A group of small business owners and investors released a report on offshore tax havens this week and launched a campaign to put an end to the tax avoidance that they facilitate.

The group, Business and Investors Against Tax Haven Abuse, explains that tax havens provide an unfair advantage to large chain retailers and financial companies over locally-owned retailers and community banks. Target, Best Buy, Citigroup, Goldman Sachs and other well-known corporations are able to shift profits to their subsidiaries in places like the Cayman Islands (where they do little or no actual business) to reduce or eliminate their U.S. taxes. Independent "mom and pop" retailers are at a huge disadvantage just because they don't have subsidiaries set up in foreign countries solely to reduce their taxes.

It's not just independent and locally-owned businesses that suffer. All honest taxpayers are being cheated, the report explains, because the huge U.S. multinational corporations that use tax havens are actually doing most or all of their actual business in the U.S., meaning they are benefiting from the American education system, legal system, highways and other types of infrastructure even though they are not doing their part to pay for these public goods and services.

A particularly interesting part of the report explains how tax havens also helped facilitate shady financial dealings that contributed to the financial collapse. It cites reports that Goldman Sachs was using subsidiaries in the Cayman Islands when it "peddled billions of dollars in shaky securities tied to subprime mortgages on unsuspecting pension funds, insurance companies and other investors when it concluded that the housing bubble would burst."

For too long, lawmakers have responded to efforts to end offshore tax avoidance as some sort of wild attack on the free market. Now that business people themselves are sounding the alarm, lawmakers should listen.

On July 1st, Representative Bill Delahunt (D-MA) introduced the Main Street Fairness Act, the latest legislative attempt to close the unfair tax loophole that has let internet companies off the hook for tens of billions in unpaid sales taxes.

With so many states facing severe budget deficits, state governments are desperate to collect the unpaid sales taxes on purchases from out-of-state internet and catalogue retailers. According to the definitive study by researchers at the University of Tennessee, the loss in sales tax revenues due to the loophole allowing internet and catalogue retailers to avoid sales taxes could range anywhere from $8.6 to $9.92 billion in 2010 and could shoot up to nearly $34 billion from 2010 to 2012. The NCSL provides a useful interactive map highlighting the revenue loss due to the loophole in each state. Unfortunately, the loss will only increase going forward as internet sales continue to become a larger and larger portion of total sales.

Delahunt’s legislation would fix the loophole by allowing states that join the Streamlined Sales and Use Tax Agreement to collect sales tax and use taxes on out-of-state retailers. Joining the agreement entails simplifying and standardizing state sales and use tax codes in order to make the system less unwieldy for out-of-state retailers. Already 23 states are part of the agreement, with many more taking steps toward standardization. In addition, the bill would exempt many small businesses and provide some funds to help with the cost of compliance.

For decades, state governments have been trying to collect sales taxes from these retailers. A 1992 Supreme Court ruling in Quill v. North Dakota made the task almost impossible by preventing state governments from requiring sellers to collect sales taxes unless the seller has a physical presence in the state. The Court ruled that states can require companies without physical presence within their borders to collect sales taxes only if given permission by a law enacted by Congress. Delahunt's bill would provide that permission.

For Joe Rinzel, Vice President for State Government Relations for the Retail Industry Leaders Association, the issue presented by the loophole is really about “fairness for both businesses and consumers.” As a brief by the Institute on Taxation and Economic Policy explains, the loophole is inherently unfair because it provides a distinct advantage to online retailers over community stores, which have to collect sales taxes. Compounding this, the failure to tax internet sales places a disproportionate burden on consumers who (for economic or other reasons) do not use the internet for shopping.

Despite the need for federal legislation, Mike Zapler reports that states are trying to act on their own. New York attempted to get around the Supreme Court Ruling by redefining what constitutes a physical presence in New York. Taking a different approach, Colorado passed a law requiring out-of-state retailers to provide the states with the names and items bought from residents. In both cases, the laws were immediately met with lawsuits from industry supporters.

The passage of Delahunt’s Main Street Fairness Act would serve to stop the harm done to ‘brick and mortar’ retailers by the ending the loophole while providing desperately needed revenue to state governments.

President Obama wants to sign a jobs bill into law. The majority of members of the House and Senate want the same thing. So do the two million out-of-work Americans who will have lost their unemployment benefits by July because of Congress's inaction. Not to mention the millions of Americans who will see public services like education and public safety slashed because their states have to make up shortfalls in Medicaid funding. And then there are the mainstream economists who conclude that some deficit-spending on measures that pump money immediately into the economy and create jobs are entirely justified when unemployment is hovering around ten percent. In the face of all this, a minority of 42 Senators has managed to block legislative action.

