Category Archives: Taxation

Inequality in America: Challenges for Tax and Spending Policies

Source: Eric M. Zolt, UCLA School of Law, Law-Econ Research Paper No. 14-02, January 27, 2014

From the abstract:
The goal of this article is to provide a guide to addressing tax and spending policies in an era of increasing inequality of income and wealth. This is challenging because it requires a good understanding of inequality and economic mobility, the changing role of taxes and government social spending, the constraints on policy options, and the possible misconceptions that may influence tax and spending policies.

Inequality in the United States has increased dramatically over the last 30 years. Perhaps even more troubling than the rise in inequality may be the persistence of high levels of poverty and the decline in economic mobility. The same thirty-year period during which inequality has increased, poverty levels have not declined, and economic mobility has decreased has seen major changes in fiscal policy. Tax law changes have altered the relative tax rates, the relative revenue contributions from different tax instruments, and the tax burdens of different income groups. Government spending on social programs has increased substantially, but perhaps not in ways one might expect. The United States likely has a smaller percentage of government social spending going to the needy than other developed countries. In recent decades, an increasingly larger percentage of social spending has been directed to the elderly (without regard to need) and to the upper-half of the income distribution through tax subsidies for healthcare, education, housing, and retirement savings.

The essential first step in shaping fiscal policy is to identify clearly the relative priorities among reducing inequality, reducing poverty, and increasing economic mobility. Tax and spending policies will differ depending on the weight given each of these objectives, and especially in a world of relatively limited resources, the government needs to make difficult choices. Perhaps the most significant implication of this reality is that it may be time to stop thinking about increasing the income tax burden on the wealthy as the only, or perhaps even the primary, way to increase funding for social spending programs. The United States may need less progressive (or even regressive) taxes to fund more progressive spending programs.

Property Taxes and Their Limits: Evidence from New York City

Source: Andrew T. Hayashi, Virginia Law and Economics Research Paper No. 2014-04, February 2014

From the abstract:
I report evidence from New York City that property assessment caps on small residential properties represent a significant tax benefit that accrues to the most valuable properties and the wealthiest neighborhoods. Moreover, rather than benefiting the long-time homeowners on fixed incomes who are their putative targets, the largest benefits go to the properties that are most likely to have been recently sold and to be located in neighborhoods where cash incomes have increased the most.

An Economic Analysis of the Adoption of Right-to-Work On Missouri Families

Source: Michael P. Kelsay, Department of Economics, University of Missouri-Kansas City, February 10, 2014

The attempt to pass right-to-work legislation in the State of Missouri is based ostensibly upon the claim that such legislation will increase income, job formation, and business formation in the state. My report shows that the movement to a right-to-work state from a free-to-bargain state for Missouri would result in significant economic losses to Missouri families and taxing jurisdictions. My report further shows that the experience to date is that free-to-bargain states perform uniformly better than right-to-work states across a wide range of socio-economic variables.

• The movement to a right-to-work state from a free-to-bargain state in Missouri would result in a combined direct and induced economic loss to households in Missouri between $1,945 and $2,547 annually per household.
• The movement from a free-to-bargain state to a right-to-work state would cost Missouri workers and their families between $4.58 billion and $6.0 billion annually in lost income as a result of lower wages.
• The movement from a free-to-bargain state to a right-to-work state would cost the state, counties, and local jurisdictions between $82.14 million and $107.56 million annually in lost sales tax collections as a result of lower wages.
• The movement from a free-to-bargain state to a right-to-work state would cost Missouri between $137.28 million and $179.89 million annually in lost state income taxes as a result of lower wages.
• The total economic loss due to movement from a free-to-bargain state to a right-to-work state would cost Missouri workers, families, and taxing authorities between $4.8 billion and $6.28 billion annually in lost wages, state, county, and local sales taxes, and income taxes as a result of lower wages…

What Cities Really Need to Attract Entrepreneurs, According to Entrepreneurs

Source: Richard Florida, Atlantic Cities, February 11, 2014

Creating high-growth, high-impact entrepreneurial enterprises has become a common goal of cities. Metros and states have cut taxes, implemented entrepreneur-friendly business policies, launched their own venture capital efforts, and underwritten incubators and accelerators – all in the hope of creating the next Apples, Facebooks, Googles, and Twitters.

But what really attracts innovative entrepreneurs who create these economy-boosting companies?

The answers: talented workers, and the quality of life that the educated and ambitious have come to expect – not the low-tax, favorable-regulation approach that many state and local governments tout.

These are the findings in a new report from Endeavor Insight, the research department of the non-profit Endeavor, which focuses on fostering and mentoring “high-impact” entrepreneurs. Based on surveys and interviews with 150 founders of some of the country’s fastest-growing companies, the report answers the basic question, “what do the best entrepreneurs want in a city?” It offers basic evidence that cities should focus on factors and conditions that attract the talented, educated workers that fast-growing entrepreneurial enterprises need….

