Posted on May 8, 2008 by Alicia Hansen
Residents of the Constitution State celebrate Tax Freedom Day today, after a very long wait. Connecticut's Tax Freedom Day is the latest in the nation, and significantly later than the notional Tax Freedom Day of April 23. The earliest state Tax Freedom Day this year, back on March 29, was celebrated in Alaska.
Residents of Connecticut are acutely aware of their high tax burden. We came across a blog post about the state's late Tax Freedom Day on a website called CtTaxed.com. Here's an excerpt:
Ok, Connecticut you get to start working for your family and yourself today. Today is Tax Freedom Day, it's the day were you've finally worked enough to pay all your Federal, State and Local taxes.
We in Connecticut have the honour of working longer than any other state in the Union to pay our fair share. We work till May 08th.
How ironic that Tax Freedom Day and the end of the CT Legislature Session coincide. Coincidence? I think NOT!
Other states where citizens wait unusually long for Tax Freedom Day® are California (April 30), Washington (April 29), Massachusetts (April 28), Maryland (April 28), Minnesota (April 27), and Florida and Hawaii on April 26.
Wow, we work a whole WEEK longer than our closest competitor California! Ouch!
For more on taxes in Connecticut, click here. Read the Tax Freedom Day Special Report here.
Posted on May 7, 2008 by TF Staff
An op-ed by Tax Foundation chief economist Patrick Fleenor appeared in the Wall Street Journal today. The op-ed, "Cigarette Taxes Are Fueling Organized Crime," discusses the damage inflicted on society by high cigarette taxes, which often cause consumers to turn to the black market. The amount of criminal activity related to cigarette taxes is staggering, as Fleenor explains:
While the problem first surfaced during the Great Depression, tax hikes in the early 1960s created a major profit opportunity for smugglers and kicked the epidemic into high gear. By 1967, a quarter of the cigarettes consumed in the Empire State were bootlegged. New York City's finance administrator labeled cigarette smuggling the "principal stoking facility of the engine of organized crime."
Crime rapidly spread beyond New York's borders, as trucks carrying cigarettes across the country were hijacked and businesses selling them robbed to supply New York's black market. In 1972, the chairman of a New York commission told Congress that retailers and other workers were "confronted almost daily with the risk and dangers of personal violence which are now inherent in their industry."
State and city officials responded with mandatory prison sentences and expanded police powers of search and seizure. But in 1973 a state commission found the crackdown to be "completely ineffective and a failure." Desperate state officials formed a special task force that proposed abolishing the city's cigarette excise. Gov. Malcolm Wilson embraced the idea, explaining: "One major incentive to organized crime is the high New York City cigarette taxes, piled on top of the state tax, which have made that city the promised land for cigarette bootleggers."
To read the rest of the op-ed, click here. To read Patrick Fleenor's Tax Foundation Special Report "California Schemin': Cigarette Tax Evasion and Crime in the Golden State," click here.
Posted on May 7, 2008 by TF Staff
Advisors to the three presidential campaigns appeared at a Tax Foundation conference in Washington, D.C. Tuesday, April 29. Brian Deese represented the Clinton campaign, Kevin Hassett the McCain campaign and Dan Tarullo the Obama campaign.
The spokesmen avoided controversial statements, and the audience of think tank personnel and reporters focused on questions of policy. Some subjects that drew attention were the McCain and Clinton plans for a temporary gas tax holiday, and the Obama plans to raise taxes on capital and wage income even above what Senator Clinton would.
Three panels of issue-area experts spoke before the campaign spokesmen, on climate change, health care and tax reform. The climate speakers were William Pizer, Resources for the Future; Nikki Roy, Pew Center on Global Climate Change; and Robert McNally, Tudor Investment Corporation. Addressing health care reform were John Sheils, The Lewin Group; Joe Antos, American Enterprise Institute; and Len Nichols, The New America Foundation. The tax reform panelists were Alex Brill, American Enterprise Institute; Len Burman, Tax Policy Center-Urban Institute; and Scott Hodge, President, Tax Foundation.
The conference was sponsored by American University, the Committee for a Responsible Federal Budget, the New America Foundation, and the Tax Foundation.
A video of the conference is available below, and photos can be viewed here.
Posted on May 6, 2008 by Gerald Prante
Huffington Post has posted a video clip of Sen. Menendez being interviewed on MSNBC, in which he says: "You know, thank God that we don't have economists making necessarily public policy, because they don't really feel the pains of average Americans."
What if economists did make public policy? You wouldn't see policy proposals like Sen. Clinton's gas tax holiday that may be well-intentioned but won't work to benefit consumers. And you wouldn't see stupid tax proposals like those that have come from Sen. Menendez's office over the past few years.
Menendez illustrates the fundamental reason that economics is the dismal science: Economists will tell you both the good and the bad when you only want to hear the good. It's also funny to hear, Menendez, a man who was appointed senator by the New Jersey political machine, and who's been on Capitol Hill for the last sixteen years, claim that economists don't care about average Americans. Such a statement shows his complete ignorance of the profession.
Even if you took the liberal position and equated care for working class people with support for government polices that are designed to care for them, you'd find economists lining up on the liberal side far more than the general public.
If you asked a random poll of economists whether they support greater spending on anti-poverty programs, you'd likely see greater support amongst (heartless) economists for such a policy than the general public. But they would also tell you which anti-poverty program would be more efficient than the other.
If you asked a random poll of economists whether they support a progressive tax structure, they'd tell you yes. But they'd also tell you how to achieve it in a way that would have minimal adverse economic harm (broad base, lower rates).
