Corporate Income Taxes News



Indiana Lawmakers Shower More Breaks on Low-Tax Corporations



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The state corporate tax study we released today shows that three very profitable Fortune 500 companies headquartered in Indiana paid an effective corporate income tax rate ranging from just 0.4 to 1.5 percent over the last five years.  Eli Lilly, NiSource, and WellPoint earned a total of over $35 billion in profits between 2008 and 2012, but thanks to a variety of tax avoidance techniques none of these companies even came close to paying the statutory 8.5 percent rate that was in effect in Indiana for most of this five-year period.  Despite this fact, Indiana lawmakers inexplicably decided last week to enact yet another corporate income tax rate cut, as well as a property tax break for business equipment.

Less than three years ago, former Governor Mitch Daniels signed into law a bill gradually lowering the state’s corporate tax rate from 8.5 percent to 6.5 percent.  The final stage of that tax cut is still over a year away, and yet Governor Pence says he’s “pleased” with the fact that the current legislature just sent him another corporate tax bill that will eventually lower the rate to 4.9 percent.  As our partner organization, the Institute on Taxation and Economic Policy (ITEP), notes: “When some of Indiana’s most successful corporations are paying such a small fraction of their profits in state income taxes to states around the country, it raises serious questions about whether reducing the corporate income tax is a worthwhile priority.”

But this corporate tax rate cut isn’t the only giveaway for big business that Governor Mike Pence will soon be signing into law.  The same legislation containing the corporate tax rate cut also grants localities the option to begin a race-to-the-bottom by eliminating their property taxes on new business equipment.  A report (PDF) from the Indiana Fiscal Policy Institute explains that giving localities this option is unlikely to draw any new businesses into the state, though it may reshuffle existing businesses around within the state’s borders.  And the president of the Institute explains that “I’m a little worried about the nature of allowing local governments to adopt this when some counties depend so much on business personal property tax and some don’t.”

Indiana’s largest and most successful companies already enjoy a shockingly low tax rate, and that rate is about to get a lot lower.  Hopefully next session lawmakers will turn their attention toward initiatives that could actually benefit ordinary Indiana residents—like improving the state’s education system and infrastructure.



What to Watch for in 2014 State Tax Policy



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Note to Readers: This is the first of a five-part series on tax policy prospects in the states in 2014.  This post provides an overview of key trends and top states to watch in the coming year.  Over the coming weeks, the Institute on Taxation and Economic Policy (ITEP) will highlight state tax proposals and take a deeper look at the four key policy trends likely to dominate 2014 legislative sessions and feature prominently on the campaign trail. Part two discusses the trend of tax shift proposals. Part three discusses the trend of tax cut proposals. Part four discusses the trend of gas tax increase proposals. Part five discusses the trend of real tax reform proposals.

2013 was a year like none we have seen before when it comes to the scope and sheer number of tax policy plans proposed and enacted in the states.  And given what we’ve seen so far, 2014 has the potential to be just as busy.

In a number of statehouses across the country last year, lawmakers proposed misguided schemes (often inspired by supply-side ideology) designed to sharply reduce the role of progressive personal and corporate income taxes, and in some cases replace them entirely with higher sales taxes.  There were also a few good faith efforts at addressing long-standing structural flaws in state tax codes through base broadening, providing tax breaks to working families, or increasing taxes paid by the wealthiest households.

The good news is that the most extreme and destructive proposals were halted.  However, several states still enacted costly and regressive tax cuts, and we expect lawmakers in many of those states to continue their quest to eliminate income taxes in the coming years.  

The historic elections of 2012, which left most states under solid one-party control (many of those states with super majorities), are a big reason why so many aggressive tax proposals got off the ground in 2013.  We expect elections to be a driving force shaping tax policy proposals again in 2014 as voters in 36 states will be electing governors this November, and most state lawmakers are up for re-election as well.

We also expect to see a continuation of the four big tax policy trends that dominated 2013:

  • Tax shifts or tax swaps:  These proposals seek to scale back or repeal personal and corporate income taxes, and generally seek to offset some, or all, of the revenue loss with a higher sales tax.

    At the end of last year, Wisconsin Governor Scott Walker made it known that he wants to give serious consideration to eliminating his state’s income tax and to hiking the sales tax to make up the lost revenue.  Even if elimination is out of reach this year, Walker and other Wisconsin lawmakers are still expected to push for income tax cuts.  Look for lawmakers in Georgia and South Carolina to debate similar proposals.  And, count on North Carolina and Ohio lawmakers to attempt to build on tax shift plans partially enacted in 2013.  
  • Tax cuts:  These proposals range from cutting personal income taxes to reducing property taxes to expanding tax breaks for businesses.  Lawmakers in more than a dozen states are considering using the revenue rebounds we’ve seen in the wake of the Great Recession as an excuse to enact permanent tax cuts.  

    Missouri
    lawmakers, for example, wasted no time in filing a new slate of tax-cutting bills at the start of the year with the hope of making good on their failed attempt to reduce personal income taxes for the state’s wealthiest residents last year.  Despite the recommendations from a Nebraska tax committee to continue studying the state’s tax system for the next year, rather than rushing to enact large scale cuts, several gubernatorial candidates as well as outgoing governor Dave Heineman are still seeking significant income and property tax cuts this session.  And, lawmakers in Michigan are debating various ways of piling new personal income tax cuts on top of the large business tax cuts (PDF) enacted these last few years.  We also expect to see major tax cut initiatives this year in Arizona, Florida, Idaho, Indiana, Iowa, New Jersey, North Dakota, and Oklahoma.

