spend or save.  

Here’s an excellent editorial from the Wisconsin State Journal urging Governor Scott Walker and the legislature to be wise about a projected uptick in revenues and invest any “surplus” in public schools, which have endured cuts in recent years. “Our editorial board is less convinced a showy income tax cut makes sense. Up is certainly better than down when it comes to revenue predictions. But some caution is required.” It seems that the Governor may not heed this caution, however, as he appears poised to propose an expansion of his current income tax cut proposal.

The Missouri House and Senate have hammered out a hybrid version of the tax bills each chamber recently passed, but with luck, it will never become law.  When the Senate passed its version in March, we wrote:

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.”

The bill the legislature will now send to Governor Nixon is a regressive income tax cut package that includes: a reduction in the corporate income tax rate, a 50 percent exclusion for pass-through business income, an additional $1,000 personal and spouse income exemption for individuals earning less than $20,000 in Missouri adjusted gross income, and a reduction in the top income tax rate from 6 to 5.5 percent.

In order for the legislation to become law, Governor Jay Nixon will have to give his okay, but he has signaled he’s going to veto the legislation. Recently he said, "Taking more than $800 million — literally the equivalent of what you spend on higher education, or literally more than you have for all of corrections or mental health — is not the fiscally responsible approach.”  He reiterated that message again this week.

Assuming Nixon, a Democrat, does veto this expensive tax package (its annual cost will be upwards of $700 million), the Republican-controlled legislature will put an override on their agenda when they return in September for a special veto session.

Senator Rand Paul of Kentucky, an opponent of efforts to crack down on offshore tax havens, is stepping up his efforts by introducing FATCA repeal, and is extending his help to tax-dodging corporations by proposing a repatriation amnesty.

Senator Paul’s Campaign for Individual Tax Cheaters: Repeal of FATCA

A year ago we explained that Senator Paul was blocking an amendment to a U.S.-Swiss tax treaty designed to facilitate U.S. tax evasion investigations:

The US and Swiss governments renegotiated their bilateral tax treaty as part of the 2009 settlement of the UBS case. That case charged the Swiss mega-bank UBS with facilitating tax evasion by US customers. Under the settlement agreement, UBS paid $780 million in criminal penalties and agreed to provide the IRS with names of 4,450 US account holders.

Before it could supply those names, however, UBS needed to be shielded from Swiss penalties for violating that country’s legendary bank-secrecy laws. The renegotiation of the US-Swiss tax treaty addressed that problem by providing, as most other recent tax treaties do, that a nation’s bank-secrecy laws cannot be a barrier to exchange of tax information.

Today Senator Paul is still blocking such treaties. Taking his efforts a step further, he has introduced a bill to repeal a major reform that clamps down on offshore tax evasion. That reform is the Foreign Account Tax Compliance Act (FATCA), which was enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act. Senator Paul says he opposes it because of “the deleterious effects of FATCA on economic growth and the financial privacy of Americans.”

His arguments are entirely unfounded and the only thing he is accomplishing is to help those illegally hiding their income from the IRS. FATCA basically requires taxpayers to tell the IRS about offshore assets greater than $50,000, and it applies a withholding tax to payments made to any foreign banks that refuse to share information about their American customers with the IRS.

For a country with personal income tax (like the U.S.), that kind of information-sharing is indispensible to tax compliance, as the IRS stated in its most recent report on the “tax gap”:

Overall, compliance is highest where there is third-party information reporting and/or withholding. For example, most wages and salaries are reported by employers to the IRS on Forms W-2 and are subject to withholding. As a result, a net of only 1 percent of wage and salary income was misreported. But amounts subject to little or no information reporting had a 56 percent net misreporting rate in 2006.

So why shouldn’t foreign banks that benefit from the business of U.S. customers report the assets they deposit to U.S. tax enforcement authorities? Without such reporting, people who have the means to shift assets offshore are able to evade U.S. income taxes, while the rest of us are left to make up the difference.

Senator Paul’s Repatriation Amnesty Would Help Corporations That Use Tax Havens

The same week he proposed repeal of FACTA, Senator Paul introduced a bill that would reward corporations for shifting profits overseas. What the corporations are doing is not actually illegal, but in some ways that is exactly the problem, and the Senator’s tax amnesty proposal would make it worse.

