Tax Foundation - Tax Foundation's "Tax Policy Blog"

Maryland Senate Approves Income Tax Hike; Sneaks in Tobacco Hike Too

Tue, 15 May 2012 00:00:00 EDT

This morning, we published a report on some of the taxes being proposed during Maryland's special session. The special session was called to avoid "doomsday" budget cuts that were triggered when the assembly failed to reach a revenue deal at the end of the regular session. Of course, the budget cuts were actually cuts to planned spending increases, so even if they had been allowed to take place, the budget would have grown 2 percent over last year. This is hardly a doomsday scenario.

Today, we've just received word from the Maryland statehouse that the Senate has passed the income tax increases, and also snuck in a tobacco excise tax increase. The income tax increase will mean that a family of four earning $250,000 in Montgomery county will pay almost $1,000 more in taxes each year. You can find the rate breakdown here.

Increasing taxes on high-income earners is often politically expedient, but that does not make it sound tax policy. While voters sometimes see hiking taxes on the rich as a free lunch, doing so in the long term has dynamic effects. Namely, people are not willing to work as much if they have less take-home pay. This hurts long-term growth for the entire economy, and all citizens bear that cost.

The tobacco tax hike is troubling as well. It raises taxes on "little cigars" from 15 percent to 70 percent of wholesale, and raises taxes on smokeless tobacco from 15 to 30 percent. More and more I find myself being persuaded by the moral argument against taxing tobacco at increased rates. Patrick Fleenor put it best back in 2009:

The fact that something is risky doesn't make it bad. Some people ride motorcycles and sunbathe; like smoking, these are risky activities. Are they therefore bad? No. As long as people understand the risks of what they are doing and bear all of the costs, there is no reason for the government to threaten to impoverish them if they don't live their lives in the way some bureaucrat demands.

Life in a free society requires tolerance of activities that have little or no effect on others, even those we don't personally approve of. If government or interest groups have information about risks that are not widely known, they should disseminate it. Otherwise, adults should be left alone to live their lives in accordance with their own dreams and values.

Congress May Vote on Bill Limiting State Taxation of Business Travelers

Tue, 15 May 2012 00:00:00 EDT

We've gotten word that the House of Representatives may consider H.R. 1864 this week, the Mobile Workforce State Income Tax Simplification Act. The bill would prohibit states from imposing income taxes on traveling workers unless they spend at least 30 days in the state. Currently, most states require tax payments and even tax withholding for workers in the state for much shorter periods of time, including as little as a day. (In that map below from the Council on State Taxation (PDF link), that's the red states.)

Such practices disrupt interstate commerce and falsely suggest that business travelers earn their income in traveling states and not from the home office. In recent hearings, Congress has shown its outrage at these state practices. Because of the tax credit for taxes paid to another state, this just shifts money around the country, toward states with the most aggressive rules. We're hearing more and more stories about state tax departments auditing travel records.

We'll update with more on the progress of the Mobile Workforce bill.

Maryland Income Tax Proposal Raises Rates Above $100,000

Mon, 14 May 2012 00:00:00 EDT

Maryland's tax special session began today; expect more analysis on it from us tomorrow. However, we just received detail on S.B. 1302, the "State and Local Revenue and Financing Act of 2012." The bill would raise income tax rates for high-income earners, defined as those making at least $100,000. The proposal also more aggressively phases out exemptions for those filers.

The rate changes:

Singles
Bracket	Current Rate	Proposed Rate
>$0	2%	2%
>$1,000	3%	3%
>$2,000	4%	4%
>$3,000	4.75%	4.75%
>$100,000	4.75%	5%
>$125,000	4.75%	5.25%
>$150,000	5%	5.5%
>$250,000	5%	5.75%
>$300,000	5.25%	5.75%
>$500,000	5.5%	5.75%

Married Filing Jointly, Head of Household
Bracket	Current Rate	Proposed Rate
>$0	2%	2%
>$1,000	3%	3%
>$2,000	4%	4%
>$3,000	4.75%	4.75%
>$150,000	4.75%	5%
>$175,000	4.75%	5.25%
>$200,000	5%	5.5%
>$225,000	5%	5.75%
>$350,000	5.25%	5.75%
>$500,000	5.5%	5.75%

Our back-of-the-envelope state income tax calculation for a dual-earner, two child family with $250,000 in federal adjusted gross income:

State	Currently	Under Maryland Proposal
Maryland	$16,786	$17,775
District of Columbia	$16,612	$16,612
Virginia	$11,651	$11,651

Monday Map: California Prop. 29 and State Cigarette Excise Taxes

Mon, 14 May 2012 00:00:00 EDT

Today's Monday Map is a repeat of our cigarette tax map from a few weeks ago, with one change: it shows how the state rankings would change if California voters pass California Proposition 29, the Tobacco Tax for Cancer Research Act - a $1.00/20-pack increase in the cigarette excise tax.

Currently, California's cigarette excise tax stands at $0.87/20-pack, giving the state the 32nd highest cigarette tax in the country. Should California pass Proposition 29, the tax would increase to $1.87, and would rank 15th highest.

Click on the map to enlarge it.

The original map is located here.

View previous Monday maps here.

Pennsylvania House Approves Corporate Rate Cuts and Tries to Close the "Delaware Loophole"

Mon, 14 May 2012 00:00:00 EDT

On May 1, the Pennsylvania General Assembly passed HB 2150 that would make some significant changes to the state's corporate income tax system. The proposal will go to the Senate for consideration.

Gradual Rate Reduction
A major feature of the legislation is the reduction of the flat corporate income tax to 6.99 percent from 9.99 percent. The gradual phase down would occur in increments over six years, beginning in 2014 (see table below). The state's current high tax rate, second only to Iowa (12% top rate), contributes to their ranking of 44th in the corporate income tax section our State Business Tax Climate Index (they are 19th overall). This rate reduction, coupled with a broadening of the tax base (largely avoided in this bill), would be a great way to improve the state's business tax system.

Single Sales Factor
The second part of the bill changes Pennsylvania's apportionment formula for state corporate income tax to a single sales factor. All business income will be apportioned by 100 percent of a company's sales instead of a mix of property, payroll, and sales.

Switching to a single sales factor could be problematic. States that adopt such an apportionment formula are essentially shifting the corporate tax burden from in-state businesses with lots of property and employees to out-of-state businesses with substantial sales into the state. Large corporations with headquarters in Pennsylvania that have a majority of sales outside of the state would be taxed less than in-state businesses that derive most of their sales from within Pennsylvania.

