After years of grim revenue news, state tax collections are surging. As they do, governors and state legislators are making decisions about how to manage the unfamiliar windfall. Some governors, including California’s Jerry Brown, are husbanding resources, trying to hold down spending and paying down one-time debts. Others, such as New York’s Andrew Cuomo, are falling victim to the siren song of targeted tax cuts.
Cuomo is not cutting tax rates across the board, like some Republican governors. Instead, he’s doubling down on a strategy of growing the state’s economy through targeted tax breaks even though there is little evidence that previous economic development subsidies paid off.
START-UP New York (SUNY Tax-free Areas to Revitalize and Transform UPstate New York), under consideration by the legislature today, would give businesses and their new employees ten years of tax breaks if firms open in specific areas designated on or near public college campuses. Employers would be exempt from corporate and property taxes (for the new business) and receive refunds for sales taxes. New workers at these firms would be exempt from personal income taxes on wages earned at the firm for five years and exempt from income taxes on income below $200,000 for another five.
Cuomo insists the subsidies would attract businesses from other states or lead to new businesses sprouting up. But researchers have found that targeted tax cuts rarely do that. While taxes matter, businesses make location decisions for many reasons, including infrastructure and labor force qualifications. Cuomo argues that while New York colleges and universities receive the second highest amount of research dollars (after California) they get much less private investment. And there is much less interest on the part of venture capitalists (as compared to California and Massachusetts). Of course, some might argue that the investment in these other states is more about the type of research underway at the schools rather than incentives from state government. ( Continue… )
Charitable organizations form a vital part of America’s safety net. Ideally, foundations would be able to make greater payouts in hard economic times when needs are greatest. Unfortunately, the design of today’s excise tax on foundations undermines and in fact discourages such efficiency.
Under current law, private foundations are required to pay an excise tax on their net investment income. The tax rate is 2 percent, but it can be reduced to 1 percent if the foundation satisfies a minimum distribution requirement. The dual-rate structure and distribution requirements obviously introduce complexity. The stated purpose of the tax in legislative history—to finance IRS activities in monitoring the charitable sector—has never been fulfilled.
In the recent recession, the impact of the excise tax was especially pernicious, as it penalized those that maintained their level of grantmaking.
RECOMMENDED: 10 biggest US foundations and what they do
How? As Martin Sullivan and I first described in 1995, the excise tax penalizes spikes in giving; under the current formula, a temporarily higher payout results in a higher excise tax when payouts fall back to previous levels. A foundation that reduced its grantmaking during the last recession would not be subject to an increased excise tax because the amount the foundation paid out would be measured as a share of current net worth. ( Continue… )
The federal government has been borrowing rapidly to finance recent budget deficits. But that’s not the only reason it’s gone deeper into debt. Uncle Sam also borrows to issue loans, build up cash, and make other financial investments.
Those financial activities have accounted for an important part of government borrowing in recent years. Since October 2007, the public debt has increased by $6.9 trillion. Most went to finance deficits, but about $650 billion went to expand the government’s investment portfolio, including a big jump in student loans. Before the financial crisis, Uncle Sam held less than $500 billion in cash, bonds, mortgages, and other financial instruments. Today, that portfolio has more than doubled, exceeding $1.1 trillion.
Financial crisis firefighting drove much of the increase from 2008 through mid-2010. Treasury raised extra cash to deposit at the Federal Reserve; this Supplemental Financing Program (SFP) helped the Fed finance its lending efforts in the days before quantitative easing. Treasury placed Fannie Mae and Freddie Mac, the two mortgage giants, into conservatorship, receiving preferred stock in return; shortly thereafter, Treasury began to purchase debt and mortgage-backed securities (MBS) issued by Fannie, Freddie, and other government-sponsored enterprises (GSEs). And through the Troubled Asset Relief Program (TARP), Treasury made investments in banks, insurance companies, and automakers and helped support various lending programs.
Together with a few smaller programs, these financial crisis responses peaked at more than $600 billion. Since then, they have declined as Treasury sold off all its agency debt and MBS and most of its TARP investments and as quantitative easing, in which the Fed simply creates new bank reserves, eliminated the need for cash raised through the SFP. ( Continue… )
If Congress is going to reform the tax code, it will take an enormous amount of hard work and a lot of luck. The stars, as they say, will have to align. Unfortunately, those galactic bodies seem to be getting more and more disarranged.
