Facebook® co-founder Eduardo Saverin is facing mounting public scorn for renouncing his US citizenship, presumably to save some tax money (which he says is not the case). There are even two US Senators after him! He left in September but the pile-on is happening this week because of Facebook’s Initial Public Offering (IPO) of its stock: Saverin’s share will be worth somewhere in the neighborhood of $4 billion.

Saving Capital Gains Taxes
If Eduardo Saverin were a US citizen and sold his stock, most of that income would be subject to special low rate capital gains taxes of 15 percent (or 20 percent in future years if the new rate goes into effect January 1 as scheduled). By renouncing his citizenship, Saverin avoids paying those current and future capital gains taxes (and he would never have to pay the full income tax rate that Facebook employees exercising their stock options will be paying), but he does have to pay an "exit tax" (see below). Saverin now lives in Singapore, which doesn’t have a capital gains tax. 

Lowering the “Exit Tax”
When wealthy Americans give up their citizenship, they must pay an “exit tax” which treats all of their assets as if they’d been sold for fair market value (the actual tax payment can be deferred until the assets are sold). The fair market value of publicly-traded stock is what it traded for that day; privately-held stock must be appraised.

A spokesman for Saverin said that he renounced his citizenship last September, well ahead of this week’s Facebook IPO. Therefore, the stock’s valuation for “exit tax” purposes was likely substantially below its expected $38 IPO value, allowing Saverin to reduce his exit tax cost.

Not Tax, But Financial Decision
According to a spokesman, Saverin is expatriating for financial, not tax reasons. He doesn’t mind paying tax, he says, he just dislikes the complicated rules. He claims that the US rules, like the recently enacted Foreign Account Tax Compliance Act ( FATCA), are preventing him from making some foreign investments he’d like to make.

Why It Feels Like Treason
Saverin emigrated to the US with his family at age 13 when his name turned up on a list of potential kidnap victims in his native Brazil where criminal gangs target the children of wealthy citizens and hold them for ransom. In the US, not only was Saverin safe from such violence, but he benefited enormously from government investment in education, the court system, and the Internet. Would he be a billionaire today if his family had relocated somewhere else?

Farhad Manjoo, a fellow immigrant, wrote a brilliant post (one of many, including this one) on the IT blog PandoDaily about what Eduardo Saverin owes America (nearly everything) including, quite possibly, his life. Taxes are the least of it.

In February, we noted that Facebook® will get huge federal and state income tax refunds and pay no tax for years to come because of an absurd tax break related to the stock options it granted to employees.

When employees exercise their stock options, they pay income tax on the difference between what they paid for the stock (its exercise price) and its fair market value (what it’s trading for). The employer, meanwhile, gets a tax deduction equal to the amount of that difference their employees report – even though the employer isn’t actually out any cash.

This week we have a vivid example of why this deduction makes no sense, and why Senator Carl Levin wants to see this loophole closed, too.

In February, Facebook estimated its tax deduction for the stock options it gave its employees to be $7.5 billion, based on the price of its soon-to-be publicly offered shares. But with its IPO price going up and up, the company has revised its estimated tax deduction. In documents filed with the SEC on May 15, Facebook now estimates the employee stock options that will be exercised in connection with the IPO will result in tax deductions for the company of $16 billion – more than twice their initial estimate!  This massive deduction will cost the federal and state governments about $6.4 billion in lost tax revenue.

The stock option loophole overall will cost the US treasury and taxpayers $25 billion over the next ten years. Surely there’s a better use of that money than making Mark Zuckerberg richer.

Photo of Facebook Logo via Dull Hunk Creative Commons Attribution License 2.0

The history of states subsidizing professional sports stadiums with taxpayer dollars is long and, increasingly, controversial. Maryland provided nearly one hundred percent of the financing for the Orioles’ and Ravens’ shiny new facilities in the 1990s. In 2006, the District of Columbia subsidized the Washington Nationals’ new stadium at a cost to taxpayers of about $700 million.  And even though most stadiums are, in the long run, economic washes at best, losers at worst, there are still politicians willing to throw money at them.

Minnesota legislators, for example, are currently grappling with how to fund a new stadium for the Vikings in response to threats that the franchise may leave the state.  But before the legislature gives away nearly a billion dollars, State Senator John Marty raises some excellent points about the math, and morals, behind the proposed taxpayer subsidies for the stadium:

“The legislation would provide public money in an amount equivalent to a $77.30 per ticket subsidy for each of the 65,000 seats at every Vikings home game. That's $77 in taxpayer funds for each ticket, at every game, including preseason ones, for the next 30 years.… Public funds can create construction jobs, but those projects should serve a public purpose, constructing public facilities, not subsidizing private business investors. The need to employ construction workers is not an excuse to subsidize wealthy business owners, especially when there is such great need for public infrastructure work.” 

