Tax Foundation - Press Room

How Much Do U.S. Corporations Really Pay in Taxes?

Mon, 06 Feb 2012 00:00:00 EST

New Video Documents High Effective Rates

Washington, DC, February 6, 2012—U.S. companies pay among the highest corporate tax rates in the world, even after accounting for all deductions and loopholes, according to a new video produced by the Tax Foundation. This explanation of "effective" tax rates for corporations, based on recent academic studies of tax systems around the globe, is the third in a 5-part series on corporate taxes.

"The impression that a large number of U.S. companies are using loopholes and creative accounting to get out of paying taxes could not be more wrong," said Tax Foundation president Scott Hodge. "American corporations are consistently paying at the highest levels in the world, and that burden impacts their ability to compete both at home and abroad."

The U.S. currently has the second highest tax rate on corporations, and will soon become number one when Japan implements a planned rate cut later this year. When the average corporate tax rate on the state level is added in, the total is almost 40%. After deductions, the effective rate naturally falls several points, but remains well above the average for developed countries and our closest trading partners.

"Pointing to a handful of prominent companies with unusually low tax payments makes for catchy headlines, but in no way tells the real story," said Hodge. "The data on American businesses in general is clear: they’re paying much higher rates than their foreign competitors. That’s a problem, and comprehensive tax reform is the answer."

The Tax Foundation video "Effective Corporate Tax Rates" is available online.

Previous installments focused on the advantages of a territorial tax system and how the U.S. has fallen behind by standing still on tax policy.

Script: "Effective Corporate Tax Rates"

The U.S. has one of the highest corporate tax rates in the world at 35% -- almost 40% when you add in state taxes.

But, just like you and I get to deduct things like our mortgages and charitable contributions, corporations get to deduct things too – like the cost of research and development and building a factory.

These deductions – what some call “loopholes” – save businesses about $100 billion a year according to the U.S. Treasury.

And from what you hear in the press, you’d think that all those “loopholes” would help American companies compete against businesses from lower-tax countries.

It turns out that is not the case when you compare what is called the 'effective tax rate.' The "effective tax rate" is the tax rate that companies ACTUALLY pay after their deductions.

You see, other countries give tax breaks too and more than a dozen international studies have compared the effective tax rates US companies pay to the effective tax rates paid by companies in other countries.

And, no matter how you measure it, American companies almost always pay the highest effective tax rates.

Take this new World Bank study, for example. They looked at the effective tax rates paid by a typical company in 183 countries around the globe. They found that 164 countries have lower effective corporate tax rates than the U.S.

The global average rate, 16%. Our average rate, nearly 28% [27.6%].

Only New Zealand, Chad and a handful of much smaller countries had higher rates than the US.
[citation: World Bank/PWC “Paying Taxes 2012”]

Another study by British economists at Oxford University compared the average tax rates for a range of industries in 19 of the biggest economies in the world.

The US didn’t stack up so well.

The average rate for industries in the US, 34.9%.

But industries in countries such as Korea (19.8%), China (22.4%), Canada (25.7%), United Kingdom (26.3%), Germany (27%), and India (29.5%), all paid lower rates. Only Japan had a higher rate.

[citation: Devereux, et.al. (2011)]

And a study by American economists comparing the effective tax rates of large businesses in 15 countries found that US companies tended to pay among the highest tax rates.

Companies in places like Sweden (18%), Taiwan (18%), France (23%), and South Africa (25%), all paid lower effective tax rates than US firms (28%).

Only Japanese companies (36%) paid a consistently higher tax rate than those in the US.
[citation: Markle/Shackelford (2011)]

But, Japan is cutting their corporate tax rate this year, which will leave us standing with the highest rate among large economies.

So not only do other nations offer lower rates, but their territorial tax systems can lower the tax burden for their companies even further. It’s no wonder that they can out-compete US firms who pay high tax rates AND a second-layer of tax because of our worldwide tax system.

Headlines about a few companies that pay little in taxes may make for juicy political sound bites, but they don’t tell the whole story.

No matter how you look at the data, U.S. companies are paying one of the heaviest tax burdens in the world, and until our system is more competitive, we will struggle to keep jobs and industries in our country.

For more information visit tax foundation dot org.

The Tax Foundation video "Effective Corporate Tax Rates" is available online.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation’s Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.

Bush Tax Cuts Did Not Increase Income Inequality

Mon, 30 Jan 2012 00:00:00 EST

Gap between Rich and Poor Driven by Business Cycle

Washington, DC, January 30, 2012- Contrary to recent reports suggesting that Bush-era tax cuts have increased income inequality in the U.S., the gap between rich and poor in recent decades has been driven mostly by the business cycle, i.e. multi-year fluctuations in economic activity, according to a new report by the Tax Foundation.

"Inequality generally increases during eras of growth and economic expansion and decreases during recessionary times," said Tax Foundation economist Will McBride. "Changes in tax rates on high-income earners over the last two decades have been incidental to this trend."

Historically, income inequality in the U.S. reached a peak in the 1920s, falling in the decades afterward and eventually rising again in the 1980s and 1990s. This rebound has been attributed to everything from globalization and immigration to the growth of super-star salaries and the computer revolution. All of these factors, however, might better be described as simply the reasonable outcomes of a growing market economy.

The resurgence of inequality in recent decades has also been attributed to tax policy. Based on the most recent IRS data, income inequality has fluctuated considerably since 2000 but is now at about the level it was in 1997. Thus, the Bush-era tax cuts, which had provisions benefitting both high- and low-income taxpayers, did not lead to increased income inequality. By contrast, inequality rose 12% between 1993 and 2000, following two tax rate increases on high-income earners. Thus, changes in inequality over the last two decades appear to be driven more by the business cycle than tax policy.

Levels of inequality can also be made to appear higher than they actually are based on how researchers present the data. The most recently published studies on income inequality use either 2006 or 2007 as their end point, without fully correcting for the business cycle. Since the peak in 2007, personal incomes have collapsed to a degree not seen since the Great Depression. The most dramatic collapse has been in high incomes. Since 2007, for example, the number of millionaires has dropped 40 percent, while income reported by millionaires has dropped in half.

"It is not evident that the Bush tax cuts in either the top marginal rate or capital gains rate had any long term effect on inequality. If anything, they appear to have reduced inequality," said Tax Foundation economist Will McBride. "Therefore, a return to Clinton-era tax rates would not necessarily reduce inequality."

Tax Foundation Fiscal Fact No. 289, "Reversal of the Trend: Income Inequality now Lower than it was Under Clinton" by Will McBride is available online.

The Tax Foundation has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation's Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org

Which States Are Best for Business?