    Conservative lawmakers are not alone in pushing a tax-cutting agenda.  New York Governor Andrew Cuomo and Maryland’s gubernatorial candidates are making tax cuts a part of their campaign strategies.  
  • Real Reform:  Most tax shift and tax cut proposals will be sold under the guise of tax reform, but only those plans that truly address state tax codes’ structural flaws, rather than simply eliminating taxes, truly deserve the banner of “reform”.

    Illinois and Kentucky are the states with the best chances of enacting long-overdue reforms this year.  Voters in Illinois will likely be given the chance to convert their state's flat income tax rate to a more progressive, graduated system.  Kentucky Governor Steve Beshear has renewed his commitment to enacting sweeping tax reform that will address inequities and inadequacies in his state’s tax system while raising additional revenue for education.  Look for lawmakers in the District of Columbia, Hawaii, and Utah to consider enacting or enhancing tax policies that reduce the tax load currently shouldered by low- and middle-income households.
  • Gas Taxes and Transportation Funding:  Roughly half the states have gone a decade or more without raising their gas tax, so there’s little doubt that the lack of growth in state transportation revenues will remain a big issue in the year ahead. While we’re unlikely to see the same level of activity as last year (when half a dozen states, plus the District of Columbia, enacted major changes to their gasoline taxes), there are a number of states where transportation funding issues are being debated. We’ll be keeping close tabs on developments in Iowa, Michigan, Missouri, New Hampshire, Utah, and Washington State, among other places.

Check back over the next month for more detailed posts about these four trends and proposals unfolding in a number of states.  



How to Understand New York Governor Andrew Cuomo's Proposed Tax Cuts



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Of all the governors across the United States supporting tax cutting proposals, New York Governor Andrew Cuomo has been one of the most aggressive in promoting his own efforts to cut taxes. Taking his tax cut efforts one step further this election year, Cuomo is now proposing to expend the entirety of his state’s hard-won budget surplus on more than $2 billion in annual tax cuts.

While the term "budget surplus" may make it sound like that there is extra money lying around in Albany, the reality is that the surplus is the product of five consecutive years of austerity budgets and a budget plan that would continue this austerity for years to come. In other words, rather than using the surplus to restore funding to state and local services that have taken a hit over the past years, Cuomo is insisting that the money be used for tax cuts (many permanent) instead.

Unfortunately, tax cutting has become a pattern during Cuomo's time as governor. In June 2011, Cuomo pushed through a property tax cap, which severely limited the ability of cash-strapped local governments to raise enough revenue to fund basic services. In December of the same year, Cuomo further starved the state of much needed revenue by killing efforts to fully extend a millionaire's surtax, and instead pushing through a scaled back surcharge that raised half as much revenue as the original. Just last year, Cuomo pushed through a program of unproven and expensive corporate tax breaks, which a CTJ investigation found could actually harm many existing New York companies.

Even worse, to defend his past and newest tax cut proposals, Cuomo has embraced the cringe-worthy rhetoric of anti-tax governors like Kansas Governor Sam Brownback in arguing that ending "high taxes" and enacting corporate tax breaks will make the state more "business-friendly" and help improve New York's economy. The problem, of course, is that taxes are crucial to funding what really drives economic development: a highly educated workforce, good infrastructure and quality healthcare.

Cuomo's anti-tax approach is in direct contrast to the newly-elected New York City Mayor, Bill de Blasio, who ran and won a landslide victory on a campaign platform of addressing growing income inequality primarily through hiking taxes on the rich to provide universal citywide pre-kindergarten classes. De Blasio's call for higher taxes has proven not only popular in New York City, but also garnered the support of 63% of New York voters statewide. What de Blasio's election proves is that a significant majority of New Yorkers, unlike Cuomo, are not only willing to forgo tax cuts, but are actually willing to support higher taxes in order to help fund critical public services.

Cuomo's Tax Proposal a Mixed Bag in Terms of Tax Fairness

While many of Cuomo’s past tax proposals have offered little or nothing to those in need, Cuomo's new plan does includes a few potentially good ideas as well as few a very bad ones. On the good side of things, Cuomo proposes to substantially expand the state's property tax circuit breaker and create a renters credit, which could potentially provide a well-targeted income boost to low-income families. While the proposals sound good, their effectiveness will really depend on their details, which are yet to be released.

Regrettably, Cuomo is also proposing a significant cut in the state's corporate income and estate taxes, which will almost exclusively go to only a very small portion of the richest New Yorkers. Considering the recent series of tax cuts already passed by Cuomo and the years of budget cuts, piling on these additional tax breaks for the rich is simply unconscionable and would make an already unfair tax system (PDF) even worse.

 



State News Quick Hits: 2014 Off to Rocky Start



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2014 is just a few days old, and already it’s not off to such a happy start in terms of tax fairness:

This editorial in the Kansas City Star predicts that in Missouri, “[m]any state lawmakers, and their constituents, found 2013 to be a taxing legislative session. But it may pale in comparison to what’s ahead in 2014.” Republican legislators aren’t going to give up on “tax reform” after their failure to override Governor Jay Nixon’s veto of an extreme tax plan last year. Instead, those lawmakers are pledging to propose another round of income tax cuts and potentially a ballot initiative if the tax cuts can’t be passed through the legislative process.

The proliferation of state film tax incentives among states seeking to siphon off Hollywood production spending has been widely criticized. But the fact that some in California are now contemplating enacting film tax breaks to prevent a home-grown industry from leaving the state is a stark reminder that the “race to the bottom” in state corporate income taxes will leave every state poorer.

January 1st marked the beginning of a new, highly regressive era in North Carolina tax policy.  An array of tax changes went into effect which will further shift the responsibility for paying for North Carolina’s public investments away from wealthy households and profitable corporations onto the backs of middle- and low-income families.  Most notable among the changes includes the collapse of the state’s graduated personal income tax structure which was replaced with a flat rate of just 5.8% and allowing the state’s Earned Income Tax Credit to expire. Lawmakers who championed the tax package have falsely claimed for months that every North Carolina taxpayer will benefit from the changes.  As  ITEP and the NC Budget and Tax Center have repeatedly pointed out (and NC fact-checking reporters and the NC Fiscal Research division have substantiated), many families will pay more.  

