For more on corporate taxes, see Kyle's recent study "U.S. Multinationals Paid More Than $100 Billion in Foreign Income Taxes."
The Tax Policy Blog
President Obama and the First Lady today expressed high praise for a congressional proposal that would legalize marijuana while at the same time imposing a 60 percent excise tax on junk food, candy, and soda.
“It’s time that we recognize personal freedom to put what we want into our bodies,” said Mr. Obama, referring to the marijuana proposal. “At the same time, we should take action to address Americans’ poor nutrition choices, which the citizens of this country are inflicting on themselves.”
The bill, the Making the US Newly Capable by Halting Imprisonment of Errant Smokers (or MUNCHIES) Act, is projected to raise nearly $1 trillion in new federal revenue over the next decade. The funds would be earmarked for the creation and upkeep of a new White House “herb” garden, with language suggesting that Vice President Joe Biden has “dibs” on the first harvest.
Some Republicans have voiced their disapproval of the bill. Former presidential contender Rick Santorum was especially vocal on condemning the marijuana legalization: “The bill is completely wrong: marijuana is dangerous and should stay illegal. But also, big government Democrats should not control Americans’ grocery store choices.”
In related tax news, the Congressional Research Service released two new studies: one finding that even a modest carbon tax would reduce carbon emissions significantly, while the other found that even a large income tax increase would have no impact on hours Americans work.
Cyprus’s outrage about a proposed tax on all bank accounts helped turn the proposal into a tax primarily on foreign deposit holders’ accounts—a lesson not lost on U.S. policymakers.
“This would be a win-win for America,” said U.S. Senator Peter Papershill. “Tax bank accounts held by foreigners and use the revenue to reduce Americans’ taxes.”
A recent poll asked Americans who should bear the burden of taxes. 11 percent replied “you,” 4 percent replied “me,” and 85 percent replied “neither you nor me but that guy behind the tree.”
Mexican border officials announced the weekend interdiction of a record number of Californians attempting to flee their home state, seeking to cross the border illegally in search of a better life south of the border.
Border patrol officials in Tijuana warned that the human tide has reached record levels since California raised its top income tax rate to 13.3 percent in November, joining high sales and business taxes. A separate retroactive business tax and a proposed exit tax has increased the outbound migration. Mexican officials are debating whether to construct a border fence and reinforce border agent numbers.
Professional golfer Phil Mickelson made quite a stir in January when he threated to leave the state, but it looks like he’s not the only one who does not like his new tax burden. Citizens of all income levels are leaving California in search of promise in their new land of opportunity.
“I love my new home. You just can’t survive with that broken California tax system,” said John Smith, one recently landed immigrant, said. “So I figured I would go to a place where I feel a little more welcome.”
Local residents are not so sure the American immigrants will enjoy the Mexican tax treatment much better.
“They’ll be in for a big surprise when they get their first paycheck and see the taxes are not much better,” one restaurant owner said. “But I’ll let them figure that out on their own.”
All the same, business is booming for a few borders towns. The desert city of Mexicali and the beach town of Rosarito Beach have seen the biggest difference. One local business owner said he has seen his sales soar 100 percent since November.
But the insurgence of American labor is not going unnoticed by the local authorities.
“The trouble is, these people are all here illegally,” one local labor official said. “They can’t stay.”
“It’s creating a real problem for us,” one Mexican border security official said. “Now we’ve got to round them up and send them home ourselves, because we know they’re not going to ‘self-deport’ back to California.”
Less than a week after hearing oral arguments on the constitutionality of the Defense of Marriage Act (DOMA) and California’s Proposition 8, the U.S. Supreme Court stunned observers today with its unexpected ruling that gay marriage is constitutionally permissible as a tax.
The opinion, authored by Chief Justice John Roberts, rejected federalism and equal protection arguments made by both sides, as well as policy arguments made by the Tax Foundation, and instead zeroed in on the federal taxing power:
There are taxes and there are penalties. Penalties are prohibitory financial punishments, involving a finding of criminal guilt, and subject to prosecutorial enforcement.
None of these things describe marriage, including same-sex marriage. Because same-sex marriage is not a penalty, it may reasonably be characterized as a tax.
