New CTJ Reports Explain the Tax Provisions in President Obama’s Fiscal Year 2015 Budget Proposal
Two new reports from Citizens for Tax Justice break down the tax provisions in President Obama’s budget.
The first CTJ report explains the tax provisions that would benefit individuals, along with provisions that would raise revenue. The second CTJ report explains business loophole-closing provisions that the President proposes as part of an effort to reduce the corporate tax rate.
Both reports provide context that is not altogether apparent in the 300-page Treasury Department document explaining these proposals.
For example, the Treasury describes a “detailed set of proposals that close loopholes and provide incentives” that would be “enacted as part of long-run revenue-neutral tax reform” for businesses. What they actually mean is that the President, for some reason, has decided that the corporate tax rate should be dramatically lowered and he has come up with loophole-closing proposals that would offset about a fourth of the costs, so Congress is on its own to come up with the rest of the money.
To take another example, when the Treasury explains that the President proposes to “conform SECA taxes for professional service businesses,” what they actually mean is, “The President proposes to close the loophole that John Edwards and Newt Gingrich used to avoid paying the Medicare tax.”
And when the Treasury says the President proposes to “limit the total accrual of tax-favored retirement benefits,” what they really mean to say is, “We don’t know how Mitt Romney ended up with $87 million in a tax-subsidized retirement account, but we sure as hell don’t want to let that happen again.”
Read the CTJ reports:
The President’s FY 2015 Budget: Tax Provisions to Benefit Individuals and Raise Revenue
The President’s FY 2015 Budget: Tax Provisions Affecting Businesses
Energy & Environment News
New CTJ Reports Explain the Tax Provisions in President Obama’s Fiscal Year 2015 Budget Proposal
Congress should end its practice of passing, every couple of years, a so-called “tax extenders” bill that reenacts a laundry list of tax breaks that are officially temporary and that mostly benefit corporations, without offsetting the cost. A new report from Citizens for Tax Justice explains that none of the tax extenders can be said to help Americans so much that they should be enacted regardless of their impact on the budget deficit and other, more worthwhile programs. It is entirely inappropriate that lawmakers refuse to fund infrastructure repairs or Head Start slots for children unless the costs are offset, while routinely extending these tax breaks without paying for them.
The tax breaks usually considered part of the “tax extenders” were last enacted as part of the deal addressing the “fiscal cliff” in January of 2013. At that time most of the provisions were extended one year retroactively and one year going forward, through 2013. As these tax breaks approach their scheduled expiration date at the end of this year, they are again in the news.
Read the report.
Nebraska’s Tax Modernization Committee, which we promised to keep tabs on in July, is scheduled to hold its final public hearings this week. But rather than wait to hear what the panel has to say, Governor Dave Heineman decided to renew his calls for lower property and income taxes. While some have argued that Nebraska’s property taxes are too high, slashing property taxes without increasing state aid to local governments would put significant strain on vital local services. Today, Nebraska ranks 43rd nationally in the amount of state aid it provides to local governments, and 49th in the aid it gives to schools. If Governor Heineman succeeds in his quest to cut state taxes, increasing local aid will become even more difficult. The Open Sky Policy Institute has issued thoughtful recommendations on this and other issues facing the Committee.
If you’re wondering whether you should put any stock in the Tax Foundation’s newest “Business Tax Climate Index,” the answer is No. For starters, Good Jobs First has shown that, contrary to popular belief, the Tax Foundation’s rankings aren’t a very good predictor of how much a business would actually pay in taxes if it were located in any given state. And now Governing magazine has taken a critical look at the rankings in a new article, and concludes that states earning high marks from the Tax Foundation don’t actually have stronger job markets or higher medium wages.
U.S. News & World Report is running an opinion piece by Carl Davis from our partner organization, the Institute on Taxation and Economic Policy (ITEP), highlighting the fact that the federal gas tax has not been raised in exactly 20 years – and has been losing value ever since. The essay draws heavily from research that ITEP published late last month, and concludes that “it's time for our elected officials to accept that keeping the gas tax cryogenically frozen at 18.4 cents per gallon is costing Americans a lot more than it's helping them.”
West Virginia is thinking about how best to use the tax revenues it expects to collect from sales of its natural gas resources. The Associated Press reports that “[f]or decades, coal from West Virginia's vast deposits was mined, loaded on rail cars and hauled off without leaving behind a lasting trust fund financed by the state's best-known commodity. Big coal's days are waning, but now a new bonanza in the natural gas fields has state leaders working to ensure history doesn't repeat itself.” According to the AP, the state’s Senate president, Jeff Kessler, is looking to use some of the severance tax revenues on oil and natural gas to create an enduring trust fund, as other states with significant natural resources have done. “His goal: a cushion of funds long after the gas is depleted to buoy an Appalachian mountain state chronically vexed by poverty, high joblessness, and cycles of boom and bust.”
Arkansas Advocates for Children and Families Executive Director, Rich Huddleston, was one of four Arkansas leaders invited to contribute to Talk Business Arkansas magazine with ideas for how to “construct a fairer state tax code.” His proposal (citing ITEP data) is here, and begins: “The goal of any good tax system is to raise enough revenue to fund critical public investments that improve well-being of children and families while also promoting economic growth and prosperity.”
Next Tuesday the federal gas tax will celebrate an unfortunate anniversary: 20 years stuck at a rate of exactly 18.4 cents per gallon. A unique new report from our partner organization, the Institute on Taxation and Economic Policy (ITEP), puts this occasion in context and explains why the gas tax has fallen some $215 billion short of what a better-designed tax would be raising. The report shows that Congress’ embarrassing failure to plan for growth in construction costs is the main cause of our transportation funding gaps.
To hear some gas tax naysayers tell it, hybrids and other fuel-efficient vehicles are consuming so little gasoline that the gas tax can’t possibly raise enough money to keep our infrastructure from falling apart. But ITEP’s new analysis shows that just 22 percent of the gas tax shortfall we’re experiencing today is due to growth in vehicle fuel-efficiency. By far the more important factor (accounting for the other 78 percent of the shortfall) has been Congress’ decision to stop the gas tax rate from rising alongside normal growth in the cost of asphalt, machinery, and other construction inputs.
Seventeen states, home to over half the country’s population, now use smarter “variable-rate” gas taxes that tend to rise over time. And we note that the federal government wisely allows other parts of the tax code to rise each year with inflation—like the personal exemption, standard deduction, and Earned Income Tax Credit (EITC), so similarly giving the gas tax room to grow shouldn’t be that hard.
ITEP’s report offers a better path forward, and explains how reform could have prevented our current funding predicament. By allowing the gas tax rate to grow alongside both construction cost inflation and fuel-efficiency, the federal transportation fund could have been brought from frequent deficits to consistent surpluses. ITEP finds that more than $215 billion in additional revenue could have been raised over the 1997-2013 period—money that would have made a real difference in putting people to work and improving the efficiency of our transportation network.
While President Barack Obama presented a myriad of new proposals to combat climate change in his new Climate Action Plan (PDF), one of the most striking aspects of the plan is that it does not contain any proposal for a carbon tax, which many experts consider the "missing link" in the president's new plan.
The basic idea behind putting a tax on carbon is that it would create a market incentive to develop low or zero carbon emission energy sources and simultaneously create a market disincentive to using carbon emitting energy sources. The market-based approach of the carbon tax explains why so many economists, from Joesph Stigliz on the left to Gregory Mankiw on the right, believe the carbon tax is the most efficient and least intrusive mechanism for dealing with emissions.
Reinforcing the case for the carbon tax just days before the release of Obama's climate plan, a new exhaustive study by the National Research Council (NRC) found that a carbon tax "will be both necessary" and a "more efficient" way to substantially reduce greenhouse gas emissions, especially compared to current energy tax policies. This conclusion is based on the NRC's economic analysis of how each provision of the tax code affects carbon emissions, which found that overall the $48 billion in energy-sector tax expenditures by the federal government between 2011 and 2012 do not necessarily decrease emissions at all. Compounding this, the report found that even the most effective tax expenditures in terms of reducing carbon emissions, resulted in "very little if any" reductions and came at a "substantial cost."
In contrast with tax expenditures which lose revenue, a carbon tax has the major advantage of generating revenue. For example, a recent Congressional Budget Office (CBO) report notes that a carbon tax that starts off at $20 per ton and then rises by 5.6 percent annually could raise as much as $1.2 trillion over ten years, while at the same time reducing carbon emissions by 8 percent over the same ten years. Such revenue could be extremely beneficial if it was used to reduce the deficit, fund critical public investments, and/or to provide financial relief to middle- and low-income families. This revenue should not however be plowed into tax breaks for corporations and the wealthy, while leaving everyone else worse off, as some groups are proposing.
Though a carbon tax may be politically difficult on the federal level in the short-term, the tax is getting some attention at the state level. For example, the state of California already adopted a carbon tax of sorts in 2013, with the implementation of it's cap-and-trade program, which raised $256 million in revenue so far this year. In addition, environmentalists are pushing for a ballot measure in Massachusetts that would create a small statewide carbon tax.
Although they do not like to admit it, even opponents of the carbon tax acknowledge that it may become politically viable as climate and budgetary pressures continue to mount and policymakers are faced with an increasingly unpopular set of alternatives.
While most commentators have focused on the back-and-forth between President Barack Obama and former Governor Mitt Romney over tax rates and deficit reduction during the first presidential debate, we paid extra close attention to what the candidates said about corporate and small business taxes. Unfortunately, we found what both candidates had to say really wanting.
Corporate Tax Reform
Early in the debate, Obama noted that he and Romney have something of a consensus over corporate taxes in that they both believe that “our corporate tax rate is too high.” If there's such an agreement, it's based on a fundamental misunderstanding. While the U.S. has a relatively high statutory corporate tax rate of 35 percent, the effective corporate tax rate (the percentage of profits that corporations actually pay in taxes) is far lower because of the loopholes they use to shield their profits from taxes. CTJ has found that large profitable corporations pay about half the statutory rate on average, while some companies like General Electric and Verizon pay nothing at all in corporate taxes.
President Obama proposes to close corporate tax loopholes, but would give the revenue savings right back to corporations as a reduction in the statutory tax rate from 35 percent to 28 percent, resulting in no change in revenue, as outlined in his corporate tax reform framework released earlier this year. (During the debate Obama actually said he’d lower the statutory rate to 25 percent, which seems more likely a misstatement than an intentional policy shift.)
In contrast, 250 non-profits, consumer groups, labor unions and faith-based groups have called for a corporate tax reform that actually raises revenue in order to pay for critical government investments and reduce the budget deficit.
Of course, Governor Romney also proposes a deep cut in the statutory corporate tax rate (to 25 percent) and is far more vague on whether he would bother to offset the costs.
Romney took issue with Obama’s claim during the debate that the tax code currently allows companies to take a deduction for moving plants overseas, saying that he had “no idea” what Obama was talking about and that if such a deduction really exists that he may “need to get a new accountant.” Technically, Obama is right that the tax code currently allows companies to take a deduction for business expenses of moving a plant overseas, but he leaves out the fact that companies are allowed to deduct most business expenses, including those associated with moving facilities. In any case, Romney certainly does not to need to hire a new accountant.
What both candidates missed during this discussion was that our current tax system does in fact encourage corporations to move operations overseas by allowing them to defer taxes on foreign profits. To his credit, Obama proposed, as part of his 2013 budget and in his framework for corporate tax reform, several reforms to the international tax system that would reduce the size of this tax break, although he has not gone as far as to call for an end to deferral entirely. In contrast, Romney wants to blow a giant hole in our corporate tax by moving the US to territorial tax system, under which US companies would pay nothing on offshore profits.
Small Business Taxes
During the debate Romney revived a classic tax myth by claiming that allowing the Bush tax cuts to expire for income over $250,000 will harm small businesses because a lot of businesses “are taxed not at the corporate tax rate, but at the individual rate.” Obama pushed back noting that he had “lowered taxes for small businesses 18 times” and that under his plan “97 percent of small businesses would not see their income taxes go up.”