The study found that two other key factors in the location choices of entrepreneurs are major transportation networks (like airports and highways that can connect them to other cities) and proximity to customers and suppliers. …

Perhaps even more interesting from the perspective of urban policy are the location factors that did not make the cut – those that high-growth entrepreneurs found to be of little consequence in their location decisions. At the very bottom of the list were taxes and business-friendly policies, which are, unfortunately, exactly the sorts of things so many states and cities continue to promote as silver bullets. Just 5 percent of the respondents mentioned low taxes as being important, and a measly 2 percent named other business-friendly policies as a factor in their location decisions. …

See also:
What Do the Best Entrepreneurs Want in a City? Lessons from the Founders of America’s Fastest-Growing Companies
Source: Endeavor Insight, February 2014

Putting State Pension Costs in Context: How They Compare To The Cost Of Corporate Subsidies, Tax Breaks And Loopholes

Source: Good Jobs First, January 2014

From the press release:
State lawmakers who are considering drastic cuts to the retirement benefits of state workers are simultaneously giving away billions of dollars in corporate tax subsidies and loopholes, often in amounts far exceeding the cost of pensions, according to a new report.

Putting State Pension Costs in Context by Good Jobs First examines 10 states where elected officials are threatening to undermine retirement security by cutting the pension benefits of their teachers, firefighters, police officers, and hundreds of thousands of other public employees. The states included in the report are: Arizona; California; Colorado; Florida; Illinois; Louisiana; Michigan; Missouri; Oklahoma; and Pennsylvania.

The findings show that in each state, the revenue lost to corporations through loopholes and tax breaks outpaces the current cost of pension benefits to state employees….

National summary

Pennsylvania Pension Fact Sheet
Source: Stephen Herzenberg, Keystone Research Center, February 3, 2014

A New Wave of Tax Cut Proposals in the States

Source: Citizens for Tax Justice, January 28, 2014

Note to Readers: This is the third of a five-part series on tax policy prospects in the states in 2014. Over the coming weeks, the Institute on Taxation and Economic Policy (ITEP) will highlight state tax proposals that are gaining momentum in states across the country. This post focuses on proposals to cut personal income, business, and property taxes.

Tax cut proposals are by no means a new trend. But, the sheer scope, scale and variety of tax cutting plans coming out of state houses in recent years and expected in 2014 are unprecedented. Whether it’s across the board personal income tax rate cuts or carving out new tax breaks for businesses, the vast majority of the dozen plus tax cut proposals under consideration this year would heavily tilt towards profitable corporations and wealthy households with very little or no benefit to low-income working families. Equally troubling is that most of the proposals would use some or all of their new found revenue surpluses (thanks to a mostly recovering economy) as an excuse to enact permanent tax cuts rather than first undoing the harmful program cuts that were enacted in response to the Great Recession. Here is a brief overview of some of the tax cut proposals we are following in 2014…

Closing the Billion Dollar Loophole: How States Are Reclaiming Revenue Lost to Offshore Tax Havens

Source: Phineas Baxandall, Dan Smith, Tom Van Heeke and Benjamin Davis, U.S. PIRG Education Fund, Winter 2014

From the summary:
Every year, corporations use complicated gimmicks to shift U.S. earnings to subsidiaries in offshore tax havens – countries with minimal or no taxes – in order to reduce their state and federal income tax liability by billions of dollars. Tax haven abusers benefit from America’s markets, public infrastructure, educated workforce, security and rule of law – all supported in one way or another by tax dollars. But they use tax havens to escape supporting these public structures and benefits. Ultimately, ordinary taxpayers end up picking up the tab, either in the form of higher taxes or cuts to public spending priorities.

While much attention is paid to the impact of tax haven abuse on federal revenue, offshore tax havens also reduce state revenue because state tax codes are often tethered to federally defined taxable income. With Congress often gridlocked, states should take action to reduce the impact of offshore tax havens on state budgets.

Montana and Oregon have passed laws to curb offshore tax haven abuse and collect tax revenue that otherwise would be lost. These two states simply treat a proportionate share of the income that corporations book to known tax havens as domestic income for state tax purposes, since it can be reasonably extrapolated that the income arose from business activity in those states.

Other states can also collect some of the revenue lost to offshore tax havens by adopting policies similar to those in Montana and Oregon. Specifically, states must:
– Close the “water’s edge” loophole by mandating that companies include their U.S. profits held in offshore tax havens when calculating taxes. In many states, companies calculate their tax liability based on their income held in subsidiaries incorporated within the water’s edge (that is, within the United States). By declaring a statutory list of tax havens, states can tax corporate profits held in tax havens that lie past the water’s edge.
– Before closing the water’s edge loophole, states must adopt “combined reporting,” which requires corporations to list the profits of all their subsidiaries on their tax forms. Combined reporting provides states with a ready formula that can be applied to tax haven income to determine which portion should be taxable by the state.