The "Delaware Loophole"
The bill attempts to address the so-called "Delaware loophole" as it pertains to expenses related to the lease of intangible property from affiliated companies in Delaware. In this tax arrangement, a corporation doing business in Pennsylvania can lease intangible property, such as a corporate logo, from a company located in Delaware that holds the rights to that property. The lease payments are deductible as a cost of doing business for the Pennsylvania company, but as far as Delaware is concerned, the payments are not taxable income for the holding company. Thus this provides a tax advantage, especially when the two companies involved are affiliated (e.g the Delaware company is a subsidiary of the Pennsylvania company). The Pennsylvania bill would disallow the deduction for lease/royalty payments if the two companies are affiliated.

Uncaps Net Operating Loss Deductions
Generally, when a company's expenses exceed its taxable total income for the year (a net operating loss, or NOL) that company can use the losses to lower their income and reduce their taxes for past or future years, helping to smooth out often volatile business income. Pennsylvania caps net operating loss carry-forwards, one of only a few states to do so, at the greater of $3 million or 20% of taxable income. This bill will eliminate Pennsylvania's cap over nine years, putting them in line with the vast majority of other states.

More information on the Keystone State.

HR 2150 Tax Rate Reduction Schedule
	Corporate Tax Rate	Net Operating Loss Deduction from Taxable Income (Lesser of)
December 31, 2013	9.99%	33% or four million dollars ($4,000,000)
December 31, 2014	9.49%	45% or five million dollars ($5,000,000)
December 31, 2015	8.75%	56% or six million dollars ($6,000,000)
December 31, 2016	8.25%	66% or seven million dollars ($7,000,000)
December 31, 2017	7.75%	75% or eight million dollars ($8,000,000)
December 31, 2018	7.25%	83% or nine million dollars ($9,000,000)
December 31, 2019	6.99%	90% or ten million dollars ($10,000,000)
December 31, 2020	6.99%	96% or eleven million dollars ($11,000,000)
December 31, 2021	6.99%	100% or twelve million dollars ($12,000,000)

�Bring Jobs Home Act� (H.R. 5542) � Legislation in Search of the Facts

Mon, 14 May 2012 00:00:00 EDT

A key element of President Obama's corporate tax reform plan has been introduced in the U.S. House of Representatives by Rep. Bill Pascrell (D-NJ) and in the Senate by Sen. Debbie Stabenow (D-MI). Called the "Bring Jobs Home Act" (H.R. 5542), the bill would give eligible firms a tax credit equal to 20 percent of the cost of relocating overseas jobs back to the U.S.

Of course, the premise behind this legislation is that U.S. companies are "shipping jobs overseas" because of various perceived loopholes in the tax code and that a new tax break will encourage them to bring those jobs home.

But the facts show that the outsourcing issue may be one of the most over-hyped issues in American politics.

Hard data from the Bureau of Labor Statistics (BLS) shows that only a small fraction of the mass layoffs in any given year are moved offshore. The vast majority of layoffs that result from the movement of jobs from one location to another are domestic - meaning that U.S. workers have more to fear from their job being moved from one state to another rather than to another country.

The table below shows the total number of job losses resulting from mass layoffs (layoffs of 50 workers or more) from 2008 to 2010. In 2010, just 3.1 percent of the nearly 1.3 million total layoffs were the result of relocating jobs from one location to another. Of those three years, 2008 had the largest percentage of relocation-driven layoffs at 4.0 percent.

BLS and the employers cannot always document where those jobs are move to, but the data clearly indicates that the vast majority of those jobs are domestic relocations and within the parent company. For example, in 2010 BLS was able to identify the destination of 18,622 job losses resulting from the movement of work (just 1.2 percent of the total layoffs that year). Of those identified, 71 percent were domestic relocations. By contrast, 5,336 of those job losses (29 percent) were relocated abroad and the majority of them were within the parent company.

The bottom line is that the outsourcing of U.S. jobs abroad has become a political urban legend that has little basis in fact. As such, policies such as the Bring Jobs Home Act are likely to play well politically but have little impact on creating jobs here in the U.S.

Mass Layoffs and Separations Resulting from Movement of Work
	2008	2009	2010
Total private nonfarm layoffs	1,516,978	2,108,202	1,256,606

Total layoffs from movement of work	60,956	61,694	39,104
Percentage of total layoffs	4.0%	2.9%	3.1%

Layoffs where relocation destination is known	35,076	32,228	18,622
Out of country relocations	11,431	10,378	5,336
Percent	33%	32%	29%
Within company	10,392	9,630	3,548
Different company	1039	748	1,788

Domestic relocations	23,370	21,555	13,286
Percent	67%	67%	71%
Within company	20,943	18,184	11,128
Different company	2,427	3,371	2,158

Source: BLS, http://www.bls.gov/mls/mlsreport1038.pdf, Tables 13, 14

Tax Policy and Breastfeeding Mothers

Fri, 11 May 2012 00:00:00 EDT

This week the editors of Time magazine stirred up an Internet-wide controversy with a cover photo of mother/blogger Jamie Lynne Grumet breastfeeing her 4 year old son. The accompanying article, which discusses the virtues of "attachment parenting," created an avalanche of reaction, commentary, and satire, everywhere from Fox News to the the Huffington Post.

It was in the latter outlet that columnist Lisa Belkin characterized the debate over breastfeeding as one that was about "nutrition, and workplace policy, and government responsibility, and gender relationships." At first it seemed odd that a personal parenting decision like what to feed young children should be about "government responsibility," but it turns out that both state and federal governmental agencies are no strangers to the issue.

It was only last year, for example, that the Internal Revenue Service, bowing to lobbying from groups such as the U.S. Lactation Consultant Association, issued new rules that reclassified breast pumping supplies as "medical devices" rather than merely "feeding devices."

The Internal Revenue Service announced today that you can use pre-tax flexible spending account money to buy a breast pump and related lactation supplies, reversing a stingy position. After all, other kinds of medical equipment, like crutches and hearing aid batteries qualify for the tax break.

It’s good news for working moms. According to the American Academy of Pediatrics, which advocated for the change in a letter to Internal Revenue Service Commissioner Douglas Shulman last year, the old policy left “millions of working mothers without the financial assistance to obtain a breast pump and continue nursing their children.” That was a problem because nursing provides numerous health benefits to mother and child, the letter said.

Decisions like this, of course, are a natural outgrowth of a tax code that attemps to micromanage behaviors and purchasing decisions in every aspect of life. As long as the government continues deciding which parenting decisions qualify for special tax treatment, the public policy process will be pulled into debates that in most times and places are considered private family matters.

Legislators Maneuver in Kansas� Income Tax Reform Debate

Fri, 11 May 2012 00:00:00 EDT

The Kansas House has approved a major tax cut bill and sent it to the Governor's desk. The bill would reduce marginal tax rates, repeal a number of income tax credits, and increase the standard deduction, among other provisions. On net the bill is estimated to reduce revenue by $231 million in 2013 and $803 million in 2014.