Wed, 25 Jan 2012 00:00:00 EST

Tax Foundation Releases Rankings on "Business-Friendliness" of State Tax Systems

Washington, DC, January 25, 2012 -- Wyoming, Florida, and Texas rank among the ten best states for taxes on business, while companies in states like New York, New Jersey, and California have a far less pleasant tax climate to deal with, according to a new report by the Tax Foundation.

The State Business Tax Climate Index, now in its 8th edition, accounts for dozens of state tax provisions, creating a single easy-to-use score that measures each state against the tax climates of every other state. Each state's ranking is therefore relative to the actual tax policies in place around the country, not a measurement against a theoretical "perfect" system.

The Index enables business leaders, government policymakers, and taxpayers to gauge how their states' tax systems compare. While some similar studies focus on the total amount residents pay in taxes each year, the Index focuses on how the elements of a state tax system enhance or harm the competitiveness of a state's business environment.

"Even in our global economy, a state's stiffest and most direct competition often comes from other states," said Tax Foundation economist Mark Robyn. "State lawmakers need to be aware of how their states' business climates match up to their immediate neighbors and to other states in their region."

The 10 best states in this year's 2012 Index are Wyoming (#1), South Dakota (#2), Nevada (#3), Alaska (#4), Florida (#5), New Hampshire (#6), Washington (#7), Montana (#8), Texas (#9), and Utah (#10). Many of these states do not have one or more of the major taxes, and thus do not have the associated complexity and distortions.

The 10 lowest ranked, or worst, states in the 2012 Index are Iowa (#41), Maryland (#42), Wisconsin (#43), North Carolina (#44), Minnesota (#45), Rhode Island (#46), Vermont (#47), California (#48), New York (#49), and New Jersey (#50). While New Jersey remained steady compared with 2011, Rhode Island improved by implementing a modest income tax reform. The states in the bottom ten generally have complex, non-neutral taxes with comparatively high rates.

Illinois moved most dramatically in its Index rank over the past year, falling twelve places after a significant income and corporate tax increase. Other states seeing a decline in their ranking include Vermont, which fell four places, while Massachusetts and North Dakota both advanced four places up the chart.

In 2011, the State Business Tax Climate Index was downloaded 487,000 times and cited in hundreds of newspaper articles, editorials, and broadcast media reports. Four governors also cited the Index's findings in their State of the State addresses.

Tax Foundation Background Paper No. 62, "2012 State Business Tax Climate Index" by Mark Robyn is available online.

Tax Foundation Grades the Presidential Candidates

Sat, 14 Jan 2012 00:00:00 EST

Jon Huntsman Leads with B+, Santorum Trails with D+

Washington, DC, December 19, 2011--Taxes are at the top of the agenda in the 2012 presidential race, but the complexity of the competing candidates' plans can make them difficult to evaluate. To help clarify the issue, the Tax Foundation has reviewed the positions of the Republican nominees for President and assigned them letter grades based on how closely their plans are guided by the principles of sound tax policy.

Top of the class honors go to former Utah Gov. Jon Huntsman, who received a grade of B+, while former Pennsylvania Sen. Rick Santorum brought up the rear with a grade of D+. Herman Cain's plan is included for comparison purposes despite his campaign being suspended.

Tax Foundation Candidate Grades:

Huntsman: B+

Perry: B

Cain: B-

Paul: B-

Gingrich: C+

Bachmann: C

Romney: C-

Santorum: D+

Johnson and Roemer: incomplete

"We relied on candidate statements, websites, and all other available information for the specifics of each plan. We also took into account not only the specified ideal of each plan but the practical implementation as we see it," said McBride. "We believe this is the right approach, since the history of taxation tells us that the law and the practice are often two very different things."

Tax Foundation economists judge every tax measure against the principles of economically sound tax policy, which say that taxes should be neutral to economic decision making, they should be simple, transparent, stable, and they should promote economic growth. From these principles, we have developed ten basic questions to judge the economic quality of any tax plan or proposal.

The basis for the candidates' grades are discussed in the recent study Tax Foundation Fiscal Fact No. 286, "How to Judge a Tax Plan" by Will McBride, Ph.D.

Information on the tax proposals of the current candidates for President of the United States is available on the Tax Foundation's Presidential Candidate Tax Plan Comparison page. Users can compare the plans side by side and click through to original source documents.

Candidate grades are provided for educational purposes only. The Tax Foundation is a nonprofit, nonpartisan organization and does not endorse or oppose any candidate for elected office.

Congress Considers Income and Sales Tax Deductions

Wed, 11 Jan 2012 00:00:00 EST

Washington, DC, January 11, 2012—As Congress debates whether to continue allowing taxpayers to deduct the amount they pay in state sales taxes from their federal returns, a new analysis from the Tax Foundation finds that states vary widely in the number of individuals taking the deduction, with the greatest impact seen in states that have a very low or no state income tax.

Taxpayers who itemize deductions have the option of deducting state and local taxes from their income. In doing so, each individual taxpayer must decide to deduct either the income tax withheld from his or her wages, or the total sales tax he or she paid during the tax year. The option of deducting sales taxes, however, expired on December 31^st, and will need to be renewed by Congress in order to be in effect for 2012.

States vary widely in the percentage of taxpayers who use each deduction. In general, more taxpayers elect to deduct income taxes than sales taxes. However, as one might expect, states that have no (or low) income taxes tend to see most taxpayers deducting sales taxes instead. Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming are all states in which over half of the taxpayers elect to deduct state and local sales taxes, rather than income taxes, on their federal return, and these are all states that have either a very limited income tax (in the case of Tennessee) or no income tax at all.

Individuals who choose to deduct sales taxes have the additional option of reporting the exact amount (if they saved all their receipts) or using an estimate from the IRS that depends on their state and their income level. If the provision is not extended by Congress, sales taxes on purchases in 2012 will not be deductible, but tax paid on purchases made in 2011 will continue to be for returns filed this year.

Tax Foundation Fiscal Fact No. 288, “States Vary Widely in Number of Taxpayers Deducting State or Local Sales Taxes” by Nick Kasprak is available online.

The Tax Foundation has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation’s Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.

A New Way to Tax Corporations: Switching to a Territorial System

Mon, 09 Jan 2012 00:00:00 EST

Washington, DC, January 9, 2012—Businesses in the United States face a strategic disadvantage when competing abroad due to the current structure of the U.S. tax code. Unlike most other countries in the world, the U.S. government taxes profits earned abroad on top of what companies pay to foreign countries. In order to spur greater investment and economic growth, the U.S. should follow the example of our closest trading partners and embrace a territorial tax system, according to the second in a new series of videos produced by the Tax Foundation.