To date, 23 states and the District of Columbia have adopted combined reporting requirements, but of these jurisdictions only Montana and Oregon have also closed the water’s edge loophole by creating a statutory list of tax haven countries to be accounted for in corporate combined reports. Montana is now collecting millions of dollars in additional tax revenue and Oregon is poised to do the same with its new law coming into force in 2014.
See also:
Press release

How Much States Lose to Corporate Tax Havens and How They Can Recoup It
Source: Mike Maciag, Governing, February 5, 2014

A recent report finds that states lost $20.7 billion to tax havens in 2011 and tallies how much they can save by closing the offshore tax loophole.

Show Us the Subsidized Jobs: An Evaluation of State Government Online Disclosure of Economic Development Subsidy Awards and Outcomes

Source: Philip Mattera, Thomas Cafcas, Leigh McIlvaine, Kasia Tarczynska, Elizabeth Bird and Greg LeRoy, Good Jobs First, January 2014

From the press release:
All but four states now post at least partial information online showing which companies are receiving economic development subsidies. But the quality and depth of that disclosure varies widely, both among and within states. Three-fourths of major state development programs still fail to disclose actual jobs created or workers trained, and only one in eleven discloses wages actually paid. The best disclosure practices are found in Illinois and Michigan, but even their scores would be near-failing as report card grades. …

… Show Us the Subsidized Jobs rates the reporting practices of 246 key state economic development subsidy programs on how well they disclose online information such as company-specific award amounts, job-creation and wage-rate figures, the geographic location of subsidized facilities, and details on the recipient company and the project. Programs are also evaluated in terms of how easy it is to find and use the online data. Each program is rated on a scale of 0 to 100, and the program scores for each state are then averaged to derive a state score.

The report’s key findings:
– Forty-six states and the District of Columbia provide online recipient disclosure for at least one key subsidy program. This is up from 37 in late 2010 and 23 in 2007.
– The states with the best average program scores are: Illinois (65), Michigan (58), North Carolina (48), Wisconsin (46), Vermont (43), Maryland (42) and Texas (40). The most-improved state is Oregon, which had no disclosure in 2010 and is now in the top ten with an average of 38.
– The four states still lacking online disclosure are: Arkansas, Delaware, Idaho and Kansas.
– Of the 246 programs examined, 135 of them, or 55 percent, have online recipient disclosure (up from 42 percent in 2010). The average score for the programs with disclosure is 39. Only seven programs score 75 or better.
– Of the 135 programs with disclosure, 101 require some degree of job reporting, but only 59 report actual jobs created or workers trained. Only 47 provide any form of wage or payroll data, and only 21 provide wage data on jobs actually created or workers trained.
– Only six states practice consistency by providing online recipient reporting for all of the key programs we examined: Maryland, Michigan, North Carolina, Vermont, Washington and Wisconsin.
– States with disclosure often have major discrepancies in the quality of reporting from one program to another. In Minnesota and Virginia, for example, there is a spread of more than 50 points between their highest and lowest program scores.
– Consistent with our previous state accountability report cards, the existence and quality of subsidy transparency follow no partisan pattern. There are “red” and “blue” states among both disclosure leaders and laggards….
See also:
Executive summary
Table of links to state disclosure websites

The Top 10 Legislative Issues to Watch in 2014 / Plus six trending issues that could be big this year

Source: Ryan Holeywell, Liz Farmer, Mike Maciag, J.B. Wogan, Chris Kardish, Governing, Vol. 27 no. 4, January 2014

For states throughout the country this year, there’s a common theme: a climate of uncertainty coupled with a sense of genuine opportunity. Amid worries about the federal government’s failure to boost funding for infrastructure, many states are taking steps to produce that funding on their own. Congress seems to have stalled—again—in its efforts to reform the immigration system, but states are enacting bills designed to grant new rights to some of their undocumented residents. And after a period in which higher education programs faced dramatic cuts, states are putting money back into those programs—some of them more efficiently than in the past. Here are 10 big issues states will look to tackle in 2014, and six smaller ones they’ll also address. …

Medicaid … Income Tax Revision … Minimum Wage Laws … Public Pensions … Immigration … Safety Net … Higher Education … Employee Compensation … Transportation Funding … Drones …

Trending: 6 More Issues That Could Be Big

Abortion … Fracking … GMOs … Privacy … Social Impact Bonds … Autonomous Vehicles …

Beware of the Tax Shift (Again)

Source: Citizens for Tax Justice, January 22, 2014

Note to Readers: This is the second of a five-part series on tax policy prospects in the states in 2014. Over the coming weeks, the Institute on Taxation and Economic Policy (ITEP) will highlight state tax proposals that are gaining momentum in states across the country. This post focuses on tax shift proposals.

The most radical and potentially devastating tax reform proposals under consideration in a number of states are those that would reduce or eliminate state income taxes and replace some or all of the lost revenue by expanding or increasing consumption taxes. These “tax swap” proposals appeared to gain momentum in a number of states last year, but ultimately proposals by the governors of Louisiana and Nebraska fell flat in 2013. Despite this, legislators in several states have reiterated their commitment to this flawed idea and may attempt to inflict it on taxpayers in 2014. Here’s a round-up of where we see tax shifts gaining momentum: …