The Senate approved a bill Wednesday that includes an extension of unemployment benefits and COBRA health benefits for unemployed workers through the end of the year, and a short-term extension of Medicaid funding for states and a Medicare "doc fix" (maintaining payments to doctors under Medicare).

The cost of this spending was not offset since it is considered emergency spending to stimulate the economy. But the costs of other provisions in the bill — extensions for $30 billion worth of business tax breaks often called the "tax extenders" — were offset. The biggest revenue-raiser used to offset this costs is a provision to close the "black liquor" loophole. This loophole allows paper-making companies using a carbon-rich by-product as fuel to use a tax credit that is supposed to encourage the use of environmentally-friendly alternative fuels.

But the "black liquor" provision may be used instead in the final health care reform bill. The health care reform bill approved by the House on November 7 of last year (H.R. 3962) included this revenue provision, and the President's recent proposal to bridge the differences between the House and Senate health bills also includes it.

There is another perfectly good revenue-raising provision that the Senate can use to offset most of the cost of the "tax extenders." The version of the tax extenders bill approved by the House on December 9 was supported by CTJ and several other progressive organizations because it included several good provisions, including one to close the infamous "carried interest" loophole. U.S. PIRG and CTJ issued a joint press release yesterday stating their disappointment that the Senate has not done the same.

The carried interest loophole allows billionaires managing hedge funds and buyout funds to pay taxes at a lower rate than middle-income workers. The House has passed legislation three separate times to close the carried interest loophole (including the recent House-passed extenders bill), and both of President Obama’s budget plans have proposed to close it. Senator Chuck Schumer (D-NY) was quoted in Congress Daily recently saying that closing the carried interest loophole is "on the table."

Until this loophole is closed, the compensation of these fund managers will continue to be taxed at a rate of 15 percent, the preferential rate for capital gains that is supposed to benefit people who invest their own money, not the people who manage it.

You don't know it, but you are probably a tax scofflaw-- because you haven't paid your "use tax." If you purchase, say, a stereo from a store in your state (and your state has a sales tax), you'll pay sales tax on that purchase. But when you buy the same stereo on-line from, say, Amazon.com, odds are that Amazon won't add sales tax to your purchase price. The laws of all sales tax states are quite clear on what is supposed to happen in this situation: you, as the purchaser, are supposed to pay the "use tax", which has exactly the same tax rates and tax base as the regular sales tax. But individual consumers purchasing items online very rarely pay the tax in this situation, and states typically make little effort to enforce it, as least with respect to household purchases (as opposed to business purchases).

If one wanted to make a short list of tax reforms that could lead to effective enforcement of the use tax, two things high on that list would be (a) that when a retailer in state X sells a sales-taxable item to a consumer in state Y, and does not collect sales tax on that item because they have no physical presence in state Y, then the retailer should have to remind the purchaser that they are legally required to pay the use tax, and (b) that under this same scenario, the retailer should have to alert state Y's Dept. of Revenue that these transactions took place.

This is precisely what Colorado did when it enacted House Bill 1193 earlier this year. The new law requires companies like Amazon, which has no physical presence in the state, to send a reminder to purchasers that they are supposed to pay the use tax. It also requires these companies to send an end-of-year statement to the state revenue department summarizing the value of untaxed sales to each customer. The law does NOT require Amazon to collect a dime of additional tax.

Earlier this week, Amazon responded to this law by dropping all its affiliates in the state of Colorado. (Affiliates are individuals or companies who put a link to Amazon on their own website, and earn a share of the take when customers click-through to buy things on Amazon's website.) As the Center on Budget and Policy Priorities' Michael Mazerov notes in a statement on Amazon's actions, this is a purely punitive action that has no relationship to the new law: the new reporting requirements under HB 1193 don't depend on whether a sale was made through a "click-through" affiliate, and even after dropping its affiliates, Amazon will still have to comply with the law. Amazon's actions can only be interpreted as a politically motivated attempt to rile up anti-tax sentiment sufficiently so that Colorado lawmakers will repeal the new law.
The use tax should be enforced by every state. Colorado's approach to doing so is sensible and fair, and does not impose substantial burdens on sellers like Amazon. By hitting its own affiliates in their wallets, Amazon is avoiding an open discussion of why they apparently believe the use tax should be repealed.