The U.S. corporate tax system is out of step with the rest of the world and is unnecessarily handicapping the ability of American companies to compete with their rivals in places like Europe, China, and India,” said Tax Foundation president Scott Hodge. “Corporations should pay their taxes in the places they do business – not to governments around the world and then a second time to the U.S. Treasury.”

Washington’s goal should be to make the U.S. a competitive place both to do business in and do business from. The U.S. corporate tax system undermines both of these goals. Thus, the key to making the U.S. more competitive globally is to put our tax system on par with our major competitors. This means moving toward a territorial system for taxing foreign earnings, while also cutting the U.S. corporate rate.

The Tax Foundation video “Advantages of a Territorial System” is available online.

How to Judge a Candidate�s Tax Plan

Thu, 15 Dec 2011 00:00:00 EST

Principles for Evaluating the Proposals of Politicians

Washington, DC, December 15, 2011 Tax reform has become in both Congress and the presidential primary campaign and will remain a key issue through the 2012 general election. While the various plans vary considerably in their scope and intent, it is important that they all be judged against a standard set of principles. A guide to those principles is now available from the Tax Foundation.

"The ideal tax system should do only one thing - raise a sufficient amount of revenues to fund government activities with the least amount of harm to the economy," said Tax Foundation economist Will McBride, Ph.D. "By all accounts, the U.S. tax system is far from that ideal."

"An economically sound tax code is one that is conducive to long-term economic growth," said McBride. "History and economic research suggests that the closer a tax reform plan adheres to the principles of simplicity, transparency, neutrality, and stability the more likely it is to lead to a more prosperous America."

Information on the tax proposals of the current candidates for President of the United States are available on the Tax Foundation's Presidential Candidate Tax Plan Comparison. Users can compare the plans side by side and click through to original source documents.

Tax Foundation Fiscal Fact No. 286, "How to Judge a Tax Plan" by Will McBride, Ph.D. is available at taxfoundation.org.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation's Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.

Comparing the Presidential Candidates� Tax Plans

Mon, 12 Dec 2011 00:00:00 EST

Evaluate the Republican Contenders Side-by-Side

Washington, DC, December 12, 2011—How does Mitt Romney compare to Ron Paul on taxes? Does Newt Gingrich have a savvier plan than Michele Bachmann? With the new Presidential Candidate Tax Plan Comparison from the Tax Foundation, you can look at the tax policies of presidential candidates side-by-side and evaluate for yourself.

With the upcoming 2012 presidential election, tax policy is on voters’ minds more than ever. Taxes are one of the central issues in any national election, and it is important for the public to understand candidates’ general views toward tax policy as well as their positions on specific issues. The online Presidential Candidate Tax Plan Comparison outlines the candidates’ positions on the most important tax questions of this election.

“It can be a challenge for individual voters to wade through candidate statements, news reports, and attacks from opponents when trying to figure out how the candidates compare on the issues,” said Tax Foundation economist Will McBride. “Our Presidential Candidate Tax Plan Comparison tool gives voters the information they need to make apples-to-apples comparisons on where all of the candidates stand on tax policy.”

Ten presidential candidates were evaluated on six different parameters of tax policy: individual income tax rates, the corporate income tax, the estate tax, payroll taxes, the alternative minimum tax, and taxes on capital gains and dividends.

Data was collected from candidate questionnaires, campaign statements, and other publicly available information. Sources for all of the listed policy positions are cited and linked to, so users can easily have the opportunity to research the candidates more thoroughly.

Information is included on the following candidates for President: Michelle Bachmann, Herman Cain (campaign currently suspended), Newt Gingrich, Jon Huntsman, Gary Johnson, Ron Paul, Rick Perry, Buddy Roemer, Mitt Romney, and Rick Santorum. As candidates leave the campaign during the primary process, details of the plans they advocated will remain online for comparison purposes.

Tax Foundation Named Organization of the Year

Tue, 06 Dec 2011 00:00:00 EST

Washington, DC, December 6, 2011—The respected trade journal State Tax Notes has named the Tax Foundation as its 2011 Organization of the Year. Tax professionals, academics, and lawmakers overwhelmingly chose the Tax Foundation as the organization they rely on most for state and local tax information.

“We’re honored to be chosen by State Tax Notes as their Organization of the Year,” said Tax Foundation Vice President of Legal & State Projects Joseph Henchman. “We are particularly excited to be honored this week, on the occasion of the 74^thanniversary.”

Excerpts from the State Tax Notes announcement:

“The Tax Foundation is State Tax Notes’ Organization of the Year.”

“Over the past decade, the foundation has become a source of data, studies, and other fiscal information for tax professionals, legislative staffs, media, governmental affairs offices, and academics.”

“…the Tax Foundation gets high marks for its commitment to the principles of sound tax policy.”

“The foundation is relied on by major news organizations, public finance scholars, and legislative staff more than any other organization.”

“… the foundation has been on the correct side of most state and local tax issues in the past decade. And appropriately, it has received high marks from both liberals and conservatives.”

“Liberal lawmakers and organizations are often critical of the Tax Foundation’s positions. But State Tax Notes found that even the most ardently liberal legislators acknowledged, often grudgingly, that the foundation was generally right in its approach to tax policy.”

Read more from the Tax Foundation on Tax Policy in the 50 States.

Calculate the Tax Burden of New Federal Health Care Laws

Tue, 06 Dec 2011 00:00:00 EST

New Online Tool for Consumers

Washington, DC, December 6, 2011—The Tax Foundation has created a new online calculator for tracking the tax burden created by the Patient Protection and Affordable Care Act, signed into law by President Obama in March 2010. The coverage provisions in the health care bill cost $788 billion in new spending over the next decade. This is paid for $511 billion in cuts elsewhere, as well as $420 billion in new taxes. This calculator shows how the new taxes will affect American households and explains how they work.

Last year’s health care law was complex and included dozens of provisions impacting Americans as consumers and taxpayers, so it’s not surprising that there’s a great deal of confusion surrounding the legislation,” said Tax Foundation analyst and programmer Nick Kasprak. “We hope the Health Care Tax Calculator will help individuals get a better idea of how revenue-raising provisions of the new law will collectively impact them.”

The Health Care Tax Calculator aggregates the cost of many different taxes included in the Patient Protection and Affordable Care Act using user-provided data, giving consumers an overall view of how those costs will affect their household budget. Main components include the “Cadillac tax” on employer-provided health plans above a certain cost, new payroll taxes on high-income earners, an annual fee on prescription drug manufacturers, and a new excise tax on medical devices.