This week, the Small Business Development Committee in the Wisconsin Assembly heard a bill about two proposed sales tax holidays. The first two-day holiday would be held in early August and would suspend the state’s 5 percent sales tax on computers and back-to-school items. The other two-day holiday would take place in November and be available for Energy Star products. Thankfully the proposal seems to be getting mixed reviews. Senate Majority Leader Scott Fitzgerald views the proposal as a gimmick and he couldn’t be more right. For more information read ITEP’s Policy Brief.



State News Quick Hits in Wisconsin, Illinois, Kentucky and Oklahoma



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The LaCrosse Tribune gets it right in this editorial titled, “Don’t Conduct Tax Talks in Private.” As we told you last week , Wisconsin  Governor Scott Walker asked Lt. Gov. Rebecca Kleefisch and Revenue Department Secretary Rick Chandler to host a series of roundtable discussions about the state’s tax structure. Unfortunately, the first invitation-only discussion happened behind closed doors. We couldn’t agree more with the Tribune that, “true tax reform deserves feedback and input from all Wisconsin citizens because while we may not all contribute to political candidates or align ourselves with political parties, we all pay taxes.” Now we hear that the Governor is interested in  income tax repeal. Let’s hope this debate doesn’t happen behind closed doors.

 

Illinois Governor Pat Quinn has come out in favor of reviewing tax breaks given to businesses over the last several years in order to see if they really had a positive impact on the state’s economy.  We’ve been critical of the Governor for offering such tax incentives to specific companies.  Reviewing those giveaways for effectiveness is long overdue.

 

In more good news for those of us concerned with the “race to the bottom” in which states are doling out massive tax incentives to businesses with little oversight, Archer Daniels Midland is set to announce that they will move their headquarters to Chicago without receiving any state or city incentives in return.


Kentucky Governor Steve Beshear is (again) committing himself to tax reform. He recently said in 

an interview, “Tax reform remains a top priority of mine, and I am hopeful that we can address it in some way in the upcoming session.”

The Oklahoma Supreme Court recently struck down a regressive and unpopular cut to the state’s top income tax rate that Governor Mary Fallin signed into law earlier this year.  According to the court, the bill containing the tax cut violated a provision in the Oklahoma constitution requiring each bill to be focused on a “single subject.”  In addition to cutting the state’s income tax, the bill would have also provided funding to repair the state’s Capitol building. 



State News Quick Hits: Wisconsin Tax Policy Round Tables, Unpopular Tax Cuts in Kansas, and More



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Governor Scott Walker says that one of his goals is to lower taxes for all Wisconsinites. He’s asked Lt. Gov. Rebecca Kleefisch and Revenue Department Secretary Rick Chandler to host a series of roundtable discussions about the state’s tax structure. Regrettably, transparency clearly isn’t another one of the Governor’s goals as the first roundtable discussion was closed to the public (and press) and only business leaders were invited.

In “race to the bottom” news, Missouri lawmakers approved a 23-year, $1.7 billion package of tax cuts for Boeing in an attempt to lure the manufacturer to the state. Missouri is one of twelve states vying for the opportunity to make the new 777X passenger jets. As we have explained, Missouri seems eager to repeat the mistakes of of Washington State, which recently provided Boeing with the largest state tax cut in history, at $8.7 billion.

It turns out that Kansas’ recent tax cuts aren’t just 
bad policy.  They’re also unpopular.  The income tax cuts, sales tax hikes, education cuts, and social service cuts that resulted from Governor Brownback’s tax plan are all opposed by a majority of Kansans, according to polling highlighted in The Wichita Eagle.

Due to the extensive changes to North Carolina’s personal income tax starting in 2014, the state’s Department of Revenue has 
asked all employers to distribute new state income tax withholding forms to their employees.  The need for a new form has unfortunately led to a lot of confusion and some really inaccurate press coverage on the regressive and costly tax “reform” package enacted this year.  Some articles mistakenly reported that everyone will get an income tax cut (and thus a little more money in their paychecks next year), but we know this is not the case.  The loss of the state’s Earned Income Tax Credit, personal exemptions (despite a higher standard deduction), and numerous other deductions and credits will negatively impact many working North Carolina families and seniors living on fixed incomes.  And, these stories all failed to point out that while income taxes may be going down for some, sales tax on items including movie tickets, service contracts and electricity will be going up in 2014.



Oregon Governor has Bad Intel on Corporate Tax Breaks



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State tax giveaways for business are reaching a fever pitch in the Pacific Northwest. Washington lawmakers last month enacted an $8.7 billion “mega-deal” package of state and local tax breaks designed to keep the state’s aerospace industry, dominated by Boeing, in the state. The sheer scale of the package, which is designed to last until 2040, has prompted some to wonder whether the time has finally come to end the tax-incentive arms race between the states. 

But across the Columbia River in Oregon, Governor John Kitzhaber is having none of this talk. Computer chipmaker Intel has just inked a new package of guaranteed tax breaks, not through legislative action but through direct negotiation with Governor Kitzhaber. In brief, Intel gets a guarantee that it will be able to use the coveted “single sales factor” manufacturing tax break for 30 years– even if the legislature repeals it for everyone else doing business in the state.

In return for a tax break that will outlive many current Oregon voters, Intel agrees to do...nothing they weren’t already doing. As the Oregon Center on Public Policy points out, the company has already begun construction of a new research facility in the state, and the result of this agreement is simply that they will continue building the facility. Intel senior leaders admit that Intel’s current investments on this site are “nothing new...just continued expansion of the site.”