If you asked a random poll of economists whether they support higher taxes to combat global warming, they'd overwhelmingly say yes. But they'd also tell you that a carbon tax is better than just arbitrary pollution restrictions.
Mark Thoma of the always thought-provoking Economist's View blog has more as he compares the gas tax holiday rhetoric with the "tax cuts pay for themselves" view that he argues comes largely from "economists" in Washington think tanks, although I hope he's not painting us all with a broad brush.
(Also, check out this blog post on Thoma's website discussing the role that the favorable tax treatment of housing played in the housing bubble. But it was written by an economist who according to Sen. Menendez obviously doesn't care about average Americans pursuing the American dream of home ownership.)
Posted on May 6, 2008 by Gerald Prante
Your daily dose of twisted thinking courtesy of Hillary Clinton:
Hillary Clinton today said that Sen. John McCain was wrong to say he would veto the 2008 farm bill as President, noting it would provide South Dakota family farms with priorities like permanent disaster relief, country of origin labeling, renewable energy advances and rural development broadband deployment.
Yesterday, McCain told an Iowa audience, “"I do not support [the farm bill]. I would veto it.” McCain missed votes on the Farm Bill in 2007, and in 2002 called a farm bill critical to South Dakota family farms "an appalling breach of our federal pending responsibility."
"Rural America is struggling in the face of skyrocketing energy prices, an economic downturn and rising food prices," Clinton said. "Saying no to the farm bill would be saying no to rural America."
“I noticed that Senator McCain said today in his statement in Iowa that he would veto the farm bill as well as he doesn’t support putting tariffs on foreign products coming into this country,” said Sturgis cattle rancher Fred McPherson. “What it looks like to me is that they’re not supporting the American farmer." Click here to listen.
Clinton's home state of New York has 34,000 family farms.
Senator Hillary Clinton made these remarks on the importance of the farm bill at the Mansfield-Metcalf Dinner in Butte on March 4:
“This Farm Bill needs to move and the president needs to get out of the way so that we can start taking care of rural America.”
Here's the logic of Sen. Clinton: A farm bill is needed to help rural America. But rising food prices are causing Rural America to struggle.
Let me repeat that again. Rising food prices are causing Rural America to struggle, according to Senator Clinton.
It appears as if she will say anything to get elected.
Posted on May 6, 2008 by Gerald Prante and Joseph Henchman
Even if the federal gas tax holiday was implemented, it would not apply (fully) to gasoline sold in four states. That's because California, Nevada, Oklahoma, and Tennessee each has a provision in the state's tax law which states that if the federal gas tax is lowered, that state's own gas tax will increase by some amount. This is theoretically designed to maintain transportation spending in the state.
Here is a link to a Taxadmin.org page citing the provisions of the four states. Here's California's:
If the federal fuel tax is reduced below the rate of nine cents ($0.09) per gallon and federal financial allocations to this state for highway and exclusive public mass transit guideway purposes are reduced or eliminated correspondingly, the tax rate imposed by this section, on and after the date of the reduction, shall be increased by an amount so that the combined state and federal tax rate per gallon equals the following:
(1) Twenty-three cents ($0.23) during 1990, on and after August 1.
(2) Twenty-four cents ($0.24) during 1991.
(3) Twenty-five cents ($0.25) during 1992.
(4) Twenty-six cents ($0.26) during 1993.
(5) Twenty-seven cents ($0.27) on and after January 1, 1994.
(c) If any person or entity is exempt or partially exempt from the federal fuel tax at the time of a reduction, the person or entity shall continue to be so exempt under this section.
The Taxing Tennessee blog has more.
Posted on May 6, 2008 by Joseph Henchman
Many states have taxpayer protections applying to tax increases. In North Carolina, for example, tax increases must pass three readings in the Legislature. In Virginia, taxes cannot be imposed by unelected officials without a public vote. And in California, Article XIII D, Section 4 of the state constitution requires that new taxes or increases to existing taxes must be approved by two-thirds of voters.
Judges in states with such protections must then confront the question of what is a tax, because politicians will often engage in definitional contortions to label what would otherwise be called taxes as fees, profits, surcharges, fines, and so forth. The Tax Foundation's Center for Legal Reform helps educate judges about the importance of a rigorous and consistently applied definition of taxes.
Governments often try to use a "voluntariness" test to shield taxes from constitutional requirements, because it is a very lenient definition. In North Carolina, for instance, government officials argued that a 35 percent charge embedded in the purchase price of lottery tickets was not a tax because those who purchased lottery tickets did so "voluntarily." Such a standard proves too much, of course, because any number of taxes are paid on items purchased voluntarily-gasoline taxes, liquor and tobacco taxes, sales taxes, and really, income taxes (we choose to work). If voluntariness is important, what should matter is whether the charge is voluntary, not whether the purchase of the good or service is voluntary. Otherwise, every charge other than a head tax wouldn't be a tax.
California's courts can now be added to the list of states understanding this point. In Bay Area Cellular Telephone Co. v. City of Union City, the Court of Appeal on April 29 ruled that a city 911 access surcharge is properly labeled a tax. The city had argued that citizens "voluntarily" pay it when they sign up for phone service. The court rejected this standard:
"Nothing is more familiar in taxation than the imposition of a tax upon a class or upon individuals who enjoy no direct benefit from its expenditure, and who are not responsible for the condition to be remedied."[...]
[The charge] is not imposed in exchange for the voluntary decision to seek a governmental service, but is instead imposed in response to the decision to seek telephone service from a private provider. Second, the Ordinance does not restrict the Fee to new telephone customers, but applies to all persons who maintain telephone service--many of whom presumably did not contemplate the fee when signing up for telephone service.[...]