We are glad to provide this tool to estimate tax costs, but users should remember that there are further costs to current health care laws as well,” said Kasprak. “For example, the impact of the individual and employer mandates, which are designed to change consumer behavior rather than raise revenue, need to be considered in addition to direct tax costs, as well as spending cuts to Medicare Advantage.”

In addition to the Health Care Tax Calculator , the Tax Foundation provides several other online data tools for consumers, taxpayers, and policymakers to examine the effects of taxes at the federal, state, and local level. Available tools include a searchable database of property taxes by county, the marginal tax rates calculator and graph, and state-to-state migration data.

U.S. Corporate Tax System: Falling Behind by Standing Still

Mon, 05 Dec 2011 00:00:00 EST

New Video Emphasizes Need for Reform

Washington, DC, December 5, 2011—The United States has been slipping from a position of economic competitiveness in recent years, in part because of changing corporate tax rates across the globe. Once a leader internationally, waves of tax reform in dozens of countries have left the U.S. burdened with one of the highest corporate tax rates in the world, slowing new investment and job growth, according to the first in a new series of videos launched today by the Tax Foundation.

"The key to restoring American competitiveness and our long-term economic growth is cutting the corporate tax rate," said Tax Foundation president Scott Hodge. "The Tax Foundation’s new video series will help put the burden of corporate taxes in perspective and encourage policymakers to consider new ideas for reforming the U.S. corporate tax system."

The federal corporate income tax was first instituted in 1909 with a one percent tax rate. Since then it has changed dozens of times, with the current top rate at 35%. When additional state rates are added, the average tax rate for U.S. corporations rises to 39.2%, the second highest in the developed world, only slightly behind Japan’s.

The Tax Foundation video "Falling Behind by Standing Still" is available online.

Script: “Falling Behind by Standing Still”

No matter where you look these days, there is another headline on big corporations and their taxes. And it can be hard to separate the facts from the rhetoric. So let’s look at where we are.

Back in early 1980s, before globalization, the U.S. had a corporate tax rate that was about the same as the rest of the world. Companies in the U.S. paid 46% in taxes.

Then, in 1986, the U.S. cut the corporate tax rate below 35%. And suddenly, the U.S. had one of the most competitive business taxes in the world.

As a result, the economy grew, tax revenues grew, and the deficit went down.

But over time, countries around the world lowered their tax rates as well, countries like Canada, Great Britain, Germany…even Sweden. And it wasn’t long before the average corporate tax rate of those countries fell way below U.S. corporate tax rate.

In other words, when it came to taxes, it became cheaper to do business OUTSIDE the United States.

This meant that tax-friendlier countries became a magnet for new investment and jobs – NOT the U.S.

And while the international corporate tax rate continued to decline, the rate in the United States stayed the same – slowing our economy and making our workers and businesses even less competitive.

We fell behind by standing still.

As the corporate tax rates fell in other countries, their share of the global economic pie grew while ours’ shrank.

Good for their workers, bad for ours.

And here’s why corporate tax rates matter.

Research has found that the corporate income tax is THE most harmful tax to long-term growth.

Meaning countries with a lower corporate income tax are likely to grow faster and attract more investment and jobs than high-tax countries like the U.S.

Also, here in the U.S., corporate taxes cost each household about $2,384 per year in higher prices, lower wages or smaller 401ks.

In fact, 75 countries large and small have cut their corporate taxes in just the past five years alone.

While our rate remains the 2nd highest rate in the world only to Japan – whose economy has been stalled for 20 years.

Until our corporate tax rate is competitive with the rest of the world, our economy will also remain stagnant and the good jobs will be created in places where the taxes are friendlier to investment and innovation.

For more information, visit Tax Foundation dot org.

Rethinking U.S. Taxation of Overseas Operations

Tue, 22 Nov 2011 00:00:00 EST

Reform Needed for "Subpart-F" Rules

Washington, DC, November 22, 2011-- The current U.S. system for taxing international businesses is out of step with today's global economy and needs to be reformed. Tax provisions applying to companies operating abroad—largely unchanged for nearly fifty years—have created distortions and inefficiencies that are a drag on growth both overseas and at home, according to a new study by the Tax Foundation.

"As globalization and competitiveness become more pressing concerns, serious reconsideration of the U.S. international tax system may be in order," said Tax Foundation Vice President for Legal & State Projects Joseph Henchman.

U.S. corporations operating overseas face a unique combination of burdens not borne by their international competitors: taxes owed to the United States, taxes owed to the country where the operating activity takes place, and a complex tax system that attempts to reduce the resultant economic harm but involves an array of credits and definitions, primarily the Internal Revenue Code's "Subpart F."

The provisions in Subpart F, originally adopted in 1962, call for so-called "passive" income like interest and dividends to be taxed immediately but permits "active" income to be deferred from U.S. taxes until it is brought back to the U.S.

To add to the complication, rents and royalties must not only be "active" to be eligible for deferral, but must also have been "received from a person other than a related person." Royalty income, unless received from third parties and even if it meets the stringent "active" test, is subject to Subpart F taxation. Thus, the tax treatment of royalties received from foreign operations under the U.S. company's direct ownership and operation is less favorable than those received from operations by third parties.

"Provisions of the corporate tax code like Subpart F should be scrubbed of policies that no longer work in today's global economy," said Henchman. "Exceptions originally meant to discourage firms from operating as overseas tax havens have instead introduced uncertainty and distortions for legitimate business activity. The 'active income' test can effectively police against tax haven behavior until such time that the United States decides to forego taxing profits from activities occurring beyond its borders."

Tax Foundation Special Report No. 197, "Rethinking U.S. Taxation of Overseas Operations," by Vice President for Legal & State Projects Joseph Henchman is available online.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation's Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.

States Gorge Themselves on Obesity Taxes

Mon, 31 Oct 2011 00:00:00 EDT

Single Out Candy, Soda for Unequal Treatment

Washington, DC, October 31, 2011--States are increasingly extending higher tax rates to products like candy and soda, ostensibly to fight obesity. Such moves are unlikely to have an impact on obesity rates and health outcomes, but will create a complex and confusing classification system to divide the "good" food and drink products from the allegedly "bad" ones, according to a new study by the Tax Foundation.

Seventeen states tax candy at a higher rate than other groceries, while four states collect a special excise tax on soda. In 2011, fourteen more states proposed new soda taxes and two states proposed new candy taxes. Some of the soda tax proposals would have raised prices as much as 264%.

