Category Archives: Taxation

Slicing the Budget Pie for Big Business: How Three States Allocate Economic Development Dollars, Large Companies versus Small

Source: Kasia Tarczynska and Thomas Cafcas with Greg LeRoy, Good Jobs First, March 2016

From the press release:
Amidst a political season thick with pro-small business rhetoric, a new study on what states actually spend to help create private-sector jobs reveals a sharp bias against the “entrepreneurial economy.” In a detailed analysis of three diverse states—Florida, Missouri and New Mexico— the new research finds that at least two-thirds of their economic development spending primarily benefits large businesses. Less than a fifth clearly benefits small businesses, and about an eighth cannot be assigned either way. In total, the study looks at $344 million spent annually through more than 60 programs…..

Federal Tax Reform Raises Questions, Possible Revenue Changes for States

Source: Anne Stauffer and Mark Robyn, Pew Charitable Trusts, March 8, 2016

As the presidential candidates add their voices to the chorus of lawmakers in Washington calling for comprehensive tax reform, policymakers should be mindful that changes to the federal tax code can have complex repercussions for state tax policy and revenue.

States have a great deal at stake when Washington considers changes to tax policy because nearly every state that levies personal income taxes connects in some way to the federal system. Understanding the extent to which state income taxes are connected to the federal system is important for policymakers at both levels of government when evaluating federal revisions or reforms. ….
What States Have at Stake in Federal Tax Reform Proposals

Fortune 500 Companies Hold a Record $2.4 Trillion Offshore – They May Be Avoiding up to $695 Billion in U.S. Taxes

Source: Citizens for Tax Justice, March 4, 2016

from the summary:
It’s been well documented that major U.S. multinational corporations are stockpiling profits offshore to avoid U.S. taxes. Congressional hearings over the past few years have raised awareness of tax avoidance strategies of major technology corporations such as Apple and Microsoft, but, as this report shows, a diverse array of companies are using offshore tax havens, including the pharmaceutical giant Amgen, apparel manufacturers Levi Strauss and Nike, the supermarket chain Safeway, the financial firm American Express, banking giants Bank of America and Wells Fargo, and even more obscure companies such as Advanced Micro Devices and Symantec.

All told, American Fortune 500 corporations are avoiding up to $695 billion in U.S. federal income taxes by holding $2.4 trillion of “permanently reinvested” profits offshore. In their latest annual financial reports, 27 of these corporations reveal that they have paid an income tax rate of 10 percent or less in countries where these profits are officially held, indicating that most of these monies are likely in offshore tax havens.

Taxing Wealth Seriously

Source: Edward J. McCaffery, USC Gould School of Law, USC Law Legal Studies Paper No. 16-10, February 26, 2016

From the abstract:
The social and political problems of wealth inequality in America are severe and getting worse. A surprise is that the U.S. tax system, as is, is a significant cause of these problems, not a cure for them. The tax-law doctrines that allow those who already have financial wealth to live, luxuriously and tax-free, or to pass on their wealth tax-free to heirs, are simple. The applicable legal doctrines have been in place for nearly a century under the income tax, the primary social tool for addressing matters of economic inequality. The analytic pathways to reform are easy to see once the law is properly understood. Yet our political systems show no serious interest in taxing wealth seriously. We are letting capital off the hook, and ratcheting up taxes on labor, at precisely a time when deep-seated and long-running economic forces suggest that this is precisely the wrong thing to do. It is time — past time — for a change. This Article canvasses a century of tax policy in the United States to show that we have never been serious about taxing wealth seriously, and to lay out pathways towards reform.

Retirement Financing: An Optimal Reform Approach

Source: Roozbeh Hosseini (Arizona State University (ASU) – Economics Department), Ali Shourideh(University of Pennsylvania – Finance Department), January 19, 2016

From the abstract:
We study policy reforms aimed at overhauling retirement financing. We develop a novel approach by considering optimal reforms: policy reforms that minimize the cost for the government while respecting the distribution of welfare in the economy. Our model is an OLG model with life-cycle features and bequest motives where individuals are heterogeneous in their earning ability and mortality. Theoretically, we show that due to the negative correlation between earnings ability and mortality, post-retirement distortions to saving decisions are a robust feature of any optimal policy. We, then, use this framework to quantitatively analyze optimal reforms. Our quantitative exercise shows that an optimal reform relative to the status-quo must have three key features: First, post-retirement assets must be subsidized while bequests must be taxed. On average, optimal marginal subsidies on assets for individuals above age 65 is 3.2 percent, while optimal marginal tax on their bequest is 60 percent. Second, pre-retirement transfers must increase while social security benefits must become less generous in the aggregate and more progressive towards low income groups. Finally, earnings tax reform does not contribute to optimal reforms, i.e., optimal marginal taxes on earnings remain very close to the status-quo. The optimal policies reduce the present discounted value of net tax and transfers to each generation by 15 percent.

The Complicated Business of Evaluating Tax Incentives

Source: Liz Farmer, Governing, February 25, 2016

Massachusetts, like many states, uses tax credits to attract companies. But also like many states, it struggles to track the effectiveness of these programs. …. For the past half-decade, businesses and legislators in the Bay State have thwarted numerous attempts to track the effectiveness of tax incentives. State Auditor Suzanne Bump has been trying since she took office in 2011 to gain access to business tax returns at the Department of Revenue (DOR) for the purposes of auditing the tax credit programs. Bump is stymied by a state law that bans the auditor from accessing business tax information filed with the department. “Although we are told to audit the tax department, we cannot actually look at tax returns,” she says. “If you can’t look at the source documents, you can’t know how well DOR is executing its functions.” ….

Tax Code Connections: How changes to federal policy affect state revenue

Source: Pew Charitable Trusts, Research & Analysis, Fiscal Federalism Initiative, February 17, 2016

From the overview:
States have a great deal at stake when federal policymakers are considering tax policy changes, whether full-scale reform or targeted revisions. Of the 41 states (plus the District of Columbia) with broad-based personal income taxes, 40 states and the District connect in some way to the federal system by incorporating a range of federal tax expenditures—exclusions, deductions, and credits—into their state tax codes. These linkages to federal law, also known as conformity, mean that changes at the federal level can affect state tax collections and can increase total federal taxes paid in some states and decrease them in others, even if federal revenue remains unchanged nationwide.

To help policymakers at both the state and federal levels better understand the extent to which states are connected to and affected by changes to federal individual income tax expenditures, this analysis illustrates the state revenue impact of eliminating the large majority of federal tax expenditures. It also reduces federal tax rates by roughly 40 percent to achieve revenue neutrality—that is, to maintain pre-reform revenue levels. Importantly, the scenario is not a tax reform proposal, nor does it endorse any particular plan or a revenue-neutral approach to tax reform.
Technical Appendix

The Earned Income Tax Credit (EITC): An Economic Analysis

Source: Margot L. Crandall-Hollick, Congressional Research Service, CRS Report for Congress, R44057, February 1, 2016

The Earned Income Tax Credit (EITC) is a refundable tax credit available to eligible workers earning relatively low wages. The EITC, enacted nearly 40 years ago, has evolved from a relatively modest tax benefit to a significant antipoverty program. In light of potential congressional interest in modifying the credit, this report reviews the economic research on the EITC. An understanding of the economic impact of the credit, as well as its limitations and potential drawbacks, may inform future legislative modifications of the credit….