In  Louisiana, the House of Representatives has gone ahead and approved a ten-year, $36 million tax subsidy  to keep the state’s NBA team, the Hornets, in New Orleans until 2024. Some are asking if the state can really afford it given a $211 million budget gap.  Representative Sam Jones noted that while the state has cut health and education spending, it still found a way to come up with millions of dollars to help out the ”wealthiest man in the state.” That would be Tom Benson, owner of not only the Hornets but the legendary New Orleans Saints football team, whose net worth is $1.1 billion dollars.

In California, however, a different scenario is unfolding. Sacramento Mayor Kevin Johnson just abandoned negotiations with owners of the city’s NBA team, the Kings.  The Kings organization was unwilling to put up any collateral, share any pre-development costs, or commit to a more than a 15 year contract; this would have left the city shouldering all the costs – and all the risks – for developing the $391 million downtown facility.  Mayor Johnson said he’d offered everything he could to the team and it still wasn’t enough, so he pulled the plug. 

Given the high cost and low return (including in terms of jobs) that sports facilities generate, more leaders should follow Minnesota’s Marty and Sacramento’s Johnson and stand up for the taxpayers who pay their salaries.

(Thanks to Field of Schemes and Good Jobs First for keeping tabs on these subsidies!)

While the sale of online coupons for local merchants boomed in 2011 – Living Social sold $750 million and Groupon sold an astounding $1.62 billion in online coupons last year – state governments are still trying to play catch up and figure out how to ensure these sales are taxed fairly.

The central question facing the states is whether a state or local sales tax should be applied on the cost of the online coupon, or on the face value of the coupon, meaning the list price of the product for which the coupon is being redeemed. For example, if you were to buy a Groupon for $25 that allows you to purchase $50 worth of books at a local bookstore, the question is whether sales tax should be assessed on $25 (the cost of the coupon) or $50 (the face value of the coupon). Whatever the amount, the tax could be collected either at the time of coupon purchase or product purchase.

As Forbes’ Janet Novack reports, right now states are treating online coupons for sales tax purposes differently, or in many cases don’t even have a definitive answer to this question. For example, New York requires that sales tax be collected by retailers on the full face value of the items purchased with coupons, but only in the case where the coupons are for a specific dollar amount of spending. California, by contrast, only applies the sales tax to the price paid for the coupon itself in any case.

So why isn’t Groupon itself collecting sales tax on the original coupon purchase, rather than having the tax collected by the merchant?  After all, it’s reasonable to compare their service to the one provided by  Expedia, Orbitz, Priceline and other travel sites who sell discount hotel rooms, as should be done in our view. The difference is that online coupon sites consider what they do to be advertising and, in fact, it’s part of Groupon’s contract with merchants that merchants handle all the taxes. Discount travel sites are more properly reselling those hotel rooms.

A promising development is that 24 states who collaborate in the Streamlined Sales and Use Tax Agreement, which grapples with state sales tax issues, are moving to tackle the coupon question head on by surveying member states and putting out model policy for all states, possibly as soon as May. The Streamlined Sales Tax Governing Board, of course, faces a difficult task because it’s a brave new world of e-commerce.  While there is more than one good way to solve the problem – as states like New York and California have shown – states need to act sooner rather than later.

Photo of Movie Ticket Groupon via Groupon Creative Commons Attribution License 2.0

Published in the Sacramento Bee, February 17, 2012

With jobs front and center in most voters' minds, politicians seeking to cut or repeal personal income taxes are marketing their proposals as tools for boosting the economy. Recently, some have sought to bolster this claim by asserting that states without income taxes are experiencing a real economic boom, and by promising that the boom can be recreated in any state smart enough to join the no-tax club.

My organization was skeptical of these claims, so we decided to take a closer look at one of the most prominent studies, cited by the governors of Kansas and Oklahoma, among others. It turns out that the study was done by a consulting firm headed by economist Arthur Laffer, perhaps best known as a longtime spokesman of a supply-side economic theory that George H.W. Bush once called "voodoo economics" because of its bizarre insistence that tax cuts often lead to higher revenues.