"While reducing obesity-related health problems is a worthy goal, adding an additional tax burden to particular food and beverage categories is a clumsy and inefficient strategy," said Tax Foundation analyst Scott Drenkard. "Obesity taxes fall on all consumers, including those who consume candy and soda in moderation and have no weight-related health issues."

Recent studies suggest that even when selective taxes on certain food products do cause individuals to consume less, those same individuals replace the calories avoided with other foods, resulting in no net decrease in caloric intake.

In addition to questions about the effectiveness of reducing obesity rates, the systems already in place for taxing candy and soda illustrate the unexpected difficulties in deciding what does and what does not count as candy and even soda. Chocolate bars that include any kind of flour, for example, generally do not meet the legal definition of candy. In the case of soda, some states exempt beverages with as little as 10% fruit juice, while in Tennessee, Oregon and Texas, drinks must be 100% juice to be exempt.

"The solution to the obesity problem will not come from government authorities picking out a handful of products to saddle with extra taxes," said Drenkard. "Consumers need to be free to make prudent decisions about their own diets and health needs without lawmakers trying to stack the deck in one direction or another."

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation's Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.

House Speaker John Boehner, Honeywell CEO David Cote to Receive Tax Foundation Award

Thu, 27 Oct 2011 00:00:00 EDT

Annual Gala to Honor 2011 Distinguished Service Award Recipients

Washington, DC, October 26, 2011--The Tax Foundation is pleased to announce that the recipients of its 2011 Distinguished Service Awards will be John Boehner, Speaker of the U.S. House of Representatives and David M. Cote, Chairman and CEO of Honeywell. The awards will be presented during the Tax Foundation's 74th Anniversary Dinner on Thursday, November 17, 2011 at the Mayflower Renaissance Hotel in Washington, D.C.

"We're delighted to be honoring such outstanding leaders from the public and private sectors," said Tax Foundation President Scott Hodge.

Since 1941, the Tax Foundation has awarded the Distinguished Service Award to a wide range of tax professionals, elected officials, and business leaders. Former recipients include Senate Finance Committee Chairman Max Baucus (D-MT), Eli Lilly Chairman and CEO Sidney Taurel, House Ways and Means Committee Chairman Bill Thomas (R-CA), Treasury Secretary James A. Baker III, Federal Reserve Chairman Paul Volcker, and President Dwight D. Eisenhower.

John A. Boehner serves as Speaker of the United States House of Representatives. Elected to represent the Eighth Congressional District of Ohio for an 11th term in November 2010, Boehner is a national leader in the drive for a smaller, less costly, and more accountable federal government. Rep. Boehner's first run for public office was for a seat on his neighborhood homeowners association, followed by a seat on his township board of trustees. He was elected to the Ohio General Assembly in 1984, where he served until the voters of southwest Ohio sent him to Congress.

David M. Cote is chairman and CEO of Honeywell, a diversified technology and manufacturing company serving customers worldwide. In 2010, Cote was named by President Barack Obama to serve on the bipartisan National Commission on Fiscal Responsibility and Reform, chaired by Erskine Bowles and Alan Simpson. Before coming to Honeywell, Cote was chairman, CEO, and president of TRW, a multibillion dollar products and services provider for the automotive, aerospace, and information technology markets. Cote joined TRW from General Electric, where he served 25 years in various manufacturing, finance, and management positions.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation's Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.

What Do the Top 1% Really Pay in Taxes?

Mon, 24 Oct 2011 00:00:00 EDT

Income Declines for Top Earners, While Effective Tax Rates Creep Up

Washington, DC, October 24, 2011--The income earned by the top 1% of Americans has declined for the second year in a row while their average tax rate has increased, according to a new Tax Foundation study. The average federal tax rate for those reporting at least $343,927 in income has increased from 22.5% in 2007 to 24.0% in 2009, while the average income for the top 1% has declined from $1.4 million to $1 million over the same period.

The Tax Foundation's analysis is based on new data from the Internal Revenue Service on individual income taxes, reporting on calendar year 2009. The amount of individual income tax paid steeply declined by $166 billion, twice the decline from 2007 to 2008. Nationally, average effective income tax rates were at their lowest levels since the IRS began tracking them in 1986. The average tax rate for returns with a positive liability went from 12.2% in 2008 to 11.1% in 2009.

"During a time of economic downturn, we expect to see significant changes in both total income reported and the share of taxes paid by those with the highest incomes," said Logan. "Unlike middle-income wage-earners whose incomes and tax liabilities are fairly steady, high-income people tend to realize significant capital gains that fluctuate wildly with the economy, causing their income tax liabilities to fluctuate as well."

In 2009, the top 1% of tax returns earned 16.9% of adjusted gross income and paid 36.7% of all federal individual income taxes. In 2008 those figures were 20.0% and 38.0%, respectively. Each year from 2005 to 2007, the top 1 percent's constantly growing share of income earned and taxes paid set a record. The 2008 reversal of this trend continued in 2009.

The study also takes a look at the very highest earners, the top 0.1 percent of tax returns, which the IRS only began singling out in recent years. In 2009, those 138,000 tax returns accounted for nearly 7.8% of adjusted gross income earned (down from almost 10% in 2008), and they paid around 17% of the nation's federal individual income taxes (down from 18.5% percent in 2008).

"The very highest income group—the top one-tenth of one percent—actually has a lower average effective income tax rate than the rest of the top 1 percent of returns because these extremely high-income returns are more likely to have income from capital gains and dividends, which are typically taxed at lower rates," said Logan. "It's worth pointing out that in the case of capital gains and dividends, however, income derived from these sources has already been taxed once by the corporate income tax, which is not included in the current study, meaning the average effective tax rate numbers can be somewhat misleading."

Tax Foundation Fiscal Fact No. 285, "Summary of Latest Federal Individual Income Tax Data," by economist David S. Logan is available online.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation's Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.

Businesses Face Higher Unemployment Taxes

Mon, 17 Oct 2011 00:00:00 EDT

New Study Examines Insolvent Trust Funds, Ranks Performance of State Unemployment Insurance Programs

Washington, DC, October 17, 2011 -- Dozens of states have exhausted their funds for paying unemployment insurance benefits and may soon face a financial crisis without significant reform to the system, according to a new study by the Tax Foundation. Increased tax levels to cover emerging deficits would hit existing employers especially hard at a time when private sector hiring is already at low levels.

With record-high unemployment and benefits lasting up to 99 weeks, unemployment programs are under enormous pressure. Thirty-four states have borrowed over $37 billion to pay benefits, and many of those states are likely to default on interest owed to the federal government. The result will be hefty tax increases for businesses unless something is done.

