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Cadillac Tax Confirms: Employers Respond to Tax Changes

Tax Foundation - Fri, 2014-03-14 07:30

A report from the consulting firm Mercer, which surveyed 700 employers, found that 62% of those employers are concerned about being hit with the excise tax on high-cost health plans, also known as the “Cadillac Tax.” According to the report, many companies are already making changes in anticipation of the tax, converting to less generous plans.

In other words, the Cadillac Tax – which institutes a 40% excise tax on plans above a certain threshold - continues to work as designed. As the Obama administration correctly argued, the Cadillac Tax will slow the growth of high-cost health plans. To some extent, it repairs a distortion where health benefits were favored over other sorts of compensation – though its design is far from ideal.

Taxing something gets you less of it. This basic principle remains true for almost any good imaginable. Elasticity is a real thing. When you hear someone argue that his proposed tax changes will not affect people’s behavior, you should immediately be skeptical. Taxes on labor reduce the supply of labor. Taxes on investment reduce investment. Taxes on saving reduce saving.

Instead of consistently acknowledging this truth, politicians only use its logic when they are trying to influence people’s behavior. They only acknowledge people’s ability to respond when that is the intent behind the tax. But people respond to taxes, whether you intend it or not. Even if you don’t intend to reduce labor or investment, taxing labor or investment will have those drawbacks.

Categories: Tax news

Funding shortage could delay U.S. road, rail projects this summer

Yahoo Tax - Wed, 2014-03-12 17:44
By Elvina Nawaguna WASHINGTON (Reuters) - U.S. transportation officials warned lawmakers on Wednesday that dwindling funds for highway and rail projects may cause delays in work this summer during the height of the construction season unless they quickly approve billions of dollars in new funding. The Highway Trust Fund, which receives money from a federal tax on every gallon of gasoline and diesel fuel sold in the United States, is expected to become insolvent by 2015. Funding for some programs could fall to dangerously low levels by this summer, forcing the Department of Transportation to delay payments to states, Peter Rogoff, the department's acting under secretary for policy testified before Congress. The United States levies 18.4 cents per gallon on gasoline and 24.4 cents per gallon on diesel to pay for transportation projects.
Categories: Tax news

Can't pay your taxes? Here's what to do - MarketWatch

Google IRS Federal Income Tax - Wed, 2014-03-12 14:34

MarketWatch

Can't pay your taxes? Here's what to do
MarketWatch
The only requirement is that you must estimate with reasonable accuracy your total 2013 federal income tax liability and any amount still owed (which could be zero) on Form 4868. I owe but don't have the dough. This is no excuse for failing to file or ...
How to File Taxes 2014: E-file 1040 and W-2 Forms with IRS vs. Using an ...Latin Post
Tips for Gathering Business Tax DataThe Ledger

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Categories: Tax news

Nebraska Legislators Approve Inflation Indexing But Drop Major Tax Overhaul

Tax Foundation - Wed, 2014-03-12 14:30

Nebraska legislators are on track to approve a bill to inflation-adjust individual income tax brackets each year, a positive change that ends "bracket creep" and will save taxpayers $10 million per year. However, efforts to adopt a more comprehensive tax overhaul appear to have stalled until the 2015 legislative session.

From the Omaha World-Herald:

The sponsor of the bill, State Sen. Burke Harr of Omaha, and a representative of one of the business groups pushing for income tax cuts said the fight was over until next year.[...]

Kearney Sen. Galen Hadley, chairman of the Legislature's Revenue Committee who headed up a tax “modernization” study last year, said lawmakers signaled that they had hit their limit for tax changes this year.[...]

As originally proposed, LB 1097 would have cut state income tax rates for individuals and corporations over three years. But with its cost — an estimated $645 million a year — it was panned during a public hearing as a budget buster that would harm K-12 and higher education. 

Even Harr, the sponsor, said the original bill was unaffordable. Tuesday, the senator said he had attempted to find more affordable alternatives but was unsuccessful.

Hadley said the Revenue Committee will probably study income taxes again this summer. Harr said that income and property taxes are too high and that Nebraska needs to reduce them to remain competitive.