The City points out that the revenues generated by the Fee do not exceed the cost of providing 911 services and that the Fee is not levied for general revenue purposes. Therefore, the City contends, the Fee is not a special tax. This argument misses the point.[...] The Fee must be paid by all nonexempt telephone service subscribers in the City--encompassing virtually all nonexempt households and businesses--whether or not they ever use 911 services. A fee for access to a governmental service is not the same as a fee for use of that service.
We would add only that to the extent a charge raises non-incidental revenue beyond that needed to pay for the service, it is tax revenue.
For a similar excellent decision in Louisiana, see here.
Posted on May 6, 2008 by Joseph Henchman
The Government Accountability Office (GAO) has released a report examining Value-Added Taxes (VATs) in Australia, Canada, France, New Zealand, and the United Kingdom to look at compliance costs, how VATs work with subnational taxes, and what issues arose during transition to a VAT. About 130 countries have a VAT, including all of the OECD countries except the United States.
A VAT is similar to a sales tax, except that it is paid at all levels of production, on only the value added at each level, to prevent pyramiding and eliminating the need to separate business inputs from retail sales. For instance, take a wooden table sold at retail and a 10 percent VAT rate. The lumber company sells the wood to the furniture maker for $50, paying $5 (10% of $50) to the government. The furniture maker sells the table to the retailer for $120, sending $7 ($120 - $50 = $70 X 10% = $7) to the government. The retailer sells the finished table to a customer for $150, sending $3 to the government ($150 - $120 = $30 X 10% = $3). The total tax paid is $15, or 10% of the final retail price.
Advocates of VATs say this structure reduces evasion because it's harder for three entities to avoid paying a $15 tax than it is for one. This in turn allows VAT rates to be much higher than ordinary sales taxes (which suffer evasion as they move into double digits), and they can generate huge sums of money. The GAO reports that on average, countries with VATs generate 18 percent of government revenue from them.
The report's results:
- Compliance Problems Similar to Other Taxes. VATs are vulnerable to refund fraud (illegitimate businesses or fraudsters submitting fraudulent refund claims) and missing trader fraud (businesses set up for the sole purpose of collecting VAT on sales, disappearing with the proceeds). Because of such compliance risks, even simple VATs require enforcement activities, such as audits, and record-keeping by businesses that create administrative costs for the government and compliance burden for businesses. (The GAO notes that these costs are comparable to other taxes.)
- Shrinking the VAT Tax Base Decreases Revenue and Increases Compliance Costs. A VAT may be less expensive to administer than an income tax, but adding complexity through exemptions, exclusions, and reduced rates, which can exist in other tax systems, generally decreases revenues and increases compliance risks, administrative costs, and compliance burden. (France and the UK, for instance, exempt more than half of the taxable base, driving the tax rate up on everything that's left taxed.)
- Having Both Federal and Local VATs Increases Complexity. Tax system complexity and compliance burden in Canada vary among provinces depending on the level of coordination between the provinces and the federal VAT.
- Transition Issues Arise Even With Significant Efforts. Countries take 15 to 24 months to implement a VAT with a great deal of time and effort devoted to education activities. Despite significant efforts to encourage businesses to submit materials early for VAT registration, both Australia and Canada still had difficulty getting businesses to register prior to the VAT implementation date.
Read the complete study here.
Back in 1979, the Tax Foundation examined whether a Value-Added Tax (VAT) could work in the United States. Read that study here.
Posted on May 5, 2008 by Gerald Prante
As far as temporary gas tax holidays go, the Tax Foundation's position has long been that they're all bad. But even within gas tax holidays, there are bad and worse. And this one being suggested in the Missouri legislature is the worst.
You could get a break at the gas pumps in Missouri this summer if a bill gets the approval of the Legislature and the governor. It would lift the state’s gasoline tax for the summer – in a way.
The state’s gas tax is 17 cents on every gallon. If the bill becomes law, however, it wouldn’t mean 17 cents would drop off the prices at the pumps.
Gas prices are getting harder and harder to handle. In the Springfield area, regular unleaded was around $3.37 a gallon on Thursday. So word of a price cut has drivers excited.
“I think that's a fantastic idea! Anything that would cut gas prices down a little bit for us would be a great idea,” said one person.
The Missouri House gave initial approval to the measure, which would lift the state gas tax from May 24 to Sept. 2.
But Missourians would have to save their receipts and turn them in with their 2008 tax returns.
“I don't know about anybody else, but I'm terrible about saving receipts,” said Ben.
At 15,000 miles a year on 25 miles per gallon, your savings would be $27.46.
“People will just not know about it or say it's not worth the effort, so there's going to be a lot of them filtered out, and it'll lessen the impact,” said Reed Olsen, an economics professor at Missouri State University.
So instead of seeing a lower price at the pump (or possibly not even one), a consumer would be forced to save his/her receipts, and then report it on next year's Missouri income tax form.
The tax policy ideas coming from politicians just keep getting dumber and dumber...
Posted on May 5, 2008 by Joseph Henchman and Gerald Prante
Daily Tax Report notes that House Republicans are preparing to offer a $10,000 tax credit for first-time home buyers as the Republican alternative to the housing stimulus bill (H.R. 5830), which will likely be voted on this week. This one-ups the Democrats, who were proposing something in the neighborhood of $5,000 to $7,500.
According to a press release from Rep. Lee Terry (R-Nebraska) (emphasis added):
This Republican proposal offers a market-based plan with a tax credit and other reforms that will stimulate the housing market[....]
So the idea is to use government tax policy to give subsidies to one group of people, paid for by extracting taxes from others, with the goal of distorting the decisions that would otherwise be made by individuals. That's the opposite of "market-based."