The interesting twist in this story is that this bill was actually killed by the Senate in March, over concerns about the cost (Tax Analysts, subscription req'd). However, only a few hours later the Senate revived the bill in a procedural move designed to keep alive the broader tax reduction debate and negotiation. A House-Senate conference committee was working on a compromise bill that would have phased-in the tax cuts less quickly and reduced taxes by about $61 million in 2013 and $191 million in 2014.

However, some House members we apparently not satisfied with the direction or pace of the negotiations, and decided to apply some pressure. They decided to pass and send to the Governor the more costly killed-then-resurrected Senate bill. Governor Brownback has said that he is willing to sign the bill, but has also seemed to indicate that he is open to less costly solutions:

I am prepared to sign the bill but I encourage Kansas Legislators to continue their work on reforming our state's tax policy and to consider some of the alternatives I proposed in my original pro-growth tax reform to off-set the cost.

Some of the Governor's proposals went farther than the bill on his desk by eliminating more tax credits and most itemized deductions. His proposals also included freezing a scheduled sales tax rate reduction which is set to reduce the rate from 6.3% to 5.7%.

All of the proposals being discussed in Kansas cut marginal tax rates and broaden the tax base to some extent. This is good. While different experts might disagree on some of the details, they generally agree that broad tax bases and low tax rates are central features of good tax policy. Broadening the base alone (eliminating tax preferences such as credits, deductions, exemptions, etc.) will tend to increase revenue, while lowering tax rates will obviously decrease revenue. Theoretically, any tax reform could be structured so that the rate cuts exactly offset the base broadening provisions. This would be the so-called "revenue neutral" approach. If a plan does more rate-cutting than base-broadening, the reform will reduce revenue. On the other hand, more base-broadening and smaller rate cuts would increase overall revenue (this scenario does not appear to be on the table in Kansas).

Revenue neutral tax reform is generally a good idea,* but cutting the overall tax burden can be beneficial as well. It appears that the disagreement in Kansas is over whether the reform should be a large net tax cut or something closer to revenue neutrality. It will be interesting to see how the addition of this hefty bargaining chip on the Governor's desk will change the debate.

For previous posts about the evolving efforts at income tax reform/reductions in Kansas see here, here, and here.

*assuming the base-broadening eliminates distortionary tax preferences and not certain provisions that are arguably justifiable in order to get the tax base right (e.g. deductions for business expenses, net operating losses, etc.).

Why Are Hospitals Tax Exempt?

Fri, 11 May 2012 00:00:00 EDT

TaxProf points us to a very interesting article which makes the case that the origins of our current debate over "Obamacare" and particularly the health care individual mandate stem from 1960s era IRS rulings on the charitable nature of hospitals:

"In fact, under ruling 69-545 a tax-exempt hospital did not have to provide any free care to the poor so long as it maintained an emergency room open to all regardless of ability to pay, accepted Medicare and Medicaid patients, and had an independent governing body comprised of community leaders. The IRS had decided that the "promotion of health" was an inherently charitable purpose even if the cost is borne by patients and third party payors. It is important to note, that the change from a relief of poverty standard to a promotion of health/community benefit standard was not the result of a change in the law-rather it resulted solely from a change by the IRS in the regulations interpreting the law. The validity of this change has, however, withstood repeated court challenges. It appears that part of the reason for the approach taken by Revenue Ruling 69-545 was the passage of Medicare and Medicaid four years before in 1965. The IRS evidently believed that this new legislation would provide adequate access to medical care for the poor and indigent."

Accordingly, most hospitals now operate as tax-exempt entities and in return provide free or low cost care. The removal of market pricing from health care has led to the same sort of problems we might expect if shoes were provided free of charge: over-consumption, out of control costs, poor quality service, and rationing. The health care individual mandate is meant to address this market distortion by penalizing those who do not buy health insurance. In this sense the circle is complete: both providers and consumers are subject to government pricing and terms.

See this for more on tax law and the individual mandate.

See this, this, and this for more on tax-exempt organizations.

Follow William McBride on Twitter @EconoWill

Brown University, PILOTS, and Tax-Exemptions

Thu, 10 May 2012 00:00:00 EDT

Although Brown University is a non-profit institution and is exempt from paying property taxes to the city of Providence, Rhode Island, it still makes payments of $4 million per year to the city. This week the city convinced Brown University to pay $31 million more over the next 11 years. To put this in perspective, if Brown had to pay the commercial property real estate tax, it would owe about $38 million per year. The city will raise a total of nearly $100 million by collecting these payments in lieu of taxes (PILOTs) from nine of the city's tax exempt organizations.

Generally, municipal governments exempt universities, hospitals and other nonprofits from paying property taxes. But the government is often partially compensated for lost tax revenue by collecting PILOTs either from the exempt organizations or from the state government. As for colleges and universities, a 'significant minority' pay PILOTs, according to the Lincoln Institute. In Brown's case, the state government used subtle coercion to increase these payments by considering legislation to require PILOTs from tax exempt organizations. In another example of coercion, Baltimore threatened to tax hospital and dorm beds at Johns Hopkins University if it didn't agree to a PILOT arrangement. Cities have increasingly considered turning to non-profits after the recession put a dent in their other revenue sources.

Proponents of PILOTs argue that these agreements correct two imbalances in the tax system. If nonprofits paid taxes, nonprofits with valuable land holdings pay an arbitrarily higher tax than other nonprofits. The other imbalance is that while local governments foot the bill to provide services such as policing or fire protection to universities, the benefits of those services go to university students from all over the country. The payments also satisfy governments' desire to raise revenue. One official in Syracuse worried that hospitals "gobbled up property that used to be taxable."

Although these imbalances may exist, governments should also consider the hazards of PILOT agreements. A study by the Lincoln Institute concluded that they are often secretive, haphazard, arbitrarily calculated, and an unreliable source of funds in the long-term.

PILOT payments are less than what a nonprofit would pay if it was not tax exempt, but more than what it is obligated to pay as tax exempt organizations (i.e. zero). Because of this, PILOTs might be viewed either as a subsidy or as a tax. An example where many would view the PILOT as a subsidy is New York City, where the City financed construction of Yankee Stadium with tax exempt bonds and then paid the IRS a small fraction of the taxes it would have paid if they had issued taxable bonds. With Brown, on the other hand, if you believe that universities should be tax exempt, you might view the PILOT as a tax. Viewed either way, the payment is in an arbitrary amount.