"Unemployment insurance was meant to be a program that built up surpluses in prosperous times, with the expectation that they would be spent down during economic downturns," said Tax Foundation Vice President of Legal and State Projects Joseph Henchman. "The problem with most state funds is that they stopped building up reserves during the good times. Before the beginning of the recession in 2008, less than half the states were in a position to disburse more than a year's worth of the kind of high benefit pay-outs that would be expected in a major economic downturn."

The new study, "Unemployment Insurance Taxes: Options for Program Design and Insolvent Trust Funds," describes how the programs work, what some states have done, and what states and the federal government could do going forward. The study serves both as a primer for an important, but complex, system and a roadmap for how to improve it. The study also includes several state-by-state rankings on unemployment insurance program structure, funding, and other metrics.

"Given the array of serious problems facing government unemployment programs today, it could be an opportune time for reform," said Henchman. "Lawmakers have an opportunity to take a new look at benefit levels, program requirements, and whether such programs should be expected to accomplish additional fiscal and social policy goals."

Tax Foundation Background Paper No. 61, "Unemployment Insurance Taxes: Options for Program Design and Insolvent Trust Funds," by Joseph Henchman is available online.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation's Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.

Local Sales Taxes Add Significant Burden on Consumers

Thu, 22 Sep 2011 00:00:00 EDT

New Study Ranks States by Total Sales Tax Rates

Washington, DC, September 22, 2011 - Local sales taxes—added on top of existing statewide sales taxes—can add significantly to the amount consumers pay for everyday goods, and are frequently less well understood by taxpayers than statewide rates. A new study from the Tax Foundation updates the rates across the country and ranks each state on its combined state and local sales taxes.

"While most attention gets directed to rates that apply statewide, the proliferation of local jurisdictions levying their own sales taxes can have an enormous impact on a state's overall tax structure." said Tax Foundation analyst Scott Drenkard. "In some states, local rates can more than double the average sales tax paid by consumers."

The five highest average local rates are in Louisiana (4.84%), Alabama (4.64%), Colorado (4.58%), New York (4.48%) and Oklahoma (4.16%). The highest single jurisdiction in the U.S. for sales taxes is Tuba City, Arizona, which has a combined rate of 13.725%. This is composed of a 6.6% state tax, a 1.125% Coconino county tax, and an additional 6% tax levied by the local Navajo tribal government.

Mississippi has the lowest non-zero average local rate of 0.003%; attributable entirely to a 2.5% sales tax in the small city of Tupelo, which has a population of 34,546. After Mississippi, the states that round out the lowest five non-zero rates are Idaho (0.02%), New Jersey (0.03%), Vermont (0.14%) and Minnesota (0.30%).

"Fourteen states have no general local option sales tax, but this does not always make for favorable rankings," said Drenkard. "Indiana, for example, despite having no local general sales taxes, still ranks 21^st because of a 7% statewide rate."

Among states that do collect a statewide tax, the five with the lowest average combined rates are Hawaii (4.35%), Maine (5%), Virginia (5%), Wyoming (5.34%), and Wisconsin (5.43%). The five highest combined rates are Tennessee (9.43%), Arizona (9.12%), Louisiana (8.84%), Washington (8.79%) and Oklahoma (8.66%).

Four states tie for the lowest state and local sales tax rate - Delaware, Montana, New Hampshire and Oregon - none of which tax sales at either the state or local level.

Tax Foundation Fiscal Fact No. 284, "Ranking State and Local Sales Taxes" by Scott Drenkard is available online.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation's Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.

American Jobs Act Unlikely to Produce Many Jobs

Mon, 19 Sep 2011 00:00:00 EDT

Recent Research Suggests White House Proposal on Wrong Track

Washington, DC, September 19, 2011-President Obama has presented a $447 billion plan to encourage businesses to hire new workers and stimulate spending, but a review of the academic literature suggests that the proposed policies will have little, if any, impact. Indeed, because these temporary tax measures would be offset by some $460 billion in permanent tax increases, the whole package could end up doing much more economic harm than good.

The key tax measures in the American Jobs Act include hiring incentives for new workers, a 50% payroll tax cut for workers, and a business investment incentive that allows for 100% expensing of qualifying business deductions. A review of the economic research suggests that "jobs" incentives tend to be ineffective in spurring new hiring, while the three most recent "demand-side" tax cut plans have failed to induce new consumer spending. The business-expensing provision, while a reasonable policy on its own, will only have a modest impact on economic growth because of its one-year limit.

"Much of the problem with the President's tax proposals stems from their temporary nature. The same is true of both households and corporations - they don't make the kind of economic decisions the administration is hoping to see based on temporary changes in tax policy," said Tax Foundation economist David S. Logan.

Many Americans will choose to pay off debt or save their additional wages from a payroll tax cut, while income saved by business could very well go to similar priorities, despite those being the opposite of the plan's goal. Moreover, although the American Jobs Act says that employers will receive a credit for hiring a qualifying worker, it does not state that a layoff cannot accompany the new hire. Simply put, a firm can fire an employee, hire a new one to do the same job, and collect up to $9,600 for its efforts - which results in a loss to the Treasury with no net reduction in unemployment.

"While it is likely that the tax incentive portion of the President's plan would deliver few jobs and little economic growth, the permanent tax increases that 'pay for' the tax cuts can do permanent harm to the economy," said Logan. "By and large, these measures are not motivated by sound tax policy, but rather as a means of punishing politically unpopular groups such as hedge fund managers, oil companies, and anyone that falls under one of the shifting definitions of 'the rich.'"

Tax Foundation Fiscal Fact No. 283, "Academic Research Suggests That the American Jobs Act Will Produce Few Jobs" by David S. Logan, is available online.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation's Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.

What Income Tax Bracket Will You Be in for 2012?

Thu, 15 Sep 2011 00:00:00 EDT

Tax Foundation Calculates Latest IRS "Tax Parameters"

Washington, DC, September 15, 2011 -- Based on the federal government's official inflation rate, the Tax Foundation has now calculated how much income taxpayers will need to have to be subject to each of the six individual tax brackets. Single filers making between $35,350 and $85,650, for example, will be subject to the 25% marginal tax rate, while only those making $388,350 or more will be subject to the highest marginal rate of 35%.

Over the past twelve months inflation averaged 2.43%, which is slightly under the historical average since 1992, but significantly higher than the previous 12-month average of 1.48%, according to a new report by the Tax Foundation. This information is used to calculate federal tax parameters such as the standard deduction, personal exemption, and tax bracket thresholds. The Internal Revenue Service will use these to set withholding rates on wages throughout 2012 and for 2012 tax forms to be filed in early 2013.