Why does Governor Kitzhaber have the power to unilaterally negotiate tax deals with Fortune 500 companies? Because the legislature gave him that power. In a special legislative session last year, the legislature enacted a bill (PDF) initially designed to authorize a similar tax break package for the Nike corporation, but ultimately crafted to allow any large company to negotiate directly with the governor on tax incentive packages, as long as those negotiations took place before the end of 2013. (Reminder to mom-and-pop businesses in Oregon: you’ve got just two short weeks left to set up your personal meeting with Kitzhaber if you want to secure similar tax breaks– better get with the program!)

The good news is that in the limited time Kitzhaber has had access to his “magic wand” for granting tax breaks, he’s only done it for Intel and Nike. So when Kitzhaber turns over a new leaf and starts pushing for comprehensive tax reform after the next gubernatorial election, he’ll have to spend a bit less time undoing the damage he’s wrought in 2013.

What makes this all the more astonishing is that Kitzhaber and the legislature have no idea whether these companies are paying a meaningful amount of income tax to Oregon to begin with—and there’s anecdotal evidence that they don’t. A 2011 report from Citizens for Tax Justice and the Institute on Taxation and Economic Policy shows that Intel was one of over a dozen Fortune 500 companies that, despite being hugely profitable between 2008 and 2010, managed to pay not even a dime of state corporate tax nationwide during this three-year period.

Public disclosure of corporate tax payments (PDF) remains a terrific, if largely unfulfilled, step toward reform, and it’s worth asking: if Kitzhaber, to say nothing of Oregon taxpayers, knew just how little income tax Intel is paying right now to Oregon, would this horrific deal have ever seen the light of day?



Missouri Lawmakers to Washington: We'll See Your $8.7 Billion, And...



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When Washington State lawmakers approved a record $8.7 billion in tax breaks for Boeing and other aerospace companies last month, many observers hoped that the unprecedented scale of the new tax cuts—which will last through 2040—might open policymakers’ eyes to the folly of the “race to the bottom” that will eventually result from ever-increasing corporate giveaways. But Missouri Governor Jay Nixon’s eyes remain firmly shut. Nixon has called a special legislative session to urge the Missouri legislature to approve tax cuts totaling $1.7 billion , also geared toward Boeing and other aerospace companies.

Nixon’s professed hope is that the tax breaks will entice Boeing to produce their 777X commercial aircraft in Missouri. But Boeing’s own taxpaying behavior suggests that for some, the “race to the bottom” may already be over: a recent CTJ report found that over the past decade Boeing managed to avoid paying even a dime of state income taxes nationwide on $35 billion in pretax U.S. profits.



More Illinois Companies Trying to Extort Tax Breaks



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We’ve followed the tactics of corporations in Illinois, from Motorola to CME Group, who again and again ask lawmakers for pricey handouts they claim they need to keep doing business in the state. House Majority Leader Barbara Flynn Currie has called this egregious behavior “blackmail.” She recently said, "[i]t essentially is saying, if you don’t jump to, if you don’t go do this for us we might think about going somewhere else."  

Now the list of companies asking for handouts is growing, including: Archer Daniels Midland Company, OfficeMax, Zurich North America Insurance, Univar, and High Voltage Software. Giving individual companies special treatment is a violation of the neutrality principle and means that similarly situated companies are treated differently based on who can get the Legislature to bend to their will. Granting these singular incentives creates an environment wherein states end up competing in a “race to the bottom” and, ultimately, ordinary taxpayers pay the price through higher taxes or fewer services.

Illinois is facing an enormous budget crisis, due in part to the tax breaks for big multistate corporations that lawmakers have enacted over the years. Now is not the time for pandering to corporations at the expense of investing in the state’s future.

 

 



ITEP to Legislators: Business Tax Breaks Don't Live Up to the Hype



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Some of the country’s most influential state tax-writers heard this week from our partner organization, the Institute on Taxation and Economic Policy (ITEP), about why they should reject the conventional wisdom about special business tax breaks being economy-boosters. Best known for its work promoting the collection of sales taxes on purchases made over the Internet, the NCSL Task Force on State and Local Taxation asked ITEP to speak at its meeting in Atlanta on the effectiveness of so-called “tax incentives.”

Among the reasons ITEP urged lawmakers to be skeptical of these special breaks:

  • Tax incentives often reward companies for hiring decisions or investments they would have made anyway. These “windfall” benefits significantly reduce the cost-effectiveness of every tax incentive.
  • State economies are closely interconnected, so the taxpayer dollars given to companies through incentive programs never remain in-state for very long.
  • Tax incentives require picking winners and losers. Incentive-fueled growth at one business usually comes at the expense of losses at other businesses – including businesses located in the same state.
  • Tax incentives must be paid for somehow, and state economies are likely to suffer if that means skimping on public services like education and infrastructure that are fundamental to a strong economy.

To address these problems, ITEP recommended a three-pronged approach to the Task Force: cut back on tax incentives (both unilaterally and through cooperation with other states); reform tax incentives to limit their most obvious flaws; and closely scrutinize incentives on an ongoing basis to weed out the least effective programs.

ITEP staff also participated in a follow-up panel on best practices for “tax expenditure reporting”—the main tool states use to keep tabs on the slew of special tax breaks they offer to businesses and individuals. For that panel, ITEP recommended expanding state tax expenditure reports to include more tax breaks, and to include more information, like the purpose of each tax break and a description of its beneficiaries.  ITEP also explained why lawmakers shouldn’t gut state tax expenditure reports by excluding large tax breaks from their scope; every tax break has supporters and a constituency who insist it’s justified, but every tax expenditure requires equal scrutiny.