Four justices dissented from the conclusion, while four others stated their preference for upholding same-sex marriage on equal protection and federalism grounds. Only Roberts focused squarely on the taxing power as the basis for upholding the same-sex marriage, citing his health care decision from last June. We analyzed that decision here.
After five years of litigation and appeals, New York's highest court today upheld the state's "Amazon tax" in a 4 to 1 decision (PDF). The law, nicknamed after its most visible target, deems an out-of-state company to be an in-state taxpayer if the company receives commissioned referrals from in-state resident "affiliates." The out-of-state company then must collect sales tax for the state. Generally, just as state services are only provided within their borders, state tax authority (or "nexus") ends at its border, with it only able to require sales tax collection from in-state companies.
On the central question of whether Amazon.com and other online retailers are "physically present" due to their affiliate contracts, despite not being physically present themselves, the Court of Appeals today found it was so:
[E]ven in the Internet world, many websites are geared toward predominantly local audiences -- including, for instance, radio stations, religious institutions and schools -– such that the physical presence of the website owner becomes relevant to Commerce Clause analysis. Indeed, the Appellate Division record in this case contains examples of such websites urging their local constituents to support them by making purchases through their Amazon links. Essentially, through these types of affiliation agreements, a vendor is deemed to have established an in-state sales force.
Viewed in this manner the statute plainly satisfies the substantial nexus requirement. Active, in-state solicitation that produces a significant amount of revenue qualifies as “demonstrably more than a ‘slightest presence’” under Orvis. Although it is not a dispositive factor, it also merits notice that vendors are not required to pay these taxes out-of-pocket. Rather, they are collecting taxes that are unquestionably due, which are exceedingly difficult to collect from the individual purchasers themselves, and as to which there is no risk of multiple taxation.
(p. 9-10.) In short, physical presence means not just having your property or your employees in a state, but now also targeted advertising through others that resembles an in-state local sales force. The Court quickly notes in its next paragraph that "no one disputes" that "passive" advertising does not create phyiscal presence. (p. 10). Consequently, the line the Court draws is between passive advertising (no nexus with the state) and active advertising (nexus with the state).
Judge Robert Smith dissented, saying that the statute unconstitutionally expands the physical presence rule, and rejecting the majority's apparent constitutional distinction between advertising paid per result (tax nexus) and advertising paid as a flat fee (no tax nexus).
This is obviously not the decision we wanted, having filed briefs in the case urging that the statute be struck down as unconstitutional. The parties may yet appeal the case to the U.S. Supreme Court and we'd say the same thing.
However, three thoughts to keep in mind nevertheless.
- First, New York's courts remain alone in having upheld these laws; similar ones elsewhere have been struck down (Illinois, North Carolina, Colorado).
- Second, these state nexus expansion laws remain bad policy, generating far less revenue than expected while failing to solve the overall problem of how to tax Internet commerce in an equitable and non-stifling manner. A federal solution remains the better approach: one that prevents excessive state tax overreaching while establishing a system that allows states to collect taxes owed by their residents in a simplified manner, balancing uniformity of administration with competitiveness in rates.
- Third, the New York Court of Appeal's decision rejects a facial challenge--the difficult standard of proving that a statute is unconstitutional on its face with no legitimate application. The Court did not address what might be next; an as applied challenge finding the statute's application in a particular context to be unconstitutional. Given how nebulous the line between "passive advertising" and "active advertising" is, the Court might have to rethink that standard when real cases start heading their way.
Check out everything we've ever done on nexus (including my most recent congressional testimony on the topic) here.
This morning we released an extensive new state-by-state resource guide, How Is the Money Used? Federal and State Cases Distinguishing Taxes and Fees (download PDF version here). This report examines what a tax is, what a fee is, and how public understanding of the difference between the two can strengthen taxpayer protection provisions, minimize distortions caused by hidden or mislabeled taxes, and help increase transparency of the cost of government programs. Hundreds of relevant legal cases, from each state, are summarized.
A tax has the primary purpose of raising revenue. By contrast, a fee recoups the cost of providing a service from a beneficiary.