In kicking the tires on the study's findings, we paid particular attention to the same 18 states it includes: the nine without income taxes, and the nine with the highest top income tax rates.laf But while Laffer chose to focus on clumsy aggregate data (more on that later), we took a look at three of the most important and widely recognized measures of economic success: growth in economic output per person, growth in median income levels, and the unemployment rate. The results we found were very different than Laffer's.

In terms of the first two measures - economic output per person and median income levels - the nine states without income taxes are actually lagging behind the nine states with the highest top income tax rates, and most no-tax states are actually doing worse than the national average. On the third measure, the unemployment rate, it turns out that no-tax states and "high tax rate" states are essentially neck and neck, which will no doubt shock lawmakers promising that an improved job climate will come hot on the heels of income tax repeal.

We also found that on all three measures, some of the states most frequently disparaged by the tax cut true believers - including Maryland, Hawaii and Vermont - managed to best not only no-tax idol Texas but also most of the other eight states "unburdened" by a personal income tax.

So how was Laffer able to reach the opposite conclusion, and in the process generate a wave of assertions that states without income taxes are booming? It turns out that the aggregate numbers he picked - designed to measure the total size of an economy and its workforce - are heavily influenced by shifts in population. These shifts, in turn, are driven by a slew of factors Laffer fails to control for, like the housing market, population density, birth rates, immigration and even climate. And since most no-tax states happen to be located in the growing south and western regions of the country, they tend to have a lot of these factors working in their favor.

Laffer also makes no effort to account for the tremendous natural resource advantages enjoyed by many no-tax states. The two best performing states, according to Laffer, also happen to be the two states most dependent on mining: Alaska and Wyoming. But one would be hard pressed to find a serious analyst in either state willing to attribute their recent growth to the lack of an income tax.

The bottom line is this: no-tax states aren't booming, and lawmakers should not expect their states' economies to improve if they join the no-tax or low-tax club. In fact, in terms of the economic factors that matter most to families - income levels, and whether or not they can find a job - the states with the highest top income tax rates are, in most cases, doing better than the no-tax states. If the economy is really the concern of lawmakers railing against the income tax, it's time for them to put away Arthur Laffer's tax cut snake oil.

ABOUT THE WRITER

Carl Davis is a senior analyst at the I nstitute on Taxation and Economic Policy, 1616 P Street NW, Suite 200, Washington, D.C. 20036; website: www.itepnet.org.

This essay is available to McClatchy-Tribune News Service subscribers. McClatchy-Tribune did not subsidize the writing of this column; the opinions are those of the writer and do not necessarily represent the views of McClatchy-Tribune or its editors.

Photo of Art Laffer via  Republican Conference Creative Commons Attribution License 2.0

Oklahoma’s Governor Mary Fallin finally unveiled her plan for eliminating the state income tax.  Full elimination would take a number of years, but low-income families are likely to be hit hard right away when various refundable credits are repealed.  The Institute on Taxation and Economic Policy ( ITEP) plans to conduct a full analysis as soon as sufficient details are made available.

One Michigan lawmaker wants to take money away from Medicaid, education, and other programs to cover the cost of maintaining the state’s roads – costs that the state’s long stagnant gas tax can’t keep up with.  This is not the only such proposal to redirect money to cover up for lawmakers who lack the political courage to raise their state’s gas tax. Nebraska, Utah, Wisconsin, Virginia, and Oklahoma have proposed or enacted similar raids that ITEP warned of in its recent report, Building a Better Gas Tax.

The Colorado legislature is debating a boondoggle of a bill which would create a sales tax holiday the first weekend in August.  The facts are getting out that these events are expensive and don’t benefit the people who need them most.

The Virginia-Pilot has an excellent editorial on the efforts of some lawmakers to ramp up the level of scrutiny applied to billions of dollars in special interest tax breaks.  As the Pilot points out, Richmond is increasingly forcing cities and counties to pick up costs the state can’t cover, yet lawmakers threw away $12.5 billion in corporate tax breaks without any evidence they are helping Virginians.

Two tax increase initiatives appear headed for California’s November ballot that Governor Jerry Brown fears will undermine support for his own initiative to temporarily raise the sales tax and income taxes on wealthier Californians.  The competing measures are both permanent and superior in terms of fairness: a “millionaire’s tax” backed by labor groups who say it will raise $6 to $10 billion for education; and a $ 10 billion personal income tax hike on all Californians except for low-income families, backed by a wealthy civil rights attorney. But with three tax increasing options on the ballot, there’s a good chance the measures will cancel each other out, leaving California still in a fiscal wreck.