After meeting with stakeholders across Nebraska, the Platte Institute and the Tax Foundation prepared a review of the state's tax system and outlined many potential reform options. Key among these were getting the individual rate below 6 percent, getting the corporate rate below 6 percent, and inflation-adjusting the brackets. Looks like one out of three for 2014, with a likelihood that the other items will be key on the 2015 legislative agenda.
Categories: Tax news

Italy presents sweeping tax cuts, plans to raise deficit goal

Yahoo Tax - Wed, 2014-03-12 14:01

By Gavin Jones ROME (Reuters) - Italian Prime Minister Matteo Renzi on Wednesday presented a sweeping package of tax cuts, saying they could help economic recovery in the euro zone's third largest economy without breaking EU budget deficit limits. Renzi, in his first full news conference since taking office last month, said income tax would be reduced by a total of 10 billion euros ($14 billion) annually for 10 million low and middle income workers from May 1. The cuts will be financed by reductions in central government spending, extra borrowing and by resources freed up thanks to the recent fall in Italy's borrowing costs, he said. "This is not what Italy needs," he said.


Categories: Tax news

Minnesota Governor Proposes to Eliminate Business-to-Business Taxes, Gift Tax, Marriage Penalty

Tax Foundation - Wed, 2014-03-12 14:00

Last year, Minnesota passed a large package of tax increases on high-income individuals, tobacco products, and business inputs. These tax hikes amounted to a projected $2.1 billion in new expected revenues. Some of those new taxes, especially taxes on business inputs like warehousing and equipment, proved uniquely burdensome for the business community, and led to rapid calls for repeal.

Governor Mark Dayton (DFL) unveiled a supplemental budget proposal yesterday including the repeal of those business-to-business taxes, and other tax reforms. The Governor’s tax plan would result in $616 million in tax cuts, and much of that would come through truly valuable tax reforms. It mostly focuses on fixing components of last year’s tax reform that were added in at the last minute, such as taxes on business inputs, and a gift tax. The plan identifies a projected surplus of $1.2 billion, and also increases spending by $162 million (and puts $455 million in the budget reserve).

These windfalls are thanks to Minnesota’s relatively strong economy, due in no small part to its role in supplying sand for hydraulic fracking in North Dakota. According to Bureau of Labor Statistics figures, since Minnesota’s low-point for employment in September 2009, mining and logging employment has grown 73 percent (the next highest growth is in education, with 19 percent growth, and then professional and business services at13 percent). Mining’s share of Minnesota’s employment has risen 61 percent. With so much money coming into the state, Governor Dayton would be hard-pressed not to give some kind of tax relief after last year’s tax hike. Especially given the Chamber of Commerce’ consistent campaign to get relief from damaging B2B taxes, some kind of tax relief was inevitable. Indeed, with a $1.2 billion surplus, just $616 million in tax relief is a bit underwhelming.

However, the Governor’s plan does have some important structural changes. It includes a provision to eliminate the “marriage penalty;” eliminate sales taxes on equipment repair, telecommunications equipment, and warehousing; eliminate the gift tax; reduce the estate tax; and also expand several tax credits for families and businesses.

The marriage penalty occurs when tax brackets do not double for married joint filers relative to single filers. This means that when two working people get married, they face significantly higher taxes. This is unfair to married people, and can lead to distortions in how people treat their family status for tax purposes. It’s not clear precisely what Governor Dayton means by eliminating the marriage penalty: it should involve restructuring tax brackets. While credits and deductions could be offered to approximate this, such a method would merely increase the complexity of the tax code, creating an inefficient solution to what is ultimately a simple problem to fix.

A major component of the plan is elimination of new taxes on business-to-business transactions. Taxes on business inputs create tax pyramiding and violate the neutrality principle, as they can distort the structure of businesses by encouraging economically inefficient vertical integration.

Finally, the estate tax is a damaging tax that disproportionately falls, not on the truly wealthy (who can often shift wealth through creative tax planning in order to avoid taxes), but on family businesses and farms (who are not as mobile). Fewer and fewer states levy estate and inheritance taxes each year, and Indiana repealed its inheritance tax last year. Minnesota’s estate tax cut would follow the national trend of reducing this inefficient tax. As a corollary, the gift tax, slated for elimination, is also a dying tax, with only Connecticut levying it if Minnesota repeals.