The general rule under current law is that U.S. corporations are allowed to “defer” paying U.S. taxes on their offshore profits until those profits are “repatriated” (until they are brought back to the U.S.). A significant tax benefit to corporations, “deferral” actually encourages them to disguise their U.S. profits as foreign profits generated in a country that has no corporate tax or a very low corporate tax — in other words, a tax haven.

Whereas now U.S. corporations do have to pay the U.S. corporate tax on those profits upon repatriation (minus whatever amount they paid to the other country’s government, to avoid double-taxation), a repatriation amnesty would temporarily call off almost all the U.S. tax on those offshore profits. Paul’s proposal would subject the repatriated profits to a tax rate of just five percent.

A similar repatriation amnesty was enacted in 2004 and is widely considered to have been a disaster. A CTJ fact sheet explains (PDF) why proposals for a second repatriation amnesty should be rejected:

■ Another temporary tax amnesty for repatriated offshore corporate profits would increase incentives for job offshoring and offshore profit shifting... One reason why the Joint Committee on Taxation concluded that a repeat of the 2004 “repatriation holiday” would cost $79 billion over ten years is the likelihood that many U.S. corporations would respond by shifting even more investments offshore in the belief that Congress will call off most of the U.S. taxes on those profits again in the future by enacting more “holidays.”

■ The Congressional Research Service concluded that the offshore profits repatriated under the 2004 tax amnesty went to corporate shareholders and not towards job creation. In fact, many of the companies that benefited the most actually reduced their U.S. workforces.

Completely ignoring JCT’s findings, Senator Paul claims that the tax revenue generated from taxing the repatriated profits (even at a low rate of 5 percent) could be used to fund repairs of bridges and highways.

We’d like to assume that Senators know you can’t use a tax proposal that loses revenue to pay for something. We would like to assume that, but, sadly, we can’t.  

Photo of Rand Paul via Gage Skidmore Creative Commons Attribution License 2.0

Why do 56 percent of Americans dislike or even hate doing their taxes? A recent Pew Research poll found that it’s not for any of the reasons anti-tax activists like Grover Norquist would like you to believe. As Pew explains:

Among those who dislike or hate doing their taxes, most cite the hassles of the process or the amount of time it takes: 31% say it is complicated, requires too much paperwork or they are afraid of making mistakes, while 24% say it is inconvenient and time-consuming. A much smaller share (12%) says they dislike doing their taxes because of how the government uses tax money. Just 5% of those who dislike or hate doing their income taxes say it is because they pay too much in taxes.

So what if it weren’t a time-consuming hassle? You have probably heard that a “flat tax” or “fair tax” is the solution, but we do not need to turn our progressive tax system upside-down (PDF) to simplify tax collection.

The real solution to the hassle problem is called “return-free filing.” It doesn’t just reduce your work to fill out a postcard, it eliminates it altogether.

Under one version of a return-free filing system, the IRS would send each taxpayer their own tax return, already filled out and with their taxes owed calculated. The taxpayer can either approve it, or choose to fill out their own return.

Even with our complicated system of tax breaks, experts estimate that as many as 54 percent of taxpayers would no longer need to go through the trouble of filling out their own tax return under a return-free filing system. According to one estimate, moving to this system could save Americans over $2 billion in tax prep costs and 225 million hours in tax prep time each year.

A return-free tax system is more than just theoretical. The reality is that thirty-six countries (PDF) like Germany, Japan and the United Kingdom already use a return-free filing system to greater or lesser extents. In fact, you do not have to look any further than California, which uses this approach in its ReadyReturn program. According to a study of ReadyReturn (subscription required), participants in the program spent about 80 percent less time filing and had an error rate of a tenth of the level of comparable taxpayers.

The benefits of return-free filing have been lauded by members of both major political parties. For example, the comprehensive tax reform plan co-sponsored by Democratic Senator Ron Wyden and Republican Senator Dan Coats in 2011 includes a return-free filing system dubbed “Easyfile,” and both President Barack Obama and former President Ronald Reagan have sung the praises of return-free filing.