The Senate finally passed a 30-day extension of unemployment insurance and health care benefits for the unemployed, but not before benefits had expired for hundreds of thousands of jobless Americans and thousands of others were furloughed from construction jobs as federal funding expired.  The legislation had been held up by Senator Jim Bunning (R-KY) who wanted to offset the costs of the bill, while other Republican Senators threatened to block the bill if they were not promised a vote on a measure to reduce the estate tax for millionaires. 
 
The President signed the 30-day extension into law on Tuesday evening, just hours after the bill had passed.

Senators then returned to legislation extending jobless benefits, as well as many expiring tax provisions, through the end of the year. The Senate took up a substitute amendment (S. Amdt 3336) for the House  "tax extenders" bill that was passed in December. The Senate version was expected to contain a reinstatement of the estate tax (which is temporarily repealed for 2010), but it was not included. However, many amendments to the bill are being offered and it's still unclear whether any will address the estate tax. President Obama and Democratic leaders want to reinstate the estate tax at the level in effect in 2009 (which was cut down about 50 percent from the pre-Bush level) while Senate Republicans and a few Senate Democrats wish to cut the estate tax even further.

Like the House Democrats, the Senate Democrats plan to offset the cost of the "tax extenders," which is included in the long-term extension of UI and COBRA that they plan to vote on next week. The "tax extenders" are a group of supposedly temporary tax cuts that mostly go to business interests and that Congress extends each year, sometimes retroactively. The extenders themselves are questionable policy, but the fact that Congress wants to pay for them by closing loopholes is a positive development.

The Senate version of the extenders bill would close the "black liquor" loophole, which allows paper companies to take an alternative fuel tax credit for a long-used process that is not environmentally friendly.

The 2005 highway law includes a tax credit for fuel that is a mix of alternative fuel (cellulosic fuel, meaning fuel made from the non-edible parts of plants) and traditional fossil fuel. In 2007, this credit was extended to include fuel used for purposes like manufacturing.

The problem is that certain paper companies already have a process that involves a cellulosic fuel (“black liquor,” a by-product from the pulp-making process), albeit one that is carbon-rich and not something Congress would want to encourage for environmental reasons. These paper companies realized that they could qualify for this new credit if they added fossil fuel to the cellulosic fuel they were already using.

In other words, companies are actually getting paid to add diesel to a relatively dirty fuel that they were already using. This is obviously not what Congress intended when it enacted this tax credit. The Senate is right to close this loophole.

The U.S. House of Representatives adjourned for the year on Wednesday while the Senate hustles to finish legislation on health care. As of this writing, an array of major tax issues are still to be resolved in the next several days or when Congress returns in 2010:

Health Care Reform

On November 7, the House passed its health care bill, (H.R. 3962), which includes a public option. The largest revenue-raising provision in the House health bill is a surcharge of 5.4 percent on adjusted gross incomes over $1 million (or over $500,000 for unmarried individuals).

(See CTJ's previous analysis and state-by-state estimates of the surcharge in the House health care bill.)

The Senate is still working to pass a health care bill, and some reports claim that the chamber could be working on Christmas Eve to accomplish it. While there is a clear majority of Senators willing to support a public option, the rules allowing 41 Senators to filibuster legislation have encouraged a few conservative Democrats to join Republicans in blocking a public option.

While some details remain to be worked out, a majority of Senators seems to have settled on certain revenue-raising provisions to help pay for health care reform. The largest revenue-raiser in the still-developing Senate bill is an excise tax on high-cost health insurance plans. This excise tax is controversial because many analysts conclude that these plans are not particularly generous in the benefits they provide and they are not necessarily enjoyed by high-income workers. Rather, the high costs are often the result of insurers charging more to cover a work force that is older than average or that has high health risks.

(See CTJ's previous analysis concluding that the Senate's proposed excise tax on high-cost health insurance is less progressive than the surcharge in the House health care bill.)

One revenue-raiser in the Senate proposal that is progressive is an increase in the Medicare payroll tax rate on earnings over $250,000 (or over $200,000 for an unmarried individual).