Photo of Jerry Brown via Randy Bayne  and Creative Commons Attribution License 2.0

Note to Readers: Over the coming weeks, the Institute on Taxation and Economic Policy will highlight tax policy proposals that are gaining momentum in states across the country.  This week, we’re taking a closer look at proposals which would increase state revenues to pay for important public investments. 

Given the number of Governors calling for major tax cuts in their states, you’d think that states are suddenly awash in cash and well on the road to economic recovery.  But the reality is that very few states are back to where they were before the recession hit in terms of tax collections and public spending.  Many were limping along with federal stimulus funds, but now that’s dried up, too. Recognizing the need to begin restoring investments in education, transportation, and health care or prevent even more devastating cuts to these services, a handful of Governors have put tax increases on the table.  The proposals range from across-the-board rate increases to tax hikes only on the wealthiest, permanent to temporary changes, and plans that require only legislative approval to ballot initiatives for the public to decide.

California Governor Jerry Brown is taking his proposed tax increase to the voters in November.  In an effort to prevent damaging cuts to public education, Brown is asking wealthy Californians to pay more income taxes and everyone to chip in with a higher sales tax for the next five years.  A recent poll shows Californians are overwhelmingly on his side- more than 2/3rds of those surveyed support the Governor especially when the tax increases are linked to investments in education.

Maryland Governor Martin O’Malley included several r evenue raising measures in his recent budget proposal to help close a $940 million gap.  Most notable is a plan to raise taxes on upper-income Marylanders through limiting the amount of itemized deductions and personal exemptions they are able to claim - a recommendation ITEP made last year.

O’Malley also proposed taxing internet transactions, digital downloads and increasing taxes on tobacco products and the state’s “flush tax.”  He recently announced a plan to apply the sales tax to gasoline rather than an increase in the designated gas tax to address transportation needs in the state.

Washington lawmakers are facing off on how best to address a $1 billion budget gap this year.  Governor Christine Gregoire is pushing for a temporary half-cent sales tax increase that would raise roughly $500 million, and to close the remaining gap with spending cuts.  At least two competing proposals, however, have emerged that would raise needed revenue and improve the fairness of the state’s tax structure.  The first is a one percent tax on corporate and personal income that would raise $500 million and allow for a reduction in the state’s sales and business-occupations taxes. Another plan would tax realized capital gains at five percent, raising between $215 million and $650 million a year. 

Given Washington’s restrictive rules on revenue-raising (a two thirds legislative supermajority is required to enact increases), any proposed tax increase will likely end up on a ballot (which a legislative simple majority can implement) for the voters to decide this Spring or Fall.

North Carolina Governor Beverly Perdue recently proposed reinstating most of a temporary sales tax increase that expired last year.  She wants to invest the $800 million the tax would raise in the state’s public schools, community colleges and universities, all of which suffered massive cuts over the past four years.

Massachusetts Governor Deval Patrick is promoting some r evenue raising ideas he says are supported by the public.  His $230 million revenue package includes a 50 cent per pack increase in the cigarette tax (bringing the total to $3.01), increases on other tobacco products, expanding the bottle bill so that a wider range of beverages require a redeemable nickel deposit, and taxing candy and soda at the state’s 6.25 percent rate (both are currently exempt from taxation).

Rhode Island After failing to gain legislative support last year for his reform-minded and sensible tax plan, Governor Lincoln Chafee has offered up a hodgepodge of tax changes this year he thinks lawmakers can stomach.  Chafee’s $88 million tax package includes some modest expansion of the sales tax to items such as taxi and limousine rides and pet services.

Photo of Christine Gregoire via Studio 8, photo of Deval Patrick via Green Massachusetts, and photo Jerry Brown via Steve Rhodes Creative Commons Attribution License 2.0

Amazon.com announced this week that it plans to bankroll a California ballot initiative that would make it easier for online shoppers to commit sales tax evasion.

At issue is a new California law expanding the group of retailers required to collect and remit sales taxes.  Virtually every traditional “brick and mortar” retailer, as well as a number of online retailers, is already required to collect sales taxes on every sale they make.  Absent this requirement, California’s sales tax law would be basically unenforceable.

But many online retailers are able to skirt this collection requirement because they lack a so-called “physical presence” in the state, like a warehouse or a store. (By contrast, Amazon.com does have a physical presence in the state even though they claim otherwise.)  This unfortunate reality came about because of a misguided US Supreme Court ruling from nearly two decades ago, and the result of this arrangement has been completely predictable.