Reform just can’t catch a break. The deficit is shrinking, taking away one possible driver of a rewrite. The Congressional Budget Office now projects the nation won’t bump up against its debt limit until October or even November, taking even more steam out of any Grand Bargain—or even a not-so-grand deal. And pols seem unable to disentangle themselves from distracting sideshows such as the IRS tea party flap.
Some have argued that these events make reform easier, not harder. The IRS scandal, they say, will encourage bipartisan compromise. Without immediate deficit pressures, Democrats would be more willing to accept a deal that raises the same amount of money as the current code and not insist on a reform that raises revenue.
I don’t think so. ( Continue… )
Any day now, the Supreme Court will rule on whether same-sex married couples have the right to file joint federal tax returns. But Yale tax law professor Anne Alstott has me wondering whether the entire debate over the tax consequences of the Defense of Marriage Act is missing the point. In an upcoming paper for Yale’s Tax Law Review, she argues that it makes little sense to tie the Revenue Code so closely to formal marriage when so many people are in very different family relationships than they were even 40 years ago.
As Alstott notes, nearly half of American adults are now unmarried, 40 percent of children are born to unmarried parents, and labor force participation among married women is now very close to that of married men (thanks to the always-helpful Paul Caron at TaxProf blog for tipping me off to her paper). Ozzie and Harriet have been in reruns for half-a-century. So why even bother with the concept of joint tax filing?
Alstott borrows from Johns Hopkins University sociologist Andrew Cherlin, who calls the trend away from formal marriage “new individualism.” This, she says, “has rendered obsolete legal doctrines and policy analyses that treat formal marriage as a proxy for family life….Joint filing is no longer well-tailored to serve important social objectives.”
RECOMMENDED: 6 ways to make tax reform happen
And, she adds, this argument applies whether one is a liberal who embraces the new individualism or a conservative who is offended by it.
Reframing the tax treatment of families in this way will help solve some problems and create some new ones. And Alstott isn’t so much arguing for a specific alternative to joint filing as urging tax wonks to consider the law in the context of social change. ( Continue… )
Kansas Governor Sam Brownback (R) and the GOP-controlled legislature are struggling to accomplish two goals: They want to repeal the state income tax but need to balance a budget that, despite substantial spending cuts, faces a $700 million shortfall.
It is no easy trick. Their solution: new net short-term revenue increases accompanied by a promise to phase out the state’s income tax. This year’s final budget agreement includes both spending cuts and about $300 billion in new sales and income tax revenue that promise to balance the fiscal year 2014 books. But over the next five years, those new revenues will be overwhelmed by a proposed 20 percent cut in individual income tax rates, setting the stage for annual budget crises.
It isn’t easy to keep track of whether Kansas is cutting taxes or raising them. The agreement backtracks on income and sales tax cuts scheduled to happen this year. Much like the congressional tax debate of 2012, it is all about what baseline you prefer.
Let’s start with the new revenue, which the state projects will boost its coffers by about $365 million in 2014. About $195 million will come from setting the state sales tax rate at 6.15 percent, lower than the current temporary rate of 6.3 percent but above the 5.7 percent scheduled to take effect in July.
The remaining $170 million will come from changes to individual deductions. Itemized deductions, other than charitable contributions, will be trimmed by 30 percent in tax year 2013 and the haircut will gradually increase to 50 percent by 2017. At the same time, lawmakers scaled back a scheduled rise in the standard deduction, further increasing the tax base. ( Continue… )
Tax preferences for housing are under fire, with mounting evidence that these preferences are inefficient, unequal, and too expensive to warrant a place in the tax code. Critics of proposed changes in the tax treatment of home ownership argue that these reforms would slash home prices at the very time they are showing signs of recovery. But in a new paper, I find that changes to the deductions for mortgage interest and property tax payments might not reduce prices much at all, and some reforms might even boost prices.