While this tax increase would only affect those who can afford to pay more, an even better proposal would reform the Medicare tax so that it no longer exempts investment income. This idea was included in an amendment that was filed by Senator Debbie Stabenow during the Finance Committee markup, but was not acted on. Such an amendment may be offered when health care reform is debated on the Senate floor.

Job Creation

On December 8, President Obama announced several proposals to create jobs. His best ideas involve direct spending by the federal government (including extending aid to unemployed and low-income people and aid to state and local governments, among other things). His worst ideas involve tax cuts (including eliminating capital gains taxes on small business investment and providing a tax credit for payroll expansion).

(See CTJ's previous discussion of President Obama's job creation proposals and ways to stimulate the economy.)

The House approved a $154 billion jobs bill, as part of a regular appropriations bill (H.R. 2847), before adjourning this week, and thankfully, it focuses on direct spending. One of the few tax cuts included is a provision to remove the earnings requirement (currently set at $3,000) for the refundable portion of the Child Tax Credit, ensuring that low-income families with children can benefit from it. The Senate is not expected to take up jobs legislation until sometime next year.

Estate Tax

The tax cut legislation enacted by President Bush and his allies in Congress in 2001 set the estate tax to gradually shrink until disappearing altogether in 2010. But, like all the Bush tax cuts, this estate tax cut expires at the end of 2010, meaning the estate tax will reappear in 2011 at the pre-Bush levels if Congress simply does nothing.

Families who have several million dollars to leave to the next generation have benefited the most from the infrastructure, educated workforce, stability and other public goods that taxes make possible. So it's entirely reasonable that these families pay a tax on the transfer of their enormous estates from one generation to the next, particularly since the majority of the value in these estates is capital gains income that has never been taxed.

One might be tempted to think that allowing the estate tax to disappear would be fine if it reappears at the pre-Bush levels in 2010. Unfortunately, the one-year repeal of the estate tax could tempt some lawmakers to make that repeal permanent, or might tempt them to allow only a very scaled back version of the estate tax to reappear in 2011.

So the House of Representatives approved a compromise that would make permanent the estate tax rules in effect in 2009. This would partially preserve the Bush cut in the estate tax, but prevent the tax from disappearing in 2010.

(See CTJ's previous analysis of the estate tax legislation, along with state-by-state figures showing how few estates are actually subject to the tax.)

Key Democratic Senators indicated that they did not want to make permanent the 2009 rules because -- incredibly -- they were interested in reducing the estate tax even more. Democratic leaders in the Senate attempted but failed to get agreement in the chamber to pass a one-year extension of the 2009 rules, which would prevent the estate tax from disappearing in 2010 and allow Congress to debate a permanent solution as part of the broader tax debate that must happen before the Bush tax cuts expire at the end of next year.

Pathetically, the Senate failed last week to prevent the one-year repeal, which they had known was coming ever since the Bush cut in the estate tax was enacted back in 2001. Democratic leaders in the Senate say they will enact the one-year extension of the 2009 estate tax rules retroactively in 2010. While retroactive tax increases may not be the ideal way to do things, this approach should not cause any problems since tax planners have known for years that Congress was likely to act to prevent this one-year disappearance of the estate tax.

Corporate Tax Breaks (aka "Tax Extenders")

On December 9, the House approved H.R. 4213, which would extend a series of tax cuts (mostly breaks for business) but would offset the costs by closing the infamous "carried interest" loophole for buyout fund managers and by cracking down on offshore tax cheats.

The bill would also require the Joint Committee on Taxation (JCT) to issue reports evaluating these tax cuts before the end of next year, when Congress is likely to act on them again.

CTJ joined the AFL-CIO, SEIU, AFSCME and eight national non-profits in signing a letter in support of H.R. 4213 for these reasons.

The provisions extending the tax cuts (often called the "tax extenders") are enacted by Congress every year or so. CTJ and other analysts have often criticized the tax extenders as corporate pork routed through the tax code.

But H.R. 4213 is a major step in the right direction for the reasons spelled out in the letter to Congress.

(See our previous article on H.R. 4213 explaining the points made in the letter.)