While Californians who shop at Amazon.com are required to pay sales taxes directly to the state, only a small number actually do so.  But rather than attempt to track down these tax scofflaws one by one, California recently enacted a law that increases the number of retailers required to help the state enforce its existing sales tax laws.  Specifically, online retailers that partner with California businesses to generate sales are now required to help collect sales taxes, just like most other retailers operating in the state.

Evidently, Amazon views its ability to offer an open highway for sales tax evasion as a huge advantage over its competitors.  To protect that advantage, the company plans to spearhead an effort to collect half a million signatures in order to get a measure repealing the new law onto the ballot in either February or June of 2012.  Presumably, the company is also planning to spend the big money needed to combat what the California Retailers Association has already promised will be a major opposition campaign.  The fact that Amazon views sales tax evasion as so central to its business strategy that it’s willing to take these radical (and costly) steps is an enormous revelation.

Of course, as we’ve pointed out before, this is hardly the first time that Amazon has resorted to aggressive tactics to combat tax policy it dislikes.  And California is learning the online giant will go to great lengths to avoid doing what most every retailer has to do every day – collect sales taxes.

Photo via Markuz Creative Commons Attribution License 2.0

After months of negotiations, California Governor Jerry Brown was ultimately unsuccessful in his attempt to balance the state’s massive budget using new tax dollars, specifically, $11 billion in revenues from an extension of temporary increased personal income and sales taxes and vehicle fees.  Rather than including the revenue in his own budget proposal, Brown stuck to a campaign promise to take all tax increases to the voters (this was also necessary because it takes a supermajority to pass tax increases in the legislature).  He was unable to garner the support of enough GOP legislators to put the extension on the ballot this summer or fall, so he gave up to allow the state’s budget to be completed in time for the new fiscal year.

On the eve of the new fiscal year, Governor Brown signed a plan that relies primarily on deep spending cuts and higher than previously forecast revenues to close the state’s budget gap.  Still, deeper cuts in spending will need to be made if revenues do not hit the $4 billion above target projection lawmakers counted on when balancing the budget.

In response to the enacted spending plan, the California Budget Project wrote: “This is a very tough budget for families and communities across California… it is deeply disappointing that the approved budget does not reflect a balanced approach that combines additional revenues with spending reductions to move the budget toward balance.”

One significant tax change did make it into the final budget.  California became the 7^th state to adopt an “Amazon law” which will make it more difficult for state residents to evade sales taxes when shopping online.  Under California’s new law (which went into effect July 1), a larger set of online and catalogue retailers (specifically, those partnering with in-state businesses in order to generate sales) are required to collect and remit sales taxes.  Traditional brick and mortar retailers have dutifully fulfilled this responsibility for decades – and indeed, having the retailer collect sales taxes is the only effective method for enforcing existing sales tax laws.

In response to the enactment of this new law in California, Amazon.com and Overstock.com ended their relationships with their California affiliates (a move the retailers also made in North Carolina, Rhode Island and Connecticut).  These large online retailers’ tactics are doing very little to slow the spread of this sensible method for reducing sales tax evasion.  Illinois, Connecticut and Arkansas enacted Amazon laws this year and nearly a dozen more states seriously considered them.  The seven states with Amazon laws include nearly 30 percent of the country’s population.

Photo via  Neon Tommy Creative Commons Attribution License 2.0

Sales tax laws would be essentially meaningless if retailers were not required to collect the tax every time a purchase is made.  The opportunities for customers to evade the sales tax (either on accident, or on purpose) would be overwhelming.  Every state with a sales tax knows this — and as a result, the vast majority of retailers are legally required to collect and remit sales taxes.

Amazon.com and many other online retailers, however, are the major exception to this broad rule.  A 1992 Supreme Court case carved out a special exemption for any “remote sellers” that don’t have a “physical presence” in a state — like a store or warehouse.  The ruling has allowed the Internet to become an open highway for tax evasion. While customers shopping online owe the same sales tax they would if they shopped in a store, very few actually take the time and effort necessary to pay that tax.

This week, four states (California, Louisiana, Texas, and Vermont) made headlines for their attempts to limit the amount of sales tax evasion occurring through “remote sellers,” while a fifth state (Illinois) will soon have to defend its efforts to do the same in court.  By contrast, South Carolina lawmakers were recently bullied into granting Amazon an exemption from having to collect sales taxes for five years, despite the fact that it will soon have a “physical presence” in the state.