While return-free filing gets accolades from across the political spectrum, it has some powerful opponents thwarting its implementation in the U.S. An exceptional article from ProPublica explains that the most prominent opponents of this system are tax preparation companies like H&R Block and Intuit (the maker of TurboTax), which stand to lose a lot of money if taxpayers no longer need help preparing tax returns. In the past five years, these companies have spent $20 million lobbying Congress to ignore the benefits to taxpayers of return-free filing.

There are debates, however, as to whether the act of filling out tax returns “promotes civic reflection,” making us somehow more engaged in our government, perhaps more critical as well, in the same way that jury duty reminds us we are all participants in democracy.

And while Duke University Law Professor Lawrence Zelenak has been a proponent of this argument, in his recent book he suggests that “the fiscal-citizenship-promoting character of the return-filing process might well be even more pronounced” under a return-free filing system.  Echoing the Pew findings, he suggests that eliminating the “negative feeling engendered by grappling with complexity or by paying a surrogate” might allow Americans to focus more clearly on the larger picture and benefits of government.

While there is no shortage of critical tax reforms we should implement to improve our tax system, moving toward a return-free tax system would be an important step toward bolstering “the bond between taxation and citizenship” as Zelenak put it in a recent New York Times editorial, and making “filing Form 1040 an act of civic pride rather than a bureaucratic hassle.”

The Brewers Association, a lobbying group for craft beer brewers, has been trying to make a case for a reduction in the federal excise tax on small U.S. craft brewers. The group supports legislation – the Small BREW Act – introduced earlier this year which would cut in half the excise tax on the first 60,000 cases of beer a craft brewer produces. Significantly, the bill would also quietly redefine what the federal tax code considers a “craft brewer” to include companies producing up to 6 million barrels of beer a year. (Right now, companies making less than 2 million barrels a year are eligible for an already-existing, smaller excise tax break on the first 60,000 barrels.) This would have the effect of giving beer tax breaks to some companies that few Americans would think of as “craft brewers.”

That would make the Boston Beer Company, maker of tasty brews under the Sam Adams label which enjoyed more than $95 million in US profits last year, a craft brewer and take a big bite out of its already low tax bill.

Over the past five years, the Boston Beer Company has claimed $22 million in tax breaks for executive stock options, has cut its taxes by $9 million using a federal tax break for “domestic manufacturing” and it has even enjoyed millions of dollars in federal research and development tax breaks. The company’s effective tax rate on its $330 million in US profits over the past five years has been just 23 percent, well below the 35 percent corporate income tax rate. And in 2008, while it reported $16 million in US profits it managed not to pay a dime in federal income taxes on that income. (In fact, the company reported receiving a tax rebate of $2 million from Uncle Sam that year.)

Boston Beer would become eligible for “craft brewer” tax breaks under the proposed bill (courtesy of the Congressional Small Brewers Caucus). While the Boston Beer Company is certainly smaller than the two multinational giants it competes against (Anheuser-Busch Inbev and SAB Miller), the company with the ubiquitous Sam Adams products enjoys profits on a scale that dwarfs the true craft breweries dotting the American landscape.

At a time when Congress and the Obama administration are critically examining many of the unwarranted tax breaks that have been purchased with lobbying dollars over the years, one has to ask: are new tax breaks for a mid-sized tax-avoider beer company high on our national “to-do” list?

While major tax swap proposals have collapsed this year in Louisiana, Nebraska and Ohio, plans to pay for personal and corporate income tax cuts with a greater reliance on a regressive sales tax are still very much alive in North Carolina. This week, North Carolina’s Senate President and Senate Finance chairs released the latest version of a tax swap for the Tarheel State which they named the Tax Fairness Act. They are billing it as the largest tax cut in the state’s history.

Details of the plan are lacking despite the unveiling of a flashy website showcasing a tax calculator and video of the Senate President pontificating about the “plan.”  Vaguely, we know the proponents intend to flatten the income tax, reduce taxes on businesses, eliminate the estate tax, and expand the sales tax base to most consumer services, food and prescription drugs.

It is clear that the result of the plan will be threefold: a significant tax hike on low- and middle-income families; a large tax cut for the state’s wealthiest households and profitable corporations; and a loss of more than $1 billion in revenue annually for vital public investments.