Democratic leaders in the Senate want to pass the tax extenders retroactively early in 2010. One problem is that the chairman of the Senate tax-writing committee, Max Baucus (D-MT) believes that the carried interest issue is “best dealt with in the context of an overall tax reform,” according to a spokesman. As we've explained before, this is an all-purpose excuse for legislators who want to avoid closing even the most unfair and outrageous loopholes.

On December 9, the U.S. House of Representatives approved H.R. 4213, which would extend a series of tax cuts (mostly breaks for business) but would offset the costs by closing the infamous "carried interest" loophole for buyout fund managers and by cracking down on offshore tax cheats.

The bill would also require the Joint Committee on Taxation (JCT) to issue reports evaluating these tax cuts before the end of next year, when Congress is likely to act on them again. Congress would receive these reports at the same time it is trying to decide which of the Bush tax cuts should be extended, what to do with the President's tax reform proposals, and how to balance the federal budget. In this context, it is hoped that the reports will prod some lawmakers to take a more critical look at corporate tax breaks before extending them again.

CTJ joined the AFL-CIO, SEIU, AFSCME and eight national non-profits in signing a letter in support of H.R. 4213 for these reasons.

The provisions extending the tax cuts (often called the "tax extenders") are enacted by Congress every year or so. CTJ and other analysts have often criticized the tax extenders as corporate pork routed through the tax code.

But H.R. 4213 is a major step in the right direction for the reasons spelled out in the letter to Congress. (See our previous article on H.R. 4213 for the points made in the letter.)

Prospects in the Senate are unclear. One problem is the full agenda the Senate has with health care reform.

Another problem is that the chairman of the Senate tax-writing committee, Max Baucus (D-MT) believes that the carried interest issue is “best dealt with in the context of an overall tax reform,” according to a spokesman. This is, frankly, an all-purpose excuse for legislators who want to avoid closing even the most unfair and outrageous loopholes. They know full well that comprehensive tax reform might not happen for decades. (The last one was in 1986, after all).

The carried interest loophole allows managers of private equity funds (a euphemistic term for buyout funds) to pay taxes at a lower rate than their secretaries. It involves using the tax subsidy (the special top rate of 15% for capital gains) that was intended for people who invest their own money. Whether or not the capital gains tax subsidy is justified is another matter. (We believe it's not.) But private equity fund managers are not investing their own money anyway. They're being paid to manage other people's money, but by calling their compensation "carried interest" they're able to pay income taxes at the low, capital gains rate.

The notion that Congress can tackle tax schemes this blatantly unfair only in the context of comprehensive tax reform (which apparently only comes once every 25 years, if even that often) is ridiculous. Advocates of tax fairness need to call upon the Senate to approve H.R. 4213 as it was written and approved by the House of Representatives. 

Citizens for Tax Justice and several other national organizations have come together to support passage of (H.R. 4213), which fairly and responsibly offsets the cost of the "tax extenders." The House of Representatives plans to vote on this bill as early as December 9.

Read the letter in support of H.R. 4213.

To be sure, many of these organizations question the efficacy and fairness of some of the "tax extenders," which are provisions that Congress enacts periodically to extend, for a year or so, various temporary tax breaks. But we nonetheless agree that the core revenue-raising provisions included in this legislation are important reforms to our tax system. We  support this bill for the following reasons:

H.R. 4213 would reverse Congress's tradition of increasing the budget deficit every year by extending "temporary" tax breaks without paying for them.

Unlike many previous "tax extenders" bills, this legislation includes revenue-raising provisions that would offset the costs of extending these tax breaks. Enacting corporate tax breaks (which make up the bulk of the "tax extenders") without paying for them contributes to our federal budget deficits and our national debt, which is borne by all Americans. The revenue-raising provisions in this bill prevent an increase in the deficit while also making the tax code fairer and more efficient.

H.R. 4213 would finally close the loophole for what private equity fund managers call "carried interest." (See CTJ's previous analyses of the carried interest loophole.)

A middle-income person typically pays income taxes as high as 25 percent plus payroll taxes. Private equity fund managers can receive millions of dollars (or even billions of dollars, during boom times) in compensation for their work, but by calling this income "carried interest," they pay only income taxes at a 15 percent rate.