A Citizens for Tax Justice (CTJ) analysis found that only the 3 to 5 percent richest business owners would be lose any their tax breaks under Obama’s plan. The CTJ report also points out that if you’re a business owner, tax breaks affect how much of your profits you can take home, but not whether or not you have profits. A business owner will make investments that create jobs if, and only if, such investments will lead to profits, regardless of what tax rates apply.
In an attempt to push his small business claim even further, Romney cited a study by the National Federation of Independent Businesses (NFIB) claiming that Obama’s plan will force small business to cut 700,000 jobs. When the NFIB report came out during the summer, the White House did a fine job of pointing out the many, many outrageous distortions in the report. Just to take one, the NFIB report makes assumptions about the relationship between taxes and investment that are far out of line with those of the non-partisan Congressional Budget Office and even the Treasury Department during the Bush administration.
Oil and Gas Tax Breaks
President Obama stated that the oil industry receives “$4 billion a year in corporate welfare” and added that he didn’t think anyone believes that a corporation like ExxonMobil really needs extra money coming from the government. Romney hit back saying that the tax break for oil companies is only $2.8 billion a year and that Obama had enacted $90 billion worth of tax breaks in one year for green energy, which he said dwarfed the oil tax breaks 50 times over.
On the oil company tax break claims, Obama’s figure is much closer to the truth. The President’s 2013 budget has a package of provisions that would eliminate or reduce special tax breaks for the fossil fuel industry and the Treasury estimates this would raise $39 billion over a decade. (See page 80 of this budget document.) A CTJ report explains the arguments for these provisions. Ironically, the oil industry itself puts this number much higher, claiming that the Obama administration’s proposal would eliminate about $8.5 billion in tax breaks it receives annually.
In addition, FactCheck.org points out that Romney’s claims on Obama’s clean energy tax breaks were largely bogus. Just to list some of the problems with Romney’s $90 billion claim, FactCheck.org notes that these breaks were spent over two years not one, that the figure includes loan guarantees not just actual spending, and that many of these “breaks” were spent on infrastructure projects.
Let’s start with the good news. There's a growing recognition among even the most virulently anti-tax lawmakers that one core area of government is actually underfunded and needs revenues: transportation maintenance and construction.
Unfortunately, there’s some bad news, too. Rather than fixing the gas tax shortcomings that have led to transportation coffers (quite predictably) running dry, many of those same lawmakers want to divert money away from education, health care, and other services, and spend it on roads and bridges instead.
One lawmaker touting this approach is Iowa Governor Terry Branstad. While Branstad should be praised for realizing that the gas tax should be raised next year, his broader plan to couple that increase with big cuts in income taxes and local property taxes completely misses the mark. If enacted, everything from schools to police departments will have to be scaled back just so that Branstad can avoid the “tax raiser” label some political operatives might pin on him for favoring a long-overdue and much-needed gas tax hike.
Governor Branstad's approach echoes one outlined earlier this year by his counterpart in Virginia, Governor Bob McDonnell. During a conversation with the Associated Press (AP), McDonnell hinted that he might reverse his opposition to raising the gas tax if it’s done as part of a broader, revenue-neutral tax “reform” package. As we explained then, however:
“Even if McDonnell believed the state’s gas tax needs to be raised and indexed, his opposition to raising any new revenue overall is almost guaranteed make his reform agenda bad for the state. That’s because every dollar in new revenue McDonnell might generate for transportation would have to be offset with a dollar in tax cuts elsewhere in the budget—presumably from a tax that funds education, human services, public safety, and other core government functions.”
These proposals to actually increase the gas tax might seem remarkable at first, coming from governors who are as opposed to taxes as Branstad and McDonnell. But when you peel away the layers, the logic behind the proposals is nothing new. In the face of lagging gas tax revenues, politicians have frequently raided other revenue streams in order to avoid raising taxes but still keep their transportation systems afloat. Nebraska, Utah, and Wisconsin did it in 2011, and Michigan, Oklahoma and the federal government did it in 2012. At their core, Branstad and McDonnell’s approaches are just accomplishing the same outcome but in a more roundabout way: shifting money around in a way that benefits roads at the expense of everything else.
It turns out that Mitt Romney’s energy policy adviser, Harold Hamm, is the CEO of an oil company called Continental Resources, and we all know that energy companies get some of the most generous breaks in the U.S. corporate income tax code. When we learned Hamm had submitted testimony to the House Energy and Commerce Committee claiming that his company pays a 38% effective tax rate, we had to fact check it. We reviewed data from the company’s own financial reports and ran the numbers, and it turns out Continental Resources has paid a mere 2.2% federal corporate income tax rate on its $1,872 million in profits over the last five years. Read our one-pager here.
It May Be Time to Consider a Carbon Tax -- But Not to Finance Tax Cuts for Corporations and the Rich!
Almost all proposals for a broad-based national tax on consumption are terrible ideas. But there is one such proposal — a tax on carbon emissions — that might make sense so long as it includes features to keep it from burdening middle-income Americans and hitting low-income Americans the hardest. A new report from MIT researchers explores options for enacting a carbon tax, but unfortunately spends a lot of time discussing how the resulting revenue could be used to finance ill-advised cuts in other taxes.
Any consumption tax, like a value-added tax (VAT) or a sales tax, is regressive, taking a much larger percentage of income from middle- and low-income families than it would take from the rich.
That’s because middle- and low-income families have little choice but to put most or all of their income towards consumption (spending their paychecks to obtain basic necessities) while rich families can put a lot of their income towards savings — which are not touched by a consumption tax.
The same is true of a tax on carbon emissions, which would raise the price of gasoline, coal-generated electricity, and any product that is produced or shipped using fossil fuels (which is just about everything).
A carbon tax might be justified if these problems were addressed, and it met the compelling interest of preventing catastrophic climate change caused by greenhouse gasses. A tax on carbon emissions would reduce the amount of greenhouse gasses released into the atmosphere as manufacturers, shippers, and consumers shift away from fossil fuels.
Even though the purpose of a carbon tax would be to reduce the amount of carbon emissions, there would still be plenty of carbon emissions to be taxed, resulting in significant revenue. How that revenue is used determines whether or not the regressive impact of the tax is addressed.
The Congressional Budget Office recently found that a tax of $20 on each ton of carbon emissions would raise $1.25 trillion over a decade if it went into effect in 2012. The MIT report finds that it would raise $1.5 trillion over a decade if it went into effect in 2013.
In offering options for how this revenue could be used, the MIT report relies on some questionable assumptions that other types of taxes cause significant economic distortions. (A contrary view, in research from economists Peter Diamond and Emmanuel Saez, for example, finds that taxes affecting the rich are especially unlikely to create much economic distortions.) Yet the MIT report suggests that lower taxes on the well-off might be an appropriate use of carbon-tax revenue. To be fair, the MIT report does show (on pages 12-15) that the overall impact of a carbon tax would be regressive if the revenue is used to cut the personal or corporate income taxes. It also finds that the overall effect could be progressive if the revenue is used to shore up social programs that alleviate poverty.
In other words, a carbon tax could reasonably be considered as a part of a larger tax and budget reform if the revenue is used to offset the tax increases on middle- and low-income families, protect the elderly, and shore up the public investments that benefit people who would otherwise be hardest hit by such a tax.
But even if a Congress full of global-warming deniers would be willing to consider a carbon tax, the big question that would still remain is whether it would also be willing to offset the tax’s otherwise very regressive effects.
Over 30 million Americans will take to the roads this Memorial Day weekend, and it’s all but guaranteed that many of them will be unhappy about the price of gas. But while it’s easy to get frustrated by high prices at the pump, it’s also important that motorists realize gas taxes are not to blame for those high prices, and that gas taxes are absolutely essential to the safety and efficiency of the infrastructure we use everyday.
As the Institute on Taxation and Economic Policy (ITEP) explains in a pair of new policy briefs, federal and state gas taxes are the main sources of funding for the roads, bridges, and transit systems that keep our economy moving (and that make our summer vacations possible). Roughly 90 percent of federal transportation revenues come from the federal gas tax, while state gas taxes are the single most important source of transportation revenue under the control of state lawmakers.
Moreover, the amount of money we’re spending on gas taxes is much lower than what we used to pay. Families today are spending a smaller share of their household budgets on gas taxes than they have in about three decades—and that share is continuing to decline.
Of course, a low gas tax has a cost. The federal government is increasingly using borrowed money to pay for our roads and bridges, while states that lack the luxury of borrowing are taking money away from education and other priorities in order to fund basic road repairs. Meanwhile, even with these infusions of cash, the condition of our transportation infrastructure is continuing to decline.
ITEP’s new policy briefs put this issue into perspective by explaining how gas taxes work, their importance as a transportation revenue source, the specific problems confronting gas taxes, and the types of gas tax reforms that are needed to overcome these problems.
- The Federal Gas Tax: Long Overdue for Reform (2-page brief)
- State Gasoline Taxes: Built to Fail, But Fixable (2-page brief)
- Building a Better Gas Tax (ITEP’s 50-state report from December 2011)
Photo of man pumping gas via Teresia Creative Commons Attribution License 2.0
Quick Hits in State News: Too Business-Friendly in Michigan & Florida, A Caution on Fracking, and More
- Florida Governor Rick Scott is attending grand openings of 7-Eleven® stores but a columnist at the Orlando Sentinel observes that “if incentives and low corporate tax rates were working, Florida wouldn't rank 43rd in employment.” It’s a common sense column worth reading.
- As another massive tax cut for Michigan businesses continues to make its way through the legislature, the Michigan League for Human Services chimes in with a report, blog post, and testimony on why localities can’t afford to foot the bill for state lawmakers’ tax-cutting addiction.
- Bad tax ideas abound in Indiana’s gubernatorial race. Democratic candidate John Gregg wants to blast a $540 million hole in the state sales tax base by exempting gasoline; he claims he can pay for it by cutting unspecified "waste" from the budget. And Gregg’s Republican opponent, Mike Pence, doesn’t seem to have any better ideas. So far he’s only offered a "vague proposal" to cut state income, corporate, and estate taxes – without a way to pay for those cuts.
- Kansas lawmakers are feverishly working to meld differing House and Senate tax plans into a single piece of legislation. Governor Sam Brownback has endorsed an initial compromise which includes dropping the top income tax rate and eliminating taxes on business profits. Earlier in the week the Legislative Research Department said the plan would cost $161 million in 2018 and new state estimates say the price tag is more like $700 million in 2018. Senate leaders have said that they aren’t likely to approve a tax plan that creates a shortfall in the long term. Stay tuned....
- Finally, a USA Today article should give pause to lawmakers hoping that drilling and fracking for natural gas leads to a budgetary bonanza. It explains how the volatile price of natural gas is creating headaches in energy-producing states like New Mexico, Oklahoma, and Wyoming where a dollar drop in the commodity’s price means a budget hit of tens of millions.
Our nation’s gas tax policy is horribly designed, and the consequences have never been more obvious at either the federal or state levels. Construction costs are growing while the gas tax is flat-lining, and the resulting tension has made even routine transportation funding debates too much for our elected officials to handle. Just last week, President Obama signed into law the ninth temporary, stop-gap extension of our nation’s transportation policy since 2009, and numerous states are similarly opting to kick the proverbial can down the crumbling road.
Much of our collective transportation headache arises from our “fixed-rate” gas taxes that just don’t hold up in the face of rising construction costs. The federal gas tax hasn’t been raised in over 18 years, and most states have gone a decade or more without raising their tax. There’s no doubt that we’re long-overdue for a gas tax increase, but political concerns have kept that option largely off the table. In addition to the embarrassing federal Band-Aid fix just signed into law by the President, here’s what we’re seeing in the states:
The Michigan Senate has voted to permanently take millions in sales tax revenue away from health care, public safety, and other services in order to complete basic road repairs. But as the Michigan League for Human Services explains, the state would be much better off modernizing its stagnant gas tax.