This is not just a matter of semantics. In order to protect taxpayers, many state constitutions contain additional procedural steps and limitations that apply only to tax increases. These protective measures can be undermined if the legislature can circumvent them by merely relabeling what would otherwise be a tax, so a workable definition of "tax" is necessary to give them meaning.
The report finds that all but two states (North Carolina and Oregon) have adopted these definitions, with Ohio as the most recent addition. The report also reviews which states rule in favor of taxpayers when tax laws are ambiguously worded, which states have rejected the discredited notion that taxes are “mandatory” charges while fees are “voluntary” charges, and the impacts of the Supreme Court's decision finding the health care individual mandate to be a tax.
With April 15th arriving soon, taxes will be on the collective minds of our nation. As taxpayers sign over checks to the government, an understanding of what the word tax means is of upmost importance.
Tax Foundation Background Paper No. 63, “How Is the Money Used? Federal and State Cases Distinguishing Taxes and Fees” by Joseph Henchman is available online.
We earlier described Virginia’s passage of new transportation taxes, which include higher sales taxes in the northern Virginia and Hampton Roads regions and higher hotel and real estate taxes in northern Virginia. Although not exactly the plan Governor Bob McDonnell (R) asked for, it looked close enough to most observers and he was expected to sign it into law.
Enter Virginia Attorney General Ken Cuccinelli, widely expected to the 2014 Republican gubernatorial nominee. He noted in an advisory opinion (PDF) last Friday that Virginia’s Constitution contains a uniformity clause, which requires that all taxes imposed by the Legislature be uniform across the entire state.
Because the law does not impose the new taxes equally across the state geographically, but only in certain areas, it violates the uniformity clause. (A similar law was struck down in 2008 for allowing regional authorities to impose new taxes without voter approval, to get around northern Virginia voters’ consistent habit of rejecting regional taxes.)
So, McDonnell exercised his power to amend the statute and expand the new taxes statewide. Sort of. The new taxes apply “statewide” to any region that meets the following carefully convoluted criteria: any planning district with at least 1.5 million people as of 2010, at least 1.2 million registered vehicles, and at least 15 million transit passengers. Not surprisingly, only the Hampton Roads region and northern Virginia fit this criteria. From the Stafford County Sun:
McDonnell's amendments to the bill, filed late Monday night, would: reduce a proposed annual fee on hybrid and alternative fuel vehicles from $100 to $64; trim a 1.3-percentage point increase in the sales tax on motor vehicles to 1.15 percentage points, phased in over three years; decrease new taxes on real estate transactions and overnight lodgings in Northern Virginia for regional initiatives there; and tie the new taxes for regional initiatives — including a higher retail sales tax than the rest of the state — to specific criteria such as population, vehicles, and transit use as proxies for highway congestion and pollution.
"So empirical criteria as opposed to naming regions," said McDonnell, who added that the criteria "theoretically could be met by any region of the state."
Currently, only the Northern Virginia and Hampton Roads planning districts meet the criteria — at least 1.5 million people in the 2010 census, at least 1.2 million registered motor vehicles, and at least 15 million transit passengers a year.
This dodge allows Virginia’s new taxes to get around the Constitution’s requirement that taxes be imposed uniformly across the state. Now they are uniform technically but not for practical purposes. Maybe it’s the right policy, given the greater transportation needs of the two regions in question, but it’s bad constitutional practice.
The Minneapolis Star Tribune has published a scathing denouncement of the proposal to raise taxes on high-income earners, part of the House of Representative’s DFL tax plan and similar to the Governor’s tax plan that we've critiqued here and here:
The House DFL proposal to double down on an upper-income tax increase — albeit temporarily — risks launching the state’s top tax rate into an anticompetitive stratosphere. It’s an idea that ought to disappear faster than March snow.
The paper-of-record's editorial goes on to warn that higher taxes on wealthier taxpayers is poor tax policy, bringing Minnesota into the same camp as high-tax California and Hawaii:
That’s not good company for a state that wants to continue to be home to more Fortune 500 companies per capita than any other. Those big businesses aim to attract top talent from around the country. A supersized state income tax for top earners would make their recruitment more difficult, and could cause some companies to ask whether they ought to do their hiring elsewhere.
