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High Tax Rate Threatens to Stunt US Growth
Posted By:  - 08/08/11

If you've spent much time reading the news the past few days you already know that good news has been few and far between. Our credit rating has been downgraded because of unsustainable debt, the stock market has plunged as the world economic outlook remains uncertain, and the U.S. economy isn't growing fast enough to put a dent in unemployment.

But in an increasingly globalized marketplace, our pain can be other countries gain. Sadly, rather than attempt to alleviate the problem, Washington has only made it worse by maintaining the second highest corporate tax rate in the developed world. As the LA Times reported today,

 

Many major U.S. companies are making big plans to expand overseas even as some of them announce new layoffs at home, and there's a chilling reason why: They're beginning to give up on the American consumer as a source of future growth.

For years, U.S. companies went off shore to get cheaper labor and lower manufacturing costs for products to be sold to Americans. Now, as the nation's economy stalls and personal incomes stagnate, they see consumers in Asia and Latin America as offering brighter prospects for future sales and profits.

In effect, as many corporate executives look ahead, the United States has a diminishing place in their thinking.

The nation's tax laws reinforce the pattern. American companies have piled up mountains of profits overseas, but they must pay very high taxes if they bring the money home. So instead of investing back home, they are more apt to put the money into overseas expansion, adding jobs there.

If America wants to remain a viable destination for capital and hold its spot as the world's top economy, our elected representatives must begin to take steps to make our corporate tax code more competitive. While fundamental reform of the tax code may take time, there is a step Washington could take immediately to encourage businesses to bring money and investment back to our shores - a corporate tax holiday. Representative Kevin Brady's (R-TX) "Freedom to Invest Act" would do just that, allowing companies to repatriate foreign earnings at a rate of 5.25 percent for one year. Read more about NTU's efforts to support this bill by clicking HERE. 

 


 

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5 Things Washington Could Do to Jumpstart Job Creation
Posted By:  - 08/05/11

The debt ceiling debate has come to a merciful (if not ideal) come to an end. What is President Obama to do now? Why, pivot to jobs of course.

Sadly, it didn’t take a crack political mind, insider sources, or ESP to figure out what the White House was planning, you just have to look at history. A pivot to job creation has become Democrats go-to move. In fact, Ben Smith of Politico has identified at least six-other times that the Obama Administration has announced a similar shift.

Despite all the claims of a “laser-like focus” on jobs, the White House has never actually gotten around to it. Instead, apparently unable to walk and chew gum at the same time, he is consistently sidetracked by other things. But after more than two years and seven pivots Americans should begin to wonder whether it is truly an inability to multitask or whether it is simply that the Obama Administration has no idea how to promote job creation in the first place. It is almost as if he opened his Keynesian bag of tricks to discover it contained only one trick – stimulus.

 So while the Administration pivots themselves in circles, here are several actions that Washington could pursue to create the environment needed for job growth:

  1. Reduce the regulatory burden on businesses. The Code of Federal Regulations is over 163,000 pages and the Administration has tacked on another 600+ this month alone. The regulatory tidal wave is only predicted to grow as myriad rules are handed down as a result of the health care reform bill and Dodd-Frank. A quick solution would be to pass the Regulations from the Executive in Need of Scrutiny (REINS) Act which would require Congress to take an up-or-down vote on all proposed rules that would have an annual economic impact of $100 million or more.
  2. Ratify the pending free trade agreements with Panama, Colombia, and Korea without making it conditional upon continuation of the Trade Adjustment Assistance program. Free trade agreements have contributed to America’s place as the world’s largest exporter. Although the 17 nations covered under our current FTAs represent only 7.5 percent of the world’s non-U.S. gross GDP, they purchase 40 percent of U.S. exports. Passage of further free trade agreements would provide a further boost to U.S. manufacturers, through reduced tariffs, and taxpayers, in lower priced goods – both of which would help to jumpstart our sluggish recovery.
  3. Complete approval of the Keystone XL pipeline from Canada.  This could be accomplished by Senate passage of HR 1938 (it already sailed through the House), which would expedite a final decision on the permitting process for the Keystone XL pipeline. This pipeline would create an estimated 343,000 American jobs as well as provide an additional 500,000 barrels of oil a day from Canada – our largest and most stable supplier.
  4. Encourage safe and responsible domestic energy development. Government inaction and bureaucratic obstructionism has left the approval process for offshore lease sales at a standstill. The implicit “permitorium” has forced rigs to leave our waters, energy exploration to dramatically slow, and investment to flow to other countries. House Republicans have passed multiple pieces of legislation including H.R. 1229, H.R. 1230, and H.R. 1231, to loosen the government’s stranglehold on America’s expansive oil and natural gas deposits. The Senate should move quickly to pass these bills.  
  5. Support a repatriation holiday. America’s sky-high corporate tax rate coupled with its outdated use of a worldwide tax system places U.S. businesses at a competitive disadvantage. Although fundamental reform of our corporate tax structure should be on the top of Washington’s to-do list, a repatriation holiday, such as that offered by H.R. 1834 would provide an immediate lift to businesses. The bill, which would allow companies to bring back foreign earnings at a lower tax rate, would allow companies to reduce debt, increase investment, and create jobs.