The debate over PILOTs resembles the debate over whether to give nonprofits tax-exempt status as charitable organizations. The argument against the exemption is that it violates the benefit principle: nonprofits should pay the government for the services they use. And we have previously made the argument that giving some organizations tax-exempt status gives them a competitive advantage over similar organizations that are not tax-exempt. An example is that the tax code treats Harper's, Mother Jones, and some other magazines as 'charitable providers of educational materials.' If the rationale for tax exempt status is that the public has an interest in promoting education and certain other activities, one can argue that competitors of Harper's already promote these activities without the help of tax exempt status. As with PILOTs, governments' treatment of nonprofits is arbitrary.

There are a number of reforms that might mitigate concerns with whether and how to raise revenue from nonprofits. First, removing the tax exemption for charities would remove the differential treatment of similar organizations. We recommended a somewhat less dramatic change in our 2005 paper on the federal charitable deduction:

Most 501(c)(3) charities [...] are neither charitable, in the sense of relying mostly on altruistic gifts, nor providers of public goods. This analysis suggests lawmakers should explore ways to curtail the definition of tax exempt charity, and exclude groups that are now benefiting unfairly [...].

Third, if the system of tax exemptions and PILOTs remains, PILOTs could be made to conform to a uniform and transparent standard.

Colorado Lawmakers Reject Sales Tax Holiday

Thu, 10 May 2012 00:00:00 EDT

A Colorado back-to-school sales tax holiday bill met a quick end at the hand of the state's Senate Appropriations Committee. The bill had already passed the House and the Senate Finance Committee, but did not gain support in the Appropriations Committee. The Denver Post reports:

The fact that it was a bill sponsored by their president, who is running for Congress in the 4th Congressional District, didn't sway Senate Democrats on the committee. Nor did the fact that the bill passed with significant support in the GOP-led House convince any Republicans that the bill was worth voting for.

The sales tax holiday would have been authorized for 5 years, beginning after the first year where state personal income grew by at least 5%.

The Tax Foundation (and other policy experts) has consistently opposed sales tax holidays. They are poor tax policy. They are gimmicks that do little or nothing to help the economy or reduce overall tax burdens. The increase in consumer spending associated with a sales tax holiday is largely due to shifts in the timing of purchases, not overall increases in purchases. Consider: how many parents forgo necessary school supplies for their children because of the added cost of the sales tax?

If the justification is that families need a tax cut, there are ways to accomplish this that avoid the unnecessary costs associated with requiring retailers and consumers to jump through a bunch of hoops to make it happen. How about reducing the overall sales tax rate?

If a politician is proposing a sales tax holiday it is likely because (a) they want to be able to claim to be a tax cutter, but (b) they don't actually want to cut taxes that much. Voters should not view sales tax holidays as anything but a gimmick designed to appease them and reduce the demand for real tax reform or tax reductions.

Ernst & Young Struggles to Say Nice Things About Film Tax Credits

Wed, 09 May 2012 00:00:00 EDT

Ernst & Young (E&Y), the large accounting firm, has a new study out today (PDF) that lists potential benefits from state film tax credits. Because the study was paid for by the Motion Picture Association of America (MPAA), whose members benefit the most from such subsidies, I presume they wanted a study that endorsed the credits as good economic development policy. E&Y did not do that.

Instead, the E&Y study simply lists potential benefits from film tax credits that one should include when comparing benefits and costs. These include increased tourism, new infrastructure like studio facilities, and ancillary activity beyond studio spending. E&Y is critical of "a number of studies" (ours) that focus primarily on whether the credit pays for itself in dollar terms.

I concede that the benefits they list are important ones, but they are also tough to quantify. I presume that (unsubsidized) Family Guy has boosted tourism in Rhode Island, but by how much? Whether a hotel room would have been booked in the absence of filming activity is also tough to know. In any event, contrary to their implication, most evaluations of these programs have included these benefits in their benefit-cost calculation, nevertheless finding that the costs exceed the total benefits.

The fact that E&Y's report is unwilling to call these programs successful, but rather limit itself to listing possible benefits, is telling. Their tepid conclusion should alert officials that even a paid-for study by a reputable firm can't prove something that's not true. We applaud E&Y's call for more scrutiny of the benefits of these costly film incentive programs (over $1.2 billion in tax dollars each year). Film tax credits do not pay for themselves. While some benefits accrue to in-state filmmakers and suppliers, on the whole they are a net transfer from taxpayers to out-of-state production company beneficiaries.

For more information on film tax incentives, please see our larger report on the topic.

Monday Map: State Income and Sales Tax Deductions

Mon, 07 May 2012 00:00:00 EDT

Today's Monday Map shows which states benefit from the federal income tax deduction for state taxes. Taxpayers can elect to deduct either state income or sales taxes, but not both; in most states, the income tax deduction is worth more. New Yorkers deducted state taxes worth 6.16% of their income, to take the top spot. Alaska, where state income and sales tax deductions amounted to only 0.26% of the state's income, comes in last. (Alaska has no income tax, no state sales tax, and small local sales taxes.)

Click on the map to enlarge it.

View previous Monday maps here.

Estimating the Tax Costs of 'Obamacare'

Mon, 07 May 2012 00:00:00 EDT

Over at The Foundry, Kathryn Nix and Alyene Senger consider the tax impact of the Patient Protection and Affordable Care Act – known as “Obamacare” to its critics and supporters alike. Many recent sources have pointed out that “the wealthy” would be better off if PPACA were found unconstitutional, because of the 3.8% surtax included in the law for those earning more than $200,000 a year. Nix and Segner argue, however, that the tax burden of Obamacare will end up being quite widespread and fall on the majority of the U.S. population, not just a handful of high-income earners.

They emphasize that, over time, the normal process of inflation will pull an ever-larger number of Americans into the pool of individuals subject to higher payroll taxes:

Obamacare raises taxes by more than $500 billion in a decade, and a number of these will hit Americans at all levels of the income scale.

Beginning in 2013, the law increases the Hospital Insurance (HI) payroll tax from 2.9 percent to 3.8 percent for individuals earning above $200,000 and couples earning more than $250,000. The payroll tax is also applied to these earners’ investment income for the first time. But since the increased tax rates aimed at these higher income brackets are not indexed to inflation, they will impact more middle-class Americans every year.

In fact, the higher payroll tax rate will eventually hit a huge majority of Americans.

If you’re wondering how the tax law changes in Obamacare will affect your household in particular, make your way to the Health Care Tax Calculator, where you can get a quick estimate of how much your tax burden will rise as the law phases in.

For more information on the constitutionality of the law itself, see the Tax Foundation’s Supreme Court brief, The Health Care Individual Mandate is Beyond Congress’s Taxing Power, by Joseph Henchman and Laura Lieberman.