The plan also includes unnecessary carve-outs and tax credits, but, overall, serves to make valuable, if incremental, adjustments in Minnesota’s tax code. These changes won’t fully undo the negative impact on the state’s business tax climate caused by last year’s sizable tax increases, but they do serve to mitigate some of the worst effects, and improve the overall structure of the tax code.

Read the full State Business Tax Climate Index here.

For more on Minnesota, see here.

Follow Lyman on Twitter.

Categories: Tax news

Italy PM Renzi says approved 10 billion euros in income-tax cuts

Yahoo Tax - Wed, 2014-03-12 12:23
Italian Prime Minister Matteo Renzi said on Wednesday that the government had approved 10 billion euros ($13.90 billion) in tax cuts for low- to middle-income workers and a reduction in business tax by the beginning of May. He said the income-tax reductions would be funded by a mix of spending cuts and extra borrowing room freed up in part thanks to falling bond yields. "The funding is fully programmed," Renzi told reporters at his first full press conference since taking power last month.
Categories: Tax news

Average Wall Street cash bonus highest since crash: NYS Comptroller

Yahoo Tax - Wed, 2014-03-12 06:47

Wall Street's average cash bonus swelled last year to its highest since the financial crisis and the third largest on record, New York State's budget watchdog said on Wednesday. The cash bonus pool jumped 15 percent to $26.7 billion in 2013, pushing the average cash bonus was $164,530, according to the New York state comptroller's annual estimate based on personal income tax trends. The increased bonuses came as Wall Street posted a fifth consecutive year of profits after record losses during the 2008 financial crisis. "Wall Street navigated through some rough patches last year and had a profitable year in 2013.


Categories: Tax news

Congress to Hear Testimony on Internet Sales Tax

Tax Foundation - Tue, 2014-03-11 14:00

Tomorrow at 10:00 AM, the full U.S. House Judiciary Committee will convene a panel to discuss solutions on the Internet sales tax issue. The growth of Internet commerce has collided with constitutional restriction preventing states from taxing out-of-state sellers who sell into their state.

A proposed bill, the Marketplace Fairness Act, would give states the power to collect online sales taxes as a quid pro quo for states simplifying their tax systems (although not simplifying them enough). States have been reluctant to simplify -- sales tax systems are getting more complicated not less -- and have insisted that Congress act first. Some states have even passed their own laws and invited constitutional challenges. Meanwhile, the Marketplace Fairness Act passed the Senate last year but has not passed the House.

Hence, the hearing. The committee's chairman, Rep. Bob Goodlatte (R-VA), last fall released seven principles for an online sales tax: tax relief, neutrality, representation, simplicity, tax competition, states' rights, and privacy. Goodlatte's principles helped focus the debate on what type of bill should pass and now various speakers will be offering suggestions. One big item that has vanished from the discussion was the problematic notion of a "small-seller exemption" -- ignoring tax complexity by just exempting some number of small sellers from it. Rep. Goodlatte has made clear that whatever system we come up with, everyone has to live under it.

The six witnesses are:

Former Rep. Chris Cox, now an advisor to NetChoice (online sellers). His testimony emphasizes the importance of the existing constitutional standard, insist on meaningful simplification, and criticize the Marketplace Fairness Act and the Streamlined Sales Tax project. Joe Crosby, a principal with MultiState Associates and advisor to the retail industry. Crosby's worked on this issue for decades now, and his testimony discusses the possibility of requiring a simplified structure only for online retailers, leaving brick-and-mortar retailers with existing state sales taxes. Stephen Kranz, a partner with McDermott Will & Emery, who has worked extensively as the business representative on the Streamlined Sales Tax Project. His testimony emphasizes the danger of continued congressional inaction as states strike out on their own and harm interstate commerce.  William Moschella of the shopping center industry represents retailers and his testimony urges adoption of the Marketplace Fairness Act. Alternatively, he suggests giving states the authority to ban interstate commerce that does not comply with state tax laws. Andrew Moylan of the R Street Institute. His testimony favors origin-sourcing, the concept of taxing sales based on where the seller is located rather than where the customer is located. Origin-sourcing reconfigures the sales tax from a consumption tax to a business activity tax, which is revolutionary. The most common critique of origin-sourcing is that it would lead to online sellers clustering in states with no sales tax, which is questionable. James Sutton, a lawyer and CPA from Florida. His testimony discusses specific examples of sales tax complexity and errors by state administrators. Sutton also proposes something akin to a 1099 reporting regime, whereby retailers would collect information about their customers and provide it to tax authorities.