These few simple ideas, many of which have already passed the House of Representatives, would provide an immediate spark to our economy. If only the Obama Administration would stop pivoting and start focusing on such policies perhaps America could escape its prolonged economic malaise.  

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White House Admits Tax Relief Creates Jobs? Taxes Kill Jobs?
Posted By: Douglas Kellogg - 08/05/11

In a White House Press Conference, Press Secretary Jay Carney seems to spill the beans that tax hikes kill jobs. He pretty explicitely says tax cuts create jobs, which is a belief that goes hand-in-hand with the understanding that tax hikes would kill jobs...This makes a variety of the President's policies from tax hikes in Obamacare, to recently peddling for energy industry taxes, rather confusing. Rather than head on a taxpayer funded bus tour of battleground states to talk about jobs, perhaps the President is well aware he should look to relieve the tax burden instead?

Transcript provided by Real Clear Politics

MR. CARNEY: "Well, the White House doesn’t create jobs. The government together -- White House, Congress -- creates policies that allow for greater job creation. And that can be through tax cuts, for example, for working Americans; everyone who works pays a payroll tax. And the tax cut that this President pushed for, for one year, for this calendar year, he’s pushing for to be extended next year."

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Yes, Virginia, the New Supercommittee Can Include Tax Hikes
Posted By: Andrew Moylan - 08/01/11

So, there's a debt ceiling "deal" in Washington after months of haggling. The outline has some things to commend it (substantial and enforceable spending cuts, no immediate tax increases), and some things that have prevented NTU from supporting it (doesn't require passage of a Balanced Budget Amendment). But one of the most confusing aspects has been the so-called "Supercommittee" the debt ceiling bill establishes. This evenly-divided 12-member Joint Select Committee would be required to pursue $1.5 trillion in deficit reduction to report before Thanksgiving and, should a majority of 7 or more committee Members support its recommendations, Congress would be required to give the resulting bill expedited floor consideration (AKA no amendments, no filibuster) in both chambers by Christmas.

But note that its goal isn't spending reduction, it's deficit reduction. That's a code that should set off alarm bells for conservatives as setting the stage for tax increases. In fact, if you look at the legislative language of the new version you'll find that there is no prohibition on inclusion of tax hikes. So why is it that Republican proponents of the bill have claimed this shouldn't be cause for concern? Speaker John Boehner's own presentation to his conference said that the structure would "effectively mak[e] it impossible for the Joint Committee to increase taxes." Who's right here; does the bill allow for tax increases or not? The answer is that it does indeed allow for tax increases, and here's why.

The Speaker is referring to the fact that the committee will be required to operate on the Congressional Budget Office's "current law" baseline, which assumes that ALL of the Bush tax cuts expire and the Alternative Minimum Tax dramatically expands. That means that once those changes kick in at the end of 2012 we're looking at $3.5 trillion worth of built-in tax increases over a decade. As such, any monkeying with marginal income tax rates that would leave them below the full Clinton levels (i.e. an attempt to extend all Bush tax cuts except those for the "wealthy") would actually be scored as a "tax cut" from the assumed $3.5 trillion hike in the baseline, thus failing to fulfill the committee's required goal of reducing the deficit. In order to produce something that would score as a "tax increase" by altering marginal rates, you'd have to go above and beyond Clinton levels and increase taxes even more than the $3.5 trillion that's baked into the cake, something that I can't imagine any Republican agreeing to.