VIDEO: Payroll Taxes and the Medicare Trust Fund

Thu, 03 May 2012 00:00:00 EDT

High-Tax Europe Heading into another Great Depression

Wed, 02 May 2012 00:00:00 EDT

About half the European continent is now technically back in recession, and when all the numbers come in it is very likely that France and Germany will be added to that list. Europe is of course an integrated economy so the recession is spreading even to the relatively healthy eastern periphery (though remarkably, Estonia is still booming). Euro-zone unemployment is now higher than it has been in 15 years, with much of the pain felt by young people. In Greece and Spain more than half of those in their early 20s are unemployed, and more than a third are unemployed in Italy and Portugal.

It is looking more and more like another Great Depression in Europe. Meanwhile, by all accounts the U.S. is slowly but surely returning to health. What lessons can we draw?

Maybe do the opposite of what Europe is doing? Bruce Bartlett doesn't see it that way, not in regards to taxes. He looks at the most recent data on income and payroll taxes in the 34 industrialized countries of the OECD, most of which are in Europe, and concludes:

"As one can see, the United States is a low-tax country with a total tax wedge of 29.5 percent. Three-fourths of O.E.C.D. countries have a larger tax wedge on average workers.

I have also included the latest data on the percentage of workers employed as a share of the working-age population. I think this is a better measure of the health of the labor market than the unemployment rate, which goes up and down for a variety of reasons unconnected to taxes.

Here, too, there is little evidence that taxes affect employment one way or another. Almost half of the countries with a bigger tax wedge employ a larger percentage of their working-age populations than the United States does, and more than half of those with a smaller tax wedge have lower employment ratios."

Employment figures are hardly comparable across countries, due to definitional differences and the difficulty of collecting the data, especially in countries like Greece and Italy. And as Bartlett acknowledges, the unemployment rate is affected by a lot of non-tax things, like labor laws. The same applies to the percentage of workers employed as a share of the working-age population.

It's much better and informative to look at GDP growth, which the table below shows along with OECD data on income and payroll tax rates. This is annual real GDP growth in 2011, the most recent available, but as mentioned things are getting worse for Europe by the minute. Still, the data is quite revealing. The strongest relationship is a negative 26 percent correlation between income tax and GDP growth. That is, high income taxes are associated with low growth, in the current year. The total tax wedge, which is the combination of income and payroll taxes, is also negatively correlated, at negative 20 percent, but this is driven mainly by income taxes. Payroll taxes are largely unrelated to GDP growth, with a correlation of negative 11 percent on the employee portion and negative 2 percent on the employer portion.

A similar relationship holds when looking at the change in these taxes between 2010 and 2011. Those countries that raised income taxes in particular, which is nearly every European country, tended to see slower growth. The correlation there is negative 19 percent.

These results are very much in line with those of my earlier study on long term growth, in which I show that income taxes on high income earners are especially harmful to growth over the last 11 years. Payroll taxes have no measurable impact.

Clearly, payroll and income taxes have very different economic effects, and combining them as Bartlett does merely muddies the water. Income taxes are progressive, meaning they mainly hit high income earners. They also apply to investment and some business income. This explains why they are so damaging to economic growth. Payroll taxes, on the other hand, only apply to wages up to some ceiling, making them regressive for the most part. As such, they more tax consumption rather than saving and investment.

Income and Payroll Taxes for an Average Worker
	Taxes as a % of Labor Costs, 2011				Change 2011/10 (in percentage points)				Real GDP Growth, 2011
Country	Total Tax Wedge	Income tax	Payroll Employee	Payroll Employer	Total Tax Wedge	Income tax	Payroll Employee	Payroll Employer	Real GDP Growth, 2011
Australia	26.7	21.0	0.0	5.6	-0.18	0.04	0.00	-0.22	2.16%
Austria	48.4	11.9	14.0	22.6	0.24	0.24	0.00	0.00	3.11%
Belgium	55.5	21.7	10.8	23.1	0.16	0.04	-0.01	0.13	1.89%
Canada	30.8	13.9	6.5	10.5	0.33	0.19	0.00	0.14	2.46%
Chile	7.0	0.0	7.0	0.0	0.00	0.00	0.00	0.00	5.99%
Czech Rep.	42.5	8.9	8.2	25.4	0.38	0.38	0.00	0.00	1.65%
Denmark	38.7	28.0	10.7	0.0	0.09	0.08	0.00	0.00	1.00%
Estonia	40.1	12.5	2.1	25.6	0.09	0.09	0.00	0.00	7.64%
Finland	42.7	18.5	5.8	18.4	0.24	0.08	0.03	0.13	2.85%
France	49.4	10.0	9.6	29.7	0.03	0.04	-0.01	0.00	1.68%
Germany	49.8	15.9	17.4	16.5	0.59	0.04	0.28	0.28	3.00%
Greece	NA	NA	NA	NA	NA	NA	NA	NA	-6.91%
Hungary	49.4	13.6	13.6	22.2	2.77	2.39	0.39	0.00	1.69%
Iceland	34.0	25.6	0.5	8.0	0.63	0.63	0.00	0.00	3.05%
Ireland	26.8	13.5	3.6	9.7	0.95	3.82	-2.87	0.00	0.71%
Israel	19.8	8.0	7.4	4.5	0.41	0.32	0.05	0.03	4.75%
Italy	47.6	16.1	7.2	24.3	0.44	0.44	0.00	0.00	0.43%
Japan	30.8	6.6	11.7	12.4	0.58	-0.09	0.33	0.34	-0.75%
Korea	20.3	3.9	7.3	9.2	0.20	-0.22	0.23	0.19	3.63%
Luxembourg	36.0	13.3	11.7	11.0	1.65	0.29	0.72	0.64	1.55%
Mexico	16.2	4.4	1.2	10.5	0.62	0.59	0.00	0.04	3.94%
Netherlands	37.8	14.5	14.0	9.2	-0.34	-0.14	0.01	-0.21	1.17%
New Zealand	15.9	15.9	0.0	0.0	-1.12	-1.12	0.00	0.00	1.32%
Norway	37.5	19.0	6.9	11.6	0.25	0.03	-0.02	0.24	1.60%
Poland	34.3	5.9	15.5	12.9	0.12	0.12	0.00	0.00	4.35%
Portugal	39.0	10.9	8.9	19.2	1.38	1.38	0.00	0.00	-1.61%
Slovak Rep.	38.9	7.5	10.6	20.8	0.95	0.95	0.00	0.00	3.35%
Slovenia	42.6	9.7	19.0	13.9	0.11	0.11	0.00	0.00	-0.17%
Spain	39.9	12.0	4.9	23.0	0.14	0.14	0.00	0.00	0.71%
Sweden	42.8	13.6	5.3	23.9	0.04	0.05	0.00	0.00	3.94%
Switzerland	21.0	9.4	5.8	5.8	0.27	0.10	0.09	0.09	1.85%
Turkey	37.7	10.7	12.9	14.2	-0.16	-0.16	0.00	0.00	8.49%
UK	32.5	14.1	8.5	9.9	-0.08	-0.56	0.25	0.23	0.65%
US	29.5	15.7	5.2	8.7	-0.93	0.93	-1.82	-0.04	1.74%
Average	35.2	12.9	8.3	14.0	0.3	0.3	-0.1	0.1	2.14%
Source: OECD "Taxing Wages", http://www.oecd.org/document/8/0,3746,en_21571361_44315115_50165640_1_1_1_1,00.html