Congress has fought a months-long battle over the bill, H.R. 4213, which includes an extension of emergency unemployment benefits and Medicaid funding to states, two spending measures that economist Mark Zandi has argued are the most effective way to stimulate the economy. These measures result in immediate spending, which leads to a boost in consumer demand, and the retention or creation of jobs to produce the goods and services needed to meet that demand.

The bill also includes a collection of provisions that extend short-term tax breaks for business that Congress enacts every year or so. Members of Congress and Hill staffers often call these the "tax extenders." CTJ has criticized the tax extenders for years. But, we support them this year because they are coupled with provisions that would offset their costs by clamping down on unfair tax loopholes. This is a major step forward for Congress. See CTJ's many reports on these loophole-closing provisions.

To their credit, Democratic leaders have tried every conceivable tactic to win over the so-called "moderates" who are blocking the bill.

For example, the House passed legislation three times to completely eliminate the infamous "carried interest" loophole that allows certain wealthy investment fund managers to treat their compensation as capital gains and thus enjoy a lower tax rate. This time, the House scaled back its provision to close this loophole, and Democratic leaders in the Senate scaled the provision back multiple times in their versions of the bill. Eliminating this loophole, which was proposed by the Obama administration, was estimated to raise about $24 billion over a decade. Democratic leaders in the Senate whittled that down to $13.6 billion. The provision is not so much a loophole-closer any more as a loophole-reducer.

Other compromises made to secure votes were even more alarming. The most recent proposal would have taken over $9 billion of unspent funds from the recovery act that are supposed to be used for food stamps to help offset the costs of this bill. This is preposterous. Food stamps are one of the most effective types of stimulus, along with unemployment insurance benefits and fiscal aid to states, according to Mark Zandi.

The country needs the Senate to pass, some way or another, a jobs bill. Sadly, Democrat Ben Nelson and the 41 Republican Senators have the ability, under the Senate's bizarre rules, to stop that from happening.

As the Senate continues a seemingly endless debate over H.R. 4213, the jobs and "tax extenders" bill, business lobbyists, right-leaning economists and politicians have had more time to shape their arguments in defense of the tax loopholes that the bill would pare back.

To offset the costs of the tax breaks included in the bill, three types of loopholes would be restricted. They include the "carried interest" loophole that allows certain investment fund managers to treat their compensation as capital gains and thus enjoy a lower tax rate, the "John Edwards" loophole allowing people with "S corporations" to avoid payroll taxes, and abuses of the foreign tax credit by U.S.-based multinational corporations.

The debate over the "carried interest" loophole has received the most attention, and CTJ has responded to some of the outlandish arguments made in its defense.

More recently, Senator Olympia Snowe (R-ME) has voiced her opposition to the provisions regarding "S corporations," and filed an amendment to strip them from the bill. A recent report from CTJ explains that this amendment should be rejected because the loophole in question allows people to underestimate the extent to which their income is wages, meaning they avoid payroll taxes.

The report also explains that the main effect of the provisions in H.R. 4213 regarding S corporations would probably be on Medicare taxes. The new health care reform law actually applies Medicare taxes to most non-retirement income, but there is a bizarre exception left for certain non-wage income from S corporations. H.R. 4213 would not even eliminate this exception entirely but would merely target those taxpayers who are most obviously manipulating the tax rules to avoid paying the Medicare tax. This seems like the least Congress could do.

The provisions in H.R. 4213 that prevent abuses of the foreign tax credit have also received more attention lately. A new report from CTJ responds to criticisms of these provisions made by the Peterson Institute's Gary Hufbauer and Theodore Moran.

The purpose of the foreign tax credit is to ensure that American individuals and corporations are not double-taxed on income that they earn in other countries. Hufbauer and Moran seem to acknowledge — and endorse — the common practice of corporations using credits in excess of what is necessary to avoid double-taxation. In these instances, corporations are really using the credit to lower their U.S. taxes on their U.S. income. Or, put another way, it means the credit is being used to subsidize foreign countries by helping U.S. corporations pay their foreign taxes.

Surely, everyone should agree that this is not the purpose of the foreign tax credit. But without the reforms included in H.R. 4213, these practices will continue, and we will have missed an important opportunity to make our tax system fairer and more rational.

A new report from Citizens for Tax Justice explains that the new jobs and "extenders" bill released by the chairmen of the House and Senate tax-writing committees on Thursday contains several long-overdue provisions to close tax loopholes. The bill (H.R. 4213) takes aims at corporations that shift profits offshore, investment fund managers who use the "carried interest" loophole to pay lower tax rates than their secretaries, and business people who use the "John Edwards" loophole to avoid their Social Security and Medicare taxes.