"Last year's projection of this year's tax brackets was complicated by the uncertainty over the potential expiration of the Bush tax cuts, and the need to predict the bracket thresholds for a number of possible scenarios," said Tax Foundation Analyst Nick Kasprak. "Fortunately, this year's projection is comparatively simple: last year's tax compromise extended the Bush tax cuts for two years, so there is no doubt they'll be in effect during the next tax year."

In addition to tax bracket information, the report includes the expected changes in the standard deduction for the four categories of filing status (individual, head of household, married filing jointly and married filing separately) and the change in the personal exemption, which is set to rise from $3,700 to $3,800.

Even though taxpayers will not start filing their 2012 tax returns until January 2013, tax year 2012 parameters are needed in advance of 2012 so that the IRS can produce instructions for 2012 income tax withholding, which will begin in January. Therefore, the inflation adjustments for any tax year must be based on inflation data from portions of the previous two years.

Tax Foundation Fiscal Fact No. 281, "Tax Foundation Projects 2012 Tax Parameters Following Release of August CPI Data" by Nick Kasprak and Mark Robyn, is available online.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation's Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.

Tax Foundation President Testifies on Pro-Growth Tax Reform

Wed, 14 Sep 2011 00:00:00 EDT

Scott Hodge Will Lay out Options for Congress

Washington, DC, September 13, 2011 -- Tomorrow morning Tax Foundation president Scott A. Hodge will testify before the House Budget Committee on "The Need for Pro-Growth Tax Reform." Hodge's presentation will address both the individual and corporate sides of the federal tax code and provide reform suggestions that will reduce complexity, increase competitiveness, and spur economic growth.

"The U.S. tax system is in desperate need of simplification and reform," said Hodge. "To be sure, with the deficit now topping $1.5 trillion, many lawmakers may look at eliminating tax 'loopholes' and simplifying the tax code as an opportunity to raise more revenues. But increasing the share of the economy going to tax collections should not be the primary goal of tax reform. The primary goal should be to promote long-term economic growth and better living standards for the American people."

The House Budget Committee hearing "The Need for Pro-Growth Tax Reform" will take place on Wednesday, September 14, 2011 in the Cannon House Office Building, Room 210, at 10:00am. A live video stream of the hearing is available online, starting at approximately 9:50am.

The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation's Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.

Effective Tax Rate for U.S. Companies among the Highest in the World

Tue, 13 Sep 2011 00:00:00 EDT

Washington, DC, September 13, 2011 -- A new analysis of research on corporate taxes finds that U.S. firms consistently have among the highest effective tax rate in the world. Taking the most recent thirteen academic studies that compared effective corporate tax rates across nations, the Tax Foundation's most recent report documents the U.S. effective corporate rate as significantly higher than the average of all other nations.

"Taken as a whole, these studies indicate that the average effective tax rate for U.S. corporations - like the statutory rate - is one of the highest in the world. By every available measure, the U.S. imposes a very high tax burden on its corporate sector, in comparison to other nations, even after credits and deductions are considered," said Tax Foundation Adjunct Scholar Philip Dittmer.

The most recent studies show that the average effective corporate tax rate for corporations headquartered in the U.S. is roughly 27 percent, while the average of other nations is about 20 percent. The effective average rate for new investment in the U.S. is roughly 29.8 percent, 7.4 points above worldwide competition.

These conclusions fly in the face of much recent public discussion which has sought to characterize U.S. corporations as having relatively light tax burdens, and to foster the impression that corporate tax planning and avoidance routinely leave large U.S. firms with little or no federal tax liability.

"Unfortunately, the issue of corporate taxation is currently mired in a great deal of misinformation and confusion," said Dittmer. "Hopefully this examination of the recent literature on the subject will help illuminate the facts underlying the ongoing corporate tax reform debate."

The U.S. effective corporate tax rate consistently ranks among the five highest of nations considered. The only nation with a higher rate in each study is Japan, which not by coincidence is the only developed nation with a higher statutory rate than the U.S. Limiting each study to consideration of OECD-member nations, the U.S. never falls out of the top five, and in one major study ranks #1.

In today's highly mobile world, capital flows toward investments with the highest rates of return. The natural by-product of those capital flows is intense international tax competition. The multitude of nations that have reduced corporate tax rates in recent years - 30 out the 34 advanced OECD nations - bears witness to this trend.

"When it comes to U.S. companies doing business internationally, the government can't do anything to increase labor costs in the developing world in order to level the playing field. What it can do, however, is reduce tax impediments so that U.S. enterprises are more competitive in international markets," concluded Dittmer.

Tax Foundation Special Report No. 195, "U.S. Corporations Suffer High Effective Tax Rates by International Standards" by Philip Dittmer, is available online.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation's Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.

What Do U.S. Corporations Really Pay in Taxes?

Wed, 07 Sep 2011 00:00:00 EDT

New Study Uses IRS Data to Go Beyond the Headlines

Washington, DC, September 7, 2011 - Many recent reports of U.S. corporations avoiding federal income taxes through credits and deductions are exaggerated and misleading, according to a new report by the Tax Foundation. Recent data from the Internal Revenue Service reveals that large firms pay the vast majority of corporate income taxes and pay at one of the highest effective tax rates in the world.

"While a handful of anecdotes have been used to suggest that many U.S. companies are routinely avoiding their federal tax burden through elaborate tax planning, our analysis shows that a good deal of the variance in effective rates across industries is explained by the tax treatment of foreign versus domestic income," said Tax Foundation economist Will McBride, Ph.D.

The statutory rate of the U.S. corporate income tax is currently 35%, the second highest in the world. As with the individual tax code, the law provides for a large number of credits, exemptions and deductions, which makes the effective tax rate paid by companies lower than the statutory rate. Even with all the tax provisions benefitting U.S. companies, though, they still paid an effective tax rate between 1994 and 2008 of 26%. But that's just the beginning of the story.

In 2008, a particularly low year for corporate income and tax revenues, total reported income for all firms was $978 billion. The largest firms (those with assets over $2.5 billion) earned 75% of all taxable corporate income. The total of federal corporate income taxes paid for all firms was $229 billion, with large firms paying 68% of that total. Of the 2,582 largest firms, one quarter were unprofitable and thus paid no income tax, leaving just 1,937 firms responsible for 68% of corporate revenues.

"Not only do the largest U.S. firms pay the vast majority of corporate income taxes, firms with significant international operations end up with even higher effective rates because of taxes paid to foreign governments on profits earned abroad," said McBride.