Follow William McBride on Twitter @EconoWill

Kansas Legislators Review Tax Cut Estimates

Wed, 02 May 2012 00:00:00 EDT

The Kansas City Star reports that legislators are reacting cautiously to plans to cut Kansas's income tax after analysts have revised the estimated revenue loss through 2018 from $900 million to just $160 million. The change came from increasing projected sales tax growth from 3.75% a year to 4% a year.

The plan would take effect part way through the 2013 budget year:

Current Bracket	Current Rate	Proposed Bracket	Proposed Rate
>$0	3.50%	>$0	3.00%
>$15,000	6.25%	>$15,000	4.90%
>$30,000	6.45%

*For singles. Married couples have twice the bracket amount.

From the Kansas City Star:

The new estimate "could definitely be too rosy," said Sen. Tom Holland, a Baldwin City Democrat who serves on the conference committee trying to hammer out a compromise tax plan.

"I think we need to slow the process down and understand what's behind these numbers," Holland said. "Let's do some additional analysis and let's see what they really mean."

The plan would eliminate some tax credits and deductions, but would keep the mortgage interest and charitable contribution deductions, as well as a low-income credit. Governor Sam Brownback (R), who proposed the tax cut in January, had recommended for much of the rate cut with eliminating deductions, but that part has been pared back after opposition.

So instead of giving Kansans the choice of their mortgage deduction against a 6.45% tax, or a flat 4.9% tax, Kansans will get both or neither, depending on the revenue picture. That may be a tough sell.

D.C. Moves to Tax Food Truck Sales; Considers Repealing Discriminatory Bond Tax

Wed, 02 May 2012 00:00:00 EDT

The District of Columbia began the process of requiring food trucks to collect the city's 10 percent meals tax (fourth highest in the country) or pay $1,500 a year, whichever is greater, by passing legislation that if approved again in June, would take effect October 1. (Presently, food trucks just have to pay the $1,500.)

Restaurants have claimed unfair competition and DC officials sought to stop the rapidly growing high-end food truck industry in the nation's capital, although all sides are now reportedly cooperating on proposed regulations, including the tax collection obligation.

Interestingly, Tax Analysts reports (subscription req'd) that D.C. Council member Jack Evans (D) proposed using the additional sales tax revenue to eliminate the tax on out-of-state municipal bond interest. All states allow taxpayers to exclude from taxation any interest they earn on that state's government bonds, but taxpayers must pay tax on interest earned on other states' government bonds. (Indiana was the last state to exclude from tax all bond interest from any state, but instituted the discriminatory exclusion recently.) In 2007, we argued (as did Alan Viard of AEI) to the U.S. Supreme Court that this practice is discriminatory and unconstitutional, but the Supreme Court disagreed with us 7-2, holding that a state can condition its bond sales however it likes.

The discriminatory tax exclusions has led to the rise of state-specific municipal bond funds which exist only because of the tax benefits. The Securities Industry & Financial Markets Association has admitted that "[i]f the municipal bond tax incentive evaporates, the demand for such bonds may likewise vanish, thus drying up a major source of funding for State projects." If these investments are non-viable except when given a discriminatory tax benefit, it's probably poor tax policy.

Council members Marion Barry (D) and Vincent Orange (D) objected to tying the two proposals together, so it was tabled. However, Council member Muriel Bowser (D) says it might have to come up again. It ought to: D.C. could lead the way on good tax policy in this regard.

Apple's Taxes: A Teaching Moment About the Real Economic Impact of Corporate Taxes

Tue, 01 May 2012 00:00:00 EDT

Apple has become the latest U.S. company to have its taxes put under the media microscope. A recent New York Times expose' How Apple Sidesteps Billions in Taxes reports that Apple uses a variety of legal planning techniques to minimize its tax liability.

The article is particularly odd because while the reporters purport to document Apple's minimized tax burden, they fully admit that they have no way of knowing what Apple actually pays to the IRS in income taxes. Indeed, they say:

"Neither the government nor corporations make tax returns public, a company's taxable income often differs from the profits disclosed in annual reports. Companies report their cash outlays for income taxes on their annual Form 10-K, but it is impossible from those numbers to determine precisely how much, in total, corporations pay to governments."

Despite such a caveat, the authors cite an estimate by Tax Notes columnist Martin A. Sullivan that Apple's tax bill would have been $2.4 billion higher last year were it not for its planning techniques.

Whether or not that figures is accurate, this is a good "teaching moment" to remind people about the incidence of the corporate income tax, because many readers are no doubt convinced by the underlying message of the New York Times expose' that U.S. companies should pay more taxes.

But economics teaches us that the real burden of the corporate income tax is borne either by consumers through higher prices, workers through lower wages, or shareholders through lower returns on their investment. So what might be the consequences to Apple stakeholders of a $2.4 billion tax bill?

Consumers: Apple sold an estimated 40 million iPads last year. $2.4 billion would amount to a $60 tax on each iPad. It's a good bet that Apple would have sold fewer iPads if the base price was $559 rather than $499.

Employees: Apple employs about 63,000 employees worldwide. $2.4 billion amounts to a $38,000 tax on each Apple employee. It's fair to wonder how much less those employees would have earned last year if Apple had paid $2.4 billion in higher taxes.

Shareholders: According to a recent article in USAToday, "Morningstar says 788 U.S. stock mutual funds had Apple as one of their top 10 stock holdings." Moreover, "mutual funds aren't the only Apple fans: Institutions, such as pension funds, own $310 billion of Apple." To be sure, a $2.4 billion tax increase spread across millions of shareholders may not seem like much, but the impact on Apple's share value and, thus, the value of many pension funds shouldn't be underestimated.

These kinds of exposes make for sensational headlines, but they typically fail to tell the whole story.