I'll be in the audience tomorrow morning and will hope to provide livetweeting commentary at @jdhenchman.

Categories: Tax news

How to File Taxes 2014: E-file 1040 and W-2 Forms with IRS vs. Using an ... - Latin Post

Google IRS Federal Income Tax - Tue, 2014-03-11 11:58

Latin Post

How to File Taxes 2014: E-file 1040 and W-2 Forms with IRS vs. Using an ...
Latin Post
It can be confusing to know how or when to file your federal and state income taxes, but there are several tax filing options available that will make filing your taxes easy and headache free. One option, which is used by more than one hundred million ...
More Tennesseans filing taxes electronicallyNews & Observer
The Softer Side Of The IRSBlogger News Network (blog)

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Categories: Tax news

Retirement Tax Changes For 2014 - Investopedia

Google IRS Federal Income Tax - Tue, 2014-03-11 11:07

Investopedia

Retirement Tax Changes For 2014
Investopedia
The IRS also changed the federal income tax withholding tables and allowance amounts. According to the IRS: 1. The personal exemption amount has been increased to $3,950 from $3,800. 2. Tax withholding rates for both single and married taxpayers ...

and more »
Categories: Tax news

How High are Personal Dividends Income Tax Rates in Your State?

Tax Foundation - Tue, 2014-03-11 10:45

Currently, the United States has one of the highest tax burdens on personal dividend income in the OECD. The top federal rate on personal dividend income is 23.8 percent (20 percent top marginal tax rate plus a 3.8 percent net investment tax to fund the Affordable Care Act). In addition, taxpayer face personal dividend taxation at the state level that ranges from zero in states with no personal income tax to 13.3 percent in California.

Taking into account the deductibility of your state taxes against your federal taxes, local income taxes, the phase-out of itemized deductions, and any special treatment of personal dividend income, this map shows the combined federal, state, and local top marginal tax rate on personal dividend income in each state.

(Click on the map to enlarge it. All maps and other graphics may be published and reposted with credit to the Tax Foundation.)

Most states tax personal dividend income as ordinary income. Thus, states with high income tax rates have the highest taxes on personal dividends.

Californians face the highest top marginal personal dividend tax rate in the United States of 33 percent, followed by taxpayers in New York (31.5 percent), and Hawaii (31.6 percent).

Taxpayers in states with no personal income tax (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming) face a top marginal tax rate on personal dividend income of 25 percent.

Two states that do no tax personal income levy a tax on dividend income. Tennessee’s Hall Tax levies a 6 percent tax on personal dividend income (More on that tax here). New Hampshire levies a 5 percent tax on personal dividend income.

The average across the United States is 28.6 percent.

Read more about personal dividend taxation here.

Categories: Tax news

IRS, UNL offer assistance for Latino income tax filers - Lincoln Journal Star

Google IRS Federal Income Tax - Tue, 2014-03-11 10:18

IRS, UNL offer assistance for Latino income tax filers
Lincoln Journal Star
The VITA program uses IRS-trained volunteers to provide free tax preparation of both federal and state tax returns to individuals and families that generally earn $52,000 or less. The new VITA site is at 1505 S Street, on the second floor of the Jackie ...

Categories: Tax news

Two Pro-Growth Tax Reform Proposals from Senator Marco Rubio

Tax Foundation - Tue, 2014-03-11 10:15

This week, Senator Marco Rubio (R-FL) announced his new economic growth agenda. As part of his agenda to grow the economy, he wants to reform the United States’ tax code.

According to his speech, his proposal will focus on both the individual and the business side of the tax code. While there are many problems with the current tax code on both the individual side and the business side, Rubio only outlined two reforms on the business side of the tax code in his speech. Nonetheless, these two reforms are vital pieces to any fair, neutral, pro-growth tax system.

Moves to Full Expensing

Typically, when a business is calculating its taxable income for the IRS, it takes its revenue and subtracts its costs (such as wages, raw materials, and state and local taxes). However, with capital investments (buildings, machines, and other equipment) the calculation is much more complicated. Businesses in the U.S. and throughout the world are generally not allowed to immediately deduct the cost of their capital investments. Instead, they are required to write them off over several years or even decades.