In Vermont, Governor Shumlin recently signed a so-called “Amazon law” that will eventually require all remote sellers partnered with affiliate companies physically based in the state to collect and remit sales taxes (see this ITEP report for more on “Amazon laws”).  Unfortunately, the bill was written so that it won’t take effect until 15 other states have enacted similar laws. 

Six states — Arkansas, Connecticut, Illinois, New York, North Carolina, and Rhode Island — have enacted such laws so far, and many more have given the issue serious consideration.  In the meantime, remote sellers like Amazon will be required to notify Vermont residents of the taxes they owe when making a purchase.

The California Assembly easily passed an Amazon law last week.  That legislation now goes back to the Senate, where a similar bill gained narrow passage last month.  Even if the Senate approves the Assembly’s version of the bill, however, it’s unclear whether Governor Brown will sign the measure.

Louisiana can now be added to the long list of states giving serious consideration to enacting an Amazon law.  The House Ways and Means Committee unanimously passed such a law in late-May, though opposition by Gov. Jindal makes it unlikely that it will be enacted any time soon.

In Texas, Gov. Perry recently vetoed a measure that would have required Amazon.com to collect sales taxes in the state, though the legislature may still try to enact the measure by inserting it into a larger bill that Perry is unlikely to veto. 

Unlike the true “Amazon laws” discussed above, the measure in Texas was designed to prevent Amazon from continuing to skirt its sales tax responsibilities by claiming that its Texas distribution center is actually owned by a subsidiary, and therefore does not amount to a “physical presence.”  The nearby photo is the actual sign in front of the Texas-based distribution center that Amazon claims it does not own.  

In Illinois, the Performance Marketing Association (PMA) has filed a lawsuit challenging the constitutionality of the state’s Amazon law.  The lawsuit is similar to one being pursued by Amazon against New York State.

And in South Carolina, Amazon.com has demanded, and received, a five year exemption from having to collect sales taxes on purchases made by South Carolinians, despite the fact that it plans to open a distribution center in the state (and will therefore meet the Supreme Court’s definition of having a “physical presence”). 

The granting of this exemption represents a stark reversal from just one month ago, when it was soundly defeated 71-47 in the House. 

Brian Flynn of the South Carolina Alliance for Main Street Fairness accurately summed up the unfortunate reality of this situation when he said that “with this economy, [Amazon was] in a good position to strong-arm legislators.”  Fortunately, the exemption is only supposed to last five years — though judging from Amazon’s past behavior, it’s reasonable to expect that the company will undertake an aggressive campaign to extend that five-year window.

California, Delaware, Michigan, New Jersey, Oregon, and Wisconsin have all experienced better than expected revenue growth over the past few months.  This is unambiguously good news, but for many lawmakers it’s unfortunately an excuse to ditch any restraint on tax-cutting.

California

In California, stronger-than-expected revenue growth has made the GOP even more vocal in opposing efforts to extend a variety of temporary income, sales, and vehicle tax increases.  Governor Jerry Brown’s continued push to extend these tax hikes is very sensible given that the unanticipated revenue boost was still quite small compared to the state’s total budget.  

Brown has behaved much less sensibly, however, in deciding to abandon efforts to end a variety of business tax credits.  As Jean Ross of the California Budget Project points out, “One of the virtues of the original budget was that there was some level of shared sacrifice.  But now, some businesses are going to come out ahead of where they were last year.”

Delaware

In Delaware, a surprise bump in revenue collections has inspired the state’s Democratic Governor, and a number of Republican legislators, to begin pushing for tax cuts.  

Specifically, the Governor has proposed cutting taxes for banks, businesses, and individuals with taxable incomes of over $60,000.  

In reference to the windfall that banks would receive under the Governor’s plan, Rep. John Kowalko argues that "They do pretty damn well with the federal handouts … I want to see a return on the investment before I will blindly vote on that."

Michigan

In Michigan, better-than-expected revenue growth in the current fiscal year may be used to reduce cuts in school spending that are currently under consideration.  

Any unexpected revenue growth in subsequent fiscal years, however, will be swallowed up by the massive business tax cuts that Michigan’s legislature passed last week.

New Jersey

In New Jersey, unanticipated revenue growth is expected to be used by Governor Chris Christie as yet another excuse for doling out billions in corporate tax breaks.
 