Posted on May 4, 2008 by Gerald Prante
The current high price of gas has led to a lot of crazy proposals from gas tax holidays to creating a tax deduction based upon energy consumption. But Rep. Paul Kanjorski's (D-PA) may top them all in terms of its stupidity. From the Times Leader, Kanjorski's plan would do the following:
• H.R. 5800 would tax industries’ windfall profits.
• The bill would set up a Reasonable Profits Board to determine when these companies’ profits are in excess, and then tax them on those windfall profits.
• As oil and gas companies’ windfall profits increase, so would the tax rate for those companies.
• Kanjorski said his legislation will encourage oil companies to lower prices to prevent them from receiving higher tax rates.
While Hillary Clinton may have failed ECON 101 along with John McCain, it appears as if Kanjorski may been enrolled in Marxism 450 at the time. In all honesty, nationalization of the oil industry (i.e. Venezuela) may be better than Kanjorski's ridiculous proposal.
One can make a case for taxing that portion of the return to capital that comes from economic rents, but Kanjorski has probably never even heard the term. An economist who backed such a tax would understand that such a tax is not going to lead to lower prices at the pump, just as economists are setting the record straight on the current gas tax holiday gimmick. Furthermore, the justification for taxing economic rents would apply to all sectors, not just petroleum.
Members of Congress and the American public need to understand that no tax cut or tax hike in the short-term is going to lower the prices at the pump. And any tax hike is going to raise prices in the long-term. Raising taxes on energy is not all bad, however. While any tax hike has its costs, raising taxes on gasoline does lead to less pollution (indirectly whereas a carbon tax is more direct) and greater funds for transportation (assuming they are spent in the right way which is unfortunately not always a safe assumption).
Posted on May 3, 2008 by Gerald Prante
Whenever government gets its hands on something, it will attempt to control more and more of it, typically with purse strings. A New York Times article today shows how politicians in Canada are trying to use the subsidies of film tax credits to censor film content by giving only certain films the handout. Here's a clip.
Most Canadian films and non-news television programs apply for a government cash payment, which is described as a tax credit, to offset some of their labor costs. Sandra Cunningham, the president of Strada Films of Toronto and chairwoman of the Canadian producers’ association, said the payments typically cover about 10 to 12 percent of a production’s budget.
To receive that money, filmmakers apply in advance for a certificate declaring their project sufficiently Canadian. The government’s payment, however, does not arrive until the film or television series is completed and it is again reviewed.
It is that second review that the government hopes to expand. The change would allow the minister of Canadian heritage, an elected official, to “also certify that the public funding of the production would not be contrary to public policy.”
That broadness of the extra review is the chief concern of the writers, filmmakers, actors and free-speech groups who have visited the Senate over the past few weeks. They argue that it would allow the government to cut funds and, in effect, censor films that offend any number of moral, religious or political views.
“I have heard it suggested many times in response to our attacks on this bill that we are free to make whatever film we want but with private money,” Ms. Polley told the committee. “It is a suggestion that, unfortunately, has absolutely no basis in reality. Every Canadian television program and film that I and any of us have ever been involved in has involved some public financing. When you tell artists to use private money, it is essentially telling us to leave the country.”
"Sufficiently Canadian" is pretty funny. So if the film features Alex Trebek and a hockey game, it's alright; but if it shows Pat Sajack and a baseball game, nope?
If this all sounds socialist and totalitarian, that's because it is. And it's not likely to stop at the border. States right now are pushing these film tax credits, and don't be surprised if a state legislator someday puts in a provision that restricts the subsidy from going to a certain type of film (say those rated "R" or those containing nudity). In the end, government will be manipulating the relative price of what it deems to be "clean" movies relative to "dirty" movies. And of course, you the taxpayer will be footing the bill.
Posted on May 2, 2008 by TF Staff
Using data on who owns shares in U.S. oil companies combined with household financial data in the Survey of Consumer Finances, the Tax Foundation has done a distributional analysis of the proposed gas tax holiday and windfall profits taxes. Note that the report shows how the estimated savings from a gas tax holiday under both assumptions: (1) that the tax cut is merely capitalized into higher prices for gasoline (the economists' consensus) and (2) that the tax cut is fully passed forward to consumers.
Here is what the table looks like for a gas tax holiday that is not passed onto consumers (or equivalently a windfall profits tax on oil companies).
Average Tax Savings Per Familiy from Proposed Policies:
| Income Quintile | Windfall Profits Tax Burden per Family (Short-Run) | Gas Tax Holiday Savings (Economists' Assumption) |
|
| Bottom 20% | $6 | $6 |
| Second 20% | $10 | $10 |
| Middle 20% | $24 | $24 |
| Fourth 20% | $48 | $48 |
| 80-90% | $68 | $68 |
| Top 10% | $558 | $558 |
Sources and notes: See full paper.Note that these tables and those in the actual paper ignore the fiscal incidence on the spending side. For example, if lower taxes on gasoline leads to cuts in transportation spending, the latter would result in lower welfare for citizens, all else equal. That's because government services would be cut. (The net effect would be the value of the tax cut compared to the value of the government services cut.)
Some have discussed how a gas tax holiday would cost 30,000 jobs in the construction sector. With all due respect to those in the industry, that should be irrelevant from the perspective of gas tax policy. The purpose of government is not to maximize the number of jobs. The purpose is to provide a service to the citizens that cannot be provided by the private sector for whatever reason. If there was a way in which transportation projects could be completed without paying a single worker (say a self-operating cheap machine could do it), that would be terrific. Those labor resources could be used to produce some other product or service.