Having to deduct the cost of capital investments over a long period of time erodes to value of these deductions, boosting businesses’ taxable income and their taxes paid, create a disincentive to invest.

Rubio’s plan would get rid of this complicated capital cost recovery system and move to full immediate expensing for businesses. From his speech:

 “The reforms we are considering would allow businesses to take a full and immediate deduction for all investments. This fair and equal treatment would end the crony capitalist loopholes that benefit politically connected corporations.”

Allowing businesses to immediately write-off the full cost of capital investments, as they do with wages and raw materials, would reduce the cost of capital, create an incentive to invest, and lead to higher wages for workers and greater economic growth.

Territorial Corporate Tax System

The United States has a complicated “worldwide” system of taxation. This system requires businesses to pay the 35 percent federal corporate tax rate on their income no matter where it is earned—domestically or abroad. Once a corporation earns profits overseas and brings it back to the United States, those profits are subject to the 35 percent U.S. corporate tax rate minus any taxes they paid overseas. This puts American corporations at a competitive disadvantage and creates a “lock-out” effect that traps corporate profits overseas.

Rubio’s tax plan would fix this by moving to a territorial corporate tax system:

“We can fix that by implementing what 28 of the 34 OECD countries already have: a territorial system of taxation. The fact that the vast majority of developed economies in the world already have a territorial tax system – including all other G8 nations – has put American companies at a major competitive disadvantage.”

Moving to territorial would put U.S. corporations on an even footing with their foreign competition, rid the tax code of some of its most complicated features, and remove the incentive businesses face to keep profits overseas.

These reforms are not the only changes that the United States needs to make in order to have a fair, neutral, and pro-growth tax system, but moving to full expensing and a territorial system are necessary steps the U.S. has to take to get there.

Categories: Tax news

Factbox: Chile's incoming president Bachelet and her policies

Yahoo Tax - Tue, 2014-03-11 09:49
Michelle Bachelet, who takes over the presidency of Chile for the second time on Tuesday, plans to spend $15 billion on ambitious reforms aimed at redressing steep income inequality. Center-left Bachelet, who governed as Chile's first female president from 2006 to 2010, won an easy victory in December's election and takes over from the conservative Sebastian Pinera. A moderate socialist, Bachelet has moved further to the left since the end of her first term, a shift that has coincided with massive protests for free and improved education in Chile over the past two years. Bachelet is promising to hike corporate taxes to fund an education overhaul.
Categories: Tax news

Pennsylvania Urged Not to Tax Out-of-State Emergency Responders

Tax Foundation - Tue, 2014-03-11 08:30

In early February, as 800,000 Pennsylvanians were without power due to winter weather, over 5,000 out-of-state emergency responders came to their rescue to restore power lines and getting electricity flowing again. A voluntary program exists to share personnel and resources between utilities in different states for just such emergencies.

However, a problem was pointed out last week by former Pennsylvania Public Utility Commission member Wayne Gardner, in an op-ed in the Pittsburgh Post-Gazette:

Unfortunately, there is a problem in Pennsylvania that recalls the old saying that no good deed ever goes unpunished: Our state requires out-of-state emergency responders and others who work here for a short period — even a single day — to file state income tax returns if they earn as little as $33. Only residents of Indiana, Maryland, New Jersey, Ohio, Virginia and West Virginia are excepted.

Put this issue on a personal level: Imagine an emergency responder who has a choice of being sent to Pennsylvania where this tax burden would be imposed upon her or another state where out-of-state emergency responders are exempt from state and local income taxes. At a time when state officials should be extending a hardy “thank you,” Pennsylvania state officials are yelling “pay me!”

Fortunately, U.S. Sen. Sherrod Brown, D-Ohio, and Rep. Howard Coble, R-N.C., have teamed up to solve this problem. Their legislation, The Mobile Workforce State Income Tax Simplification Act, is a joint Democratic and Republican effort to simplify the lives of workers who might spend a few days in other states as part of their employment. It would protect them from the cost and burden of complying with multiple state tax laws.

Pennsylvania is not alone in subjecting out-of-state visitors to tax withholding on their first day of travel:

More about the proposed federal bill here.