Louisiana Considers "Amazon Tax": Target is In-State Marketers

Mon, 30 Apr 2012 00:00:00 EDT

Legislators in Louisiana are considering a click-through nexus law. Commonly known as "Amazon" laws after their most visible target, these laws deem an out-of-state company to be an in-state company for sales tax collection purposes if the company receives commissioned referrals from in-state resident "affiliates." The out-of-state company must then collect sales tax for the state. While a number of states have considered "Amazon" laws in the past four years, only five have enacted them (Connecticut, Illinois, New York, North Carolina, and Rhode Island) and they have been unsuccessful and ruled unconstitutional.

Our Special Report on Amazon tax laws explains why they expand state taxing authority in a manner likely to invite extended litigation, and that in every state, they have failed in their twin objectives of collecting additional revenue and creating a level playing field between brick-and-mortar and remote sellers. Sponsors have promised revenue windfalls follow enactment of an Amazon tax, but no windfalls have been forthcoming so far. This is often because online companies respond to Amazon tax law enactments by ending their affiliate programs. In-state persons who earn income from referring potential customers lose that income source.

Rhode Island revenue-analysis office head Paul Dion stated in December 2009 that the six-month-old law had collected no revenue. An affiliate trade group believes that Rhode Island has seen less tax revenue come in because the elimination of the affiliate program reduced income and thus income tax collections; State Treasurer Frank Caprio echoed this, saying, "The affiliate tax has hurt Rhode Island businesses and stifled their growth, as they've been shut out of some of the world's largest marketplaces, and should be repealed immediately."
North Carolina has also not seen additional revenue from the law.
Illinois has seen an outflow of Internet-related businesses after its law's passage, which was declared unconstitutional earlier this month.
While New York is collecting revenue, it is because Amazon.com is collecting taxes under protest while the issue is litigated. If New York loses the case, it will have to refund those collections to taxpayers.

"Amazon" tax laws such as the one Louisiana is currently considering are poor tax policy and likely unconstitutional. Some possible amendments to obviate these flaws include:

Require that in-state affiliates be the source of a majority of the out-of-state seller's sales in the state for the collection obligation to be effective.
Replace the collection obligation with a requirement that the out-of-state vendor notify the customer by e-mail that a use tax obligation may exist.
Treat out-of-state and in-state online businesses alike by forcing in-state businesses to collect each jurisdiction's respective sales tax on all their out-of-state sales.
Switch to an origin-based system whereby all Louisiana businesses must collect Louisiana sales tax on their sales, regardless of where the customer is, and urge other states to follow the lead.
Exempt the in-state online sales by brick-and-mortar retailers from the state sales tax.
Switch efforts to federal solutions.

How Might Berkshire Benefit from the Buffett Rule?

Mon, 30 Apr 2012 00:00:00 EDT

I was recently asked how Warren Buffett's company Berkshire Hathaway would benefit from a so-called Buffett Rule that would require the rich to pay at least 30 percent of their income in taxes.

After thinking about it for a while it occurred to me that it is plausible that Buffett's motivation for raising this issue is not about his own embarrassment about his personal taxes, rather it's about the difference in the 35 percent capital gains tax rates paid by publicly traded C-corps like Berkshire and the 15 percent rate paid by its competitors at hedge funds and private equity firms. In short, Buffett is trying to level the playing field between Berkshire and its private competitors.

As I understand it, Berkshire has two main businesses - investing in the stocks of other companies (like a hedge fund) and acquiring other businesses (like a private equity firm). As a publicly traded C-corporation Berkshire pays a 35 percent rate on any capital gains from those transactions while a private equity firm would pay 15 percent on its transaction - either because of the lower individual capital gains rate or through the use of carried interest.

So rather than make the case for a lower capital gains rate for corporations to match the individual rate, Buffett made the opposite case with the story about him paying less than his secretary. This played into the White House's tax the rich strategy and forced a big debate over carried interest and capital gains - from which Mitt Romney has profited.

There is a lot of anecdotal evidence that the 35 percent corporate capital gains rate has a big lock-in effect whereby companies don't get rid of assets as they would like because of the tax hit. Perhaps Berkshire wants to rid itself of some of its acquisitions and doesn't want to take the tax hit.

As long as we're speculating, it's possible too that if a Buffett rule were enacted, some private business owners would decide to sell their business early to beat the rate increase. Berkshire could then buy them at fire sale rates.

Of course, we can't really know the motivations of others, but limiting the tax advantages that private equity firms and hedge funds have is as good as some of the other explanations we've seen lately of Buffett's intentions.

Tax Policy Podcast: Andrew Moylan on Taxpayer-Funded Broadband

Fri, 27 Apr 2012 00:00:00 EDT

National Taxpayers Union Vice President Andrew Moylan discusses the trend of local governments investing millions (and in some cases hundreds of millions) of dollars in municipal broadband projects that compete with private ISPs. The amount of debt these projects are accumulating is documented in the recent study Municipal Broadband "Wired to Waste".

More on state and local tax policy here.

CBO: President�s Budget Worse than Taxmageddon

Thu, 26 Apr 2012 00:00:00 EDT

The Congressional Budget Office (CBO) has released their estimate of the economic impact of the President's 2013 budget. It's not good. It's not even good relative to Taxmageddon, which is the roughly $500 billion tax increase scheduled to happen at the end of this year due to expiring provisions such as the Bush tax cuts, the payroll tax holiday, and the Alternative Minimum Tax (AMT) patch. Taxmageddon is what the CBO calls their Baseline scenario, because it is current law.

If the Baseline scenario is Taxmageddon, then the President's budget is a hellish after-life. It heaps additional taxes on high-income earners, which severely damages long term economic growth as it causes less saving and investment. In the short term, things look rosier, relative to Taxmageddon, as a result of additional spending, mainly on transfer payments not investment, and an extension of the AMT patch. In other words, it is a giant cash for clunkers program, shifting future economic growth into the present. This is how the CBO describes it:

"CBO estimates that the President's budgetary proposals would boost overall output initially but reduce it in later years. For the 2013-2017 period, under most of the estimates CBO produced using alternative models and assumptions, the President's proposals would increase real (inflation-adjusted) output (relative to that under current law) primarily because taxes would be lower than those under current law, and, therefore, people's disposable income and their demand for goods and services would be greater. Over time, however, the proposals would reduce real output (relative to that under current law) because the deficits would exceed those projected under current law, and the effects of increasing government debt would more than offset the favorable effects of lower marginal tax rates on labor income.

[...]

The President's budgetary policies would influence the size of the nation's capital stock primarily by lowering national saving through higher federal budget deficits. Each year between 2013 and 2022, the proposals would expand the federal deficit relative to that in CBO's baseline, which would reduce national saving, other things being equal. (Some-but not all-of the relative reduction in public saving would be offset by an increase in private saving, in part because larger deficits would cause interest rates to be higher and because households and businesses would anticipate higher taxes and lower transfers in the future.) The President's tax proposals would also affect private saving by altering effective marginal tax rates on capital income and thus the after-tax rate of return on saving."