States should think carefully about how they decide to collect revenue. The editorial board is right—revenue should be raised in a way that minimizes economic distortions and doesn’t put states at a competitive disadvantage. Governor Dayton and state legislators alike would do well to follow the Star Tribune’s advice.
More on Minnesota here.
Follow Liz on Twitter @elizabeth_malm.
This week's map shows the top corporate income tax rate in each state. Iowa has the highest rate at 12%; three states, (Nevada, South Dakota, and Wyoming) have no corporate income tax.
Click on the map to enlarge it.
View previous maps here.
Tomorrow, the Supreme Court will hear oral arguments in United States v. Windsor. While the overall issue at stake is the constitutionality of Section III of the Defense of Marriage Act (DOMA), which defines marriage as the union of a man and a woman for federal purposes, the heart of this particular case is the $363,053 federal estate tax bill from which the plaintiff, Edith Windsor, would have been exempt had her marriage to her same-sex partner, Thea Spyer, been recognized by federal law.
The overall effect of DOMA on federal estate tax revenue is hard to measure—estate tax revenues are likely higher than otherwise, because of gay couples in similar situations as Edith Windsor—and its effect on income tax revenue is also unclear. Marriage can cause income tax penalties as well as tax bonuses, and the exact effect depends on a number of factors. Couples with unequal incomes are more likely to receive a tax bonus by getting married, while couples with similar incomes are more likely to face a tax penalty, so DOMA’s effect on income tax revenues depends on the number of married gay couples that would face penalties and bonuses if required to file a joint federal return.
Viewed purely from a tax perspective, DOMA is bad policy. It violates two important principles of sound tax policy—simplicity and neutrality. The law fails from a tax neutrality perspective because of the arbitrariness of the way it imposes complexity on, and withholds possible tax benefits from, particular classes of married couples.
The principle of simplicity is violated because couples whose marriage is recognized at the state level but not at the federal level face an incredibly complex, burdensome filing process. Gay couples living in states that recognize gay marriage must complete four different tax returns every year: one federal tax return per person, one “dummy” joint federal tax return, and then one joint state return. The dummy federal return is necessary so that couples may file their joint state tax return, which requires a joint federal filing be completed first. The dummy return is then discarded (unfiled), constituting a waste of preparation time and costs.
The situation worsens when a same-sex couple jointly owns an asset like rental property, where federal law will permit only one spouse to claim the property for tax purposes because the couple is not recognized as married. In this case, six returns must be completed to determine which spouse should claim the property: the dummy joint federal return, an individual return with the rental property included (for each spouse), an individual federal return without the rental property included (for each spouse), and a joint state return. The spouses then decide who gets the best tax treatment by including the jointly-held asset and then proceed with the appropriate federal returns. Thus, three of the returns completed, the dummy return and at least one of the federal returns completed by each spouse, are discarded without filing. This is pure waste of time, effort, and money.
Gay couples are also placed in a position whereby they must effectively lie on their federal tax return. Marriages are regulated by the states and so couples must indicate whether or not they are married on their federal tax return based on what the law of their state of residence provides. However, for federal purposes, same-sex marriages do not exist. Thus, filers must check the “single” box, even though they are married under the law of the state in which they reside. The penalties for perjury on a tax form can be substantial, so many same-sex couples opt to include a disclaimer form or otherwise make a notation on their form that they are choosing “single” as required by federal law but are married under their state’s law.
Good news out of Vermont this week, as the House Ways and Means committee voted 6-5 to kill the proposed $1.28 per gallon sugar-sweetened beverage excise tax that was being considered in the state. Back in late February, I testified to the House Ways and Means and Health Care committees on the bill. While the Health Care committee sent the bill through (after a few shenanigans), the Ways and Means committee seems to have taken the arguments against using the tax code to change behavior to heart.
As I argued in my testimony:
[…] the influence of soda taxes on obesity outcomes is questionable. We know from the law of demand that raising the price of a product will make people consume less of that product, but people don’t behave in a vacuum. A 2010 study found that soda taxes do reduce soda consumption, but that children and adolescents tend to perfectly substitute in calories from other sources. This resulted in no net change in caloric consumption. A 2007 study found that an increase of 1 percentage point in the state soft drink tax rate would lead to a decrease in BMI of just 0.003 points. For perspective, the CDC defines a “healthy” BMI for a six foot tall adult male as between the large range of 18.5 and 24.9.