As New Jersey Policy Perspective points out, however, “the state remains stuck in a very deep hole … even with that growth, the state’s revenue collections would still be $3.4 billion less than was collected in FY2008, the year prior to the recession … the state must choose to invest these revenues wisely, using the money to restore the devastating cuts made to services and to pay into the state pension system.”

Oregon

In Oregon, unexpected revenue growth will likely be used to restore cuts to human services and public safety, at least in the short term.  By 2013, however, the state’s “kicker” law will probably require that some amount of revenue growth be dedicated to tax cuts.  

As Rep. Phil Barnhart points out, "Because this budget is so bad, we don't take care of schoolchildren, basic health issues and maintaining prisons — and we have a kicker at the end … We are stuck with this kicker law when we really need to spend some of this money on the budget."

Wisconsin

Finally, in Wisconsin, Governor Scott Walker has stubbornly refused to adapt to changing conditions on the ground.   If Walker gets his way, $1 billion will still be slashed from public schools, despite the state’s recently improved revenue picture.

Elected officials in California and Florida face unprecedented fiscal challenges at both the state and local levels. Yet rather than working to reduce their budget shortfalls, policymakers in each state are doing their best to dig their budget holes deeper by offering new company-specific tax breaks to keep footloose corporations from moving their operations elsewhere.

A front-page article in today's New York Times offers some insights into this seemingly irrational behavior. Focusing on the battle between Kansas and Missouri lawmakers over the future headquarters of movie-theater chain AMC Entertainment, the article describes a system of extorting tax breaks that is viewed by everyone involved — from lawmakers to the beneficiaries of the tax breaks — as a pointless zero-sum game.

AMC's chief executive officer, poised to receive lavish tax handouts from the two states, wonders aloud "whether this is an appropriate role for government to be playing," and a lawyer whose job involves seeking out tax breaks for corporate clients describes it as "horrible public policy."

This situation won't be news to anyone who's followed the work of Greg LeRoy and the folks at Good Jobs First over the years. LeRoy's "Great American Jobs Scam" provides an excellent summary of the cottage industry of site location consultants that has emerged to facilitate the "economic war between the states" that the Times article describes. But the battle over AMC is only one example of egregious tax giveaways from the past week.

In Florida, Darden Restaurants (parent company of the Red Lobster and Olive Garden restaurant franchises) is pushing for new tax breaks. The Orlando Sentinel reports that this Fortune 500 company, which generated $7.1 billion in global sales during its most recent fiscal year, is pushing for legislation that would allow the millions in corporate income tax credits it already receives in Florida to be applied to its sales tax liability. This would save the company as much as $5 million.

Fortunately, the tax legislation has stalled as its key sponsor, Republican State Representative Chris Dorworth, read the ‘revelation’ in the Orlando Sentinel that his own tax break legislation would only apply to Darden Restaurants. He then decided he could not support his own legislation as written.  

Meanwhile, San-Franciso-based Twitter has played tax break hardball with city officials for months, threatening to move to Brisbane if it does not receive substantial tax breaks. Despite facing a tough $350 million deficit and dramatic cuts to health services, the San Francisco Board of Supervisors capitulated to Twitter’s demands this week, passing a $22 million payroll tax break for the company on Tuesday. Roxanne Sanchez, the president of Service Employees International Union Local 1021, opposed the measure, saying, “It’s a taxpayer handout to a $10 billion company at a time we’re cutting basic city services.”

As today's Times article reminds us, corporate tax breaks all too often create benefits for one jurisdiction at the direct expense of another, with no net benefit for the US economy overall. And tax breaks targeted to a specific company set an especially dangerous precedent. As an editorial in the San Francisco Guardian put it, “once you go down the path of caving in to corporate blackmail, it never ends.”

Anti-tax policymakers seeking an excuse to eviscerate the progressive personal income tax sometimes assert that its alleged volatility makes budgeting harder for state lawmakers, and that this volatility leads directly to the sort of difficult spending and tax decisions lawmakers around the nation are confronting today. A recent article in The Wall Street Journal by the often-sensible Robert Frank adds (possibly inadvertently) fuel to the fire for those seeking to make this "volatility" argument, giving the clear impression that California's budgetary woes can be laid at the door of that state's excessive reliance on boom-or-bust capital gains taxes. (No-income-tax states Nevada and Florida can breathe a sigh of relief -- presumably, the ongoing bitter budget battles in those states would be even worse if either state levied an income tax of any kind.)