Both the Oklahoma House and Senate have voted to raid the general fund as a result of lagging gas tax revenues. These proposals are very similar to the one under consideration in Michigan, and when fully phased-in they would divert $115 million away from education and other services in order to improve some of the state’s wildly deficient bridges.
Luckily, Virginia lawmakers didn’t agree to Governor McDonnell’s proposal to raid the general fund in a manner similar to what’s being considered in Michigan and Oklahoma. But they also failed to enact a much smarter proposal passed by the Senate that would have indexed the state’s gas tax to inflation. It looks like rampant traffic congestion will remain the norm in Virginia for the foreseeable future.
Iowa and Maryland appear likely to follow Virginia’s lead and do nothing substantial on transportation finance this year. Iowa House Speaker Kraig Paulsen says that after much talk, a gas tax increase is not happening. And while Maryland Governor Martin O’Malley is trying hard to end almost two decades of gas tax procrastination in the Old Line State, it doesn’t look like the odds are on his side.
Connecticut lawmakers aren’t just continuing the status quo, they’re actually making it worse. Connecticut is among the minority of states where the gas tax actually tends to grow over time, since it’s linked to gas prices. But the Governor recently signed a hard “cap” on the gas tax that prevents it from rising whenever wholesale prices exceed $3.00 per gallon. Lawmakers in North Carolina briefly considered a similar cap last year, but as the Institute on Taxation and Economic Policy (ITEP) explains, blunt caps are very bad policy and there are much better options available.
For more on adequate and sustainable gas tax policy, read ITEP’s recent report, Building a Better Gas Tax.
The much-ballyhooed plan he announced earlier this week would tax the anticipated boom in the state’s natural gas mining expected to result from newly available “hydraulic fracturing” technology, and plow every dollar of that new revenue from the tax into cutting personal income tax rates.
This plan likely seems odd to those who have sensibly advocated a “fracking” tax to help pay for the environmental costs associated with this technology, to say nothing of the many Ohio residents who have lived through painful cuts in education, library services, and a host of other vital services during the recent recession.
Moreover, the governor’s claim that his proposed income tax cuts would help “create the jobs-friendly climate that will get our state back on track” rings false, coming on the heels of a much bigger income tax cut pushed through by then-Governor Robert Taft in 2005. Policy Matters Ohio found that these tax cuts didn’t spur economy growth, and actually concluded that “the state’s relative economic decline accelerated” after those tax cuts were passed.
Policy making requires economic projections, and some things are harder to predict than others. Energy extracting industries are hard. Using an uncertain revenue source to pay for irresponsible tax cuts is two kinds of bad in one policy. There are smarter ways to rebuild revenues and the economy at the same time.
It seems impossible, but on the eve of the Iowa Caucus the once unstoppable ethanol tax credit expired. After three long decades and over $20 billion dollars spent, the relatively quiet expiration of this once sacred tax credit is surprising considering the pitched battles that took place earlier this year between Grover Norquist and Oklahoma Senator Tom Coburn over its repeal.
The fact that the credit expired on the eve of the Iowa Caucus, long considered the political bulwark against repeal, demonstrates just how far politically the credit has fallen. In fact, a survey found that even among Iowa Republican caucus goers, 57% of them favored Republican candidates calling for outright repeal of the credit.
Although the ethanol tax credit was ostensibly created to promote ethanol as a greener form of fuel, the credit has long been criticized by a wide variety of groups as a wasteful special interest tax break. As Citizens for Tax Justice Director Bob McIntyre once explained, the critical problem with subsidizing ethanol is the product itself takes “more energy to make than it saves” and that even with an exorbitant subsidy of $0.50 for every $1 gallon it was still not very competitive.
For their part, ethanol industry representatives admitted defeat, explaining that the ethanol industry had “evolved” and that now was the “right time for the incentive to expire.”
It is also the right time for scores of other tax credits to expire permanently. The ethanol tax credit is 1 of the 53 such provisions – called “extenders” because Congress quietly extends them every couple of years or so for their favored constituencies – which expired at the end of 2011, most of which are handouts to business interests. In a word, they are pork.
Let’s hope the ethanol subsidy’s death is permanent, and a sign that tax sanity is making a comeback in Congress.
Photo of Ethanol Production via Bread for the World Creative Commons Attribution License 2.0
Our roads, bridges, and transit systems are in decline, and unless lawmakers are cured of their anti-tax phobia, the “fix” could come from education cuts in some states and even more deficit spending at the federal level.
It’s against this backdrop that our friends at ITEP released a first of its kind report on gas taxes last week, titled "Building a Better Gas Tax." In the report, ITEP shows that state governments are losing $10 billion every year because of their failure to plan for predictable increases in transportation construction costs. Meantime, much of the federal government’s contribution to states’ transport budgets is being paid for with borrowed money because our national gas tax is also stagnant, costing us $23 billion annually.
Fortunately, there are glimmers of hope that this problem might be addressed responsibly, at least in some states. Most notable are Maryland, Michigan, and Pennsylvania, where influential lawmakers are planning to push for long overdue gas tax increases when legislative sessions start next month.
By contrast, Oklahoma and Virginia are each led by governors who have announced their intention to cut education funding in order to pay for road and bridge repairs.
ITEP’s report recommends that lawmakers follow the path being considered in Maryland and other states: an immediate gas tax increase, coupled with reform to ensure that the tax can hold up over time alongside rising asphalt and construction costs. ITEP’s report also urges that states enact low-income relief to offset gas tax payments made by those least able to afford the tax.
The report has already been greeted warmly by the transportation policy community, and has received significant press coverage (and praise from editorial boards) in a number of states where gas taxes are sure to be most relevant in the months ahead, including Maryland, Michigan, and Virginia.
We'll keep you updated on all of these debates as they develop, but in the meantime we encourage you to check out the report at www.itepnet.org/bettergastax and see how your state compares.
Photo of Gas Station via Future Atlas Creative Commons Attribution License 2.0
Unless Congress acts, federal gas and diesel taxes will fall by about 80 percent on September 30. If this is allowed to happen, spending on our nation’s already inadequate roads and transit systems will likely plummet, and Congress will face massive pressure to make up the difference through deficit spending or rerouting spending from other vital priorities.
Clearly, these outcomes are not ideal. That’s why extending the gas tax – albeit at low rates – has always been a routine and bipartisan undertaking. Today, however, the visceral opposition to taxes by many in Congress has led some observers to believe that the debate will be more hostile than usual, and that there is a real possibility – though small – that the gas tax will actually be allowed to expire. Simply put, there is less and less that is “routine” in our nation’s capital anymore.
In a surprising and fortunate twist to this story, Grover Norquist stated flatly recently that a gas tax extension would not violate the no-tax pledge that 277 members of Congress have signed. This should have already been obvious to anybody who’s taken the time to read Norquist’s 57-word pledge (it clearly applies only to income taxes), but his admission was nonetheless helpful in making that fact known.
Perhaps more surprising, though, was a confession by one of Norquist's employees that allowing the gas tax to fall so quickly would be too disruptive. You know the situation is serious when even Norquist's group is cautioning against tax cuts.
Less encouraging was Norquist’s recent promise to push for a system in which states could opt-out of the federal Highway Trust Fund, and instead finance their roadways entirely with tax revenues generated inside their borders. If allowed to happen, this would mark a major retreat from the federal government’s long-running role in helping to maintain our nation’s Interstate highways.
It should go without saying that the Interstate highway system is of immense importance to interstate commerce, and that there is an obvious federal role to be played in ensuring the smooth functioning of that system. For example, the federal government has always seen to it that large, sparsely populated states are able maintain their expansive highway networks for the good of the national economy.
With this in mind, it should come as little surprise that the organization representing state transportation departments (AASHTO) believes that the federal government's involvement must continue. As AASHTO representative Jack Basso recently remarked to Stateline, “The real question is can you maintain a national system, given the diversity and the breadth of geography in the country and the population situation, without some kind of national program? I think the answer is ‘No.’”
Unfortunately, while there appears to be a growing consensus that the gas tax should be extended, there's still a possibility that it will be "taken hostage" -- just like the debt ceiling and most of the Bush tax cuts were within the last year. If that happens, it's very likely that the outcome of the current transportation debate will be much more skewed toward Norquist's priorities than would otherwise be the case.
Photo via Gage Skidmore Creative Commons Attribution License 2.0
Senate Republicans and Three Democrats Filibuster Repeal of Oil and Gas Tax Breaks Criticized by CTJ
A minority of 48 Senators, including three Democrats, blocked passage of a bill on Tuesday that would have repealed several of the tax breaks for oil and gas companies that CTJ described in its recent report on energy and taxes. The Senate bill would have repealed the breaks for the "Big Five" oil companies.
The argument made by the companies has always been that these tax subsidies encourage exploration and extraction in the U.S. CTJ's report explains that the resulting increase in profits goes towards paying shareholders, not towards exploration for oil and gas.
Read CTJ's report on oil and gas tax breaks.
House Speaker John Boehner’s recent comment that Congress should “take a look at” repealing tax subsidies for large oil companies is well-founded. A new report from Citizens for Tax Justice explains that these subsidies are a particularly poor use of taxpayer funds.
The oil and gas industry argues that their tax breaks encourage them to locate and extract more oil and gas, allowing the industry to increase supply and thus keep energy prices down below the level they would otherwise reach. But whatever one thinks of this argument, it totally falls apart when oil is selling at over $100 a barrel.
Read the report.
After days of wall-to-wall media coverage of its grotesquely misleading, edited clip of USDA official Shirley Sherrod speaking about race, Andrew Breitbart’s blog Big Government is targeting Citizens for Tax Justice.
Breitbart’s bizarre and extraordinary claim is that CTJ, ACORN, The New York Times, the Center for American Progress and a group called Clean Energy Works (of which we were previously unaware) are colluding to deceive the public about tax policies affecting oil and gas companies.
Breitbart’s argument goes something like this. On July 3, the New York Times published an article saying that oil and gas companies get a whole lot of tax breaks. Then on July 9, CTJ published a report saying that oil and gas companies get a whole lot of tax breaks. Also on July 9, Clean Energy Works sent someone a strategy memo saying that the public needs to know that oil and gas companies get a whole lot of tax breaks.
As Breitbart sees it, surely this can be no coincidence! It doesn’t seem to occur to him that the tax breaks available for fossil fuel production have grown so outrageous — at a time when the world is concerned about carbon emissions and climate change — that hardly a week goes by without somebody somewhere criticizing them. Heck, even President George W. Bush criticized them.
To fill out the conspiracy a little more, Breitbart assumes that any organization that is associated with any of CTJ’s 21 board members, and any progressive organization with an employee cited in the New York Times article, is also involved in this coordinated plan to deceive the public.
Finally, Breitbart is simply wrong about the tax loopholes in question. He writes:
“The same day that Di Martino [of Clean Energy Works] released his memo, Citizens for Tax Justice (CTJ) released their own defective and dishonest hit piece, titled “What Oil and Gas Companies Extract from the American Public.” The tax breaks referred to by Di Martino and the CTJ memo, in reality, are the same credits that every American company receives for taxes paid overseas to foreign governments on income earned abroad.”
Wrong. The CTJ report titled What Oil and Gas Companies Extract—from the American Public discusses the top 5 tax loopholes enjoyed by oil and gas companies. These breaks are not “the same credits that every American company receives for taxes paid overseas to foreign governments,” which seems to refer to the foreign tax credit. One of the five loopholes our report criticizes allows oil and gas companies to take the foreign tax credit for what are really royalties (not taxes) paid to foreign governments.
The other four loopholes discussed in the report are not related to the foreign tax credit. They include the deduction for “intangible” costs of exploring and developing oil and gas sources, “percentage depletion” for oil and gas properties, Congress’s decision to redefine “manufacturing” so that oil and gas companies can receive a deduction for domestic manufacturing, and another break for writing off the costs of searching for oil.