The "carried interest" label essentially allows these fund managers to pretend that this income is a return on capital investments (and thus eligible for the exception in the income tax that subjects capital gains to an income tax rate of no more than 15 percent). This pretense clearly contradicts the will of Congress in creating the subsidy for capital gains, which was meant to reward those who invested their own money, not those who are simply being paid to manage other people's money.

H.R. 4213 also includes a proposal introduced by Finance Committee Chairman Max Baucus and Ways and Means Committee Chairman Charles Rangel to prevent wealthy Americans from cheating on their U.S. taxes by hiding their income in offshore tax havens. (See CTJ's analysis of tax haven legislation.)

While this proposal is not as strong as we would prefer, it would be an important step forward to ensure that all Americans pay their fair share in taxes. Middle-income Americans typically have few opportunities to hide their income from the IRS. But wealthy Americans have access to lawyers and accountants who help them hide their income in offshore tax havens. Tax havens are countries that have a very low income tax (or no income tax) and laws that prevent their banks from cooperating with IRS enforcement efforts.

While the vast majority of taxpayers at all income levels do the right thing and pay their fair share, a minority of wealthy Americans are engaging in these activities that are both illegal and unfair. The Baucus-Rangel proposal would create strong incentives for foreign banks to provide information that would help the IRS identify tax cheats without creating any significant burden on the banks or their honest customers.

H.R. 4213 requires that the Joint Committee on Taxation (JCT) conduct studies evaluating the "tax extenders" before the end of next year, when Congress is likely to act on them again. (See CTJ's report calling on Congress and the administration to conduct regular reviews of tax expenditures.)

Providing a special corporate tax break through the tax code has the exact same effect as providing a subsidy through direct spending. Unfortunately, lawmakers have made almost no attempt to evaluate or even think critically about the effectiveness of corporate tax breaks before extending them each year. This contrasts significantly with lawmakers' attitudes towards the discretionary spending that they grapple with annually.

JCT's reports of the effectiveness of tax breaks will at least provide Congress with a basis to judge whether or not these tax provisions are worth their costs. This is a common sense reform that is long overdue.

On November 6, President Obama signed H.R. 3548, the Worker, Homeownership, and Business Assistance Act of 2009, which provides a much-needed extension of unemployment benefits. Around 400,000 workers exhausted their unemployment benefits at the end of September and far more would have exhausted them by the end of this year without this extension. As a report from CTJ explains, it is still unfortunate that the price of providing this necessary help is tax breaks to corporations and to the housing industry.

Sadly, Congress did not think that helping the unemployed during the worst recession in decades was worthy enough to do without larding the bill up a bit with tax cuts. One is a tax cut that will benefit people who buy a residence and who would have done so whether or not a tax cut was offered to them. The second will essentially give unprofitable companies cash with no strings attached.

Read the report.

Last year, Senator Carl Levin's Permanent Subcommittee on Investigations reviewed various studies on the fiscal impact of offshore tax evasion and concluded that the resulting loss of revenue annually is in the neighborhood of $100 billion. (Yes, that's $100 billion with a "b" -- every year.)

Senator Levin then introduced the Stop Tax Haven Abuse Act in the Senate, and Rep. Lloyd Doggett introduced the House version. This legislation makes several changes that would make it easier for the IRS to identify and prosecute Americans who illegally stash their income in countries commonly called tax havens, which essentially have no income taxes (or extremely low income taxes) and laws that prevent banks from revealing anything about their clients to the U.S. tax enforcement authorities. It also includes some steps that would prevent corporations from engaging in the most egregious offshore tax avoidance schemes using some of these same tax havens for their low or non-existent income taxes.

Many of us were disappointed when the Congressional Joint Committee on Taxation (JCT) made it's official estimate that the bill would raise less than $30 billion over an entire decade (since the ten-year cost of offshore tax evasion to law-abiding America is probably over a trillion dollars.)

But the low revenue "score" is not surprising. JCT has historically erred on the side of making very low revenue estimates for measures that enhance tax enforcement, since it's hard to predict how effective new enforcement measures will be. And for that matter, it's hard to know exactly how many people are engaging in offshore tax evasion and how much they're cheating. It could cost us less than $100 billion, it could cost more, but we don't know for sure. That's the nature of tax evasion -- the money is hidden from the government, so no one knows for sure how big the problem is.