In summary, the "jobs" rhetoric is ridiculous. Think about it. Suppose the government started paying people to dig ditches and then paid other people to fill them back up. That would create a lot of jobs, but would provide no benefit to society.
Posted on May 2, 2008 by Joseph Henchman
Amazon has filed suit in New York state court seeking to invalidate the recently passed "Amazon tax", which requires any out-of-state online retailer collect sales tax on purchases if the business does at least $10,000 worth of business with in-state affiliates, even if it has no property or employees in the state.
In its lawsuit, Amazon argues the law violates the Commerce Clause, Due Process Clause, and Equal Protection Clause of the U.S. Constitution. They have a good case, as we previously discussed:
New York's move is just the latest in a string of state efforts to abandon the physical presence rule of taxing out-of-state businesses. In 1992, the U.S. Supreme Court reaffirmed the rule in the Quill v. North Dakota case, holding that a state could not impose sales tax collection obligations on a company, unless the company has either property or employees in the state. Amazon has neither in New York.
Far from creating a level playing field, New York's new law and other efforts to abandon the physical presence rule (California has a pending bill, A.B. 1840) actually move away from a level playing field. If every state did what New York did, online retailers would have to keep track of the different rates and bases of the 7,400+ sales taxing jurisdictions in the United States and all the income tax systems. We here at the Tax Foundation have a lot of researchers and subscriptions trying to do that, and it'd be quite burdensome for small online retailers to tackle that task. Meanwhile, brick-and-mortar retailers need only keep track of one sales tax rate and base.
Many states are hoping that the Streamlined Sales Tax Project, by simplifying state sales taxes, will paper over this fundamental inequity by making compliance easy. (Hard to believe since their stretch goal is to limit the 7,400+ sales tax jurisdictions by nine-digit zip codes, of which there are 38,547,080.)
Amazon's filing papers elaborate on how it impacts them:
The new law is based on a novel definition of what constitutes a presence in the state: It includes any Web site based in the state that earns a referral fee for sending customers to an online retailer. Amazon has hundreds of thousands of affiliates--from big publishers to tiny blogs--that feature links to its products. It says thousands of those have given an address in New York State, although it does not verify the addresses. The state law says that if even one of those affiliates is in New York, Amazon must collect sales tax on everything sold in the state, even if it is not sold through the affiliate.
Yours truly made a push for neutral tax systems that don't discriminate against online retailers in a comprehensive Internet News article by Kenneth Corbin:
"Brick-and-mortar retailers will have to keep track of just one tax law at a time, while online retailers will have to keep up with 7,400," he said. "A neutral tax system would have all retailers collect tax on one standard or the other."
We'll continue to monitor this case as it develops. More on the physical presence rule here, here, and here.
Posted on May 2, 2008 by Scott A. Hodge
ExxonMobil's recent announcement of first quarter profits of $10.9 billion has prompted the predictable political demagoguery about "obscene" profits and the need for a new windfall profits tax. Exxon does not need our help to defend itself against such charges but I remain amazed that none of the major news outlets have highlighted the fact that these are net profits, meaning profits after taxes.
If reporters were to dig just a bit deeper into the company's earnings statement they would find that Exxon—like all the major domestic oil companies—directly pays or remits a staggering amount of taxes to governments both here and abroad. Before taxes, Exxon had income of $20 billion on total world-wide revenue of $116 billion. Its earnings statement shows that the company paid $9.3 billion in income taxes to governments here and abroad. This amounts to an effective tax rate of more than 46 percent, 10 percentage points higher than the U.S. statutory rate of 35 percent.
In addition to income taxes, the table below shows that Exxon paid or remitted $20 billion in various sales taxes, excise taxes, severance taxes, and property taxes. This brings the total amount of taxes the company paid or remitted to $29.3 billion, nearly three times the net profits it earned for shareholders.
The financial statements of two other large U.S.-based oil companies, ConocoPhillips and ChevronTexaco, show similar large tax payments. Indeed, these three companies paid or remitted a combined $47.8 billion in taxes in the first quarter of 2008, nearly $28 billion more than they earned in net profits.
Of course, these firms are multinational so many of these taxes are paid to foreign governments not just to Uncle Sam. But the point critics and the media need to recognize is that governments in general are bigger beneficiaries of oil industry sales than are shareholders.
| First Quarter 2008 Results | | | | |
| (Millions of Dollars) | Exxon | Conoco | Chevron | Total |
| Gross Sales | $ 116,000 | $ 54,883 | $ 64,659 | $ 235,542 |
| Income before tax | $ 20,192 | $ 7,549 | $ 9,677 | $ 37,418 |
| Income taxes | $ 9,302 | $ 3,410 | $ 4,509 | $ 17,221 |
| Sales-based taxes | $ 8,432 | n/a | n/a | $ 8,432 |
| All other taxes | $ 11,607 | $ 5,155 | $ 5,443 | $ 22,205 |
| Total taxes | $ 29,341 | $ 8,565 | $ 9,952 | $ 47,858 |
| Net Profits | $ 10,890 | $ 4,139 | $ 5,168 | $ 20,197 |
| Effective Income Tax Rate | 46% | 45% | 47% | 46% |
Posted on May 1, 2008 by Gerald Prante
Here's the logic of our elected representatives in Congress when it comes to taxing profits:
Oil companies are benefiting from the higher price of an asset (oil), some of which is driven by speculation. So the proper policy prescription is to impose a special windfall profits tax on them during that boom period.
Home builders benefited from the high price of an asset (housing), some of which was driven by speculation. So the proper policy prescription is to allow them to reduce their tax bills they paid during that boom period via a special loss carryback provision.
Can you tell it's an election year?