An editorial in Wednesday’s Raleigh News and Observer suggested the proposal should be renamed the “Let Working Families Pay More And The Rich Pay Less Act”.  Indeed. Here is more from the editorial, which does an excellent job explaining the problems with the State Senate tax swap proposal:

“What’s being sold is North Carolina’s future. Berger, Rucho and Rabon promise it will be a future in which tax cuts for the wealthy and corporations will bring a flowering of new jobs. That promise, so often tested and always found wanting, will fail again. Tax cuts don’t create jobs, and they aren’t a primary reason why businesses come to this or any state. What fuels an economy and fosters business growth are a strong infrastructure, a clean environment and good schools. Those things would be undermined by tax cuts that would reduce public spending in a growing state with growing needs.

"To Berger, the new arrangement would be fair because the sales tax would be applied more broadly, services would be taxed equally and everyone would pay according to what they consume. “The more you spend, the more you pay,” he said. “The less you spend, the less you pay.” Berger tries to sweeten the bitter realities of the plan by touting the reduction in tax revenue as “the largest tax cut in state history.” But that claim doesn’t define the effect by income. Senate Democratic leader Martin Nesbitt did. “This plan actually amounts to the largest tax increase in North Carolina history on the middle class and working families,” he said....

Lowering income taxes on the rich and expanding the sales tax paid by all doesn’t make taxation fairer, no matter what you call it.”

In an excellent op-ed, Jason Bailey of the Kentucky Center for Economic Policy makes the case for real tax reform in Kentucky, and that means a tax code that can raise revenues to keep Kentucky thriving. He explains that after years of budget cuts and a sluggish economy, the Bluegrass State cannot make public investments needed to recover economically and get on a sustainable fiscal footing. Bailey lists the various stop-gap measures lawmakers have already deployed and concludes they are all out of tricks. With a good roadmap to reform available, Bailey writes, it’s time to begin that hard work.

This otherwise fine article in the St. Louis Post-Dispatch, about competing tax proposals in Missouri, provided online readers with a calculator – that utterly failed in calculating how those proposals would affect taxpayers. The state policy team at ITEP quickly responded with a Letter to the Editor pointing out that “the tax calculator omits some key information about who wins and who loses under these plans.”

Tax policy is taking center stage in Virginia’s gubernatorial race. Republican candidate Ken Cuccinelli is reportedly in the process of designing a major tax cut on which to campaign.  While precise details have yet to be announced, a 20 percent cut in the personal income tax and elimination of the corporate income tax altogether are under consideration. Watch this space for a full analysis of the plan’s impact on Virginians at different income levels once more details are announced.

The Center on Budget and Policy Priorities (CBPP) has a new report that clarifies a lot of misconceptions about the existence of fraud in the Earned Income Tax Credit (EITC). For starters, CBPP explains that most EITC overpayments “reflect unintentional errors, not fraud.”  On top of that, it turns out that IRS studies of EITC overpayments suffer from “significant methodological problems that likely cause them to overstate the actual EITC overpayments.”

Some members of Congress are pushing ahead (or at least creating the appearance that they are pushing ahead) with tax reform without addressing the most important issue of the debate: revenue. As we have pointed out before, the $975 billion in tax increases called for in the recent Senate budget resolution would not even raise revenue high enough to fund the level of spending that Ronald Reagan presided over. To discuss addressing the tax code without raising any new revenue at all is simply absurd. 

Lack of Attention to Revenue in House and Senate

In the Ways and Means Committee, the tax-writing committee in the House of Representatives, Republican chairman Dave Camp has made clear that he wants tax reform to be “revenue-neutral,” meaning loopholes and tax expenditures (subsidies provided through the tax code) may be reduced, but the revenue savings would all be used to offset the cost of reducing tax rates.

Camp split his committee members into working groups that spent several weeks focused on various tax issues and receiving comments from interested parties (dominated as usual by big business). The Congressional Joint Committee on Taxation (JCT) just published an enormous report summarizing different facets of the tax system and summarizing the comments and suggestions submitted to these working groups. The suggestions include everything imaginable, from reducing the tax expenditure for capital gains to boosting the tax expenditure for capital gains, from ending “deferral” of taxes on offshore corporate profits to exempting those profits completely with a territorial system.

But almost none of the suggestions summarized in the report actually touch upon the biggest question facing anyone trying to overhaul a tax system: How much revenue should we collect?

