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.
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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.
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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… )
A final thought, I hope, on the IRS/tea party scandal: Why do we want the IRS regulating political speech? It seems crazy on its face, yet that is exactly the system we have created.
True, the agency bungled its scrutiny of conservative political groups seeking tax-exemptions. But should it even be deciding which political organizations should get favored tax treatment and which should not? Why is a tax collection agency regulating political speech at all?
That this is happening at all is an accident of history. The section of the law political organizations are using to win tax-exempt status was never intended for this purpose. Section 501(c)(4) has been around for a hundred years, but its purpose was to grant tax-exempt status to social welfare organizations such as community groups and citizens associations.
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In the wake of the Supreme Court’s 2010 Citizens United decision, (c)(4) status became a popular mechanism for bankrolling political campaigns. Citizen’s United made it possible for unions and businesses to spend unlimited amounts of money on politics, but the vehicle they used for funneling cash to campaigns, Sec. 527 organizations, required public disclosure of their gifts. ( Continue… )
The IRS’s botched processing of requests for tax-exempt status by political groups isn’t the new Watergate. It is, in fact, as scandals go, it is barely the Days Inn–based on what we’ve learned from a much-anticipated report by the Treasury Department’s Inspector General for Tax Administration (TIGTA).
That any report by TIGTA is much anticipated says something about Washington these days. This one, a detailed look at how the IRS seemingly targeted tea party and other conservative groups for special scrutiny, found bureaucratic bungling and a troubling bunker mentality up and down the agency.
The cost to groups seeking tax-exempt status was not insignificant, and is troubling. TIGTA confirms that some conservative organizations were singled out for special scrutiny and faced burdensome requests for information and long delays before approving requests (though it should be noted that delays are common at the IRS). At the very least, this raises questions about fairness and impartiality from an agency that must be above reproach.
Yet, despite dark conspiracy theories, TIGTA found no evidence of political meddling. Despite allegations that the agency singled out tea party groups for special scrutiny, of the nearly 300 cases the IRS labeled potentially political, only one-third were identified as tea party or other conservative organizations. And not one of those 300 cases, including the conservative groups, had its application for tax-exempt status denied, though some are still pending. ( Continue… )
To help clarify whether IRS incorrectly, unfairly, or illegally targeted the Tea Party and other conservative groups, here are the answers to a few basic questions.
Is it improper for IRS to target specific groups?
Almost every contact the IRS makes with select taxpayers derives from targeting. Because its resources are constrained, the IRS conducts only limited audits, examinations, or requests for information. For instance, if you give more than the average amount to charity, you’re more likely to be audited since there is more money at stake. If you run a small business, you have a greater ability to cheat than someone whose income is reported to IRS on a W-2 form. The only way the IRS can enforce compliance at a reasonable administrative cost is by targeting.
This is especially true for the tax-exempt arena. Because audits yield little or no revenue, the IRS tax-exempt division examines very few organizations. Therefore, the IRS must use some criteria to “target” which tax-exempt organizations to approach. ( Continue… )
Let’s start with the obvious. Those IRS employees who singled out conservative groups for scrutiny over their tax-exempt status were wrong, wrong, wrong. Any whiff of politics at the agency is unacceptable, and this is far more than a whiff. In time, we shall see how far up the agency food chain the scandal goes.
But this unsavory episode should also shine a light on the law that gives tax-exempt status to political groups of all ideological stripes, often described by the code section that grants their exemption—501(c)(4)s. That is especially true since one outcome of this scandal will be to give these partisan groups even more freedom to operate outside of at least the spirit of the law.
The only way to stop the proliferation what are often-secret campaign money laundries is for Congress to change the law that grants these groups this form of tax-exempt status.
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As I wrote in a blog post back in 2010, the tax law is relatively clear about what a (c)(4) can and cannot do. The IRS defines these groups as “civic leagues, social welfare organizations, and local associations of employees.” Their net earnings are supposed to be used for charitable, educational, or recreational purposes. They may lobby and participate in political activities but their primary purpose must not be campaigning. ( Continue… )
Upon these three facts everyone agrees: 1) After a long period of explosive increases, health cost growth has slowed markedly in recent years. 2) A share of the slowdown is partially, but not entirely, due to the recent economic slump. 3) If future medical costs continue to grow at their current low rate the federal budget will be in much better shape than most analysts thought.
However, the best health economists in the country are deeply divided about #2. And the implications of this disagreement are profound. If the recession was the major driver of lower health cost growth, there is a good chance that medical spending will bump up again as the economy improves, once again putting great pressure on the deficit. But if the slump was only a small part of a broader secular trend, the U.S. may have found the key to solving its long-term budget problems.
Keep in mind that all health care costs are growing more slowly, not just government-funded programs such as Medicare and Medicaid. But since TaxVox focuses its attention on fiscal issues, I’ll concentrate on the budget effects.
In a new article in the journal Health Affairs, Harvard University economists David Cutler and Nikhil Sahni estimate that medical costs grew by only 1.2 percent from 2009-2012, far below the 5.9 percent rate of 2000-2009. If the recent spending trend could somehow be sustained for the next decade, they estimate the deficit would be $770 billion less than the Congressional Budget office forecasts. ( Continue… )