There is also evidence that taxes on soda lead people to drink more beer. A 2012 study by economists at Cornell University showed that for households prone to buying alcohol, there was a 172.4 ounce increase in beer consumption per month when a 10 percent tax was applied to soda. This equates to a heightened intake of 1,930 calories in the same time frame. This raises concerns about potentially switching one public health problem for another. As an interesting side note, Vermont currently taxes beer at a rate of 27 cents per gallon. The proposed rate on soda would be almost five times as high as the current tax on beer.
I think the overarching lesson to learn from this is that people respond to tax changes, but not necessarily in the way policymakers would want them to.
[…] this debate centers around moral questions. Reducing obesity is an important goal, but policy actions have costs. My largest concern is that placing a tax on soda is a blanket policy that would affect all Vermonters. There are many people that enjoy sodas regularly and make adjustments in their diet elsewhere to maintain a healthy lifestyle. These people will be affected by an excise tax as well, and I think that is why the tax code is far too blunt an instrument to address something as comprehensive and subtle as nutrition choices.
UPDATE: The final tax package that the House will vote on may expand the sales tax base to include candy and sugar-sweetened beverages (my arguments here), and also includes a 50 cent per pack hike on cigarettes (comprehensively addressed here). The budget will ultimately have to be signed by Governor Shumlin, who has expressed his opposition to tax hikes.
More on soda taxes here.
Follow Scott Drenkard on Twitter @ScottDrenkard.
As part of “Vote-o-rama” this past Saturday, the U.S. Senate voted 51-48 to “require the Congressional Budget Office to include macroeconomic feedback scoring of tax legislation.” Even though this is likely non-binding, it shows the majority of the Senate recognizes that CBO revenue estimates are unrealistic in that they do not account for any effects on the larger, “macro”, economy. That is, when income taxes go up, for example, the CBO ignores for purposes of revenue estimation how this might change incentives to work, save, or invest. This is clearly wrong by any school of economics, yet this “static” analysis is what determines the official revenue estimates for every tax bill passed by Congress. It is a shame that 48 Democrats, including chief Senate tax writer Max Baucus, voted to continue ignoring how taxes actually affect the economy and how that in turn feeds back into tax revenue.
It is not as if the CBO is unprepared to do a more realistic analysis, which is sometimes called “dynamic” or “macroeconomic” analysis. The CBO relies on the Joint Committee on Taxation (JCT) to estimate revenue changes from legislation, which has at its disposal three macroeconomic models that all take into account to some degree how taxes affect the labor supply, savings and investment, and GDP. These macroeconomic models could be used to provide more realistic estimates of revenues, as a supplement to JCT’s standard analysis. However, it appears the last time JCT used these macroeconomic models at all was in 2009 to estimate the effects of the Affordable Care Act.
To be clear, JCT in their standard analysis does account for certain behavioral effects which they describe as “dynamic”, namely:
- Tax planning behavior to minimize taxes, such as income shifting or timing changes.
- Shifts in consumption or production that do not affect the overall aggregate measures of the economy, such as a cigarette tax that reduces cigarette consumption and shifts employment and investment out of the tobacco industry and into other sectors.
However, JCT’s standard analysis explicitly ignores any of the big effects of tax changes that affect the overall size of the economy, such as higher income taxes causing less work and investment overall:
“A conventional JCT estimate incorporates behavioral responses in projecting tax revenues, but assumes that these tax and behavioral changes do not change the size of the U.S. economy, as measured by the Gross National Product (“GNP”).”
Failing to account for these big effects biases tax policy against economic growth, as it pretends that higher income taxes in particular won’t hurt the economy. JCT’s macroeconomic models hold the potential to do a much better job, and Congressional tax writers should at least demand they be used and the results published. Additionally, Congress should look to outside groups such as ours to independently estimate the effects of tax changes. An open discussion of the various models, and their underlying assumptions, would greatly improve the tax writing process.
Follow William McBride on Twitter @EconoWill
Just before 5:00 AM on Saturday, the U.S. Senate passed a budget for the first time in four years in a 50-49 vote. (Sen. Frank Lautenberg (D-NJ) stayed at home on doctor's orders.)