Posted on May 1, 2008 by Gerald Prante
We present to you the worst of the gas tax and windfall profits tax debate:
(1) “Barack Obama doesn’t understand the effect of high gas prices on the American economy,” McCain spokesman Tucker Bounds said in a statement. “Sen. Obama voted for a gas tax reduction before he opposed it, he has no plan for relief from record-high gas prices for Americans this summer and he’s the empty-tank candidate in this race.
On the issue of the gas tax holiday, Barack Obama is correct. On the issue of the windfall profits tax, Obama is just pandering. But Senator McCain's proposal won't bring relief from record-high gas prices either.
(2) “There are times a president will take a position that a group of quote-unquote experts will agree with and there are times when a president will take a position that a group of quote-unquote experts won’t agree with it,” campaign spokesman Howard Wolfson told reporters today, “Sen. Clinton believes this is the right policy.”
These "quote-unquote" experts are essentially unanimous in their opposition, and it doesn't matter what side of the aisle they are on, or whether they favor a larger or smaller role for government.
(3) Clinton also noted that while Democratic rival Sen. Barack Obama, D-Ill., opposes the idea, it has been embraced by presumptive Republican rival Sen. John McCain, R-Ariz.. The Indianapolis Star said Clinton chided McCain for not backing her idea of a windfall profits tax on the oil industry to make up the lost tax revenue. "I sort of feel like Goldilocks," Clinton said. "Not too much, not too little. Just right."
Actually, the nursery rhyme three blind mice would be more appropriate for the three candidates' positions on this issue.
(4) Obama: "We've got to go after the oil companies and look at their price-gouging. We've got to go after windfall profits … then we've got to use less oil, and that means raising fuel efficiency standards for cars."
"Price gouging" is already illegal. With regards to "go after the oil companies...," it's just pure rhetoric that plays well with an angry audience. A windfall profits taxes would be paid by the individuals who own the oil companies either directly as individual shareholders or indirectly through pension funds. The CEO's of these corporations aren't exactly the only ones that would be harmed by such a tax. Furthermore, a windfall profits tax is a bad way to reduce one type of investment in future energy.
(5) A policy proposal in a written statement from Grover Norquist of Americans for Tax Reform to members of Congress:
ATR suggests providing a year-end tax deduction to consumers which could be filed using the income tax system. At the end of each fiscal year, energy receipts from the preceding year would be tabulated and that amount deducted on their income tax form. Just as individuals can deduct their home mortgage or sales tax from their federal income tax bill, this same concept would be applicable to the consumption of fuel.
Such a proposal is worse than the gas tax holiday. It would create more complexity in the federal income tax, especially given that it would require energy receipts. Second, it would encourage more energy consumption, and to a large extent merely be capitalized into the price of energy, thereby saving consumers as a whole very little. And finally, the subsidy would vary based upon one's marginal tax rate, and thereby via the price effect would likely have the result of making energy more expensive for the poor, while slightly subsidizing energy for the rich (those in higher marginal tax rates).
(6) Hillary Clinton speaking about a windfall profits tax: “We will pay for it by imposing a windfall profits tax on the big oil companies. They sure can afford it."
Similar to Obama. She doesn't tell the whole truth by telling us which individuals will pay for it, and why those individuals should. See more here.
(7) Clinton also said she will make sure that the tax suspension is passed on to motorists by ordering the Federal Trade Commission to aggressively oversee service stations. Democratic rival Barack Obama has raised that concern in so far not supporting the gas tax suspension.
Trying to legally enforce economic incidence = price controls.
Posted on May 1, 2008 by Gerald Prante
Today's Politico had a story detailing how the National Association of Home Builders yields excessive influence in the tax policymaking process, seeking to have resources flow its way at the expense of economic efficiency.
The nation’s home builders are switching lobbying tacks as the industry seeks relief from the mounting housing crisis.
The National Association of Home Builders announced Wednesday that its new top priority is to secure passage of a tax credit for first-time homebuyers, worth up to $7,500, that’s part of a housing tax package approved by the House Ways and Means Committee.
After intense analysis and internal polling, the association concluded that the tax credit was the most stimulative policy option on the table, said Jerry Howard, the group’s executive vice president and chief executive officer.
“Our members overwhelmingly believe that this tax credit concept is just the ticket to get them out of the doldrums,” he said. “They’ve given us the marching orders to shift our focus.”
The decision comes after months of pursuing another policy option to help the industry through the economic slowdown — a tax provision to allow home builders and other hard-hit industries apply current losses to past tax years and claim refunds.
In early April, the Senate passed its own housing bill that included just such a “carry back” provision. It would cost $6.1 billion over 10 years.
Let's see. Members of Congress can listen to the National Association of Home Builders who is set to reap windfalls from the provision and says more tax credits for housing is good, or they can listen to every tax research organization in Washington (left and right) who has little financial stake on the issue and says more tax credits for housing is bad? Guess who they will choose?
Posted on April 30, 2008 by William Ahern
In testimony before the governor's tax commission in Jackson, Mississippi, experts from the Pew Charitable Trust and the Tax Foundation agreed that taxes on phone companies are a terrible burden on the companies and their customers.
Every new service the hyper-competitive phone companies offer spawns a new tax that is grafted onto old taxes left over from when Ma Bell was our one monopoly phone company.
Just today we received a plea for help from the manager of a new hotel who is desperately trying to figure out what her hotel's phone bill is going to be like. She drew up a chart of tax rates that she needs to fill in.