So the Speaker is right that the structure of the committee effectively protects against marginal rate increases or any wholesale tax reform that would yield dramatically more revenue than the additional $3.5 trillion that's already built in, but here's what is being ignored. The Supercommittee could very easily take a number of actions that would both hike taxes compared to where they are today and score as a deficit-reducing tax increase on CBO's current law baseline. For example, they could implement a cap of the mortgage interest deduction with the intention of reducing that benefit for wealthier Americans. That policy would likely amount to a substantial tax increase and would count as a deficit-reducer on CBO's current law baseline. The same is true of any number of changes to credits, deductions, or exemptions. The Supercommittee could also resort to tax surcharges, much the way the 2010 health care law did. They could easily add a brand new tax surcharge of, say, 5% on incomes over $1 million. This is essentially creating a new layer of taxation on top of the existing marginal rate structure. Such a surcharge would amount to a substantial tax increase and would count as a deficit-reducer on CBO's current law baseline.

As you can see, it's not accurate to say that the committee's structure makes tax increases impossible. It makes changing marginal tax rates close to impossible, but it doesn't really do anything to constrain the ability of the committee to modify credits, deductions, and exemptions in a way that could bring hundreds of billions in new tax revenue to pay for Washington's overspending. But proponents of this bill say that there are two more backstops: the appointees to the committee, and the House of Representatives. They say that if we appoint conservatives to the committee that they'll refuse to agree to a report including tax hikes. That may well be true, but I don't know how confident I am given that apparently dozens of Senate Republicans are supporting the so-called "Gang of Six" proposal which seeks a $2.3 trillion tax hike achieved in large part through modifications to credits, deductions, and exemptions. All the committee needs to secure expedited consideration of its proposals is for one Republican to join all six Democrats.

As for the House of Representatives and its strong Republican anti-tax majority, that too is of little comfort. If Democrats united in support of a package including tax increases, they'd easily secure Senate passage and would only need 25 Republicans to join the 193 Democrats to secure House passage. Normally I'd be confident that Republicans could muster a sufficient number of votes against a tax increase, but the Gang of Six experience and the profusion of rhetoric conflating reductions in tax burdens through credits/deductions/exemptions with actual government spending gives me serious pause.

This has been a long post, but the bottom line is this: the Supercommittee can include tax hikes and you can bet your bottom dollar that President Obama and Congressional Democrats, many of whom feel burned by this current debt ceiling deal, will push extremely hard to make sure that it does exactly that.

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Maryland Sales Tax Update
Posted By: Brent Mead - 07/29/11

The threat of a devastating online affiliate sales tax, and other tax hikes, is still lurking in Maryland, but has taken some unexpected positive turns

At Tuesday’s Budget and Taxation Committee briefing, Chairman Kasemeyer stressed none of the proposals heard before the Budget and Taxation Committee are under active consideration and he is not currently expecting to take up the issue of finding new revenue during the October special session.

Looking specifically at the issue of online affiliate taxes: Maryland has twice, in 2009 and 2010, looked at implementing an Amazon Tax. SB 824 and SB 1071 would have amended Maryland’s tax code to establish that a person, or seller, without a physical presence in the state is presumed to engage in taxable business in the state if that person: 1) enters into an agreement with an in-state resident by which the resident agrees, for a commission or some other consideration, to refer customers either directly or indirectly, such as through an Internet link, to that out-of-state person, and 2) the cumulative gross receipts of sales from referrals are greater than $10,000 during the preceding year.

If that language looks familiar, it is because it is almost word-for-word the same failed legislation passed in 8 other states. The author of the two previous bills, Senator Madaleno, will again push for such language. However, the Committee expressed some skepticism on the Amazon tax and floated a couple other ideas to target the $160 million in unremitted sales taxes. The Committee suggested offering a temporary sales tax exemption to an online-only retailer who locates a physical presence in the state, such as a warehouse, or forcing online retailers to place a disclaimer at the end of all sales reminding customers of their obligations. NTU will be keeping an eye out for a concrete proposal from the General Assembly.

The Committee spent significant time looking at possible expansions of the sales tax to service industries. Currently, Maryland applies its sales tax to four sectors of the service economy (pay-per-view TV, certain cleaning services, cell phone service, and pre-paid calling cards). Legislative Analysts for the General Assembly stated that expanding the 6% sales tax to other sectors has the potential to raise upwards of one billion dollars. Taxis, cable TV, and haircuts were mentioned as potential targets.

The briefing was intended to be ‘informational’ only, the claim being that Maryland is not looking to raise taxes, but in case we need to, here are some options. Of course, once that option is on the table for government, taxpayers need to watch out.