Meanwhile, Senator Max Baucus, the chairman of the Finance Committee, the tax-writing committee in the Senate, seems to believe that he can carry out a debate over tax reform without actually addressing how much revenue should be collected. A CTJ op-ed published last month criticized Baucus’s approach. We noted that

Democratic and Republican tax-writers are holding bipartisan talks to craft a tax reform bill, even though there is no agreement between the parties on what the basic goals of such reform ought to be. One party recognizes a need for more revenue while another has pledged to not raise more revenue. This would be like holding bipartisan talks on immigration reform — if one party supported a path to citizenship while the other party pledged to round up all undocumented immigrants and deport them without exceptions…

Some more recent comments from Senator Baucus have indicated that he at least might try to get some revenue from tax reform. He recently said during a hearing,

“We will close billions of dollars of loopholes. Some of this revenue should be used to cut taxes for America’s families and help our businesses create jobs, and some of the revenue raised in tax reform should also be used to reduce the deficit,” Baucus said. “It’s all about finding common ground.”

We’d feel better if Senator Baucus acknowledged that raising revenue should be the main purpose of tax reform because our most pressing need is revenue to fund public investments.

Deficit-Neutral Tax Reform Has No Place in a Plan to Address the Deficit

The most ridiculous idea aired recently is for Congressional Republicans to demand revenue-neutral tax reform in return for agreeing to President Obama’s request that the federal debt ceiling be raised.

The last time the Republican majority in the House of Representatives agreed to pleas of President Obama and the Senate to raise the debt ceiling, they demanded that the deficit be reduced by the sequestration that is in effect today. No revenue was raised in that deal.

Now, some Republican lawmakers are discussing extracting a different concession: an agreement that would provide a fast-track process to enact tax reform. But the tax reform they propose would be revenue-neutral (meaning it would be deficit-neutral). There is simply no logical connection between the deficits that require us to raise the debt ceiling and a tax reform that would do nothing to reduce those deficits.

Will “Dynamic Scoring” Paper Over the Revenue Question?

Some lawmakers have tried to confuse the debate by arguing that Congress should enact a tax reform that is revenue-neutral according to the revenue-scoring methods officially used by Congress but revenue-positive if Congress switches to a different method that they claim is more accurate. This method is known as “dynamic scoring,” which assumes that reducing tax rates increases incomes and profits so dramatically that the additional tax collected on the new income and profits would partially offset (or more than offset) the revenue lost as a result of the rate reduction. In other words, a tax cut (because it causes the economy to expand) could pay for itself or even raise revenue.

There is no evidence that the money channeled into the economy by reductions in tax rates expands the economy in this way. But even if we all agreed that it did, that would logically require us to agree that spending cuts could suck enough money out of the economy to have the opposite effect. But Chairman Camp and his colleagues support the spending cuts in the Ryan budget and would never want to admit that spending cuts have macroeconomic effects that blunt or even reverse any deficit-reduction that these lawmakers are trying to accomplish.

Members of Congress have a serious disagreement over revenue, and they can’t paper over it by using the gimmick of “dynamic scoring.” There is only one real resolution, and that’s to acknowledge a need for tax increases.

The Oklahoma legislature recently approved a cut to the state’s top personal income tax rate, at the urging of Governor Mary Fallin. When the plan is fully implemented in 2016, the state’s top tax rate will fall from 5.25 to 4.85 percent, at a cost to the state of $237 million per year.  While a slim majority (52 percent) of Oklahomans support the idea of an income tax cut in the abstract, that support evaporates (falling to 31 percent) once the plan is explained in more detail.

That detail is as follows. According to an analysis by our partner organization, the Institute on Taxation and Economic Policy (ITEP), roughly 4 in 10 Oklahomans—generally lower- and middle-income families—will receive no tax cut at all under the plan, while the average tax cut for a middle-income family will be just $30.  The wealthiest 5 percent of taxpayers, by contrast, will receive 40 percent of the benefits, with the state’s top 1 percent of earners alone taking home a tax cut averaging over $2,000 per year.

When these basic facts about the tax plan now on Governor Fallin’s desk were explained to a random sample of registered Oklahoma voters, 60 percent of them said they opposed it, with a full 47 percent describing themselves as “strongly opposed.”