TAXES | City | State | Federal | Other1 | Other2 |
Local | ____% | ____% | ____% | ____% | ____% |
950 | ____% | ____% | ____% | ____% | ____% |
976 | ____% | ____% | ____% | ____% | ____% |
411 Info | ____% | ____% | ____% | ____% | ____% |
555 Info | ____% | ____% | ____% | ____% | ____% |
1-700 | ____% | ____% | ____% | ____% | ____% |
1-800 | ____% | ____% | ____% | ____% | ____% |
1-900 | ____% | ____% | ____% | ____% | ____% |
(0+) | ____% | ____% | ____% | ____% | ____% |
Message Unit | ____% | ____% | ____% | ____% | ____% |
In-state | ____% | ____% | ____% | ____% | ____% |
State-to-state | ____% | ____% | ____% | ____% | ____% |
International | ____% | ____% | ____% | ____% | ____% |
HOBIC | ____% | ____% | ____% | ____% | ____% |
Equipment | ____% | ____% | ____% | ____% | ____% |
Those "other" columns could be school districts or some other regional tax authority, legal entities created by state or local politicians who have delegated the power to tax so that they can avoid voting on a tax hike.
More on cell phone taxes here.
Posted on April 30, 2008 by Gerald Prante
Yesterday, Democratic presidential candidate Hillary Clinton made the following statement in support of her windfall profits tax on oil companies to finance a temporary gas tax holiday:
“We will pay for it by imposing a windfall profits tax on the big oil companies. They sure can afford it."
They can afford it? What does that even mean? A windfall profits tax will be borne almost entirely by the shareholders of the oil companies. Companies really have no "ability to pay" as their taxes are borne by individuals, which is where the true "ability to pay" lies.
Clinton fails to understand that the current value of the oil stocks that shareholders are holding represents expectations about future profits (even if those profits are from economic rents due to some barriers to entry, etc.) and those accrued profits that have yet to be distributed (either via stock buyback or dividend payments). However, the shareholders of Exxon-Mobile, Shell, BP, etc. change everyday. So if I go buy a share of Exxon today at its high price expecting higher future payments, but then Clinton's windfall profits tax kicks in, I would be the one to lose, an individual who has not benefited a dime from the higher profits that Exxon has reaped.
On the other hand, many stockholders of Exxon are stable, mostly pension funds and those who merely hold onto the stock for a long period of time. If one truly feels that the current profits Exxon (and others) have made are excessive and unfair, then really the only fair tax would be to somehow tax those shareholders past and present that have truly benefited from those "excess" profits. And that will not necessarily be the same person who holds the stock at the time of the profits being earned due to expectations being factored into the stock price. In lay men's terms, you would ideally be taxing those who bought low and sold high (or currently hold the stock). Otherwise, there is no justification from a "they sure can afford it" argument for imposing a windfall profits tax because the party that bore the windfall profits tax may not necessarily be the same party that reaped the gains from the profits. It would actually be more justifiable under the "they can afford it" criterion to merely raise capital gains taxes and dividends taxes at the individual level, although doing so would some adverse economic consequences (no free lunch).
Overall, Clinton fails, like most politicians on both sides of the aisle who know little about tax incidence, to realize that corporations' tax burdens (and profits) are borne by individuals.
Posted on April 29, 2008 by Scott A. Hodge
For the second time this month, a major British firm announced that it will reincorporate in Ireland to lower its tax bill. United Business Media (UBM) joined the pharmaceutical company Shire in the exodus of UK firms seeking relief from the country's 28 percent corporate tax rate—which is low compared to the 39.4 percent overall rate in the U.S., but is high by E.U. standards. Ireland's corporate tax rate is currently the lowest in Europe at 12.5 percent.
The common trait among the companies that reincorporate in low-tax jurisdictions is that they have grown beyond their home country's borders and become predominantly global in nature. According to the Guardian, more than 85 percent of UBM's profits are generated from foreign operations. Since Great Britain, like the U.S., has a worldwide tax system, the vast majority of the company's profits are exposed to British tax even though only its U.K. presence is quite small. By creating a parent holding company in Ireland, UBM will lower the tax rate on those foreign profits by 15.5 percentage points (28 minus 12.5). It will still pay the 28 percent rate on its U.K. profits.
While these news reports have prompted a heated debate among British lawmakers over how to make their tax system more competitive and attractive to business, they should prompt a similar debate in this country. After all, the U.S. has the second highest overall corporate tax rate among industrialized countries and 11 percentage points higher than Great Britain's rate. See: http://www.taxfoundation.org/news/show/22917.html Moreover, a growing number of U.S. multinational firms are, like UBM and Shire, are generating more profits abroad than domestically. As a result, some may face pressure from shareholders to reduce the exposure of those profits to U.S. tax.
Four years ago, then-presidential candidate John Kerry tarred U.S. companies that reincorporated in low-tax jurisdictions with the treasonous label of "Benedict Arnold companies." That unpleasant label has probably stopped many American firms from reincorporating abroad since 2004. But as corporate tax rates continue to fall across the globe, U.S. firms may find that survival is more important than stigma.
Posted on April 29, 2008 by Joseph Henchman
In May, the U.S. Supreme Court will decide whether to hear the case of Centerior Energy Corp. v. Mikulski, an appeal from a lower court decision opening the door to fragmented state-by-state interpretations of the U.S. tax code. The Tax Foundation has filed a friend of the court brief urging the Court to take the case, which raises the question of whether taxes paid to the government can be recovered from a business instead of from the IRS.
Like many taxpayers, Centerior Energy Corp. was confronted with applying complex tax laws to its individual situation. The tax law in question, 26 U.S.C. § 7422, was left ambiguous by Congress, which had expected the IRS to issue further regulations. Since the IRS never did, Centerior and other taxpayers had to choose between two conflicting, but equally plausible, interpretations. The plaintiffs in this case (the Mikulskis) allege that Centerior chose wrongly, and as a result, caused them to overpay their income taxes. The lower court agreed, suggesting that "correct" interpretations of ambiguous tax laws could vary state-by-state.