Read ITEP’s written remarks on the folly of business tax incentives.

Read ITEP’s written remarks on best practices for tax expenditure reporting.



State News Quick Hits: The Folly of Cutting Virginia's Corporate Tax, and More



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The Commonwealth Institute of Virginia explains the folly of cutting state corporate income taxes – a move endorsed by Virginia gubernatorial candidate Ken Cuccinelli, among others. The Institute points out that corporations are already paying a smaller share of state income taxes than in years past, and have left individual taxpayers to pick up the rest of the tab. Moreover, Virginia analysts say (PDF) that about three-quarters of any corporate income tax cut would actually flow outside of Virginia’s borders, since most of the cut would go to large, multi-state corporations.

The Washington Post reports on the state of America’s bridges, and provides some consumer-focused context for why raising taxes to fund infrastructure repair is so important.  “In many cases ... a bridge has weakened to the point where it can no longer handle the heavy loads it once did. When lower weight restrictions are imposed, the big trucks that deliver goods of all sorts have to detour, making their routes longer, and that cost generally trickles down to the price consumers pay for almost everything.”

Illinois lawmakers have been focused on pension reform lately, but this Crain’s Chicago Business piece highlights the need for real tax reform in the state. Notably two aspects of the state’s income tax are flagged for reform (the same ones we’ve been talking about for years) – the state’s exemption for all retirement income and a universal property tax credit that’s not based on need.

Last week, Arizona Governor Jan Brewer signed into law SB 1179, a bill containing a wide assortment of tax breaks. The bill’s initial goal was to create a small tax break for one specific industry, but it ended up being a vehicle for tax breaks that lawmakers couldn’t pass individually. The final bill provided certain exemptions for an energy drink company, a sales tax break for companies that rent ignition devices to people with DUI convictions, and an extended property tax break for biofuel manufacturers. The Associated Press reports it this way: “As lawmakers rushed to adjournment last week, those with bills that had languished looked for places for them to land. House members with tax breaks in mind found SB1179, adding four amendments in the late-night hours of June 13.”



Governor Cuomo, Meet Governor Brown



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California Shows that Geographically Targeted Tax Incentives Don’t Work

Last week, the New York State Legislature overwhelmingly passed START-UP New York (previously known as Tax-Free NY). The approval came after nearly a month of Governor Cuomo’s state-wide campus PR tour where he touted the plan’s infallible greatness, a claim we have explained is almost completely unjustified.

3,000 miles to the west, in California, fellow Democratic Governor Jerry Brown is telling a different story. He has proposed eliminating the state’s costly Enterprise Zone (EZ) Program, citing its ineffectiveness and huge cost as the rationale for the move.

California’s EZ Program was created in 1986 and has been the state’s primary policy tool in attempting to promote economic development in distressed areas. Like START-UP NY, California’s EZ Program provides geographically targeted tax breaks to 40 “zones” determined by the state. (START-UP NY provides tax breaks to over 70 zones, primarily college campuses.)

According to the Public Policy Institute of California, however, the EZ Program has had “no effect on business creation or job growth.” Furthermore, the California Budget Project has found that EZs “have cost the state a total of $4.8 billion in lost revenue since the program’s inception” while benefiting “less than half of one percent of the state’s corporations.”

Governor Brown’s proposal – initially outlined in his May budget revision (PDF) – signifies an important shift away from using geographically targeted tax breaks as an economic development tool. A growing body of research has shown (and shown again) tax incentives of most kinds to be poor tools for economic development, and California’s three decades of experience with its EZ Program is a case in point.

“California’s thirty-year-old Enterprise Zone program is not enterprising, it’s wasteful. It’s inefficient and not giving taxpayers the biggest bang for their buck,” said the Governor in a meeting with business leaders and labor groups. “There’s a better way and it will help encourage manufacturing in California.”

It must be noted, of course, that Governor Brown’s “better way” is only half better; it throws half of those EZ Program dollars at similarly unproven tax breaks while spending the other half – wisely – on a reduction in the sales tax (PDF) businesses pay.  Still, a governor who is beginning to listen to policy experts over pollsters deserves some credit for moving in the right direction.

If Governor Brown’s proposal is enacted (it may be on the ballot next year), it appears we will have a tale of two states: in California, a state trying to learn from the past; in New York, a state blindly shaping policy based on political interests.



New Hampshire Court Agrees: Tax Breaks Cost Public Dollars



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Last year we wrote about an unwelcome mini-trend in state corporate tax policy: the creation of “neo-vouchers,” tax breaks for businesses that donate money to private-school scholarship funds. At the time, advocates for these neo-vouchers were making the (not very convincing) case that these programs shouldn’t be counted as government spending since the programs were quite specifically designed such that “the money would never go into public accounts, making it less susceptible to court challenges.” (The legal challenges are often based on the argument that most private schools are religious in nature and the First Amendment prohibits public funds from supporting religion.) In other words, the argument went, if a company gets a million dollar tax break for donating money to private school scholarship funds, those million dollars never got collected by the state, so they remain somehow private dollars, outside the grasp of the state government.

At the time, a number of states were contemplating enacting tax breaks of this kind, (available to individuals, corporations or both), and New Hampshire subsequently did enact neo-vouchers in June of 2012, overriding a veto by Governor John Lynch, and took effect in January 2013. The law gives New Hampshire corporations a tax credit equal to 85 percent of any contributions they make to private school foundations. The law’s authors also attempts to codify the “private dollars” argument and inoculate it against constitutional challenges by asserting (PDF), “[c]redits provided under this chapter shall not be deemed taxes paid.” If the money was never handed over to the public treasury, it was never the public’s money, right?