Now it’s true that there are some huge problems with the international tax system generally and it’s true that we are more than happy to use the energy industry as an example of those problems, even though they are not confined to the energy industry. CTJ’s recent report on oil drilling and taxes uses the example of Transocean to illustrate the problems with corporate inversions, transfer pricing schemes, and payroll tax avoidance, since Transocean has exploited all three. But this report makes clear that Transocean is just one example of many types of companies that are abusing the rules in these ways.
And, to be fair (although it’s not clear why we should be fair to Andrew Breitbart) the New York Times article did discuss both problems — tax breaks that are specific to oil and gas companies and tax avoidance schemes that are not limited to any particular type of company. But that doesn’t change the fact that oil and gas companies are particularly adept at finding ways to get out of paying their fair share to maintain the society that makes their enormous profits possible.
Given Breitbart’s track record, we’re not particularly surprised that we're being attacked by the blog Big Government. As Franklin D. Roosevelt once said, "I ask you to judge me by the enemies I have made."
A new report from Citizens for Tax Justice describes the biggest tax subsidies enjoyed by oil and gas companies and explains that these subsidies do nothing to encourage energy independence or cleaner energy.
In the wake of the disastrous oil spill in the Gulf of Mexico, the public and the media have turned their attention to some of the subsidies provided through the tax code to BP, the corporation that leased the ill-fated Deepwater Horizon drilling platform. The truth is that oil and gas companies have for years received a bonanza of unjustified tax breaks that serve only to boost profits for their shareholders.
The oil and gas industry is also resisting any taxes that would allow it to pay for its own messes. One proposal under consideration by Congress is an increase in the tax used to fund the Oil Spill Liability Trust Fund, which is currently 8 cents per barrel. Another is reinstating the Superfund Tax which expired in 1995. Both proposals have been met with furious opposition by the petroleum industry, which has spent a reported $340 million on lobbyists in the last 2-1/2 years.
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.
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.
Does the "cap-and-trade" bill (H.R. 2454, the American Clean Energy and Security Act of 2009) passed out of the House of Representatives in June do enough to protect consumers, or is it too riddled with give-aways to corporate America to be worth enacting? The question of how much the legislation does to protect consumers is a complicated one, but two things are certain. First, if this Congress fails to enact climate change legislation (even imperfect legislation) the consequences could be terrible. Second, when the Senate takes up climate change in September, it will have an opportunity to significantly improve the legislation, as explained by recent reports from the Center on Budget and Policy Priorities.
What the Recent House-Passed Bill Would Do
Under H.R. 2454, companies would need to have allowances to emit greenhouse gases, and the amount of allowances would be capped at a level that would decline for several years. The total level of emissions allowed in 2050 would be only 17 percent of the amount emitted in 2005.
The right to pollute would therefore become scarce, as its supply would decrease, and when the supply of anything decreases, its price generally goes up. Energy from oil, gas or coal and any products made or transported in ways that involve oil, gas or coal would therefore become more expensive. For consumers, the effects of a cap-and-trade system would be similar to those of a carbon tax. The question is whether the extra cash paid by consumers will go towards increased corporate profits or be routed back to the consumers.
For this reason, the President proposed in his first budget that Congress create a cap-and-trade system in which ALL of the emissions allowances are auctioned off to companies rather than given away freely. The revenue raised could be largely used, the President reasoned, for a refundable tax credit that would offset the impact of the resulting higher energy costs for low- and middle-income families.
The bill passed out of the House at the end of June only auctions off 15 percent of the allowances, and the revenue raised would help offset the costs for the poorest fifth of families.
Free Allowances for Utilities -- in Return for Promise to Pass Savings on to Consumers
85 percent of the allowances would not be auctioned off, but neither would they be doled out for free to corporations (not all of them anyway). There would be strings attached for some. For example, local utility companies would initially get almost half of the allowances, but in return they would be required to pass savings onto consumers.
There are many reasons why this is an inefficient way to protect consumers. If it doesn't work, Congress could feel pressure in the future to clamp down on the utilities until it does work. But even if utilities pass savings onto their customers, they would be split between their residential customers and their business customers. As one of the Center on Budget reports explains, the Congressional Budget Office finds that most of the savings for businesses would go to the stockholders, who are very disproportionately among the wealthy.
Better Protection for the Poor
The provisions to shield the poorest fifth of families from the resulting increased energy costs are stronger. An agency within the Energy Department would determine what the average increase in energy costs would be for a family of a given size, after accounting for the offset in costs that will (in theory) be provided by the utilities.
Most families with incomes at 150 percent of the official poverty line or lower would receive a monthly energy refund based on this calculation. Families participating in certain programs (like food stamps) would be automatically enrolled. The monthly refund would usually be delivered through the Electronic Benefit Transfer (EBT) cards that states already use to deliver food stamps and other benefits, further streamlining the administration of the refund.
Since poor working-age adults without children typically do not participate in these other programs or even have a EBT card, they would be helped by an increase in the (very meager) maximum Earned Income Tax Credit (EITC) available for childless adults.
What the Senate Should Do
The increased costs that middle-income families would see if the House bill becomes law are not gigantic ($235 a year according to the Congressional Budget Office). But Congress needs to decide whether the increased prices paid for energy should go largely towards corporate profits (which seems to be the potential result of the House-passed bill) or be redirected back to consumers.
The obvious way to make the latter happen would be to auction off more than 15 percent of the allowances and use the revenue to offset the increased energy costs more effectively for both low- and middle-income families. The Center on Budget points out that refundable tax credits, combined with more use of EBT cards, would be an effective way to deliver the necessary energy refund to the vast majority of low- and middle-income families.
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And this would make for better environmental policy anyway. Families would clearly see the costs of energy rising and have an incentive to curb their energy consumption, even though their total purchasing power would be unchanged.
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.
Citizens for Tax Justice called uponPresident Obama this week to stand by his message of transparency by finally making "tax expenditure" performance reviews a regular part of the OMB's evaluations of government effectiveness.
Simply put, tax expenditures differ from the rest of the tax code in that they focus on encouraging a specific activity or rewarding a particular group of people, rather than on trying to improve the efficiency, simplicity, or fairness of our tax system.Since tax expenditures are usually enacted with primarily non-tax goals in mind (e.g. encouraging investment, encouraging research and development, encouraging home ownership, etc.) it is important that the government make an effort to gauge their effectiveness in achieving those goals.
But despite calls from the GAO, past Congresses, and outside experts in favor of subjecting tax expenditures to regular performance reviews, the most comprehensive performance measure currently in place, the OMB's Program Assessment Rating Tool (PART), continues to focus narrowly on only traditional spending programs.
Encouragingly, language in the President's recently released budget blueprint suggests that a more comprehensive approach for evaluating the government's performance will be used under the Obama Administration (see. pp.39).It's hard to see how anything approaching true comprehensiveness could ignore the hundreds of billions of dollars the government directs toward programs administered via the tax code.Hopefully, the brief language addressing performance reviews that was included in this blueprint is the first signal that an end is coming to the free-ride thus far enjoyed by tax expenditures.
On February 26, President Obama sent to Congress the blueprint for what could be one of the most progressive federal budgets in generations. The budget calls for national health care reform, expanded education funding, a program to reduce global warming, and several improvements in human needs programs. As a new report from Citizens for Tax Justice explains, it would make the tax code considerably more progressive, and close a number of egregious tax loopholes.
There is, however, a flaw in the budget proposal: It does not raise enough revenue to pay for public services. Instead, its net effect is to cut taxes dramatically.
Opponents of the President have attempted to argue that the budget proposal calls for tax increases that could sink the economy, but this complaint is plainly unfounded. President Bush and his allies in Congress were adamant that lower taxes would lead to an explosion of prosperity, and they enacted tax cuts in 2001, 2002, 2003, 2004 and 2006. Some allies of the former President argue that Congress is now insufficiently focused on tax cuts, but this view seems bizarre and incredible given the sad economic facts all around us.
Indeed, one might reasonably conclude that we could safely allow most of the Bush tax cuts to expire at the end of 2010, as they are scheduled to under current law, without any concern about how this will impact the economy. But President Obama actually proposes to keep most of the Bush tax cuts. Obama's largest proposed tax cut is to re-enact 80 percent of the Bush tax cuts that are scheduled to expire at the end of 2010. Most of this reflects re-enacting the Bush income tax cuts for married couples with incomes below $250,000 and others with incomes below $200,000 (or put another way, for about 98 percent of taxpayers), and permanently reducing the Alternative Minimum Tax (AMT). In addition, Obama proposes to re-enact close to half of the Bush estate tax cut.
On top of re-enacting most of the Bush tax cuts, the Obama budget includes a number of additional tax cuts for families and individuals. (These would be extensions of temporary tax cuts included in the recently passed stimulus law.) It also proposes some questionable business tax cuts.
Partially offsetting its tax-cut proposals, the Obama budget proposes some significant revenue-raising provisions. These include a cap-and-trade program to reduce carbon emissions, a limit on the benefits of itemized deductions for high-bracket taxpayers, and a number of corporate and high-income loophole-closing measures.
A new report from Citizens for Tax Justice compares the tax cuts proposed as economic stimulus by the House Democrats to the tax cuts proposed by their Republican counterparts. The report includes both national and state-by-state figures showing the average tax cut and the share of total tax cuts that would be received by taxpayers in various income groups under the different proposals.
The report finds that the Democrats' proposal (H.R. 598) includes some tax cuts that are far more targeted to low- and middle-income people than any of the tax cuts included in the Republican alternatives. This is largely because H.R. 598 includes a new refundable credit (the Making Work Pay Credit) and expands two others (the Earned Income Tax Credit and the Child Tax Credit) while the Republican alternatives do not. Working people who pay federal payroll taxes but do not earn enough to owe federal income taxes will only benefit from an income tax cut if it takes the form of a refundable credit. Many economists have argued that any effective stimulus policy would have to boost demand for goods and services by causing immediate spending -- and one way to do that is to put money in the hands of low- and middle-income people who are more likely than wealthy taxpayers to spend it quickly.
The House of Representatives is expected to vote this week on the Democratic proposal, H.R. 598. Many of the provisions of this bill have wide support from progressive advocates. The Coalition on Human Needs is distributing a sign-on letter for organizations in support of the expansion in the Child Tax Credit. If you are authorized to sign on behalf on an organization in support of this provision, click here for more information.
House Democrats' Tax Proposal Makes Some Improvements on Obama Plan While Retaining Some Ill-Advised Tax Cuts for Business
On Thursday, House Ways and Means Committee Chairman Charlie Rangel (D-NY) released the outlines of a $275 billion tax cut package to be included with a larger stimulus bill that Democratic leaders hope to enact by President's Day. In many ways it is an improvement over the proposal initially floated by the Obama transition team, but it also keeps many of Obama's ill-advised tax cuts for business that will have little or no stimulative effect on the economy.
Most economists believe that the current economic downturn is largely the result of a collapse in demand for goods and services, and that direct government spending can boost demand and prevent the recession from becoming more severe and destructive. Tax cuts are less effective because it's difficult to ensure that they will result in the sort of immediate spending needed to boost demand quickly. But if tax cuts can at least be targeted to those people who are likely to spend the extra money right away (like low-income families), then they could have a decent chance of accomplishing the goal of stimulating the economy.
More Progressive Tax Cuts for Families
Last week, Citizens for Tax Justice released a report that showed how some of Obama's proposed tax cuts would be targeted to those who would likely spend the money right away (thus immediately pumping the money into the economy) while others were more likely to be ineffective giveaways to business. Obama's proposed Making Work Pay Credit would reach people at lower income levels, but it would not be particularly targeted towards the bottom half of the income ladder. (The poorest 60 percent of taxpayers would only get 48 percent of the benefits while the richest 20 percent would get 25 percent of the benefits.) A proposal to increase the availability of the refundable portion of the $1,000 Child Tax Credit looked more promising because nearly all of the benefits would go to the poorest 60 percent.