It should be some consolation that the Senate is devoting some effort to examping the possible consequences of tax hikes. That may help avoid another debacle like the repealed computer services tax in 2007. Another way to avoid such situations would be to cut spending, not raise taxes, when looking at a budget deficit.

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Where You Travel Matters
Posted By:  - 07/25/11

One online reservation site says that where you book matters.  It turns out, that where you're headed matters too -- in terms of your tax bill that is.  Tanya Mohn, blogging at Forbes.com, reports on a study done by the Global Business Travel Association Foundation that found "taxes targeting travelers impose an average cost of 56 percent more than general sales taxes."  The report looks at the overall tax burden that travelers face (this combines both general sales tax and travel-related taxes) as well as just travel-related taxes. 

So, if you still haven't booked your summer vacation yet, take a look at the lists and see whether you'll need to fork over a little more in taxes for that enjoyable summer getaway. 

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Don't Miss School Tax Holidays for 2011
Posted By:  - 07/25/11

Tax Girl, aka Kelly Phillips Erb, has compiled a list of states that offer sales tax holidays for back to school purchases on her blog on Forbes.com.  She lists dates and the exempted items along with any restrictions, such as purchases of school supplies under $75.  Plan ahead and you might be able to save.

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Maryland vs. The Travel Gnome
Posted By: Brent Mead - 07/22/11

This morning’s Baltimore Sun chronicles the latest development in Maryland’s assault against online businesses. As a prelude to next week’s Amazon tax hearing, the state took aim at online travel companies such as Travelocity and Orbitz.

Across the country, almost all state and local governments apply an occupancy tax, in one form or another, on hotel rooms. More often than not, such taxes are higher than the base sales and use tax. What is at issue in Maryland, and under legal challenge in at least 80 other jurisdictions, is how that occupancy rate is applied to online travel companies who book rooms for clients.

 Currently, a company like Travelocity will enter an agreement with a hotel to reserve multiple rooms and then book those rooms for customers. The online companies claim the difference in price between what the room is reserved for and then booked for is the company’s service fee, and not subject to taxation.  NTU generally takes this view. States such as Maryland contend occupancy taxes should apply to the higher retail rate.

However, the state’s view is a fundamental misunderstanding of the online travel business model. Travelocity and its brethren do not own or operate any hotels and they do not act as resellers. They are merely agents who connect sellers (hotels) with customers. No different than a personal shopper really.

Also at issue is a basic matter of fairness.  Governor O'Malley's desired lawsuit would target out-of-state businesses only. Old fashioned travel agencies are not being discussed as part of any lawsuit, despite performing a nearly identical function. Unfortunately, Maryland is simply following the trend of state governments looking beyond their borders for additional tax revenue. By only going after out-of-state groups, politicians can avoid appearing to raise taxes on their voters, even though these taxes will get passed down onto all consumers.

Finally, similar to Amazon taxes, we are talking about a small slice of revenue – at most $30 million per year. In order to claw back those revenues, states must go through years of legal challenges, which have proven unsuccessful elsewhere. When your state is already the 44th worst for business climate, one needs to question the efficacy of pursuing a multi-million challenge against a growing sector of the economy, which is likely to fail.

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They're Baa-aack. Gang of Six Returns to Haunt Taxpayers
Posted By:  - 07/20/11

They’re baa-aack. Just like the evil spirits in Poltergeist ( the movie that spawned the phrase) the Gang of Six has seemingly come back from the dead. Moreover, it appears their goal is to haunt the American taxpayer.

The six Senators have put forth a lame-brained “plan,” or to be more specific, “set of vague ideas,” that they say will reduce the deficit. But why now? After all, Sen. Dick Durbin (D-IL), a member of the Gang of Six, said that the plan would not be ready in time to factor into the debt limit negotiations. “The Gang of Six plan has not been drafted nor has it been scored by the CBO – it’s not ready for prime time,” Durbin told The Hill.”

Seems curious that you would release something that isn’t ready now and has no hopes of being ready before the supposed August 2nd deadline. That is, until you realize that the entire purpose behind the release was to divert media attention from the passage of the Cut, Cap and Balance Act. While the mainstream media, President Obama, and a smattering of Senate Democrats were fawning over the Gang’s vague promises and unspecified cuts, House Republicans actually passed a concrete plan to reduce the deficit and raise the debt limit.