Voters’ reaction was similar upon being informed that the plan will require reducing state services like education, public safety, and health care. This vital piece of information resulted in support for the tax cut dropping to just 34 percent, and opposition rising to 56 percent (with 44 percent “strongly opposed.”)

These polling results are backed up by interviews with Oklahoma citizens conducted by the state’s largest newspaper, The Oklahoman. One Oklahoma resident explains, for example, that “If [the tax cut] harmed education I don't want it. I have a niece that is a schoolteacher and I'd rather have more teachers than the little bit of money.” Another says that “It sounds like the rich are just getting richer.”

Meanwhile, the Oklahoma Policy Institute (OPI) explains that the plan isn’t just unpopular—it’s fundamentally irresponsible: “We have seen no evidence that Oklahoma will be able to afford a tax cut in [2015, when the first stage of the cut takes effect]. Indeed, we are already seeing signs of faltering revenue collections, with revenue falling below last year.” Concern about the sustainability of Oklahoma’s revenues is compounded by the possibility that “the state could be on the hook for as much as $480 million” in additional expenses if a court ruling against its tax break for capital gains is upheld. The Associated Press reports that when the impact of this court ruling is “combined with an estimated $237 million price tag for a tax cut approved by the Legislature this year and expected to be signed into law by Gov. Mary Fallin… the cost to the state could amount to 10 percent of the total state appropriated budget.”

Given these challenges, it’s hard to argue with OPI’s policy prescription: “Now that cuts are scheduled, the only responsible path forward is to pursue real tax reform that goes beyond the top income tax rate. To fund education and ensure a prosperous future for Oklahoma, we need real action to reign in unnecessary tax credits and exemptions that cost us hundreds of millions of dollars every year.”

Washington, DC – Today, the U.S. Senate is expected to pass the Marketplace Fairness Act, a bipartisan bill that would finally let state governments enforce their sales tax laws on purchases made over the Internet. Currently, retailers are only required to collect sales taxes from their customers if they have a store, warehouse, sales force, or other “physical presence” in the same state as the customer. In all other cases, online shoppers are required to pay the sales tax directly to their state government, but this requirement is unenforceable and routinely ignored. President Obama has indicated that he will sign the bill if it also passes the House of Representatives.

In anticipation of the vote, Carl Davis, senior analyst at the Institute on Taxation and Economic Policy (ITEP), issued the following statement:

“State lawmakers across the country will be celebrating today’s Senate vote aimed at ending the fiscal nightmare that online shopping has become. This vote begins to untie states’ hands in the fight against online sales tax evasion.

“Billions of dollars of revenue go uncollected every year because a court ruling from the days of floppy disks and dial-up allows online merchants to dodge their responsibility.

“We are not talking about a new tax here, these taxes are due by law. For the sales tax to work, retailers – no matter where they’re located – have to participate in collecting the tax from customers.

“State and local governments would have an additional 23 billion dollars a year to invest in education, infrastructure, law enforcement and other public services if they could collect online sales taxes due. Today they are one step closer to being able to make those investments.”

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

The debate over how to effectively tax property in Iowa has raged for years. A new report from the Iowa Fiscal Project (IFP) compares and contrasts the property tax reform proposals put forward by the Iowa House and Senate. The report was described in this Des Moines Register editorial with high praise: “No matter which approach prevails, the Iowa Fiscal Partnership deserves credit for an unbiased examination of the impact of the competing property tax proposals on real businesses in Iowa.”

Currently, commercial property taxes are based on 100 percent of their actual values. Residential property is treated very differently. IFP reports that most recently residential property was assessed at just 52.8 percent of actual value. This disparity is something that Governor Branstad, the Iowa House and Senate are working to address. The Senate bill would create a property tax credit which would ultimately mean that some commercial property would be taxed like residential property. The House bill (which has the support of Governor Branstad) would ultimately tax commercial property at 80 percent of its actual value. In its report, IFP raises important questions about how local governments will be reimbursed for the resulting reductions in a significant local government revenue source should either bill become law. The Senate bill provides more targeted tax relief to corporations, whereas the House bill provides a property tax reduction to all businesses.

It could be that this issue gets put on hold for yet another year because Senator Joe Bolkcom (chair of the Ways and Means Committee) is vowing, as he has before, that no compromise on a tax bill will be reached until an increase in Earned Income tax Credit (EITC) is signed into law.