Fragmented interpretations of the federal tax code exacerbate complexity, harm taxpayers, and inhibit commercial activity. If the lower court plaintiffs are successful, states would declare "official" state interpretations of federal tax laws twenty years after the fact, and businesses would be subject to fraud lawsuits for any actions relying on any other interpretation. A federal tax code with supposedly universal application would end up balkanized with fifty different interpretations. Unless the U.S. Supreme Court acts, the plaintiffs' success in the Sixth Circuit will harm taxpayers, weaken the Grable test, and undermine the uniform application of the federal tax code.
Click here to read the Tax Foundation's Fiscal Fact on Centerior Energy Corp. v. Mikulski.
Click here to read the amicus brief.
Posted on April 29, 2008 by Gerald Prante and Joseph Henchman
In suburban Chicago, some enterprising retailers are encouraging taxpayers to spend their stimulus payment checks in their shops:
About 75 merchants in Geneva's downtown area along and off State Street are looking for you to visit them today and Sunday.
If you do, they'll pick up the sales tax on your purchases.[...]
"Everybody is pretty geared up for it," said Carolyn Dellutri, downtown development coordinator for the city.
The unofficial theme, she said, is "You paid your income taxes on Tuesday, we'll pay your sales taxes this weekend."
Participating stores are flying a Tax-Free Zone banner.
Cutting your prices by 7% may not be much, but it's a nice gesture that probably worked rather well. (Especially since Chicago, with its punitive 10.25% sales tax rate, is just across town.) One problem though: it's probably illegal. Illinois law:
It is unlawful for any retailer to advertise or hold out or state to the public or to any purchaser, consumer or user, directly or indirectly, that the tax or any part thereof imposed by section 3 hereof will be assumed or absorbed by the retailer or that it will not be added to the selling price of the property sold, or if added that it or any part thereof will be refunded....
--35 Ill. Comp. Stat. 105/7.
And Illinois enforces it, with state revenue officials sending these threatening letters to retailers who dare tell customers that they'll pick up the sales tax. It's a Class A misdemeanor offense, that can get you up to a year in jail and a $2,500 fine:
While we do not want to interfere with your advertising techniques, under the circumstances, we are compelled to do so. You should immediately cease advertising that no sales tax will be incurred. Any future advertisements of this kind will be viewed as a continuing violation, which could result in criminal prosecution.
This may be the dumbest tax law in the history of dumb tax laws. If a company offers a 7-percent-off sale across the entire store, that's legal. But if the company says, "We'll pay your 7 percent sales tax," that's not legal. The two are equivalent from the perspective of the state treasury, the seller, and the buyer. It's just a matter of wording. Now there may be a case if the tax is hidden, but here it's not—big posters are advertising that the tax exists and is being paid.
Because the statute prohibits such promises "directly or indirectly," is it even possible to draw a line between what is legal and illegal? If the company says in an ad, "Everything in the store is 6.25 percent off today, which is the same as you, our customer, paying no sales tax," is that legal? What if the store just says, "6.25 percent off today," which would hint that there is no sales tax? Is that legal? We'd love to be the economist or legal expert called to testify in a state prosecution over this silliness.
Posted on April 28, 2008 by Courtney Albregts
Co-sponsored by the Tax Foundation and three other nonprofits, a conference on domestic policy issues will be held on Tuesday morning, April 29, from 8:30 to 12:30 at the Sewall-Belmont House & Museum (next to Hart Senate Bldg) at 144 Constitution Ave, NE.
American University, the New America Foundation, and the Committee for a Responsible Federal Budget are co-sponsoring the event with the Tax Foundation. The forum includes top advisers to the campaigns, as well as leading policy experts from across the political and ideological spectrum who will examine the differences and similarities of the domestic plans and explore the impact they would have if implemented.
Click here to view the details. Click here for a chart comparing the tax plans of Clinton, McCain, and Obama.
Posted on April 28, 2008 by Joseph Henchman
The first stimulus checks were mailed today. When your economic stimulus check arrives depends on whether your 2007 tax return set up a direct deposit payment, and on the last two digits of your Social Security number, according to an IRS announcement updated today:
| Direct Deposit Payments |
| If the last two digits of your Social Security number are: | Direct deposits will begin on: | Payments should be deposited by: |
| 00 – 20 | April 28 | May 2 |
| 21 – 75 | May 5 | May 9 |
| 76 – 99 | May 12 | May 16 |
| Paper Check |
| If the last two digits of your Social Security number are: | Checks will be mailed beginning: | Your check should be in the mail by: |
| 00 – 09 | May 9 | May 16 |
| 10 – 18 | May 16 | May 23 |
| 19 – 25 | May 23 | May 30 |
| 26 – 38 | May 30 | June 6 |
| 39 – 51 | June 6 | June 13 |
| 52 – 63 | June 13 | June 20 |
| 64 – 75 | June 20 | June 27 |
| 76 – 87 | June 27 | July 4 |
| 88 – 99 | July 4 | July 11 |
Note: These dates apply only to individuals who filed taxes by April 15. For joint filers, checks will be mailed to the person listed first on the return.
The IRS will be mailing approximately 130 million stimulus payment checks. Estimate yours at their new online calculator (most will receive $600 for an individual, $1,200 for married, plus $300 per qualifying child). Checks may be reduced to satisfy back taxes, child support, or other unpaid obligations.
More Tax Foundation commentary on the stimulus plan here.