Below are two graphs showing the CBO's projection of effective tax rates on capital and labor under the two scenarios. Both scenarios are horrible, but the President's budget makes things a little more horrible for investors and a little less horrible for workers, i.e. relative to Taxmageddon.

However, the third graph, taken from Steve Landsburg's blog and David Weil's text book on economic growth, illustrates that capital and labor are closely linked. This is physical capital, such as computers and buildings. The graph clearly shows that high wages require high capital investment. Think of trying to do what you do with a typewriter rather than a computer. As we can see, the game of short term stimulus at the expense of long term investment is one that ultimately hurts workers.

Follow William McBride on Twitter @EconoWill

States Without Income Taxes Rely on Varying Forms of Revenue

Thu, 26 Apr 2012 00:00:00 EDT

According to the latest U.S. Census Bureau data, state-level individual income taxes make up the largest share of total state government tax collections. In 2011, state governments brought in $259 billion through these taxes, approximately 34 percent of total collections. However, there are currently 9 states that do not tax wage income (New Hampshire and Tennessee tax interest and dividends): Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. The composition of tax collections in these states varies considerably.

For example, Florida, South Dakota, and Washington each raised about 60 percent of their collections through sales taxes in 2011; nearly double the national average. New Hampshire collected 39 percent of its $2.3 billion of tax revenue from excise taxes (national average: 17.4 percent), and around 25 percent from corporate income taxes (national average: 5.3 percent). Alaska and Wyoming, both of which rely heavily on severance taxes on natural resource extraction, each collected a much larger percentage of their tax revenue from "other taxes" than the national average of 12.1 percent; 82.4 and 59.9, respectively. Besides severance taxes, this category includes state-level property taxes, death and gift taxes, documentary and stock transfer taxes, and licenses. Nevada and Texas each collect about half of their respective totals from sales tax collections, splitting the rest between excise and other taxes.

Since 2000, some of these states have seen large changes in the overall make-up of their tax collections, while others have stayed rather consistent. In 2000, over 30 percent of Alaska's tax revenue came from its corporate income tax; in 2011, that same figure accounts for less than 5 percent of total collections. This has not been caused by decreases in corporate tax collections, which in fact increased by 64 percent between 2000 and 2011, but by enormous increases in severance taxes. These tax revenues, included in "other" below, increased by nearly 600 percent in Alaska since 2000. In Florida, excise taxes increased from 16.6 percent of the total to 24 percent between 2000 and 2011. During those years, dependence on "other taxes" fell from 18.1 percent to 10.8 percent. On the other hand, the composition of tax collections in Tennessee and Texas has largely remained unchanged over the last decade.

After income, sales taxes make up about 31 percent of state government tax collections nationwide. Out of the five states that don't levy a sales tax (Alaska*, Delaware, Montana, New Hampshire, and Oregon), Alaska and New Hampshire rely on corporate income taxes over individual income taxes, with the opposite being true for Delaware, Montana, and Oregon. In every year since 2000, Oregon has collected over two-thirds of its tax revenue through personal income taxes.

Composition of State Government Tax Collections, % of Total, FY 2011: States Without One of the Major Tax Sources
State	Income	Corporate	Excise	Sales	Other
Alaska	0%	13.0%	4.6%	0%	82.4%
Delaware	31.9%	10.7%	16.3%	0%	41.1%
Florida	0%	5.7%	24.0%	59.4%	10.9%
Montana	35.3%	5.4%	23.2%	0%	36.2%
Nevada	0%	0%	27.8%	46.3%	26.0%
New Hampshire	3.6%	25.1%	39.0%	0%	32.3%
Oregon	67.7%	5.8%	13.5%	0%	13.0%
South Dakota	0%	1.1%	25.0%	58.6%	15.3%
Tennessee	1.8%	9.8%	18.8%	57.0%	12.7%
Texas	0%	0%	27.8%	50.5%	21.7%
Washington	0%	0%	20.2%	60.8%	19.0%
Wyoming	0%	0%	5.1%	35.1%	59.9%

Note: Percentages may not sum to 100 due to rounding

*Alaska does not have a statewide sales tax, but allows local jurisdictions to levy sales taxes. For more info, see State and Local Sales Taxes in 2012.

Illinois "Amazon Tax" Ruled Unconstitutional

Thu, 26 Apr 2012 00:00:00 EDT

Yesterday, Illinois circuit court judge Robert Lopez Cepero ruled that Illinois's affiliate click-through nexus law, passed last year, violates the U.S. Constitution's Commerce Clause and conflicts with the federal Internet Tax Freedom Act. The decision was a relatively fast one:

The quick decision Wednesday was unexpected, even to officials of the Performance Marketing Association, said Rebecca Madigan, the association's executive director.

"The judge pointed out and agreed with us that the state overreached its boundaries in trying to regulate interstate commerce," Madigan said. "We ... believe it paves the way for Internet marketing affiliates to get back in business in Illinois."[...]

Revenue officials claimed that the law would raise $150 million a year in revenue, but the immediate effect was several Internet-based businesses fleeing to Indiana and Wisconsin so as to not be cut off from commissions. The Illinois law, like a few others, require out-of-state retailers that have contracts with in-state "affiliates"-independent persons within the state who post a link to an out-of-state business on their website and get a share of revenues from the out-of-state business-to collect the state's sales tax.

In 2010, we issued a report identifying the trend and demonstrating that states were abandoning "first-generation" version of these taxes, since they failed to produce any revenue and led to extended and unresolved litigation. The "second-generation" versions of these taxes, emphasizing mandatory disclosure of use tax obligations to consumers, are also enmeshed in litigation, with one version struck down in North Carolina on First Amendment grounds. We spoke too soon: Illinois's version is (was?) one of those a traditional first-generation "Amazon" tax that targets affiliates.

Contrary to the claims of supporters, Amazon taxes do not provide easy revenue. In fact, the nation's first few Amazon taxes have not produced any revenue at all, and there is some evidence of lost revenue. For instance, Rhode Island has seen no additional sales tax revenue from its Amazon tax, and because Amazon reacted by discontinuing its affiliate program, Rhode Islanders are earning less income and paying less income tax.

Enacting an Amazon tax law also sends a signal of hostility to businesses engaged in interstate commerce, runs the serious risk of retaliation from other states and from affected businesses, and undermines efforts to improve the uniformity of state sales taxes. The judge is correct in finding the law to be unconstitutional.