Categories: Tax news

Idaho Considering Complicated and Gimmicky Job Creation Tax Credit

Tax Foundation - Mon, 2014-03-10 17:00

Idaho officials believe not enough businesses are looking at their state when deciding to expand or relocate. Unfortunately, the proposed solution (PDF) – a new jobs tax credit – is unlikely to be the fix.

From the Associated Press:

According to the proposal, companies would have to create jobs and pay income, sales and payroll taxes before ever getting a penny back from Idaho's government.

Beforehand, they'd work with the Department of Commerce, as well as the seven-member Idaho Economic Advisory Council, to negotiate the level of tax credit — ranging from 1 percent to 30 percent. They'd also hash out the duration of the deal — up to 15 years — along with the terms to be met in order to get their tax credit.

Companies in rural areas would have to create at least 20 new jobs, while companies in urban areas would have to create 50 jobs, all of which pay more than the average in the county where those jobs are located.

While tax preferences like new jobs tax credits can be politically appealing because they ostensibly incentivize new jobs, at best they distort business investment decisions and at worst they subsidize select companies for doing something they would have done anyway. Even if administered efficiently (which is difficult given the degree of political connections required to obtain them), job tax credits can misfire in several ways. They push businesses who would be better served by buying new equipment or marketing to instead hire new employees. They favor expanding and out-of-state businesses at the expense of firms that may be struggling to keep the employees they have. Their record in other states has shown that they can never hope to attract more than a tiny fraction of new jobs, often at heavy taxpayer cost. And, if the impediment to job growth is high taxes, then they ought to be cut for all taxpayers not just big business or out-of-state businesses.

Wayne Hoffman of the Idaho Freedom Foundation offers examples of similar failed policies in Idaho:

Recall, for example, the Corporate Headquarters Incentive Act. It was heralded as a tool to lure and keep big corporations to Idaho. Born 2005, died 2008. Total usage: zero.

The Small Employer Tax Credit, also born 2005, extended to 2020, has done little — less than half a million dollars in annual usage.

Biofuels investment tax credit. Born 2007. Was supposed to generate up to $300,000 in utilization. Sunsetted in 2011. The most it ever did was $68,000 a year.

The Hire One tax jobs tax credit, created in 2011. That was supposed to generate $25 million in tax revenue at a cost of $7.9 million. Total actual usage: zero.

The Otter administration’s latest offering is no different. It promises to provide a tax credit if an existing business or a new business brings in, for some weird reason, at least 20 new jobs. But what if I create only 19 jobs? What if I create no new jobs but I give all my employees raises so instead of making $11 an hour, they’re now making $22 an hour? Isn’t that good for my employees, for the state and for the economy?

What if I own a little company? And what if I have only four employees and I double my workforce to eight employees. I get no consideration from the state, but I’m expected to help subsidize the business of my competitor.

Likewise, the state would make its tax credits available to, say, Walmart, which has the resources to create hundreds of retail jobs at a time. But the little neighborhood grocery store, or restaurant or automobile mechanic — companies that are the backbone of the American economy — can expect nothing except to have to subsidize their competition through higher tax rates.

The Idaho corporate tax rate is 7.4 percent, compared to 5% in Utah, 6.75% in Montana, 7.6% in Oregon, and zero in Wyoming. Idaho has a throwback rule to punish out-of-state corporations, doesn’t index its tax brackets for inflation, and applies its sales tax to office equipment and business rentals. Those might be more fruitful areas to tackle than a gimmicky new credit that won’t move the needle much on job creation.

Categories: Tax news

IRS Says Certain Tribal Trust Money Is Income Tax-Free - Law360 (subscription)

Google IRS Federal Income Tax - Mon, 2014-03-10 14:30

IRS Says Certain Tribal Trust Money Is Income Tax-Free
Law360 (subscription)
Law360, New York (March 10, 2014, 5:29 PM ET) -- Per capita distributions made to Native American tribe members from funds held in trust by the U.S. secretary of the interior are exempt from federal income taxes, according to interim guidance issued by ...