The Ways and Means Committee proposal improves on Obama's tax cuts for individuals. For example, the improvement in the Child Tax Credit (CTC) would be even more progressive. Under current law, some working families who pay federal payroll taxes but who do not earn enough to owe federal income taxes are actually too poor to benefit from the CTC. That's because people with no income tax liability do not benefit from a tax credit unless it is refundable, and the refundable portion of the CTC is limited to 15 percent of earnings above $12,550 in 2009. The Ways and Means Committee proposal would remove that earnings threshold so that the refundable portion of the CTC is equal to 15 percent of all earnings (with the maximum credit limit unchanged at $1,000 per child).
The refundable Making Work Pay Credit, which Obama proposed during his campaign and which would generally offer working people $500 (or $1,000 for a couple if both spouses work), is also included. A new addition to the package is an improvement in the Earned Income Tax Credit (EITC). It is unclear at this time how extensive the change in the EITC will be. (It may be similar to the EITC expansion Obama proposed during his campaign.) But it's quite clear that expanding the EITC is a promising way to put money in the hands of families who have probably cut back on purchasing all sorts of needed goods and services and who will therefore spend that money quickly.
Tax Cuts for Business: One Bad Idea Dropped, Several Others Included
The Ways and Means proposal does not include Obama's proposed refundable $3,000 tax credit for businesses that create jobs, which was roundly criticized as unworkable. Democrats in the House and Senate are said to have been doubtful that the credit could possibly be implemented in a way that did not result in a huge tax giveaway for companies that were merely hiring people they would hire anyway.
Unfortunately, many other business tax cuts in Obama's proposal that CTJ and others criticized are included in the Ways and Means package. Earlier attempts at using bonus depreciation to boost the economy have proven to be ineffective, but lawmakers apparently insist on this giveaway to business-owners. A 2006 Federal Reserve study reached a similar conclusion to our own findings, finding that previous versions of this tax break had "only a very limited impact... on investment spending, if any." Worse, the proposal would allow businesses to use their losses to reduce taxes they already paid going back five years (the current limit is two years). As Dean Baker explains, this tax cut must have even less stimulative effect than other business tax cuts because it does nothing to change the incentives of business-owners or investors going forward. The net operating loss carryback provision simply hands money to businesses without requiring any sort of investment (or anything) in return.
House Democratic Proposal Would Rescind the Infamous "Wells Fargo Ruling"
Another provision in the package would reverse IRS Notice 2008-83, also called the "Wells Fargo ruling" after its largest beneficiary. In October, the IRS issued this two-page notice declaring, with no authorization from Congress, that banks could ignore a section of the tax code enacted under President Reagan to prevent abusive tax shelters. In December, over a hundred organizations signed a letter to the House and Senate asking them to rescind the Wells Fargo ruling. That call is now being answered.
The Ways and Means package contains provisions addressing many other needs, including a partially refundable credit for higher education, increased availability of bonds for state and local government, energy tax incentives, child support funding and many others.
Senate Prepares to Dig the Budget Deficit Deeper with AMT Relief, Special Interest Tax Cuts, and Few Revenue-Raising Provisions
The Senate is poised to add a hundred billion dollars to the federal budget deficit by enacting more tax cuts. Democratic Senate leaders have stated that they believe new tax cuts should be paid for, but many Republicans insist on blocking any bill that increases anyone's tax bill, even if the legislation merely closes an egregious tax loophole. Their blocking tactics can succeed in the Senate, where a minority of 41 lawmakers can block most legislation. The House of Representatives, which is governed by the majority rule principle recognized by most modern democracies but not in the U.S. Senate, has passed legislation that includes most of these tax cuts but also includes revenue-raising provisions to offset their costs.
Senate leaders have apparently made a deal that would allow them to enact relief from the Alternative Minimum Tax (AMT) for a year and extensions of several temporary tax cuts targeted to various special interests (often called the tax extenders) at a cost of around $130 billion, and including a revenue-raising provision that would offset just $25 billion of that cost. The Senate is scheduled to take several votes on Tuesday, including one to provide AMT relief with the costs fully offset by revenue-raising provisions, but this is expected to fail because a minority of Senators will block it. The Senate is then expected to move on to approve AMT relief that is not paid for.
Important Revenue-Raising Provision Would Crack Down on Tax Avoidance Through Deferred Compensation
The revenue-raiser is certainly a worthy provision. It would shut down offshore tax schemes that help the already highly compensated avoid taxes on their deferred compensation. Generally, when a company pays into a deferred compensation plan for an employee, if that plan is "non-qualified" (meaning it exceeds certain limits that the super-compensated don't want to deal with) the company cannot take a tax deduction for the payment until it is actually received as income in later years by the employee. But some have figured out how to have their deferred compensation routed through an offshore entity in some tax haven so that there is no tax paid to the U.S. government or any other government, so not being able to deduct the payment is not an issue. This provision would make the deferred compensation in this situation immediately taxable to the individual, so that there would no longer be an incentive to use this scheme.
But this provision, worthy as it is, pays for less than a fifth of the total cost of the tax cuts included in the bill. The Bush administration and its allies in Congress have promoted the bizarre idea that any tax cut that is enacted for one year can be extended indefinitely without offsetting the cost because such an extension is merely "preventing a tax increase."
Republican Leaders Are Shocked -- Shocked I Tell You! -- that the AMT Will Affect More Taxpayers
This is most ludicrous in the case of AMT relief. The AMT is basically a backstop tax geared towards getting well-off people to pay some minimum tax no matter how proficient they are at finding tax loopholes to reduce or wipe out their tax liability. Tax liability is calculated under the regular rules and the AMT rules, and you only have to pay the AMT if your AMT liability exceeds your regular income tax liability. For most people who are not rich, this is usually not an issue. But the Bush administration chose to lower the regular income tax without making any permanent change to the AMT, so of course that means that more people are going have to pay the AMT. Another problem, albeit a less important one, is that inflation is eating away at the value of the exemptions that keep most of us from paying the AMT. The Clinton administration increased these exemptions, but no permanent increase in those exemptions has been made during the Bush years.
The AMT will affect over 20 million people this year if Congress does not act. In recent years Congress has passed several temporary "patches" to the AMT to prevent this from happening, and this year's patch will cost over $60 billion.
The Bush administration chose to not include a permanent fix to the AMT in its tax plan in 2001 because that would have increased the cost of the proposal. During George W. Bush's first presidential campaign in 2000, CTJ's initial analysis of the governor's tax proposal assumed that it did include a fix to the AMT, but Bush's advisers insisted that this was not true. Of course, we have ended up paying for AMT relief anyway, the only difference is that now President Bush and his allies can pretend that the need for AMT relief was entirely unexpected and that this somehow means it can be deficit-financed.
The Center on Budget and Policy Priorities helps us out with a little history lesson. This is what Senate Finance Committee ranking Republican Charles Grassley said in January of last year. It typifies what the President and his allies have been saying about the AMT:
"It's ridiculous to rely on revenue that was never supposed to be collected in the first place... It's unfair to raise taxes to repeal something with serious unintended consequences like the AMT."
Compare this to what Senator Grassley said when the first Bush tax cut bill was being debated:
"Roughly one in seven taxpayers will come under the shadow of the Alternative Minimum Tax by the end of the decade... That figure will significantly be higher if President Bush's tax plan is adopted, and that is according to the Joint Tax Committee of the Congress."
The Tax Extenders and Other Tax Cuts -- Some Bad, Some Good
The extenders include all sorts of handouts that either subsidize businesses that don't need subsidies (like the research credit), cut taxes in ways that are not particularly progressive (like the deduction for state sales taxes and the deduction for tuition which really only benefits fairly well-off families), or just offer very trivial benefits (like the provision allowing teachers to deduct $250 in classroom expenses, which yields a benefit of about $60 for teachers lucky enough to be in the 25 percent bracket). CTJ has explained in detail why Congress would be better off ending the ritual of passing "extenders" and should simply let these provisions expire.
There are surely some good provisions in the bill as well. A portion of the tax cuts (about six percent) are targeted towards disaster relief. One particularly progressive provision would make it easier for low-income people to receive the refundable portion of the child credit. Over a thousand organizations from all over the country supported this provision, including CTJ. This improvement in the child credit accounts for only around 2 percent of the cost of the entire bill, and we certainly wish that progressive provisions like this made up a much larger proportion of the tax legislation coming out of Congress lately.
Energy Tax Provisions
The Senate will also vote on a package of extensions and modifications of energy tax breaks on Tuesday. This package at least includes revenue-raising provisions to offset its $17 billion cost. One would limit -- but not eliminate -- the use of the section 199 deduction for manufacturing by oil and gas companies. (Apparently many Senators still believe that pumping oil or gas is "manufacturing" and scaled back an earlier proposal that would completely stop the energy companies from using the manufacturing deduction). Another requires securities brokers to report the "basis" of securities they buy and sell, which will help prevent evasion of capital gains taxes.
While some environmental organizations are applauding this package of incentives for everything from wind and solar power to electric cars, other green groups have thrown cold water on the party by criticizing the compromises that were made leading to passage.
"Unfortunately," wrote the president of the National Wildlife Federation in a letter to the Senate, "by including sweeping new federal subsidies for oil shale, tar sands and liquid coal refining, the bill no longer represents the kind of progress America needs to confront global warming."
As explained by U.S. Transportation Secretary Mary Peters, "At current spending rates, we will start the new fiscal year on Oct. 1 with a zero balance in the [Federal Highway] Trust Fund, and will continue to spend more than we take in." If allowed to continue untreated, the consequences of this shortfall would be immense, as every state depends heavily on federal highway dollars to carry out transportation construction projects. Fortunately, a transfer of $8 billion of general revenues into the Highway Trust Fund (aptly described by one Senator as a "short term fix") appears as if it is about to be adopted. Regardless of the resolution of this immediate problem, however, this development brings with it a unique opportunity to discuss two important points related to transportation funding.
First, following the announcement that the Trust Fund would fall short, Arizona and Oklahoma each halted work on scheduled transportation projects, and numerous other states made it clear that they would be forced to follow suit if the problem is not quickly remedied. Such a development would not only have long-term consequences for the efficiency of the nation's transportation infrastructure, but would also have immediate consequences in terms of lost jobs and lost wages.
Members of Congress did not dispute these points in their overwhelming support of the $8 billion transfer to the Trust Fund. But for some reason, talk of how best to bolster the economy (especially the talk going on in the Presidential election) has been held hostage to the idea that tax cuts must be at the center of any wise economic policy. Spending on government employment (such as in the transportation sector) is more important to the nation's economic vitality, and should not be overlooked, despite the zeal with which all sides have professed the importance of tax cuts. (Although at least Democratic leaders in the House and Senate are now discussing a new stimulus bill without tax cuts.)
The second debate that needs to take place in the wake of this transportation funding scare is over what to do about the long-term sustainability of the nation's transportation finance system. The Highway Trust Fund consists mainly of revenue collected by the federal 18.4 cent-per-gallon gasoline tax. The federal gas tax has not been raised since 1994, despite the fact that 18.4 cents in 1994 is the equivalent of what would be about 27 cents in today's dollars, adjusting for inflation. While gas tax hikes aren't likely to be something you'll hear much about during the Presidential election, serious consideration will have to be given to such a plan soon (or at least to some kind of sustainable fix for our revenue shortage) should another eventual shortfall in the Trust Fund be averted.
Presidential candidate Barack Obama has talked up several proposals relating to energy and taxes over the past couple weeks, including a one-time tax rebate of $500 per spouse that would be funded by a five-year windfall profits tax on oil companies. He also proposes a $7,000 tax credit for "advanced technology vehicles" which include hybrid cars that can be plugged into an electrical socket and flexible fuel vehicles (which can run on gasoline or ethanol). Obama has also supported eliminating tax loopholes for oil and gas companies. He also supports a cap and trade program in which businesses must obtain an allowance to emit carbon pollutants and all of these allowances (rather than just a portion of them) would be auctioned off, raising revenue that can be reinvested into alternative fuels and assistance to keep families from being harmed by the increased cost of energy.