Wrong, at least according to a lower court in the Granite State that just ruled the new tax credit is unconstitutional, explicitly rejecting the “private dollars” charade. The judges wrote:

“The phrases ‘public funds,’ or ‘money raised by taxation,’ focuses the Court’s inquiry not on when the government’s technical ‘ownership’ of funds or monies arises, but on when, or at what point, the public’s interest fairly arises in how funds or monies are spent. The Court concludes that the interest of New Hampshire taxpayers in regard to challenging the legality of legislation such as the program at bar does not arise only after money is deposited in the New Hampshire treasury….”

The Court sensibly notes that if “money that would otherwise be flowing to the government is diverted” for private ends, that is essentially the same as direct government spending. This shouldn’t be news to anyone familiar with the “tax expenditure” concept—the notion that a $1 million tax break for a specific business is not meaningfully different from government writing a $1 million check to the same business.

Of course, it’s not hard to see that the neo-voucher idea is bad policy whether it’s constitutional or not. It erodes corporate tax revenues, takes money away from already-strapped public schools, and (in the case of the New Hampshire laws) sharply limits state policymakers’ oversight of the private schools receiving these state-funded scholarships. But the New Hampshire court’s finding underscores the absurdity of the fiction that neo-vouchers subsidized by corporate tax credits can be thought of as “private dollars” outside the purview of state governments—and offers a helpful precedent for advocates seeking to repeal neo-vouchers in other states.

 



Lots of Losers in Governor Cuomo's "Tax-Free New York"



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Last week we wrote about Governor Cuomo’s ill-conceived Tax-Free NY initiative.  We reserve judgment as to whether it’s politically motivated ( a New York Post column called him “Gov $uck-up”, for instance, and this column also questions the motivation) but we can be pretty sure it will cost more than it will benefit the people of New York, because this is what business tax credits do.

Still, since that post, the Governor has continued his promotional tour of New York campuses, so we spent some time digging into how actual businesses would fare under his plan. As it turns out, the Governor’s focus on rewarding new investment could end up arbitrarily discriminating against existing small businesses (and their employees) who are already doing the same things Cuomo’s plan will reward others to start doing.

Capraro Technologies, Inc. (CTI), for example, has been based in Utica (home to SUNY Institute of Technology) for almost two decades. The company shares the SUNY-IT mission of advancing the field of information technology through research and innovation, and appears to be a model of the kind of business the Governor hopes to attract. But CTI would be ineligible for any benefits under Tax-Free NY, and the company could find itself at a disadvantage relative to other firms who do qualify for the tax-free treatment.

To gain eligibility, CTI would need to “expand its New York operations while maintaining its existing jobs.” But such an expansion would need to take place within one mile from the SUNY-IT campus. Unless CTI were able to obtain a special waiver, this would mean having to open a new office about two miles down the road from its current location; hardly an example of economic efficiency.

CTI is only one of many existing companies throughout the state that could be placed at a disadvantage relative to new competitors. BlueRock Energy, a Syracuse-based company that helps customers lower their energy costs and environmental footprint and would be ineligible for Tax-Free NY benefits if it expanded at its current lots, is another case-in-point. Located about 2.5 miles away from the SUNY College of Environmental Science and Forestry, BlueRock Energy shares a common mission with SUNY-ESF.

And the list goes on. From mobile app creator miSoft Studios near SUNY Binghamton to software developer Wetstone Technologies near SUNY Cortland, existing local businesses across the state will all reap zero rewards for having already done exactly what the Governor will allegedly incentivize other businesses to do in the future.

And of course, you are not only out of luck if you started your business at the wrong time, but place matters, too. State tax expert David Brunori at Tax Analysts summed up one of Tax-Free NY’s absurdities by highlighting, “if you are in the community you don’t pay taxes. If you are outside, even by six inches, you do.”

Existing small businesses are not the only losers because the plan extends to employees, too. Professor John Yinger, an expert in fiscal policy from Syracuse University, says the Governor’s plan “means some businesses are getting lower taxes than others and in this case it means some people are getting much lower taxes than others, those are new sources of inequities.”

There are so many problems with Governor Cuomo’s idea for tax-free zones, it’s hard to know where to begin. But the Institute on Taxation and Economic Policy’s (ITEP) policy briefs library is a good place to look, and we invite the Governor to consider this guidance (all links are PDF’s).

Taxes and Economic Development 101: “Lawmakers are under intense pressure to create a healthy climate for investment. But the simplistic view that tax cuts are the best medicine can result in unintentionally making this climate worse. Unaffordable tax cuts shift the cost of funding public services onto every business that isn’t lucky enough to receive these tax breaks—and makes it harder to fund the public investments on which all businesses rely.”

Accountable Economic Development Strategies: “Some lawmakers are wising up to the idea that subsidies don’t work. But for policymakers who insist on offering incentives, there are some important, simple, and concrete steps that can be taken to ensure that subsidies aren’t allowed to go unchecked.”

Tax Principles: The principle of neutrality (sometimes called “efficiency”) tells us that a tax system should stay out of the way of economic decisions. Tax policies that systematically favor one kind of economic activity or another can lead to the misallocation of resources, or worse, to schemes whose sole aim is to exploit such preferential tax treatment.”



Governor Cuomo Hearts Tax Cuts



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

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

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

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

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

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

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



Rich States, Poor States and Fake Research: "Business Climate" Rankings Mislead Lawmakers by Design



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

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

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

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

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

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

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

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

Read the report



No Business Tax Repeal in Idaho, Only a Pared-Back Cut



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Idaho lawmakers have opted for a dramatically scaled back tax cut on business equipment.  Rather than repealing the business personal property tax entirely as Governor Butch Otter had proposed, the House and Senate have sent him a bill that exempts the first $100,000 of property from the tax.  This change eliminates the tax for 90 percent of Idaho businesses while costing the treasury a fraction of the amount of outright repeal.