The craziest thing about this ruse is that even the few details that were provided paint a pretty scary picture. Given the list of bullet points that seemingly comprise the entirety of the “plan,” it looks like it only cuts $500 billion (despite providing no details on where they come from) and then establishing a “process for the committees in Congress to specify further savings.”

And that’s the plan at its most concrete. For instance, the plan promises savings by “spend[ing] health care dollars more efficiently in order to strengthen Medicare and Medicaid.” If it were as easy as this, wouldn’t be doing it already? All that description really tells me is that it punts on making much-needed adjustments to our largest drivers of spending.

Where the plan really induces some Poltergeist-style terror are its tax provisions. To be fair, the plan says it would eliminate the Alternative Minimum Tax (which Congress already patches every year) and reduce top individual and corporate tax rates, but, as with everything that comes out of Washington these days, the devil is in the details.  

The plan says it would “reform, not eliminate, tax expenditures for health, charitable giving, homeownership and retirement” which somehow would “provide $1 trillion in additional revenue.” As Daniel Horowitz sarcastically asks, “You really mean to tell me that Chris Coons and Dick Durbin finally understand the Laffer Curve and the economic effect of cutting marginal tax rates?” Either that, or (as is more likely) the vague mandate to “improve the progressivity of the tax code” implies some sneaky tax hikes on things like capital gains.   

Overall, the plan promises to provide $1.5 trillion in tax relief relative to the CBO March baseline. But this is nothing more than a dishonest budgetary trick designed to hide the real impact on taxpayers. “The CBO baseline assumes the expiration of tax relief, resulting in a $3.5 trillion revenue increase. As a result, the plan appears to include a $2 trillion revenue increase relative to a current policy baseline,” says the House Budget Committee in their analysis of the proposal. “If the $800 billion in tax increases from the new health care law are included, the plan appears to increase revenues by $2.8 trillion, without addressing unsustainable health care spending that is driving our debt problems.”

$2.8 trillion in tax hikes?!? The Gang of Six may be baa-aack, but if that’s the best they can do, they should have stayed gone.  

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50 State Flyby: Week of July 15th
Posted By: Brent Mead - 07/15/11

Minnesota is looking like they have a tentative deal on a budget solution. The compromise is essentially the budget deal Republicans offered Governor Dayton before the state shutdown for two weeks. Differences between the two sides will be covered by $700 million in defered K-12 payments and $700 million in state bonds using tobacco settlement funds. Additionally, the Governor called for halting a plan to cut the state workforce by 15%, stripping policy riders from the budget, and passage of a $500 million bonding bill.

Whether Dayton’s change in heart on soaking the rich comes from political pressure, or threat of bars going dry, the deal as it stands now does not contain any new taxes. 

California

Before heading out for a break, the California Assembly narrowly defeated ACA 6. Requiring a 2/3 majority for passage, it failed 50-23. The folks at Howard Jarvis Taxpayers Association have been on top of the attempt to radically rewrite the initiative process in California.

ACA 6 would prohibit any initiative from even being voted on if, in the opinion of either the Legislative Analyst or the Director of Finance, the measure did not “pay for itself.”

The most telling aspect of ACA 6 is that if it had been on the books in 1978, Prop 13 likely would never have gone to the voters.

Michigan

It is not a huge secret that pension reform looms large over many states. The Mackinac Center published a report this week detailing the billions in savings achieved in 1997 when the state moved from a defined benefit to defined contribution plan for most new hires. 

As states attempt to reform unfunded liabilities in public pensions they would do well to follow Michigan’s example.

California (Again)

Amazon.com decided to file a referendum to repeal the recently passed affiliate tax. While things are about to get litigious, affiliate taxes remain terrible policy.

As NTU’s press release earlier in the week states, companies such as Amazon have very little incentive to submit to such onerous requirements. It is far easier for the large online retailers to terminate their affiliate programs. Amazon's decision to cancel its 10,000 contracts falls in line with what happened in North Carolina, Rhode Island, New York, and elsewhere. Meanwhile, the state will not reap the predicted $150 million revenue windfall, and will likely cost itself a healthy portion of the current $125 million in existing taxes collected from affiliates.

NTU argues against these proposal because they attempt to impose a burden on businesses which do not have a physical presence in the state. Further, the big box stores, Best Buy, Wal-Mart, etc. account for a large percentage of online sales and are subject to a state's sales and use tax. Amazon taxes end up having the effect of punishing small affiliates for little, if any, gain to the state.

New York

Sports fans – Next time you have a chance to grab a part of history, remember the tax implications.

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