Category Archives: Taxation

State Estate Taxes: A Key Tool for Broad Prosperity

Source: Elizabeth McNichol, Center on Budget and Policy Priorities, May 11, 2016

From the summary:
As the income gap between the wealthiest Americans and those at the bottom and middle has widened in recent years, many states have eliminated their estate tax ― a key tool for reducing inequality and building broadly shared prosperity. States that have eliminated their estate tax should reinstate it and those with an estate tax should keep it and, if needed, improve it.

Only the very wealthiest taxpayers pay estate taxes.Only the very wealthiest taxpayers pay estate taxes — just 2.56 percent of estates, in the states with the tax, on average. The estate tax raises revenue for public services that build a stronger economy, protects against extreme levels of income inequality, and ensures that the wealthy cannot avoid paying taxes on certain forms of wealth.

A phase-out of the federal estate tax enacted under President Bush in June 2001 effectively repealed state estate taxes by 2005 unless states acted to retain this tax. Many states kept their estate taxes intact by passing legislation to “decouple” from the federal law or by creating separate taxes, but other states failed to act, allowing their estate taxes to disappear.

That was a mistake. Estate taxes serve many important public purposes, including:
– Providing revenue for investments that promote a strong economy. …..
– An estate tax will help — not harm — a state’s economy. ….. Reducing inequality. The vast majority of taxpayers would never owe estate taxes. …..
– Closing a loophole that benefits the wealthiest. …..

Are we ready to raise taxes on the rich? History says no

Source: Kenneth Scheve, David Stasavage, The Conversation, May 9, 2016

Economic inequality is high and rising. At the same time, many governments are struggling to balance budgets while maintaining spending for popular programs. …. We investigated tax debates and policies in 20 countries from 1800 to the present for our new book, “Taxing the Rich: A History of Fiscal Fairness in the United States and Europe.” Our research shows that it is changes in beliefs about fairness – and not economic inequality or the need for revenue alone – that have driven the major variations in taxes on high incomes and wealth over the last two centuries. ….

A Leak in Tax Shelters?

Source: Jackson Brainerd, State Legislatures Magazine, Vol. 42, No. 5. May 2016

The corporate income tax has long been a relatively small, though important, portion of state tax revenue. It accounted for 5.4 percent of total tax collections in 2014, down from 7.4 percent in 2007.

Revenues are down for several reasons, but the most common revenue drain comes from corporations sheltering profits (done easily these days electronically) in places with favorable taxes—aka tax havens.
Along with low, or no, taxes, havens offer privacy, with laws that prevent sharing information about taxpayers. They also usually allow foreign-owned entities to “establish” themselves there without doing much business locally. Havens also often limit local residents from taking advantage of the benefits they offer foreign-owned enterprises.

Because defining a tax haven is subjective—and no one embraces that label—lawmakers are moving cautiously. To recoup some of the revenue they are losing, several states now require corporations to include in their bottom line not only income from domestic enterprises but also from affiliates incorporated or engaged in foreign tax havens. And, in the last several years, legislators in six states and the District of Columbia have passed additional tax haven laws. ….

Traditional and Roth Individual Retirement Accounts (IRAs): A Primer

Source: John J. Topoleski, Congressional Research Service (CRS), CRS Report for Congress, RL34397, April 27, 2016

In response to concerns over the adequacy of retirement savings, Congress has created incentives to encourage individuals to save more for retirement through a variety of retirement plans. Some retirement plans are employer-sponsored, such as 401(k) plans, and others are established by individual employees, such as Individual Retirement Accounts (IRAs). This report describes the primary features of two common retirement savings accounts that are available to individuals. Although the accounts have many features in common, they differ in some important aspects. Both traditional and Roth IRAs offer tax incentives to encourage individuals to save for retirement. Contributions to traditional IRAs may be tax-deductible for taxpayers who (1) are not covered by a retirement plan at their place of employment or (2) have income below specified limits. Contributions to Roth IRAs are not tax-deductible and eligibility is limited to those with incomes under specified limits. …. This report explains the eligibility requirements, contribution limits, tax deductibility of contributions, rules for withdrawing funds from the accounts, and provides data on the account holdings. It also describes the Saver’s Credit and provisions enacted after the Gulf of Mexico hurricanes in 2005 and the Midwestern storms in 2008 to exempt distributions to those affected by the disasters from the 10% early withdrawal penalty….

Cities seek to regulate Airbnb to collect lodging taxes

Source: Jason Axelrod, American City and County, May 11, 2016

As community-driven lodging rental site Airbnb continues exploding in popularity, several cities across the U.S. are seeking to regulate its activities at various levels.

Virginia Beach, Va. estimates it is losing over $200,000 in annual taxes because of Airbnb’s activities in the city, according to WTKR. City officials have tried to get the company to identify who in the city has been renting properties so it can pinpoint who to tax, but 18 months’ worth of talks have been stalled….

Income Tax Checkoff Programs

Source: Kathleen Quinn, Legisbrief, Vol. 24 n. 19, May 2016

Income tax “checkoff” programs allow all taxpayers to contribute to a prescribed list of charitable organizations on their state income tax form. First appearing on the federal income tax form in 1972, the first state checkoff program was introduced in Colorado in 1977. Since then, the practice has flourished and is now used by the 41 states with a broad-based income tax. In 2003, the Federation of Tax Administrators (FTA) counted 220 checkoff programs. By 2015, that number had nearly doubled to 410 programs. ….