Even with the bill’s $20 million price tag, the Associated Press (AP) reasonably described it as a victory for counties and schools that would have been hit hard if the tax were repealed.  The AP also called it a “setback” for big businesses’ major lobby—the Idaho Association of Commerce and Industry (IACI).  IACI has pledged to continue lobbying for full repeal next year.

Had the business personal property tax been repealed in full, the biggest winner would have been Idaho Power, which would have seen its tax bill drop by anywhere from $10.5 to $15.3 million per year. Our partner organization, the Institute on Taxation and Economic Policy (ITEP), helped put this property tax cut into context with a report explaining that Idaho Power already pays nothing in state corporate income taxes.  Looking at nationwide state corporate tax payments, ITEP showed that from 2007 to 2011, the company actually collected a $7 million state tax rebate despite earning $623 million in profits. That amounts to an overall effective tax rate of negative 1.1 percent.

While it’s discouraging that lawmakers prioritized cutting taxes this session on the heels of last year’s regressive income tax cut, the decision to keep the business personal property tax on the books is a welcome bit of fiscal sanity.



Business Tax Cuts Crammed Into Final Moments of New Mexico Session



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New Mexico lawmakers recently approved a cut in the corporate income tax rate and special tax breaks for manufacturers and filmmakers. State officials estimate that the bill will eventually cost (PDF) the state about $55 million in lost revenue per year, but they admit that they’re not especially confident in their estimates.  The Santa Fe New Mexican explains how the vote in the House literally came down to the final seconds of the legislative session, and says that House Speaker Kenny Martinez “acknowledged that some [House] members may not have been familiar with [the bill] at all.”

The largest single tax cut contained in the bill is a reduction in the corporate income tax rate from 7.6 to 5.9 percent, phased-in over five years.  Our partner organization, the Institute on Taxation and Economic Policy (ITEP), recently found that the corporate income tax is one of New Mexico’s few progressive taxes in a tax system that is sharply regressive overall.  On top of this cut, lawmakers voted to give manufacturers the option to use a tax break known as single sales factor (PDF) that only benefits businesses selling most of their products out-of-state.  The package also expanded tax giveaways for filmmakers that are widely understood to offer little economic benefit.

To pay for a portion of the cost of these cuts, the bill raises sales taxes on manufacturers, cuts aid to local governments (though it lets them raise their own sales taxes), trims some existing tax credits, and limits the tax avoidance opportunities available to some “big box” retailers through the adoption of mandatory “combined reporting” (PDF) for those companies.

Overall, however, the corporate tax rate cut represents a case of misplaced priorities in a state whose tax system is fundamentally unfair and where funding for things like higher education has been slashed in recent years.

 



New from ITEP: Laffer's Latest Job Growth Factoid is All Rhetoric



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A new talking point from tax cut snake oil salesman Arthur Laffer is making the rounds. It’s been seen in the pages of The Wall Street Journal and cited by Indiana Governor Mike Pence, Iowa House Majority Whip Chris Hagenow, and Tim Barfield, Governor Jindal’s point man for income tax elimination in Louisiana.   

As the Journal put it: A new analysis by economist Art Laffer for the American Legislative Exchange Council finds that, from 2002 to 2012, 62% of the three million net new jobs in America were created in the nine states without an income tax, though these states account for only about 20% of the national population.

But as they’ve done with many of Laffer’s previous analyses, the Institute on Taxation and Economic Policy (ITEP) explains why this talking point is all rhetoric and no substance. Laffer’s research is like a house of cards, depending on data selected and placed precisely to help reach the conclusion he wanted, as ITEP details:

1) Most of the states without income taxes contributed just one percent or less to the nation’s job growth over the period Laffer examines.  Laffer’s claim has nothing to do with the “nine states without an income tax,” and everything to do with one of those states: Texas.

2) Texas’ economy differs from that of other states in many significant ways, and comparing its job growth to the rest of the country provides no insight into the economic impact of its tax policies.  This is particularly true of the time period Laffer examines, since it includes the housing crisis that Texas largely avoided for reasons unrelated to tax policy.

3) Looking beyond the specific Recession-dominated time period chosen by Laffer, Texas’ job growth has otherwise generally been in line with its rate of population growth.

The four-page report with graphs and footnotes is here.

 

 



Idaho Ponders Tax Break for a Company that Pays Nothing in State Income Taxes



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For months, Idaho lawmakers have been seriously considering repealing the personal property tax on business equipment.  If enacted, repeal would cost local governments and public schools over $140 million a year, and would likely force cuts in public services and increases in property taxes on other taxpayers.

The single biggest winner under repeal would be Idaho Power, held by IDACorp, which will reportedly see its taxes fall by $10.5 to $15.3 million per year if repeal is enacted.  A new report from our partner organization, the Institute on Taxation and Economic Policy (ITEP), helps put this costly tax proposal into perspective by looking at the state income taxes being paid (or not) by the plan’s largest beneficiary.

According to IDACorp’s financial disclosures, the company earned $623 million in U.S. profits over the last five years (2007-11) but paid nothing in state income taxes to the states in which it operates.  In fact, the company’s effective state income tax rate across all states was actually negative.  IDACorp received $7 million in tax rebates from the states between 2007 and 2011, giving it an effective tax rate of negative 1.1 percent for the five year period as a whole.

The proposed repeal of the personal property tax in Idaho would leave the state corporate income tax as the main means by which companies like IDACorp contribute to the public investments that allow them to do business and generate profits. Before lawmakers take such a step, they should at least know whether the state corporate tax is working to begin with. In Idaho and virtually every other state, however, neither elected officials nor the tax-paying public have access to this kind of information. Obviously, they should (PDF).