Yet, as a new ITEP report shows, the "income tax volatility" fears reinforced by Frank's article are misleading in a number of ways. In many states, sales taxes have plummeted as rapidly as income taxes during the recent recession, and academic research suggests that on average, state income taxes are probably not meaningfully more volatile than sales taxes over the long haul. Moreover, the same research shows that progressive income taxes are a far more sustainable and reliable funding source, over the long term, for needed public investments than the other major revenue sources available to states. Finally, the "volatility" argument is usually made in states (like California) in which rainy day funds are either unprotected or inadequately funded to begin with.
 
Read the ITEP report

California Governor Jerry Brown’s proposal to raise $9.3 billion in sorely needed revenue to help close a $26 billion budget gap through 2013 is in jeopardy.  In January, he pitched the idea of allowing voters to decide whether or not to extend temporary tax increases (first enacted in 2009 and set to expire this year) for another five years. 

Governor Brown needs a two-thirds majority of state lawmakers to place such a measure on the ballot, and to date, the governor has failed to garner support from a single Republican lawmaker (he needs four to vote with him).  

California’s constitutional deadline for passing a budget is June 15th.  Originally, Governor Brown had set a self-imposed deadline of March 10th to gain approval for his tax extension plan to ensure time to get the question on the ballot by early June.  That date has come and gone with no avail, so Brown is now seeking ways around the Republican blockade and still hoping something can be worked out in time for June. 

One alternative under consideration is a November vote on the measure which would be placed on the ballot through a petition drive rather than the legislative process.  But, that would mean the vote would come long after the budget deadline forcing lawmakers to cut billions of dollars more from an already depleted state budget. 

All eyes are on California and its popular governor to see if he can work things out in time for a June vote on the tax extension, but time is certainly running out.

Last week Illinois joined New York, North Carolina, and Rhode Island by enacting legislation requiring Amazon.com and other online retailers working with in-state affiliates to collect sales taxes.  Arkansas’s Senate and Vermont’s House recently passed similar legislation, and Arizona, California, Connecticut, Hawaii, Minnesota, Mississippi, and New Mexico are considering doing the same.  Interestingly, lawmakers in each of these states are being spurred to do the right thing by major retailers like Wal-Mart, Sears, and Barnes & Noble.

In most states, Amazon and other online retailers are not currently required to collect sales taxes unless they have a “physical presence” in the state, though consumers are still required to remit the tax themselves.  Unfortunately, very few consumers actually pay the sales taxes they owe on online purchases — in California, for example, unpaid taxes on internet and catalog sales are estimated to cost the state as much as $1.15 billion per year.

The so-called “Amazon laws” recently adopted in Illinois, New York, North Carolina, and Rhode Island are all designed to limit this form of tax evasion by broadening the class of online retailers that must pay sales taxes.  Specifically, under these new laws, any retailer partnering with in-state affiliate merchants is required to pay sales taxes on purchases made by residents of that state.

Up until recently, the reaction to these laws has been mostly hostile.  Grover Norquist has branded them a (gasp) “tax increase,” despite the fact that they’re designed only to reduce illegal tax evasion.  More importantly, Amazon has challenged the New York law in court, and has ended relationships with affiliates in North Carolina and Rhode Island in order to avoid having to pay sales taxes on sales made within those states.  Amazon has also promised to severe ties with its Illinois affiliates, and has threatened to do the same in California if a similar law is adopted there.  These tactics mirror a recent decision by Amazon to shut down a Texas-based distribution center in order to avoid having to remit taxes in that state as well.

But Amazon may not be able to bully state lawmakers for much longer.  Since New York passed its so-called “Amazon law” in 2008, North Carolina, Rhode Island, and now Illinois have already followed suit despite all the threats.  And it appears that Arkansas and Vermont may very well do the same — as proposals to enact Amazon laws in each of those states have already made it through one legislative chamber.  In addition, at least seven other states (listed in the opening paragraph) have similar legislation pending.

According to State Tax Notes (subscription required), Wal-Mart, Sears, and Barnes & Noble are each attempting to partner with affiliate merchants recently dropped by Amazon.  Even more importantly, several of the large retail companies (like Wal-Mart, Target and Home Depot) are joining forces to lobby in favor of Amazon laws. These companies’ interest is in large part due to the fact that they already have to remit sales taxes in the vast majority of states because of the “physical presence” created by their large networks of “brick and mortar” stores.  If more traditional retailers begin to voice support for Amazon laws, the progress already being made on this issue is likely to accelerate.

For more background information on the Amazon.com tax controversy, check out this helpful report from the Center on Budget and Policy Priorities.