But even the little bit of revenue that the Levin-Doggett bill would officially raise over a decade seems to be too much for some members of both parties in Congress. Yesterday, the chairmen of the two tax-writing committees, Rep. Charles Rangel and Senator Max Baucus, introduced their own bill to crack down on tax havens (officially called the Foreign Account Tax Compliance Act), which will only raise $8.5 billion over ten years according to JCT.

The Baucus-Rangel bill does include important measures to require more reporting of foreign bank accounts and foreign assets and closing loopholes, and most of these provisions are in the Levin-Doggett bill. But Baucus and Rangel unfortunately left out some key provisions that are in the Levin-Doggett bill, which accounts for a large part of the difference in the revenue "scores" for the two bills.

Presumptions Against Americans Who Use Tax Havens

For example, the Levin-Doggett bill includes a list of countries that meet its definition of an "offshore secrecy jurisdiction," which is generally what we would call a tax haven. The Treasury would be authorized to remove countries from or add countries to the list as circumstances change. In tax evasion cases concerning accounts or assets in one of the listed countries, the IRS would be allowed three presumptions. (This means there would be three things that the IRS would not have to prove in court when prosecuting these cases, so the burden of proof would shift to the defendant.)

The first presumption would be that a U.S. taxpayer who “formed, transferred assets to, was a beneficiary of, or received money or property” from an offshore entity is in control of that entity. For example, this rule would prevent U.S. taxpayers from claiming that the trustee (usually a foreign person or entity) of their offshore trust is not permitted by the trust document to send money back to the U.S. to pay creditors (including the IRS).

The second presumption is that funds or other property received from offshore are taxable income, and funds or other property transferred offshore have not yet been taxed. The taxpayer will have to prove that the funds aren’t taxable income, or else pay the tax. The third presumption is that a financial account in a foreign country controlled by a U.S. taxpayer has a large enough balance ($10,000) that it must be reported to the IRS.

Special Enforcement Measures

Another set of provisions that are in the Levin-Doggett bill but not in the Baucus-Rangel bill would add to existing Treasury authority to impose special requirements on U.S. financial institutions. Under the Patriot Act, Treasury can impose a range of requirements on U.S. financial institutions dealing with certain entities -- from requiring greater information reporting to prohibiting opening accounts. The Patriot Act’s provisions are aimed at combating money laundering. The Levin-Doggett bill would extend that authority to allow Treasury to use those tools against foreign jurisdictions or financial institutions that are “impeding U.S. tax enforcement.” It would also add an additional tool to the Treasury’s arsenal: it would allow Treasury to prohibit U.S. financial institutions from accepting credit card transactions involving a designated foreign jurisdiction or financial institution.

Treatment of Foreign Corporations Managed and Controlled in the U.S. as U.S. Corporations

Yet another provision that is in the Levin-Doggett bill but not the Baucus-Rangel bill would treat foreign corporations as U.S. domestic corporations for tax purposes if 1) the corporation is publicly traded or has aggregate gross assets of $50 million or more, AND 2) its management and control occurs primarily in the U.S.

This provision of the bill deals with a certain type of tax avoidance rather than tax evasion, meaning a practice that may be technically legal even though it's an abuse of the tax system. The provision is particularly aimed at hedge funds and investment management businesses that are structured as foreign entities, although their key decision-makers live and work in the U.S. As Sen. Levin put it in his statement, “It is unacceptable that such companies utilize U.S. offices, personnel, laws, and markets to make their money, but then stiff Uncle Sam and offload their tax burden onto competitors who play by the rules.”

Less Robust Crackdown on Tax Havens Means Less Revenue

These provisions, which are some of the most important in the Levin-Doggett bill but which are not in the Baucus-Rangel bill, would raise $9 billion over ten years according to JCT. There may be many things that make Congressional leaders uncomfortable with these provisions, but surely one major factor is that it would require them to take on financial institutions that have subsidiaries in tax havens.

Economic Substance

There are other provisions included in the Levin-Doggett bill, but not the Baucus-Rangel bill, such as a provision codifying the “economic substance doctrine” in the Internal Revenue Code. The doctrine has been developed over the years by courts to disallow losses or deductions that have no economic substance apart from their tax benefits. Unfortunately, different courts have developed different interpretations of the rule and courts do not apply the doctrine uniformly. The bill would put the economic substance doctrine into the tax law, thereby disallowing losses, deductions, or credits arising from “tax avoidance transactions,” for example, where the present value of the tax savings far exceeds the present value of the pre-tax profits.