The overall tax rate on the worldwide income of U.S. corporations, including foreign taxes paid on foreign income, is between 32.1% and 33%, close to the statutory rate of 35%. Even this rate, however, doesn't account for business taxes at the state and local level, which add about 4%, for a total effective corporate tax rate of about 37% on U.S. companies.

"The corporate tax code - like the individual tax code - is complicated by too many credits and deductions that benefit a narrow set of taxpayers at the expense of the many. That said, the data clearly demonstrates that the overall tax burden for U.S. companies remains high by international standards," concluded McBride.

Tax Foundation Special Report No. 194, "Beyond the Headlines: What Do Corporations Pay in Income Taxes?" by Will McBride, is available online.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation's Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.

Local Income Taxes on the Decline

Wed, 31 Aug 2011 00:00:00 EDT

City- and County-Based Taxes Most Common in Pennsylvania, Ohio, Kansas, Iowa, and Kentucky

Washington, DC, August 31, 2011—Local taxes on wages and income, largely concentrated in a small handful of states, are on the wane nationwide, according to a new report by the Tax Foundation. The current total of 4,943 local income tax jurisdictions has been declining slowly in recent years, with some local income tax rates also falling.

"Income and wage taxes are generally applied to those who live or work in a jurisdiction," said Tax Foundation Vice President of Legal & State Projects Joseph Henchman. "Unlike property taxes, local income taxes can also be applied to nonresidents. If abused, however, local income taxes could enable a jurisdiction to export its tax burden to nonresidents who are not the primary beneficiary of city- and county-provided services."

Local income taxes can be assessed at different levels of local government. In Indiana and Maryland, for example, each county imposes its own local income tax. In Ohio, 593 municipalities and 181 school districts have such a tax. Pennsylvania has by far the most, with 2,469 municipalities and 469 school districts imposing local income or wage taxes. Many cities and school districts in Iowa and Michigan also have these taxes.

Local income taxes arose during the Great Depression as declining property tax revenues forced local governments to look for other sources of revenue. The first local income taxes emerged in Philadelphia in 1939 as the city sought to avoid bankruptcy, gradually spreading to cities in Ohio in 1946, Kentucky in 1947, Missouri in 1948, and Michigan in 1962. New York City and Baltimore adopted municipal income taxes in 1966.

"While most local income tax rates are low - about one to three percent - they generally have broad bases and are difficult to avoid." said Henchman. "State and local officials need to ensure that these taxes do not discourage economic development or drive out mobile workers and businesses."

Tax Foundation Fiscal Fact No. 280, "Local Income Taxes: City- and County-Level Income and Wage Taxes Continue to Wane" by Joseph Henchman and Jason Sapia, is available online.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation's Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.

The Texas Lesson on Business Taxes

Wed, 17 Aug 2011 00:00:00 EDT

State's Margin Tax Confusing, Unfair, and Underperforming

Washington, DC, August 17, 2011--Texas' state business tax, enacted in 2006, has proven to be a failed experiment desperately needing reform, according to a new report by the Tax Foundation. The Lone Star State's so-called "margin" tax, which has become notorious for its complexity, has aroused controversy both for placing dramatically different burdens on businesses in different sectors and failing even at providing the projected amount of revenue for the state treasury.

The Texas margin tax replaced the state's corporate income tax, with the goal of broadening the base of businesses subject to it. Arguments that the tax created an unacceptable burden on small and unprofitable businesses, however, led to significant exemptions which undermined its ostensible goal. In 2009 alone, an additional 100 proposals to modify the tax made their way through the Texas state legislature.

"Far from solving the problems of the previous corporate franchise tax, the margin tax seems to have only aggravated them." said Tax Foundation Vice President of Legal & State Projects Joseph Henchman.

There have even been disagreements as to what the terms of law themselves mean. One of the three options for calculating a company's liability under the margin tax is based on "total revenue minus cost of goods sold." The state's definition of "costs of goods sold," however, differs significantly from that in federal law, creating widespread confusion as to what deductions are and are not allowed.

"Of course, there's more to Texas's tax system than just the margin tax." said Henchman. "The state imposes no individual income tax, with Texans paying just 7.9 percent of their income in state and local taxes, ranking them 45th highest nationally. Their tax structure is also the 13th most business-friendly in the country, according to the most recent State Business Tax Climate Index. That said, there's always room for improvement."

With the Texas margin tax collecting far less in revenue than expected, causing significant confusion and compliance costs, resulting in significant litigation, and facing calls for substantial overhaul and even repeal, it should not be used as a model tax reform for any other state.

Tax Foundation Fiscal Fact No. 279, "Texas Margin Tax Experiment Failing Due to Collection Shortfalls, Perceived Unfairness for Taxing Unprofitable and Small Businesses, and Confusing Rules" by Joseph Henchman, is available online.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation's Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.

The Proper Role of Taxes in Deficit and Debt Reduction Spending Cuts Win out over Tax Increases in International Experience

Fri, 29 Jul 2011 00:00:00 EDT

Washington, DC, July 29, 2011--With the White House and Congress currently embroiled in a debate over how to reduce the nation's deficit and debt, the experience of other countries can provide helpful evidence about the most effective methods for budget reform. Countries that have faced similar financial situations have found that deficit reduction plans based on spending cuts rather than tax increases are far more likely to succeed, according to a new analysis by the Tax Foundation.

"The most successful reform efforts put all spending programs on the table, not a select few programs," said Tax Foundation economist David S. Logan. "But contrary to the conventional wisdom in the U.S., the international experience indicates that pairing spending cuts with tax cuts can produce meaningful deficit reduction and improved economic performance."

In successful reform efforts, reducing expenditures accounted for approximately 80 percent of the improvement in the deficit. By contrast, deficit/debt reduction attempts driven by tax increases overwhelmingly failed to correct imbalances and slowed economic growth.

Both Sweden and the United Kingdom faced the need for government budget reform in the early 1990s, and both efforts underscored the success of a strategy based on spending cuts. As of 1993, Sweden's public expenditures had increased to an intimidating 73% of GDP while public debt stood at 70%. Between 1993 and 2000, transfers, subsidies, government consumption, and pensions were reduced by an average of 3.3 percent of GDP. These cuts facilitated double-digit decreases in government spending and public debt, as well as double-digit improvements in the deficit.

"Perhaps the most dramatic result of the literature is that the most successful deficit reduction plans have been based off of not just spending cuts but tax decreases as well," said Logan. "Pro-growth strategies have seen consistently better results around the world, as countries have reduced the tax burden on the private sector and brought public expenditures into line with available revenues."

Tax Foundation Fiscal Fact No. 278, "The Proper Role of Taxes in Deficit and Debt Reduction" by David S. Logan, is available online.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation's Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org