Many people are more familiar with the important spending provisions in the bill geared to speed up the economic recovery, including an extension of unemployment insurance and COBRA health care benefits for the unemployed, Medicaid funding for states, TANF jobs and emergency funding for states and other measures that will help boost the economy.

The tax loophole-closing provisions are used to offset the costs of extending several small tax breaks. The spending portion is mostly considered emergency spending that does not have to be paid for under Congress's budget procedures because it is temporary and necessary to prevent the economy from drifting back towards recession. (The Center on Budget and Policy Priorities explains why the spending portions of the bill are economically necessary and fiscally sound.)

Call your lawmakers now and urge them to vote in favor of H.R. 4213. Visit the website for Jobs for America Now, which makes it extremely easy for you to make a toll-free call to your lawmakers to support this bill.

The U.S. Chamber of Commerce recently said that it will not try to repeal the new health care reform law. Has big business seen the light?

No. Actually, the Chamber is still planning on spending $50 million to defeat lawmakers who voted in favor of reform. And they will work to shape regulations and try to repeal parts of the law that are not in the interest of big business, which presumably includes the health insurance industry. Which means it's hard to see what part of the new law the Chamber does NOT want to repeal.

Business groups are already taking aim at particular provisions. For example, the American Benefits Council is complaining that several large corporations must take write-downs ranging from $50 million to $1 billion on their financial statements because the health care reform law repealed a tax break enacted as part of the Medicare prescription drug law in 2003.

The tax break in question should never have been enacted. The prescription drug law subsidizes companies that provide prescription drug coverage for their retirees, ostensibly to prevent those retirees from shifting over to the government program. On top of this subsidy, the companies were also allowed to continue deducting the entire costs of the drug coverage, including the 28 percent subsidy paid by the government.

The health care reform law leaves in place those 28 percent subsidies but repeals the deductions. Telecommunications giant AT&T announced that it would take a $1 billion charge against its profits to reflect the likely future impact of this tax change. Verizon announced a $970 million charge, and other companies, including Exelon, 3M, Caterpillar and John Deere, announced charges in the millions or tens of millions.

But this is only because they're losing a tax break that was never really justified in the first place. The point of deductions is that they account for expenses that companies pay and that reduce their bottom line, i.e., reduce their profits, because profit is what is ultimately taxed. It makes no sense for a company to deduct a subsidy from the government because it does not reflect an expense paid by the company itself.

It seems that Congress really wanted to give these companies a larger subsidy than just the 28 percent, but decided that it would be easier to do so through the tax code. Whether or not larger subsidies were justified, it's generally poor policy to provide them through the tax code because it creates more tax complexity (causing corporations to pour more resources into figuring out how to lower their tax liability) and is less transparent. At least direct spending on subsidies for corporations show up as "costs" each year in government budget documents and are debated extensively by lawmakers. Corporate subsidies provided through the tax code, however, rarely receive this much attention.

It's also worth pointing out that the charges that the companies are announcing may sound like big numbers, but they're actually costs to the companies over many, many years. They reflect the costs of paying full taxes on those subsidies for retiree drug coverage over the course of the retirees' lives, which will be decades. They do NOT represent costs that they must pay this year.

Also, to the extent that the health care reform law provides any benefits to these companies, those are not going to show up on their financial statements today, which is another reason that they are a poor measure of how reform will affect them. Health and Human Services Secretary Kathleen Sebelius recently said that company executives she has communicated with "admit at the outset that what they will give up in terms of closing that kind of a loophole on tax benefits is well overcome by the kind of savings they're looking at with not only incentives for businesses to keep health insurance for their employees, but the kind of wellness and prevention efforts to lower costs in the long run."

Finally, it's entertaining to see conservatives tie themselves in knots as they try to defend the massive subsidies provided in the Medicare prescription drug law (enacted under President Bush) despite their supposedly "free market" philosophy. The Wall Street Journal, presumably, does not support government subsidies, but their opposition seems to melt when some part of the subsidy takes the form of a tax break.

The paper essentially argues that the subsidy and the tax break are justified because they actually save the government money by keeping retirees off of the Medicare prescription drug program. It may or may not be true that the 28 percent subsidy ends up saving the government money, but there is no reason to think that the double deduction, on top of that subsidy, does so, too. On the contrary, the Joint Committee on Taxation estimates that scrapping this unjustified tax break will save the government $4.5 billion from fiscal 2013 through fiscal 2019.

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.