Categories: Tax news

A Comparison of the Camp and Obama International Corporate Tax Proposals

Tax Foundation - Mon, 2014-03-10 13:00

One of the more compelling reasons to pursue tax reform is the fact that the U.S. has the highest corporate tax rate in the developed world. Another compelling reason is that U.S. multinational corporations (MNCs) must pay that high corporate rate on their worldwide earnings, while their foreign competitors operate mostly under territorial tax systems that largely exempt foreign earnings from domestic taxation. These two factors are behind a host of problems plaguing the U.S. economy including low investment, chronic unemployment, slow growth, and a general flight of capital leading to the loss of corporate headquarters. Recently, two very different tax proposals have been put forth to deal with these issues: one by Chairman Dave Camp, of the House Ways and Means Committee, and the other by the Obama administration in its most recent budget.

Obama’s Corporate Tax Plan: Build a Wall

Recognizing the corporate tax rate problem, the Obama administration in its latest budget, as in previous proposals, has agreed to lower the corporate rate, however, only in exchange for higher corporate taxes elsewhere. In fact, the administration specifies an overall corporate tax increase of more than $400 billion over 10 years. This completely defeats the purpose of cutting the corporate tax rate, which is to attract highly mobile corporate capital.

It is also a larger corporate tax increase than in previous Obama budgets. Many of the tax increases are aimed at multinational corporations, such as various limits on deferral of foreign income. This would move the U.S. closer to a pure worldwide tax system, where all foreign income is subject to U.S. tax, rather than a territorial tax system, which exempts most foreign income from additional domestic taxation. Most countries use a territorial tax system, so these changes would make the U.S. even less competitive. The only country to try a pure worldwide tax system without deferral was New Zealand, which after experiencing prolonged economic stagnation switched back to a territorial tax system in 2009.

For instance, the administration proposes to end deferral for digital goods or services sold abroad, subjecting those profits to immediate domestic taxation at the 35 percent federal tax rate. Deferral has allowed companies like Apple and Amazon to compete abroad on a level playing field with companies based in territorial countries. America could very well lose its competitive edge in the digital goods sector if the administration’s proposal becomes law.

The natural response for profitable companies faced with punitive taxes is to look for a way out. Indeed, dozens of companies have already left the U.S. in recent years, often by merging with or acquiring foreign companies and “inverting” so the new parent company headquarters is outside the U.S. for tax purposes. Just today, Chiquita Banana, currently based in North Carolina, announced it is merging with the Irish Company Fyffes and the new company will be based in Ireland, where the corporate tax rate is 12.5 percent. The U.S. government has tried to prevent such moves with various penalties and restrictions, but the practice continues and appears to be accelerating.

Unfortunately, the Obama administration has an answer to this problem too: make it even more difficult to leave. The current rule says a U.S. company can invert only if the U.S. parent company would be no more than 80 percent of the new combined post-merger company, in terms of shares. Additionally, there are penalties for inverting if the U.S. parent is 60 percent or more of the combined company. That effectively prevents really big U.S. corporations, such as Apple and Amazon, from leaving, since a) it’s hard to find willing partners outside the U.S. that approach that size, and b) it’s hard to justify the costs of such a big merger. The Obama administration proposes to make it even more difficult for more companies by lowering the 80 percent rule to 50 percent. Such a rule would probably have prevented some of the recent high-profile inversions, e.g. Applied Materials and Actavis. However, it does nothing to address the ultimate problems of high corporate taxes in the U.S. and a worldwide tax system, both of which constrain U.S. investment and hiring.

Rather than the Berlin Wall approach, the U.S. should be attracting business with lower corporate taxes, which is what most countries outside the U.S. have done.

Comparison to Camp’s Proposal

Chairman of the House Ways and Means Committee, Dave Camp, offers a more competitive approach on international corporate tax reform, although it would still place a high tax burden on U.S. MNCs relative to their competitors in other countries (see our earlier discussion of some of the other problems in the Camp proposal).

Camp calls for a lower corporate tax rate of 25 percent and a 95 percent exemption of most active foreign earnings, which would put the U.S. much closer to the international norm. However, he proposes a minimum tax of 15 percent on intangible earnings, whether earned domestically or abroad, which would be a tax increase on some forms of intangible earnings, such as royalties, that are currently eligible for deferral. This “patent box” approach is found in seven other developed countries, but usually with lower tax rates: Spain and France have 15 percent tax rates and the other five countries tax intangible income at 5 to 10 percent.