State Film Production Incentives and Programs

Source: National Conference of State Legislatures (NCSL), April 12, 2016

From the summary:
….Most states’ policymakers walk a fine line and try to balance film production incentives in ways that limit forgone revenue, yet still reduce the chances of losing the state’s film industry to competing incentive programs. Since 2009, 10 states have ended their incentive programs. Most recently, growing budget deficits or unclear economic benefits caused Michigan, New Jersey, and Alaska to cut their incentive programs. No additional states have introduced programs since Nevada in 2014. However, Kentucky, Maryland, and California have expanded or extended their programs to better compete with other states’ film industries…..

Overall, states are increasing evaluation and oversight of film incentive programs. A number of states have performed a cost benefit analysis of their film incentive program, or require an audit before a production can receive a rebate or credit. At least 55 percent of all states offering incentives now require an audit or other verification from production companies. This percentage has increased from 38 percent in 2014…..

How to Tax Capital

Source: Mark P. Gergen, University of California, Berkeley – School of Law, UC Berkeley Public Law Research Paper No. 2749422, February 13, 2016

From the abstract:
This paper proposes a new system for taxing capital that can collect the same amount of revenue as the existing system with much lower administrative and compliance costs, and with somewhat lower distortionary impact. Its pillar is a flat annual tax assessed on the market value of publicly traded securities paid by an issuer. Wealth represented by a string of publicly traded securities is taxed once by giving an issuer a credit for amounts remitted with respect to publicly traded securities it owns. The securities tax will cover around 75 to 80 percent of income producing capital that is presently subject to the individual and corporate income taxes.

Income producing capital held by households and nonprofits that is not subject to the securities tax, e.g. interests in closely held businesses and real estate held for investment, is covered by a complementary tax. The complementary tax is paid on the estimated value of an asset assuming an investment yields a normal return in cash or appreciation. An entity is required to estimate value and remit the tax on an interest in the entity. If an interest is of a class, such as a unit in a private equity fund, then an entity is required to revalue all interests in a class when there is a redemption or trade of any interest in the class. This brings the incidence of the complementary tax roughly into line with the incidence of the securities tax with respect to relatively liquid assets, like interests in hedge funds, through periodic revaluations.

The securities tax and the complementary tax are intended to replace the entire existing patchwork system for taxing capital income. With an annual rate of .8 percent (.008) the securities tax and the complementary tax will impose a tax burden on capital roughly comparable to the burden imposed by the existing patchwork system for taxing capital that the two taxes are intended to replace. If the average real rate of return on capital is 4 percent, then the tax is equivalent to an income tax with a rate of 20 percent on the average real rate of return. From the perspective of a firm the tax raises the cost of capital by .8 percent or 80 basis points. A companion article will address the taxation of global capital under the two taxes.

Better Incentive Information: Three strategies for states to use economic development data effectively

Source: Pew Charitable Trusts, Issue Brief, April 2016

From the overview:
Economic development incentives are one of the primary tools states use to try to strengthen their economies. Every state uses a mix of tax incentives, grants, and loans in an effort to create jobs, encourage business expansions, and achieve other goals. Collectively, states spend billions of dollars a year on incentives, which can significantly affect their budgets, businesses, and economies.
To make these programs work as well as they can, states need good data. Data are necessary for officials to administer incentives and measure their effectiveness.

There are multiple sources of these data. Relevant information can come from businesses, federal records, and other third-party databases. In fact, states already possess, in some form, much of the data they need. But they must ensure that the right people have access to these data; the information needs to be of high quality and analyzed effectively. Many states have struggled with these challenges, leaving officials without the information they need to administer incentives well and policymakers unsure of whether the programs are working as intended.

To identify solutions, The Pew Charitable Trusts partnered with the Center for Regional Economic Competitiveness (CREC) to create the business incentives initiative in 2014. Through the initiative, cross-agency work groups from Indiana, Maryland, Michigan, Oklahoma, Tennessee, and Virginia worked closely with Pew and CREC to provide in-depth access to their economic development oversight and management procedures. While the initiative focused primarily on these six states, Pew and CREC also convened stakeholders from 22 additional states. The initiative built on Pew’s ongoing work to help states establish processes to regularly and rigorously evaluate the results of their tax incentives.
From March 2014 to December 2015, Pew conducted numerous interviews and site visits with participating states’ elected lawmakers and economic development, tax, and budget officials in the legislative and executive branches. The six states reviewed their incentive policies and practices to identify possible strengths and weaknesses, and received technical assistance from Pew to design and implement policy improvements.

The business incentives initiative provided strategies on how states can:
• Share relevant data.
• Ensure data are high-quality.
• Analyze data effectively.

Could the Saver’s Credit Enhance State Coverage Initiatives?

Source: Alicia H. Munnell and Anqi Chen, Center for Retirement Research at Boston College, IB#16-7, April 2016

The brief’s key findings are:
• States are introducing initiatives to provide retirement plan coverage to private sector workers who lack it.
• These initiatives could be supplemented by the Saver’s Credit, a federal tax incentive for low- and moderate-income savers.
• The existing Saver’s Credit is limited and not refundable, but proposed legislation would extend the Credit and make it refundable.
• Our analysis shows that the proposed Credit could considerably enhance state efforts by encouraging participation and savings.