This particular provision was probably left out of Baucus and Rangel's bill simply because they want to use this as a revenue-raiser for other purposes, since it has already been attached to several bills.

The Path Ahead

The introduction of Baucus and Rangel's bill, the Foreign Account Tax Compliance Act, is certainly a positive development because it means Congress might finally be ready to do something about those who cheat on their taxes at the expense of the rest of us. But Congress tends to take on a controversial issue only once every decade (or longer) so if the legislation that is finally enacted is too weak to make a difference, we're stuck with it for a while. That's why the Baucus-Rangel bill will need to be amended in committee or on the floor of the House and Senate to incorporate some of the best elements of the Levin-Doggett bill.

President Obama’s Economic Recovery Advisory Board (PERAB) recently requested ideas from the public about how the federal tax system could be reformed. The comments submitted by Citizens for Tax Justice yesterday begin "We want a fairer, simpler tax code that raises enough money to pay for public services and promotes economic prosperity for all Americans. Our current tax system falls far short of achieving these goals."

The comments note that:

- On the revenue side, even after the current recession ends, we can expect to be funding about a quarter of all non-Social Security spending with borrowed money (including amounts borrowed from the Social Security trust fund).

- As for simplicity and fairness, well, both parties have been guilty of using the tax code to promote a vast array of favored activities. One result is that taxpayers with similar incomes can be treated wildly differently depending on how they make their money or how they spend it.

- In fact, our current tax system allows many of our biggest and most profitable corporations to pay little or no tax.

The rest of the comments lay out principles for solving these problems.

Read CTJ's Suggested Principles for Tax Reform (2 pages)

The Treasury Department has recently issued rulings that to allow a newly bailed out General Motors to avoid part of the 1986 tax reform that is supposed to prevent abusive tax shelters.

Many years ago, Congress enacted rules to keep companies from trafficking in net operating losses (NOLs). Profitable companies were buying companies with NOLs and using the NOLs to offset their income, reducing or completely eliminating their tax liability. In many cases ability to use the NOLs was the only valuable asset the loss company owned. So Congress added Internal Revenue Code Section 382 to limit the amount of NOL "carryforwards" that companies can use when there is a change in ownership of more than 50 percent.

Under the General Motors restructuring, the federal government will own about 60 percent of the stock of the new GM. Generally that would mean that the ability to use the NOLs would be strictly limited (a small portion would be allowable each year). But the Treasury Department has issued a series of rulings that will allow GM to use the NOLs. The rulings basically treat the U.S. government as never having been a shareholder. So if things start looking up for the troubled automaker and the government is able to share some of its stake in the company, the GM stock will be significantly more valuable to a potential investor because of the NOLs that will save GM taxes in the future. Net operating losses can be carried forward 20 years to offset taxable income. They can also be carried back two years, but GM has not posted a profit since 2004.

Citizens for Tax Justice (CTJ) has joined forces with a broad coalition of organizations called Rebuild and Renew America Now (RRAN) to promote a simple message: Congress has a whole lot of options to raise revenue to pay for health care reform and other initiatives without unfairly impacting low- or middle-income people and without harming the economy.

These progressive revenue options include both the tax changes included in President Obama's fiscal year 2010 budget proposals as well as additional options formulated in a recent report by CTJ and endorsed by Health Care for America Now (HCAN) and the Service Employees International Union (SEIU). (See CTJ's report on the President's tax proposals and CTJ's report on additional revenue options to fund health care reform.)

RRAN is a coalition that engaged in education, communications and lobbying efforts in support of the President's budget and other progressive initiatives earlier this year and has mobilized advocates and activists all over the country. Many of the organizations involved are usually focused on particular public services or progressive reforms, but have realized that all public services and reforms are in danger if Congress can't bring itself to raise the revenue needed to pay for them.