His recent statements have caused some controversy, particularly his call to release oil from the Strategic Petroleum Reserve and his statement that he could be open to repealing the ban on offshore drilling if it was part of a larger compromise on energy policy. But some of the more strident criticism has been aimed at his desire to close tax loopholes and implement a windfall profits tax. Critics argue that many businesses have a period of unusually high profits and it's not clear why targeting the oil industry for a change in tax treatment makes any sense.
But that argument largely misses the point. The oil and gas industry has not just profited enormously. It has profited enormously partly because Americans are subsidizing it through the tax code -- and these tax subsidies have resulted in no clear benefit for the American public. Even if the tax subsidies are repealed, the public will never recoup the revenue showered on the oil and gas industry over the past years unless a windfall profits tax is implemented. The windfall profits tax blocked by Senate Republicans earlier this summer would sensibly ensure that any profits reinvested in renewable energy would not be subject to the tax.
A report released by Citizens for Tax Justice in July makes this argument and explains just how well oil and gas company stockholders are doing, just how little they invest in alternative energy, and how much they have siphoned from federal revenue through tax loopholes. For example, the report cites the American Petroleum Institute (API) which admits that in the six years stretching from 2000 through 2005 the oil industry only put a total of $1.2 billion towards investment in alternatives to fossil fuels, which is just 0.3 percent of its $383 billion in net profits over that period. If this figure had increased since then, the industry would surely be publicizing that fact.
But while the public has not benefited from the tax subsidies for the oil and gas industry, stockholders surely have. As the report explains, if you invested $10,000 in the top five oil companies 20 years ago, your portfolio would now be worth $100,000. That same $10,000 invested in an S&P 500 index fund is now worth $60,000. Oil shareholders enjoy a big advantage, and hardly seem in need of tax subsidies.
Whether a small tax rebate is what working families really need right now seems doubtful, but closing tax loopholes for oil and gas companies is a common sense policy, and a windfall profits tax might be a sensible supplement to this policy.
Members of Congress have left the Capitol for the August recess and some important tax bills await them when they return in the fall.
House Passes Tax Extenders Bill, Republicans Block Senate Action
In May, the House passed a bill (H.R. 6049) that includes extensions of several temporary tax cuts targeting various interests (commonly referred to as "extenders") as well as renewable energy tax incentives and a few new tax cuts. Unlike similar bills passed during the Bush years, this bill includes revenue-raising provisions to replace the $54 billion that would otherwise be lost.
The one-year "extenders" cost a total of $27 billion and include extensions of several tax breaks targeting businesses and generally well-off individuals. The renewable energy tax incentives in this bill cost a total of $17 billion and the largest is the 3-year extension of the "section 45 tax credit" for the production of energy from renewable resources.
The new tax cuts in the bill, which cost an additional $10 billion, include a change in the AMT related to the treatment of stock options and an expansion in eligibility for the Child Tax Credit (CTC) for low-income families.
The Bush administration opposes this bill because it opposes any and all tax increases, even if they are included in a bill with tax cuts to make the legislation deficit-neutral. CTJ released a report in May that was critical of the administration's position and that explained the provisions in the bill. Democratic leaders in the Senate tried three times to invoke cloture on this House-passed bill, but the Republican minority blocked the effort each time.
House Passes Bill to Patch AMT and Close the Carried Interest Loophole, Republicans Defend Private Equity Fat Cats
In June, the House passed a bill (H.R. 6275) that would provide relief from the Alternative Minimum Tax (AMT) for one year.
The AMT was first created in 1969 to ensure that wealthy taxpayers would pay some minimum level of income tax no matter how proficient they are at using loopholes. It has been adjusted several times since then but the Bush tax cuts caused more people to be affected by the AMT and did not include any permanent adjustment for it. Congress, in recent years, has frequently enacted a "patch" which adjusts the exemptions that keep most of us from paying the AMT, but has not provided a permanent fix.
The one-year AMT "patch" would cost over $60 billion, and the House bill would replace the revenue, partly by closing the loophole for "carried interest" paid to private equity fund managers. A report from CTJ explains that since AMT relief will mostly help families that are relatively well-off, it should not be deficit-financed because that could eventually lead to higher taxes or cuts in services for middle-income people.
The Senate has not acted on the House-passed AMT bill. One sticking point is the provision to close the "carried interest" loophole. Carried interest is a form of compensation paid to fund managers in return for investing other people's money. Most of us who earn an income from work are subject to federal income taxes at progressive rates, starting at 10 percent and going up to 35 percent for the very wealthiest. Private equity fund managers are at the top of this wealthy group, but nevertheless pay only 15 percent -- the special low capital gains tax rate -- on their carried interest.
Presidential candidate Barack Obama favors closing the carried interest loophole, while John McCain does not. In fact, McCain's opposition to closing loopholes enjoyed by the private equity industry inspired an SEIU protest involving the performance of an ABBA song with new lyrics, retitled "Loophole King."
Senate Democrats Ready to Cave on Paying for AMT Relief But Insist on Paying for Extenders
Senator Max Baucus introduced a bill (S. 3335) that includes both the extenders, energy provisions and a one-year AMT "patch." The legislation includes enough revenue-raising provisions to pay for the extenders but not for the AMT patch. The biggest revenue-raising provisions are the same ones that are in the House-passed extenders bill. One would clamp down on the use of schemes by private equity fund managers to move deferred compensation offshore to avoid taxes. Another would delay a 2004-enacted law that has not even gone into effect yet. The soon-to-take-effect law is designed to make it easier for multinational corporations to take U.S. tax deductions for interest payments that are really expenses of earning foreign profits and therefore should not be deductible.
The Republican minority in the Senate blocked efforts to invoke cloture on this bill before the recess because they object to the revenue-raising provisions.
Needed Improvement in the Child Tax Credit
Both the House-passed extenders bill and Senator Baucus's extenders/AMT bill have a provision that would make the Child Tax Credit (CTC) more widely available for low-income families.
First enacted during the Clinton administration, the CTC was significantly expanded as part of the Bush tax cuts. It is now worth up to $1,000 for each child under age 17. But many low-income families do not benefit at all from the child credit, and many others get only partial credits. That's because the credit is unavailable to families with earnings below $12,050 (indexed for inflation), and the credit is limited to 15 percent of earnings above that amount. In other words, a working family making less than $12,050 this year is too poor to get any child credit.
The House extenders bill would lower the child credit's earnings threshold from the current $12,050 to $8,500. The Center on Budget and Policy Priorities points out that 13 million children would be helped by this provision.
With enormous transportation funding shortfalls on the horizon at both the federal and state levels, lawmakers are thinking about how they will address the problem of inadequate transportation funds in the short-term and long-term. Major developments in both these short- and long-term components of the issue occurred over the last few days in the form of a House bill that would supplement the Highway Trust Fund with general fund revenues, and the unveiling of the Bush Administration's transportation plan by Transportation Secretary Mary Peters.
On the revenue side of the Administration's transportation plan, Secretary Peters rightly points out that changes in Americans' driving habits, as well as the inevitable shift towards improved vehicle fuel economy, have created serious sustainability problems for the gas tax as a source of transportation funding. In the long run, these changes may spell the end for the gas tax as a meaningful source of transportation revenue, but many political figures are prematurely declaring that day to have already arrived.
In her description of the Bush Administration's transportation plan, Secretary Peters referred to the gas tax funding mechanism as "broken" and "antiquated". Unfortunately, this sentiment is surprisingly common. Virginia Governor Tim Kaine, for example, recently referred to the tax as a "fossil". The frustration being felt by government leaders over declining gas tax revenues is understandable, but persuasive reasons exist for viewing the gas tax not as an obsolete relic of a bygone era, but as a useful option for addressing immediate funding shortfalls.
While some of the blame for the inadequacy of the gas tax can be placed on reduced demand, much of the problem stems from the unwillingness of legislators to increase tax rates when necessary. The federal gas tax has been set at 18.4 cents per gallon since 1993, but because of inflation, the real value of that amount has declined by over 30%. States are feeling the pinch too, as well over half of the states haven't increased their tax in over 5 years.
The consequences of this inaction have been dire. The one year anniversary of the Minnesota bridge collapse has brought with it a pair of studies into the continued lack of maintenance (driven largely by lack of funding) of the nation's bridges. Clearly, the usual arguments that we can just "trim the fat" instead of raising taxes will not suffice. The House of Representatives recognized this fact recently and passed a bill that would fill the shortfall in the Highway Trust Fund with general revenues (which would obviously increase the over budget deficit). The Bush Administration has threatened to veto this bill on the grounds that highway users, rather than taxpayers at large, should be responsible for funding the transportation infrastructure. It's ironic then that the Administration has proposed filling the gap with funds taken from mass transit. In either case, filling a gap that is sure to reoccur with one-time revenues leaves something to be desired.
Of course, increasing the gas tax could result in revenues that would satisfy the Administration's demand that transportation be paid for by its users, but for some reason that option is completely off the table. Even some states have decided to avoid the issue of the gas tax by proposing to pay for transportation with revenues unrelated to road usage. Recent proposals in Virginia and Arizona have included provisions to use sales tax revenues for transportation, despite the fact that these states have not raised their gas taxes since 1986 and 1990, respectively.
Admittedly, increased tolling and taxes on vehicle miles traveled may now be better suited to perform the job the gas tax was originally designed to do: serve as a user-charge for drivers. But these options are cumbersome to implement, and are therefore not well suited for addressing the immediate revenue shortfall. While policymakers need to spend time fleshing out these ideas in preparation for the impending rearrangement of transportation finance, they should also spend some time thinking about the merits of increasing gas taxes (perhaps by indexing the rate to inflation, as is done in Maine) as a way of preserving a rough user-fee system in the short-term, rather than relying on sales taxes and one-time funding injections.
On Friday of last week, Republican Senate leaders successfully filibustered the Lieberman-Warner "cap and trade" bill (S. 3036). This bill would reduce carbon emissions from electric power, transportation, manufacturing, and natural gas by 4 percent below the 2005 level starting in 2012, then by 19 percent below the 2005 level in 2012 and by 71 percent below 2005 level in 2050. Permits to emit carbon would be allocated to industry. Some of these allocations would be given away while others would be auctioned off, and the allocations could be traded (hence the term "cap and trade").
The proceeds from these auctions would be used for various purposes, some of which could mitigate the resulting higher energy costs for low- and middle-income families. Part of the revenue would be dedicated towards tax changes that would help consumers, but the exact nature of the tax provisions would have to be worked out by the Senate Finance Committee.
On Tuesday, Republican Senate leaders managed to block another energy bill, (S. 3044), which would have eliminated some significant tax giveaways for large oil and gas companies and would have imposed a windfall profits tax on those not investing enough in sustainable energy. The bill would impose a 25 percent tax on windfall profits, which are defined by a formula that targets profits far out of line with average profits over the 2002-2006 period. Any windfall profits invested into renewable energy development would not be subject to this tax.
Revenue from the windfall profits tax would be dedicated to an Energy Independence and Security Trust Fund to be used for the development of renewable energy sources. The bill would also bar large oil and gas companies from using the deduction for domestic manufacturing (often called the Section 199 deduction), raising about $10 billion over ten years, and would also restrict the use of credits for foreign taxes by oil and gas companies, raising $4 billion over ten years.
Current tax policy gives oil and gas companies breaks that other industries don't enjoy and does little to encourage the development of alternative energy sources. Jeffrey Hooke, an expert on investment and finance, argued in a Baltimore Sun op-ed back in April that "Oil executives lament that only 9 cents of every sales dollar is profit, which is below the average for American business. However, if profit margin were a reliable yardstick, all supermarkets would close, because they earn less than 1 cent per sales dollar." Further, he says, "Alternative energy research has a minuscule budget at Big Oil. Any oil substitute would be a prized commodity, but its discovery presupposes a reduced value for the industry's reserves, refineries, pipelines and the like. The companies' incentive to find a substitute is thus quite weak."
This week, the Senate debated the Lieberman-Warner Climate Security Act that seeks to establish a cap-and-trade program for reducing carbon emissions from the electricity, transportation, and manufacturing industries. Its likelihood of passing is remote and prospects for overturning a veto threatened by President Bush are even more farfetched. However, it is worth considering the soundness of the proposal due to the virtual certainty of having a president (Sen. Barack Obama or Sen. John McCain) in January 2009 who favors reducing carbon emissions at least in principle.