Read the report



Taxpayer-Backed Sports Stadiums are a $31 Billion Rip-Off



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We’ve known for a while that government subsidies and tax breaks for sports stadiums are a raw deal for taxpayers. But a new book by Harvard University urban planning professor Judith Grant Long reveals that the costs are worse than we thought. According to Long’s book, Public/Private Partnerships for Major League Sports Facilities, taxpayers spent over $31 billion in tax or direct subsidies for the 121 sport facilities in use in 2010, which is $10 billion more than the cost estimated by the industry itself.

Most of the difference between Long’s and industry calculations is explained by the industry’s failure to fully account for the cost of land, infrastructure, operations, and lost property taxes as part of the cost of stadium construction deals. When all factors are taken into account, cities bore, on average, 78 percent of the cost of the public-private (so-called) partnership stadium construction deals. Long found in some particularly egregious cases, such as Indianapolis’s Lucas Oil Stadium and Paul Brown Stadium in Cincinnati, the public’s share of the cost actually surpassed the entire cost of building the stadium because of these unaccounted for external costs to the city.

What do taxpayers get in return for the billions they have to pay in subsidies? Not all that much, frankly. As the watchdog group Good Jobs First has chronicled, the costs of new stadiums do not pay off in terms of economic growth or job creation. The primary reason for this is that these entertainment venues tend to redirect consumer spending from other activities rather than generating entirely new economic activity. Even if you accept that new stadiums do generate some jobs (rather than just shifting those jobs from other industries), they aren’t any bargain considering that they can cost taxpayers as much as $200,000 per job “created.”

Just this week, the Miami Marlins reinforced every bad stereotype of sports teams acting in bad faith when it traded away its best players – and its National League competitiveness – in order to reduce salary costs. The trades were made in spite of the explicit promise by the team’s owner that he would spend whatever it took to build a power house team as part of a sweetheart deal that will end up costing taxpayers an astounding $2.4 billion.

With the case against subsidizing stadiums with public dollars growing ever stronger, lawmakers need to finally put a stop to this ludicrous form of corporate welfare.



Good News in Illinois: Hidden Business Tax Breaks May Soon See the Light



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It’s no longer news to most Americans that big, profitable corporations from Apple to General Electric are finding creative ways to zero out their income taxes.  Two widely cited recent reports on federal and state taxes from CTJ and ITEP identified dozens of companies that have achieved this dubious goal.

But the big news out of Illinois this week is that at least in the Land of Lincoln, lawmakers are taking positive steps towards doing something about rampant corporate tax avoidance. A bill introduced Wednesday by Senate President John Cullerton would require publicly traded companies to make available some basic information about the amount of state income taxes they pay, and specify which tax breaks reduced their taxes. The bill would also require companies to disclose their profits generated in Illinois, making it easy for lawmakers and the public to know whether these companies are really paying tax at the legal rate.

While the bill was approved by a Senate committee and sent to the Senate floor on Wednesday, its prospects for passage this year remain murky. And identifying the beneficiaries of unwarranted tax breaks is obviously only a first step towards repealing those tax breaks. But this legislation, along with a similar bill championed by the California Tax Reform Association in the Golden State, likely represents the beginning of a shift toward more transparency in corporate taxation—and that can only lead to improvements in the fairness of our overall corporate tax system.

Right now virtually every state (there are a few signs of hope) fails to disclose even the most basic information about corporate tax breaks. The Center on Budget and Policy Priorities’ Michael Mazerov has the dirt on how your state can move in the right direction, as does the encyclopedic Good Jobs First.

Photo from Senator Cullerton's legislative website.



Virginia Governor Expands Wasteful Corporate Tax Giveaway



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Virginia Governor Bob McDonnell just signed into law the expansion of a tax break meant to support “manufacturing” that has, in fact, been used to subsidize everything from making movies to designing homes to roasting coffee. The break piggybacks on the federal deduction for “Qualified Production Activities Income” (QPAI), which was first proposed in the early 2000’s as a way to benefit US-based manufacturers.  As the proposal made its way through Congress, however, it morphed into a loosely defined tax break that Starbucks, for example, has been able to use to get $40 million knocked off its tax bill over the last few years. Walt Disney, Halliburton, Altria and the Washington Post Company are among scores of companies - not known for manufacturing - that have successfully exploited this loophole.

In most cases, state corporate tax law is based on the federal corporate tax, which means that when Congress creates an expensive giveaway like the QPAI deduction, the states go ahead and offer the same break for reasons of simplicity.  But 22 states have specifically decided that this break isn’t worth the cost, and have “decoupled” their laws from that part of the federal code.  Unfortunately, Virginia is moving in exactly the opposite direction.

The Virginia Department of Taxation estimates that this recent expansion of the state’s QPAI deduction will drain somewhere in the neighborhood of $10 million from the state’s coffers each year. Worse, Virginians can’t expect much of a return on that $10 million “investment.”  As the Institute on Taxation and Economic Policy (ITEP) explains:

“The QPAI deduction has little value as an economic development strategy for individual states, because a corporation can use the QPAI deduction to reduce its taxable income for “domestic production” activities anywhere in the United States. That is, a multi-state company that engages in manufacturing activities in Michigan will be able to use those activities to claim the QPAI deduction—and thus cut its taxes—in any state that offers the deduction, even if the company does not have manufacturing facilities in those states.

Eliminating state QPAI deductions was recently proposed in a joint CTJ-ITEP report as a way to improve the adequacy and fairness of state corporate taxes.  That report showed that many profitable companies – including some headquartered in Virginia – are paying at a rate equal to less than half the average statutory state corporate tax rate.  Loopholes like QPAI are the reason.

Photo of Gov. Bob McDonnell via Gage Skidmore Creative Commons Attribution License 2.0

 

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