RRAN has invited organizations (both national organizations and state organizations) to sign onto its two-page statement of principles for this new campaign for progressive revenue options. Signing does not commit an organization to do anything (although all are also encouraged to become active in RRAN's activities) but simply states support for efforts to pay for initiatives in progressive ways. Anyone who is authorized to sign on behalf of an organization can visit the website of the Coalition on Human Needs (CHN) or simply click here.

The statement lists three broad principles to guide Congress's efforts to find revenue:

1. Adequacy. The federal tax system should raise sufficient revenue over time to meet our shared priorities and invest in our common future.

2. Fairness. Tax preferences that overwhelmingly benefit the wealthy and corporations should be eliminated, and individuals and businesses should contribute their fair share of taxes, based on ability to pay.

3. Responsibility. We should not saddle future generations with unsustainable levels of debt.

The statement also lists examples of the kinds of tax policies RRAN supports:

• raising revenues from upper-income households;
• assessing a significant tax on large estates;
• reducing abuses among corporations and individuals who shelter income in offshore tax evasion or avoidance schemes;
• closing financial industry, oil and gas, and other inefficient corporate loopholes; and
• reducing tax preferences for unearned as opposed to earned income.

For more information in the coming days, visit RRAN's website: www.rebuildandrenew.org

On May 11, the Treasury Department released its "Green Book" containing new details of the tax changes included in the President's fiscal year 2010 budget proposal. In addition to extending the Bush tax cuts for all but the richest Americans and making permanent many of the tax cuts in the recently enacted economic recovery act, the President would also make many changes that would raise revenue by closing loopholes, blocking tax avoidance schemes and making the tax code more progressive.

A new report from Citizens for Tax Justice examines and describes the significant revenue-raising provisions that are sure to be debated fiercely in the months to come.

Read the report.

New Data from Citizens for Tax Justice Shows that the U.S. Tax System Is Not as Progressive as You Think

Many politicians, pundits and media outlets have recently claimed that the richest one percent of American taxpayers are providing a hugely disproportionate share of the tax revenue we need to fund public services. New data from Citizens for Tax Justice show that this simply is not true. CTJ estimates that the share of total taxes (federal state and local taxes) paid by taxpayers in each income group is quite similar to the share of total income received by each income group in 2008.

- The total federal, state and local effective tax rate for the richest one percent of Americans (30.9 percent) is only slightly higher than the average effective tax rate for the remaining 99 percent of Americans (29.4 percent).

- From the middle-income ranges upward, total effective tax rates are virtually flat across income groups.

Read the fact sheet.

When anti-tax activists and lawmakers complain that Congress and the President are pursuing policies that will cause taxes to be too high, the first question anyone should ask is: Compared to what? What exactly is the alternative to allowing the Bush tax cuts to end (at least for the rich) and finding new ways to raise revenue?

This week the House GOP showed us what the alternative is and it's frightening. On Wednesday, the ranking Republican on the U.S. House of Representatives' Budget Committee, Congressman Paul Ryan (R-Wisc.), released a budget plan which he argues is a more fiscally responsible alternative to the budget outline proposed by President Obama and the similar budget resolutions approved by both chambers last night. His proposal is apparently an update of the plan that House GOP leaders introduced last week and is different in some key respects.

The revised House GOP budget plan would move towards cutting and privatizing Medicare, convert Medicaid into limited block grants to states, and even cut Social Security benefits for some retirees. The plan would deeply cut the relatively small amount of government spending devoted to non-military, non-mandatory programs by refusing to adjust the budgets of these programs for inflation and population growth for five years. The House GOP plan would repeal the recently enacted economic stimulus law (the American Recovery and Reinvestment Act of 2009, or ARRA) a year before its expiration at the end of 2010.

A report from Citizens for Tax Justice compares the income tax proposals in the House GOP plan to the income tax proposals in the House Democratic plan in 2010, and finds that:

• Over a third of taxpayers, mostly low- and middle-income families, would pay more in taxes under the House GOP plan than they would under the House Democratic plan in 2010.
• The richest one percent of taxpayers would pay $75,000 less, on average, in income taxes under the House GOP plan than they would under the Democratic plan in 2010.
• The income tax proposals in the House GOP plan, which is presented as a fiscally responsible alternative to the Democratic plan, would cost over $225 billion more than the Democratic plan's income tax policies in 2010 alone.

Read the report.