RECOMMENDED: 10 best cities to buy short sale homes
I estimate the impact on metropolitan housing prices of the higher tax rates imposed this year on high income households as well as three proposed tax changes: President Obama’s 28 percent limit on selected tax expenditures; eliminating deductions for mortgage interest and property taxes; and limiting the tax savings from the mortgage interest deduction to 20 percent while providing a flat credit for closing costs.
The president’s 28 percent limit on itemized deductions would barely move housing prices at all, causing them to fall just 0.3 percent. The higher top tax rates put in place in 2013, which drive up the value of deductions for housing for high-income taxpayers, are estimated to increase home prices by an even smaller margin.
By contrast, completely eliminating the mortgage interest and property tax deduction—a drastic change that probably would only happen if accompanied by a new tax preference for housing—would cause housing prices to fall by an average of 11.8 percent in the 23 cities studied. Estimated price declines would range from 10.3 percent in Seattle to 13.8 percent in Milwaukee. ( Continue… )
The Congressional Budget Office report on the distribution of tax expenditures is getting lots of buzz, nearly all of it positive. This is a gratifying and somewhat surprising outcome. The paper confirms many of the findings of my Tax Policy Center colleagues who have done similar analyses in recent years.
The basic story is pretty simple: Just about everyone benefits from these tax preferences (which, for the most part, look like government spending). The highest income households get the biggest share of these tax breaks. But when looked at through a somewhat different lens—how much these subsidies increase after-tax income–the lowest income households are the big winners. And middle-income households do pretty well too.
But to me the most interesting results are in the details. Who benefits from which preferences? Or, to put it another way, who would lose if Congress trimmed or even eliminated some of these provisions as part of a broad-based tax reform.
And make no mistake, CBO was looking at the big commonly used tax preferences that politicians often dismiss as loopholes or special interest tax breaks. When pols talk about cutting rates by getting rid of loopholes, this is what they are talking about. ( Continue… )
Two interesting new papers from the Congressional Research Service highlight a major challenge faced by any tax reform that reduces itemized deductions to help pay for lower tax rates—lots of middle-income people would lose at least some benefits from scaling back those deductions.
It isn’t a new lesson, but it is one that bears repeating. For instance, a March 21 CRS paper shows that in 2010 about 40 percent of all deductions were claimed by households making between $20,000 and $100,000, with 28 percent going to those making between $50,000 and $100,000. Nearly half of tax filers making between $50,000 and $100,000 claimed deductions for mortgage interest and charitable giving, and more than half deducted state and local taxes.
Those three deductions alone represent more than two-thirds of all itemized deductions. Thus, it is hard to imagine any base-broadening, rate-cutting reform plan that doesn’t include some cuts in those preferences. And taking that step threatens to make a lot of middle-income taxpayers very unhappy. As Bruce Bartlett (who tipped me off to the CRS papers in his New York Times blog this morning) notes, this may explain why so few tax reform plans ever identify a single tax preference they would target.
Of course, higher income people disproportionately benefit from many deductions. For instance, the Tax Policy Center estimates that households making $500,000 or more represent less than 1 percent of all taxpayers. Yet, CRS estimates they claim about 15 percent of all deductions. ( Continue… )
Because Apple is so profitable, the dollars involved will certainly attract attention (this is a Senate committee after all, so that is the point). The report alleges Apple reduced its U.S. corporate income tax by an average of $10 billion-a-year for the past four years. Since the corporate levy generated only about $240 billion in 2012, $10 billion foregone from one company is a very big number indeed.
But while it added a few interesting twists, Apple cut its taxes with the same tools multinationals have been using for years to minimize their worldwide tax liability. And if there is a scandal, I suppose it is the very ordinariness of these transactions. Apple’s tax avoidance shop, it seems, is a lot less innovative than its phone designers.
RECOMMENDED: Fortune 500: Top 10 companies in 2013
The tactics are complicated but the strategy is simple: A company designs its business to locate as much income as possible in those countries where taxes are low. At the same time, it allocates as many costs as possible to those high-tax jurisdictions (like the U.S.) where deductions are especially valuable. A deduction is worth 35 cents on the dollar in the U.S. but only one-third as much in Ireland, where the corporate rate is only 12.5 percent. ( Continue… )