Good Jobs First (GJF) has a new in-depth report revealing how the most aggressively promoted and publicized measures of states’ “business climates” are nothing more than messaging tools “designed to promote a particular political agenda.”  According to the study’s co-author, PhD economist Peter Fisher, “When we scrutinized the business climate methodologies, we found profound and elementary errors. We found effects presented as causes. We found factors that have no empirically proven relationship to economic growth. And we found scores that ignore major differences among state tax systems.” Yet too often, such rankings are reported uncritically in the media and – worse – cited by lawmakers seeking to change policy. Of course, this is precisely the goal of the corporate-backed, ideologically driven organizations generating these simplistic reports.

Looking at indexes from the Tax Foundation, ALEC and other anti-tax groups, GJF finds that “the one consistent theme that the indexes harp on is regressive taxation, especially lower corporate income taxes, lower or flat or nonexistent personal income taxes, and no estate or inheritance taxes.”  While the biggest problem is that none of the indexes show any actual economic benefits from their policy prescriptions, GJF also spotlights a slew of methodological problems that in some cases border on comical:

The Tax Foundation’s State Business Tax Climate Index is compiled by “stirring together no less than 118 features of the tax law and producing out of that stew a single, arbitrary index number.” Since the Tax Foundation index gets sidetracked into trivial issues like the number of income tax brackets and the tax rate on beer, it should come as little surprise that their ranking bears no resemblance to more careful measures of the actual level of taxes paid by businesses in each state. GJF concludes that “it is hard to imagine how the [Tax Foundation] could do much worse in terms of measuring the actual amount of taxes businesses pay in one state versus another.”

The index contained in the American Legislative Exchange Council’s (ALEC) Rich States, Poor States report fails an even more fundamental test. After running a series of statistical models to examine how states that have enacted ALEC’s preferred policies have fared, GJF concludes that the index “fails to predict job creation, GDP growth, state and local revenue growth, or rising personal incomes.”

The Beacon Hill Institute’s State Competitiveness Report misses the purpose of these indexes entirely by assuming that things like the creation of new businesses and the existence of state government budget surpluses somehow cause economic growth—rather than being direct result of it. 

Finally, the Small Business and Entrepreneurship Council’s (SBEC) U.S. Business Policy Index has a somewhat more narrow focus: grading states based on policies that the SBEC thinks are important to entrepreneurship and small business development.  But GJF explains that “the authors apparently believe that there are in fact no government programs or policies that are supportable … State spending on infrastructure, the quality of the education system, small business development centers or entrepreneurship programs at public universities, technology transfer or business extension programs, business-university partnerships, small business incubators, state venture capital funding—none of these public activities is included in the [index].”  Unsurprisingly, then, GJF also finds that a state’s ranking on the SBEC index has no relation with how well it actually does in terms of variables like the prevalence of business startups and existence of fast-growing firms.

But while each index has its own problems, GJF also points out that when it comes to tax policy, there’s a much more fundamental flaw with what these organizations have tried to do:

State and local taxes are a very small share of business costs—less than two percent … State and local governments have a great deal of power to affect the other 98+ percent of companies’ cost structures, particularly in the education and skill levels of the workforce, the efficiency of infrastructure, and the quality of public services generally. … The business tax rankings examined here … are worse than meaningless – they distract policy makers from the most important responsibilities of the public sector and help to undermine the long run foundations of state economic growth and prosperity.

Read the report

President Obama has proposed to limit the tax savings for high-income taxpayers from itemized deductions and certain other deductions and exclusions to 28 cents for each dollar deducted or excluded. This proposal would raise more than half a trillion dollars in revenue over the up­coming decade. 

A new report from Citizens for Tax Justice (CTJ) analyzes the proposal and models its effects on taxpayers nationally and state-by-state. Findings include:

• Only 3.6 percent of Americans would receive a tax increase under the plan in 2014, and their average tax increase would equal less than one percent of their income, or $5,950.
• The deduction for state and local taxes and the deduction for charitable giving together would make up just over half of the tax expenditures (deductions, etc.) limited under the proposal.
• Arkansas and West Virginia have the lowest percentage (1.6 percent) of taxpayers who would see a tax increase from this proposal; Washington, D.C. would have the largest percentage (8.9 percent) followed by Connecticut and New Jersey (both 6.7 percent).