Under the Lieberman-Warner Act, most industrial carbon emitters (comprising 86% of U.S. emissions) would need permits in order to emit carbon. If they produced more carbon than their permits allowed, they would have to buy permits from other emitters, creating an incentive to minimize emissions. If the bill were made law, 80% of carbon allowances would initially be distributed for free, with 20% of them auctioned off. Over time a gradually increasing percentage would be auctioned off. The total amount distributed would be based on 2005 levels and would decline 2% per year between 2010 and 2050. As the number of permits declined, they would become more expensive and the new effective price of carbon should force emissions to drop. The backers of the proposal maintain that it would reduce emissions about 70% from current levels by 2050 (although many consider this inadequate).
The advantage of cap-and-trade is that it can ensure in theory that only a sustainable amount of carbon is emitted. A tax, on the other hand, doesn't set an actual cap, although the incentives to reduce emissions would be equally strong. The main disadvantages of cap-and-trade are its administrative challenges and vulnerability to political pressures and corruption. Europe's cap-and-trade program established three years ago has suffered from problems such as cheating by certain corporations obtaining more emissions credits than they should have. Carbon emissions have actually increased in Europe since the implementation of cap-and-trade.
The flawed method of implementation in Europe is present in Sen. McCain's global warming plan. McCain proposes giving away the emissions credits initially, which will not create incentives for the biggest emitters to reduce their emissions faster. Giving the credits away free of charge also would open up the possibility of the influence of special interests to creep into the process of distributing the credits. Sen. Obama's plan proposes auctioning off credits at the program's onset, which is much sounder policy according to Former Labor Secretary Robert Reich.
There is also the question of what to do with any revenues generated by permit auctions or by carbon taxes. Lieberman-Warner proposes placing revenues from carbon permits into a public-private entity known as a Climate Change Credit Corporation. This will finance other greenhouse gas reducing activities such as researching alternative energies, improving fuel efficiency, and insulating homes and businesses. But there is evidence this could be subject to abuse, as many of the biggest carbon-emitting corporations are lobbying to obtain funding to develop their own private pollution-reducing technologies. On the other hand, both cap-and-trade and carbon taxes will likely increase energy costs in the short-run and disproportionately impact the poor and middle-class. An alternative is to return the proceeds of the carbon permits to these groups which will render the policy revenue-neutral.
Al Gore, along with many environmental groups and economists, has supported creating a more straight-forward carbon tax. This will lead to more predictable energy prices over the long-term on which environmentally responsible economic decisions can be based. But, of course, proposing "new taxes" of any kind is politically difficult, even if they're imposed on something as environmentally devastating as unregulated carbon dioxide.
A case can be made for either carbon-reducing scheme, but the bottom line is that tax policy will in some form have to play a key role in any method chosen to address the climate crisis.
This week, Senator Hillary Clinton came out in support of lifting the federal tax on gasoline during the summer months, an idea originally proposed by Senator John McCain. Senator Barack Obama publicly scoffed at the idea, saying "this isn't an idea designed to get you through the summer, it's designed to get them through an election." Obama explained that the overall savings for a family over the summer would probably average about "$25 to $30. Half a tank of gas."
The federal gas tax is currently 18.4 cents per gallon for gasoline and 24.4 cents per gallon for diesel. With the average gasoline price $3.60 per gallon this week, the federal gas tax is only around 5 percent of the total cost of gasoline.
While the benefit to the consumer may be too small to even notice, this proposal could have a very real and very negative effect on the Highway Trust Fund which is supported by the gas tax and which we depend on to fix and improve congested highways and roads in need or repair. The American Society of Civil Engineers points out that every dollar spent on highway construction is estimated to bring $5.40 in benefits and every billion dollars spent on highway construction generates about 30,000 jobs each year, according to the Department of Transportation. Repealing the gas tax for a summer would cost the Highway Trust Fund about $8.5 billion.
It's true that the gas tax is a regressive tax, requiring low-income drivers to pay more of their income in tax than wealthier drivers. But the gas tax is different from most other taxes in ways that minimize the importance of tax fairness. Most notably, the gas tax can serve to help reduce demand in a market where many would agree demand is far too high. With gasoline in limited supply (Paul Krugman explains that the supply is actually fixed for the next few months), environmental concerns continuing to mount, and traffic congestion remaining a problem, any effect the gas tax has on reducing demand should be a welcome one.
Senator Clinton would replace the money in the Highway Trust Fund by enacting a new windfall profits tax for oil companies. With a White House opposed to anything that can conceivably be called a tax increase and a Senate that has trouble paying its bills, it's hard to imagine this part of the proposal being enacted during this Congress. President Bush said he was open to considering the idea of a gas tax holiday, but there appears to be no chance he would ever support a windfall tax on oil companies to pay for it.
On Wednesday, the House of Representatives voted 236-182 to pass an energy tax bill that would shift nearly $18 billion in tax breaks away from oil and gas companies to renewable energy. The President has stated that he would veto the bill (H.R. 5351) if passed by the Senate. Congress attempted to include a very similar set of tax provisions in last year's law improving fuel efficiency standards, but failed -- by just one vote -- to obtain the sixty votes needed to defeat a filibuster and keep the tax provisions in the law. This year that vote could go very differently, as Democrats may use the budget reconciliation process for an energy tax bill. Under this process, the budget resolution could spell out some fiscal goal and then Congress could later pass a bill meeting that goal with just a simple majority of votes in the Senate instead of the usual 60 needed to overcome a filibuster.
If passed by both chambers of Congress, this maneuver would set up a very public fight with the White House over whether tax breaks should be targeted toward big oil and gas companies or renewable energy.
H.R. 5351 would extend and modify the "section 45 credit" for energy from renewable sources like wind, geothermal and hydropower, at a cost of $6.6 billion over ten years. Other provisions costing over a billion dollars each include a $4,000 credit for hybrid vehicles that can be plugged into an electric socket for recharging, bonds for state and local conservation programs, the extension and modification of a $300 credit for energy efficiency improvements in homes, and bonds for infrastructure in and around the World Trade Center. Several other provisions would promote the production and use of renewable fuels and other goals.
The costs of these initiatives would be offset by provisions that reduce or eliminate tax breaks for oil and gas companies. The largest of these provisions would raise $13.6 billion over ten years by barring large oil and gas companies from using the deduction for domestic manufacturing (often called the Section 199 deduction) and limiting the deduction for smaller oil and gas companies.
In December, Congress passed an energy bill that increases fuel efficiency standards for automobile manufacturers (known as corporate average fuel economy, or CAFE) to 35 miles per gallon by 2020 and requires gasoline to contain a certain level of biofuels by 2022. Previous versions of the bill that included a package of tax provisions were unable to get the 60 votes needed in the Senate for approval, in one case failing by just one vote. Republicans in the Senate cast the revenue-raising provisions in the tax package as tax increases that would hurt the economy. To the contrary, the tax package was a revenue-neutral set of provisions that would merely shift tax incentives from the oil and gas industry, which seems to profit immensely regardless of what Congress does, to renewable energy sources.
House Ways and Means Chairman Charles Rangel (D-NY) has introduced a bill (H.R. 5351) that is similar to the tax package that failed in the Senate. It would extend and modify the "section 45 credit" for energy from renewable sources like wind, geothermal and hydropower, at a cost of $6.6 billion over ten years. Other provisions costing over a billion each include a $4,000 credit for hybrid vehicles that can be plugged into an electric socket for recharging, bonds for state and local conservation programs, the extension and modification of a $300 credit for energy efficiency improvements in homes, and bonds for infrastructure in and around the World Trade Center. Several other provisions would promote the production and use of renewable fuels and other goals.
The bill includes two main revenue-raising provisions to offset the costs. The largest would raise $13.6 billion over ten years by barring large oil and gas companies from using the deduction for domestic manufacturing (often called the Section 199 deduction) and limiting the deduction for smaller oil and gas companies. To put that in perspective, this would raise an average of over $1.3 billion a year for ten years, while the net profits last year for Exxon-Mobil alone were over $40 billion.
In the 2004 tax cut law enacted by Congress and the President, manufactured goods under Section 199 were redefined to include oil and gas, thus allowing energy companies to use this tax break that was not initially intended for them. (The deduction is 6% of the cost of domestic manufacturing activities this year, rising to 9% in 2010.) The second revenue-raising provision would restrict the use of credits for foreign taxes by oil and gas companies, raising $4 billion over ten years.
This week the House approved an energy bill (H.R. 6) that the Senate passed last week after stripping from it a $21 billion tax title that would have shifted tax breaks away from oil and gas companies to more sustainable energy sources. In the Senate, the bill with the tax package received 59 votes, one short of the 60-vote threshold needed to consider the bill, prompting Democratic Senate leaders to remove the tax provisions.
The remaining provisions, which passed easily, are still important. They would increase fuel efficiency standards for automobile manufacturers (known as corporate average fuel economy, or CAFE) to 35 miles per gallon by 2020 and would require gasoline to contain a certain level of biofuels by 2022. The President signed this legislation on Thursday.
On Thursday, the Senate failed by one vote to agree to consider legislation that would shift tax breaks away from oil and gas companies and towards more sustainable forms of energy. The move to invoke cloture on the energy bill received only 59 votes, one short of the 60-vote threshold needed to consider the bill. The sticking point for many Republicans is the $21 billion tax title, which Senate Majority Leader Harry Reid (D-NV) then removed from the bill to ensure passage. The bill, (H.R. 6) minus the tax title passed the Senate, 86-8, the same day.
The remaining provisions of the energy bill would increase fuel efficiency standards for automobile manufacturers (known as corporate average fuel economy, or CAFE) to 35 miles per gallon by 2020 and would require gasoline to contain a certain level of biofuels by 2022.
The tax provisions stripped from the bill include an extension and expansion of the renewable energy production tax credit (known as the Section 45 credit), which is a tax subsidy for deriving energy from wind, geothermal sources, hydropower or several other specific renewable sources. This provision would have cost $6.2 billion over ten years. Other provisions would encourage cleaner coal facilities, greener commercial buildings, electronic energy meters and the use of electricity from wall sockets to power automobiles, among many other advances.
The tax title included revenue-raising provisions to offset these costs, which the President and the Republicans disingenuously claim are tax increases that would hurt the economy.
The biggest offset would have barred the big oil and gas companies from using the deduction for domestic manufacturing (often called the Section 199 deduction). A legislative slight-of-hand in the tax break law enacted in 2004 redefined manufactured goods to include oil and gas so that energy companies could enjoy this tax break. (The deduction is 6% of the cost of domestic manufacturing activities this year, rising to 9% in 2010.) This tax break should arguably have never applied to oil and gas in the first place.
Other offsets included new basis reporting requirements for securities transactions to prevent avoidance of taxes on capital gains, restrictions on foreign tax credits for oil and gas, and several other provisions.
As we've argued here before, experts can certainly debate whether or not energy policy should be implemented through the tax code, but perhaps the more important point is that Congress has already showered oil and gas companies with numerous tax breaks that CTJ has criticized in the past. The tax title that has been dropped from the energy bill would have merely shifted some tax breaks away from oil and gas towards more sustainable types of energy.
On Thursday, the Senate fell three votes short of the 60 needed to end debate and pass a $32 billion dollar energy tax package that was intended to be attached to a broader energy bill. The broader bill includes changes in Corporate Average Fuel Economy standards, fuel price gouging, ethanol and other related matters, and was passed with 65 votes. The tax package, which the Finance Committee approved on Tuesday, could be revived in the days to come. Meanwhile, the House Ways and Means Committee marked up its own energy tax package on Wednesday which, at $16 billion, costs about half as much as the Senate's version. The two packages create and expand several tax breaks that purportedly encourage energy efficiency and the production of energy from alternative sources and both include revenue-raising provisions to offset the costs.