As well, Camp agrees with Obama that existing U.S. MNCs should pay for the privilege of having a more competitive tax system. They both would levy a retroactive “deemed repatriation” on accumulated foreign earnings, through which Camp expects to raise $170 billion over 10 years and Obama expects to raise $150 billion. Oddly, both Camp and Obama devote this revenue to the Highway Trust Fund, as if corporations are now supposed to pay for the decline in gas tax revenue. First, money raised from corporate tax reform should only be used to reduce the corporate tax rate and exempt foreign earnings. Second, retroactive tax increases are never justified.

Overall, Camp’s international corporate tax reform proposals are an improvement over current law, but some aspects are less than competitive and would put some U.S. companies at a disadvantage. In contrast, the Obama administration would take the extremely uncompetitive U.S. corporate tax system and make it worse, and then try to prevent U.S. corporations from leaving.

Follow William McBride on Twitter

Categories: Tax news

State Tax Reforms Are More Than Just Revenue Changes

Tax Foundation - Mon, 2014-03-10 05:30

A recent report by the National Conference of State Legislatures (NCSL) examining state tax actions in 2013 found that “collective revenue actions taken by the 50 states resulted in a slight net tax cut of less than $1 billion, representing 0.1 percent of the prior year’s state tax collections.” The report finds that seven states (Alaska, Arizona, Iowa, Maine, North Dakota, Ohio, and Wisconsin) had tax reductions, while seven had tax increases (Georgia Massachusetts, Minnesota, Oregon, Vermont, Virginia, and Wyoming). The study is based on expected changes to Fiscal Year 2014 collections as a percent of 2012 collections, so, put precisely, what it measures is the aggregate effect of past tax cuts in a given year (in this case fiscal year 2014).

The study notes that “Given all the tax reform, the net tax reduction of 0.01 percent is a bit misleading­—there was more activity in 2013 than what is reflected by the aggregate total. Tax measures dominated 2013 legislative agendas in several states.”

We agree with that assessment, and would add that a major part of tax reform isn’t about how much revenue states raise, but how they raise it. This type of structural reform is absolutely vital, but doesn’t always show up in revenues. An analysis of such structural elements, like our State Business Tax Climate Index, is an important complement to a revenue-based study like this report.

The study appropriately assesses just one year of changes in revenues (FY 2014) against one year of collections (2012). However, many tax plans change revenues over several years. For example, in North Carolina, which made major changes to its tax code, fully $600 million of its tax cuts will land in FY 2015, not FY 2014. This means that a state that lowers its taxes gradually could show up as never having significantly lowered its taxes. The report explains this issue well in its introduction, but it’s worth reiterating, as many tax cuts are gradual, especially if they contain revenue-triggers.

But more to the point, we consider 2013 one of the most successful years for tax reform we’ve seen in a while. We saw North Carolina cut its taxes but, more importantly, massively restructure them to become flatter, simpler, and more competitive. The real improvement in North Carolina wasn’t just the amount of taxes (though they did cut taxes, as noted above), but the structure of the tax code.

Beyond North Carolina’s landmark reform, Indiana under Governor Mike Pence (R) also moved to cut its personal income taxes and abolish its death tax. Wisconsin also made significant income tax cuts accompanied by positive structural changes authored by Representative Dale Kooyenga. Even in states that couldn’t achieve such sweeping reforms, valuable progress was made. Arizona implemented an important simplification of its sales tax code. Governor Martinez of New Mexico worked with her legislature to cut her state’s corporate tax. Texas made some positive reforms to its damaging gross receipts tax, the margin tax.

It’s true that some states made negative changes as well. Minnesota, most notably, passed a major tax increase. Ohio’s tax cut included serious structural problems. Massachusetts passed a damaging tech tax, which was repealed before the end of the year. But these negative changes far from outweigh the monumental accomplishments in the other states listed above.

Many states accomplished meaningful reform in 2013, with some, like North Carolina, putting in place landmark reforms that can inspire positive changes elsewhere as well. This new report from NCSL serves as a valuable benchmark to show that there remains a long way to go, but it also shows the importance of the tax debate in the states. At least 41 states saw their tax code change in 2013, and 24 of them reduced taxes. With 2013 behind us, we’re looking forward to seeing that last number rise, and think 2014 could be another banner year for tax reform as more states take the necessary steps to make their tax codes simple, transparent, stable, and neutral.

Categories: Tax news
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