Read the report.

Michigan’s former Treasurer, Robert Kleine, explains in a Detroit Free Press op-ed that “there is no evidence that … [a 2011 tax change] reducing business taxes by $1.7 billion has created new jobs in Michigan.”  Among other things, Kleine observes that “state business taxes are such a small part of a business’ costs that even large changes have a minor impact.”

Gas taxes remain a major topic of debate in the states.  Since publishing our mid-session update on state gas tax debates two weeks ago, Vermont Governor Peter Shumlin signed a gas tax increase into law, Iowa Governor Terry Branstad reiterated that a gas tax hike is still on the table in his state, and The Olympian reports that raising Washington State’s gas tax is “now widely seen as a topic for special session.”

New Jersey Governor Chris Christie has been traveling the state seeking support for his more than $2 billion tax cut proposal (once fully phased-in) ever since using Tax Day 2013 to announce his renewed push for the plan he first championed last year. An op-ed from the Better Choices for New Jersey Campaign says the proposal was “a bad idea then, and it remains one today.”  Why?  Simply put, the state cannot afford even the scaled-back tax cut the governor is proposing for 2013 without reducing spending.

A new report from the North Carolina Budget and Tax Center takes on two common myths about the state’s economy that policymakers often use to justify cutting or eliminating taxes: North Carolina’s economy is uncompetitive compared to neighboring states and high tax rates drive North Carolina’s high unemployment. The report found that North Carolina is actually either leading or in the middle of the pack in every major indicator of economic health except for unemployment.  And, the explanation for high unemployment? A decline in specific industries the state has long relied on – like textiles and furniture – that are highly vulnerable to offshoring, outsourcing and other global pressures, not high tax rates.

Anti-Taxer-in-Chief Grover Norquist recently travelled to Minnesota where he met up with Congresswoman Michele Bachmann to rally against taxes. Minnesota is actually one of the bright lights this year for tax justice advocates who are supporting House and Senate plans there that would raise taxes on the wealthiest Minnesotans.

The Missouri House and Senate have each passed their own versions of a “race to the bottom” tax plan in a misguided effort to keep up with neighboring Kansas, where a radical tax plan that is eviscerating the state’s budget might actually be followed up by another round of tax cuts (currently being debated by the legislature).

Both the Missouri Senate and House plans would reduce income tax rates, introduce a 50 percent exclusion for “pass-through” business income, reduce corporate income tax rates, and increase the sales tax. The Senate plan is summed up in this St. Louis Post-Dispatch editorial, Missouri Senate Declares Class War Against Citizens.

“The poorest 20 percent of Missourians, those earning $18,000 a year or less, will pay $63 a year more in taxes. Those earning between $18,000 and $33,000 a year will pay $129 more. The middle quintile — those earning between $33,000 and $53,000 a year — will pay $150 a year more. The fourth quintile ($53,000 to $85,000 a year) will pay $149 a year more. That’s a grand total of 80 percent of Missourians who will pay more and get less: crummier schools, higher college tuitions (because state aid will continue to fall) and less access to worse state services. The poor are used to this. It remains to be seen whether the middle class will put up with it.”

Despite the fact that similarly reckless tax proposals in other states have failed (Louisiana and Nebraska) or been scaled back (Ohio), it seems the proposals are moving forward in Missouri, thanks in large part to Americans for Prosperity. This national group uses state chapters to throw money at anti-tax, anti-government agendas its corporate funders like, and it has launched a “Bold Ideas Tour” to travel Missouri advocating for deep tax cuts as the state’s legislature approaches its closing date of May 17.

Governor Jay Nixon has vowed he will veto a tax cut bill of this magnitude, rightly saying, "Making a veteran with aches and pains pay more for an aspirin so that an S Corporation can get a tax cut does not reflect our values or our priorities. I have long opposed schemes like this one that would shift costs onto families because they reflect the wrong priorities and do not work.”

The Governor’s position is supported by multiple experts, including the Institute on Taxation and Economic Policy (ITEP), and it looks like Missouri could be a state where good information comes between the national anti-tax movement and their legislative agenda.