Experts can certainly debate whether or not energy policy should be implemented through the tax code, but perhaps the more important point is that Congress has already showered oil and gas companies with numerous tax breaks that CTJ has criticized in the past. The energy tax legislation being debated now would generally shift some tax breaks away from oil and gas towards more sustainable types of energy. Lobbyists from the oil and automotive industries convinced many Senators that the tax package would "raise taxes" on oil and gas companies, but most of the provisions would really close loopholes for these companies that have no justification.
Tax Breaks to Encourage Energy Efficiency and Independence
According to the Congressional Joint Committee on Taxation, the biggest item in both versions is the expansion of the tax credit for electricity production from renewable resources, which costs $6.6 billion over ten years in the House version and $10.1 billion over ten years in the Senate version. This credit is currently available for the production of wind, geothermal, solar and many other types of energy. The Senate version would allow more energy sources to qualify (such as tidal energy) and would extend the credit for a longer period of time.
Some noteworthy provisions appear in the Senate package but not in the House package. One is a $3.8 billion expansion and modification of the tax credit for coal gasification, a process by which coal is broken down into a gas which can be burned. The CO2 that results can be more easily separated from the gas and stored, thereby reducing CO2 emissions. Groups like Environmental Defense support coal gasification, particularly since the use of coal in the US and the world is projected to rise a great deal over the next few decades.
Other provisions that appear only in the Senate version include about $1.5 billion in tax breaks for "carbon mitigation," including a credit for capturing and storing CO2 resulting from industrial processes, at a cost of just over $1 billion. The Senate extends certain credits for longer periods and in some cases offers larger credits, such as a tax credit for production of cellulosic alcohol, which is basically alcohol produced from parts of plants that are not edible, at a cost of $828 million over ten years in the Senate version but only $24 million in the House version.
Both versions include incentives to purchase hybrid vehicles, including a provision for "plug-in" hybrids, which are said to use even less gasoline than the hybrids currently in use because plug-in hybrids can be charged up from an electrical socket. This provision would cost $706 million in the Senate version and $1.2 billion in the House version. Both versions also include several billions of dollars to encourage the use of energy-efficient buildings and energy-saving devices and appliances.
One of the offsets included in both tax packages is the elimination of the "section 199" domestic manufacturing tax deduction for oil and gas companies. (The House included the elimination of this deduction in the energy bill it passed earlier this year.) The deduction was made available to energy companies in 2004 when Congress redefined manufactured goods to include oil and gas. (The deduction is 6% of the cost of domestic manufacturing activities this year, rising to 9% in 2010.) The House version would eliminate this deduction for all oil and gas companies and raise $11.4 billion over ten years. The Senate would eliminate it only for large oil and gas companies and would raise $9.4 billion over ten years.
The Senate package has more offsets since it includes more tax breaks. Among them are a 13 percent tax on the production of oil and gas in the Gulf of Mexico, projected to raise $10.6 billion over ten years. While criticism of this provision from some Republican Senators was fierce, it is designed merely to obtain payments from those oil companies who are drilling on public lands without paying royalties, which can be used as a credit against the tax. Other offsets include restrictions on foreign tax credits for oil and gas and an increase and extension of the excise tax on oil for the Oil Spill Liability Fund, among other provisions.
Amendment Adopted Includes Controversial Offsets
While marking up the Senate tax package, the Finance Committee adopted an amendment introduced by Ron Wyden (D-OR) that would fund the Secure Rural Schools and Community Self-Determination Act, which provides what are often called "county payments," at a cost of $3.6 billion. The amendment included two revenue-raising provisions to fully offset this cost. One takes aim at tax shelters known as sale-in, lease-out (SILOs). These arrangements, which can involve an American bank buying something like a subway or sewer system in another country and "leasing" it back to the foreign government for tax advantages, were already banned starting in 2004 but that ban would retroactively apply to deals made before 2004 under this provision. Some members of Congress oppose any such retroactive changes in tax laws, but the Senate Finance Committee earlier this year tried to include this change in the tax provisions that were attached to the minimum wage legislation.
The U.S. Senate began debate this week on H.R. 6, a bipartisan energy bill that promises to protect consumers from price gouging, strengthen the economy, increase energy efficiency and develop clean alternative fuels. Senate Majority Leader Harry Reid spoke Monday morning at the Center for American Progress about America's "oil addiction" that has resulted in tax breaks and record profits for the oil-industry while low-income consumers still face higher energy prices.
Senator Reid claims that too few resources are being devoted to the development of clean, efficient, and renewable alternative fuels. The multi-part bill would set new green standards for federal buildings, raise Corporate Average Fuel Economy (CAFE) standards for new cars and trucks to 35 mpg by 2020, reduce crude oil consumption by 10 percent over 15 years by producing renewable fuels, and set new energy efficiency standards. It would also punish companies that "price gouge," provide research funds for carbon sequestration programs, and seek to improve relations with worldwide energy partners.
Debate has been moving swiftly but not without protests from the auto, coal and oil industries who stand to be the hardest hit by reductions in subsidies and the higher CAFE standards. Questions are being raised as to whether or not the bill can garner enough support and still create policies that will prevent consumers from seeing energy prices rise.
As the week ended, Senate Finance Committee Chairman Max Baucus (D-Mont.) released a proposed $13.7 billion package of tax incentives to go along with the energy bill aimed at improving energy efficiency and expanding production. More than $9 billion of the package's cost would be offset by eliminating the manufacturing tax deduction for major oil producers. Baucus expects that the committee markup next week will add another $10-12 billion in additional amendments. Reid hopes to finish the bill by next week.
Several bills have been introduced in the U.S. Senate to create a cap-and-trade system to reduce carbon emissions. At a recent forum on the topic hosted by the Urban Institute in Washington, DC, debate over the regulation of greenhouse gases focused on the advantages and disadvantages of implementing either a carbon tax or a cap-and-trade program, both of which are market-based approaches to reducing global warming.
A carbon tax is straightforward in that it requires firms to pay a fixed amount for each unit of carbon emissions they produce. This increases the cost of fuels for the producers and is passed down in the form of higher prices to consumers. Both producers and consumers then have the incentive to either consume less, consume more efficiently or find alternate fuels. Firms that use these alternatives avoid paying the tax and reduce their emissions. Firms that don't use the alternatives pay the tax. As with any tax on consumption, a carbon tax burdens people of low incomes disproportionately, making this tax regressive. The tax revenue generated could go toward compensating those impacted most harshly, although it might be difficult to target such compensation towards those affected.
A cap-and-trade program works by setting a limit on total emissions and then distributing allowances for firms to pollute corresponding to that limit. The firms can then trade these allowances, the idea being that this will lead to a more efficient outcome. Firms that can reduce emissions cheaply will do so, and then sell excess permits to firms for which it is costly to reduce emissions. As with a carbon tax, the added cost to firms of buying allowances would cause the price of fuels to increase. This would force consumers to alter their behavior, and also place a heavy burden on low-income families, making this option just as regressive as a tax. However, the government could initially auction off allowances, which would be extremely valuable, and use the revenues to try to target those hardest hit by increased prices.
Both programs are flexible in that the amount of tax, emissions cap, or amount of allowances could be adjusted after implementation. Both programs are likely to have regressive impacts since they would raise consumer prices, and it remains to be seen how this problem might be resolved. The cap-and-trade program seems to be more politically acceptable to many lawmakers who fear anything resembling a tax increase, while many economists favor the carbon tax because it requires less bureaucracy to implement.
While the 110th Congress has not yet passed any major tax legislation related to energy, the level of interest among members is so intense that it seems likely that some legislation will be sent to the President's desk. There are plenty of options. A paper from Citizens for Tax Justice from December pointed out that at very least Congress could repeal several tax subsidies that provide billions of dollars to oil and gas companies at a time when energy prices are at record highs.
Legislation Passed in the House is Only the Beginning
Back in January the House passed the Creating Long-Term Energy Alternatives for the Nation (CLEAN) Act (H.R. 6), which repealed two of the tax subsidies criticized by CTJ. The first is the domestic manufacturing deduction for gas and oil, and the second is the five-year amortization of geological and geophysical expenditures, or, in plain English, the faster write-off of the cost of exploring for oil and gas. Other provisions would close loopholes that have allowed companies drilling on public lands to avoid paying royalties. Revenues raised through these provisions would go into a fund used to increase the development of alternative energy sources.
The House Ways and Means Subcommittee on Select Revenue Measures held hearings last week on further steps the House could take, and members spoke of several possible measures. One that came up frequently was extending the Section 45 Renewable Electricity Production Credit, which is a credit for the production of energy from various alternative sources
Different Direction Possible in the Senate
Things move more slowly in the Senate, which has not acted on H.R. 6, but some Senators have indicated that they might add provisions from that bill to other energy legislation.
Last week Senator Robert Casey (D-PA) introduced a bill (S. 1238) with several energy tax provisions. An accounting method that reduces taxes for oil companies ("last in, first out" or LIFO) would be curtailed. The faster write-off for exploring for oil and gas would be repealed, as in the House bill, as would several loopholes allowing companies to escape paying royalties when they drill on public lands. The bill would also repeal another tax break criticized by CTJ, the foreign tax credit for energy companies that aren't really paying foreign taxes. The revenue raised from these provisions would go towards research on ethanol and biodiesel and towards alternative energy infrastructure.
A Windfall Profits Tax?
A more controversial part of Casey's bill would raise a "windfall profits tax" on oil companies equal to 50 percent of the portion of sales prices exceeding $50 per barrel. Companies would be able to lower or eliminate the tax by making certain investments, including investments in alternative energy production. The revenue raised would be put in a fund to help low-income people purchase gasoline or pay for public transportation.
Presidential candidate and Senator Chris Dodd (D-CT) announced his support this week for a tax on carbon emissions as a way to reduce global warming. Other candidates have avoided any talk of raising taxes as a way to combat CO2 emissions and most have avoided talk of tax increases altogether. But even conservative economists have been publicly promoting the carbon tax for some time now.
While most Democrats in Congress have been considering several "cap-and-trade" programs that would limit the overall amount of CO2 emissions and allow companies to trade rights to pollute amongst themselves, several economists and even business leaders have lately argued that a carbon tax would be less burdensome. Part of the reason is the great bureaucracy required to measure emissions from individual plants under a cap-and-trade system. Another reason is that a carbon tax would create more certainty about how much it costs to pollute.
Some environmental groups, however, worry that a carbon tax sets no overall limit on pollution the way a cap-and-trade system would. The challenge for proponents of the carbon tax is to design it in a progressive way. Otherwise, it would be passed onto consumers and therefore act much like a consumption tax, which is always regressive. Working families probably don't use less gasoline than rich families, but if they pay the same carbon taxes (indirectly) that means the carbon tax will take a greater percentage of a working family's income. A progressive version might have to somehow target offsetting tax cuts towards those hardest hit by the carbon tax.
In what some Democratic members of Congress are calling a first step towards a larger change in energy policy, the House of Representatives on Thursday passed the Creating Long-Term Energy Alternatives for the Nation (CLEAN) Act (H.R. 6).
The legislation only repeals two of the tax subsidies directed at oil and gas companies that CTJ has criticized. One is the domestic manufacturing tax deduction, which is available for oil and gas companies only because a provision of the 2004 tax cut bill redefined manufactured goods to include oil and gas. The White House has argued that it would be unfair for manufacturing companies, but not energy companies, to take advantage of this tax subsidy
The other is the five-year amortization of geological and geophysical expenditures (the faster write-off of the cost of exploring for oil and gas, in other words), which would be changed to a seven year amortization.
Other provisions would close loopholes that have allowed companies drilling on public lands to avoid paying royalties. Around $14 billion of savings would be reallocated towards the development of alternative energy sources.
A paper from Citizens for Tax Justice describes some of the biggest tax loopholes enjoyed by Big Oil and what steps members of Congress have proposed to deal with them. When the price of oil and oil industry profits are at an all-time high, it's hard to imagine why the United States should subsidize Big Oil through the tax code. The new Congressional leadership understands this, and we hope the President does as well.