The budget blueprint, opposed by all Senate Republicans and four red-state Democrats facing re-election in 2014, sets a level of $3.7 trillion in federal spending for fiscal year 2014. Over a ten year timeframe, the budget cancels $1.2 trillion in planned spending cuts, substitutes $975 billion in reduced projected spending, and raises taxes by $975 billion.
The budget vote sent Washington scrambling because of the "Vote-o-rama" that comes with it: every senator is able to propose amendments that the entire Senate will vote on. Lots of ideas have been sitting un-voted on after four years of no budgets, so 572 amendments were filed. The Senate methodically worked through them, one by one, into the wee hours, ultimately doing 43 roll call votes and a number of voice-only votes and unanimous consent approvals. Because the budget would need to be meshed with a House version to become law (which is unlikely), the amendments were considered by all to be non-binding in nature.
Among the tax-related votes included approving 79-20 the repeal of the "Obamacare" medical device tax, approving 51-48 the inclusion of dynamic scoring analysis in revenue estimates, rejecting 46-53 the repeal of the federal estate tax, and approved 80-19 a separate amendment to repeal or reduce the federal estate tax in a revenue-neutral manner.
The Senate also approved 75-24 a modified version of the Marketplace Fairness Act, a proposal to authorize states to collect sales tax on Internet and catalog transactions between their residents and out-of-state retailers. Presently, state tax authority over retail transactions extends only to retailers with a physical presence in the jurisdiction (just as one must have a physical presence in the jurisdiction to receive state services). The hotly controversial amendment has been pushed by an alliance of big-box retailers and state officials, and opposed by some Internet retailers and conservative groups.
I'm writing a piece for later this week on what's missing from the Marketplace Fairness Act, omissions that could threaten interstate commerce and economic growth unless remedied.
Here's the vote breakdown on the Internet sales tax vote (Enzi Amendment 656):
Not Voting - 1
Note: Blog updated to correct the medical device tax vote.
This week marks the third anniversary of President Obama signing into law the Patient Protection and Affordable Care Act, aka "ObamaCare." Peter Suderman has a good round-up of the current state of the debate over health care policy and the impacts of the ACA:
The president’s health care overhaul has already had a rough life. Since passage, it’s survived a Supreme Court challenge, more than two dozen repeal votes in Congress, and host of implementation hurdles and political controversies. And that’s just the beginning: The law’s major coverage provisions — a Medicaid expansion and private health insurance subsidies administered through state-based health exchanges — won’t kick in until later this year.
I recently interviewed economist Alan Viard of the American Enterprise Institute for the Tax Policy Podcast on the ACA's 3.8% Medicare tax on high-earners. This is the same tax that has been frequently (and erroneously) cited as a tax on home sales. The provision, technically the "Unearned Income Medicare Contribution," has been so controversial that a previous post by former Tax Foundation economist Gerald Prante debunking it has been one of the most widely-read in our 8-year blog history. Small business owners looking for practical advice on how they could be impacted by the tax should take a look at this Forbes piece from earlier in the year.
More recent updates include "Obamacare Medical Device Tax Still Baffling Business" by economist Kyle Pomerleau and "Obamacare Tax Increases Will Impact Us All" by government relations associate Andrew Lundeen.
NBC may be a successful, profitable company but that's not stopping New York legislators from offering them taxpayer subsidies to lure The Tonight Show back to 30 Rockefeller Plaza from California. NBC is rumored to be replacing Jay Leno as host of the late night mainstay with comic Jimmy Fallon.
The provision would make state tax credits available for the producers of “a talk or variety program that filmed at least five seasons outside the state prior to its first relocated season in New York,” budget documents show.
In addition, the episodes “must be filmed before a studio audience” of at least 200 people. And the program must have an annual production budget of at least $30 million or incur at least $10 million a year in capital expenses.
In other words, a program exactly like “The Tonight Show.”
Aides to Gov. Andrew Cuomo (D) denied to the Daily News that the provision was written with The Tonight Show in mind.
Altogether, New York provides $420 million in tax subsidies each year for the film and television industry, one of the highest levels of taxpayer support in the country.