Kleinbard: “Competitiveness” Argument for Moving Firms’ Headquarters Overseas Is a Canard

August 12, 2014 at 10:10 am

The claim that many U.S. companies are moving their headquarters overseas because U.S. corporate tax rates make them uncompetitive is “largely fact-free,” USC law professor and former Joint Tax Committee staff director Edward Kleinbard concludes in a new paper.

While many firms and their lobbyists highlight the 35 percent top U.S. corporate rate, that’s not what companies actually pay, Kleinbard explains.  The effective tax rate that U.S. multinationals face on their worldwide income — that is, the share of this income that they pay in taxes — is well below this statutory rate.  A big reason is that multinationals report vast amounts of their income as coming from tax havens where they pay little or no tax, even if they have few staff and do little business there.

Kleinbard also explains that the 2004 repatriation tax holiday, which allowed multinationals to bring profits held overseas back to the United States at a temporary, vastly reduced tax rate, gave them a big incentive to stockpile billions more in tax havens and await another tax holiday.  These large stashes of profits in tax havens are an important reason — Kleinbard thinks the key reason — why many companies are considering moving their headquarters overseas.  By “inverting,” these companies can basically declare their own, permanent tax holiday and avoid ever paying U.S. taxes on foreign-held profits.  And once inverted, they can use legal avoidance schemes to effectively get those profits to their U.S. shareholders.

In other words, multinationals are already using tax havens to achieve zero or extremely low tax rates.  Firms considering inversions are searching not for a “competitive” tax rate but a zero tax rate by ensuring that those profits remain “stateless” — that is, taxed nowhere at all. (Echoing a famous line from Mae West, Kleinbard’s paper is titled “‘Competitiveness’ Has Nothing to Do With It.”)

Kleinbard’s solution has three parts:

  1. Make it harder for a U.S. multinational to invert.
  2. Prevent companies that do invert from effectively distributing their “foreign profits” to U.S. shareholders without paying U.S. tax.
  3. Make it harder for all U.S. multinationals to claim that U.S.-earned profits were actually earned in tax havens and low-tax countries.

A Deserved Downgrade of Kansas’ Bonds

August 11, 2014 at 9:41 am

The meaning of Standard & Poor’s recent downgrade of Kansas’ credit rating, in which it cited Kansas’ “structurally unbalanced budget,” is clear:  Kansas’ budget is a train heading off a cliff.

Here are the details:

  • Kansas’ massive tax cuts have sharply cut state tax revenues.  Since Kansas’ massive tax cuts took effect a year and a half ago, revenues have nosedived.  Revenues were down about $700 million in the last fiscal year.  That’s much more of a drop-off than the state’s official forecasters expected.
  • There’s not enough revenue coming in this year to cover the state’s budget.  Hoping the tax cuts would produce more economic growth and wanting to avoid additional spending cuts, Kansas lawmakers approved a budget for this fiscal year that’s $326 million larger than the state forecasts it will collect in revenue.  In reality, the imbalance is even worse, because the budget is based on overly optimistic revenue projections.  The state assumes revenues will surge over the next year — even though more tax cuts will kick in in January.  That’s why Duane Goossen, the state’s former budget director, recently wrote, “[t]he Kansas budget appears to be teetering on the edge of a fiscal cliff, but that’s an illusion.  We’ve already gone over the edge.”
  • Kansas is avoiding immediate budget cuts only by drawing down its operating reserves.  The state isn’t in emergency mode already because it’s using its only operating reserves to cover the cost of state services.  (Kansas is one of only four states with no formal “rainy day fund,” so its operating reserves are not well protected and can be used in this imprudent way.)
  • The reserves likely will run dry sometime in the next few months, creating a budgetary emergency.  Once the reserves are gone, Kansas will be forced to make emergency cuts to state services, or to raise new revenue.  And any cuts would come on top of deep cuts the state has already made in recent years to its schools and other services.
  • The future looks even worse.  The new tax cuts taking effect at the beginning of 2015 will be followed by even more income tax rate cuts in each of the subsequent three years.  The additional cuts in 2016 alone will reduce revenues by about another $113 million.  So when the legislature comes back in session next January to write the state budget for 2016, lawmakers will have even less revenue to work with, making it even harder for Kansas to fund its schools and other services.

It’s no wonder that Standard & Poor’s downgraded Kansas’ credit rating, or that another major credit rating agency — Moody’s — did so earlier this year.  The rating agencies rightly understand that Kansas’ fiscal policy is a disaster.

In Case You Missed It…

August 8, 2014 at 2:47 pm

This week on Off the Charts, we focused on state budgets and taxes, food assistance, health care, the safety net, and Social Security.

  • On state budgets and taxes, Elizabeth McNichol listed five ways that states can produce a more trusted and reliable revenue estimate.
  • On food assistance, Becca Segal explained how community eligibility is poised to help millions more students nationwide receive free school meals.
  • On health care, Edwin Park highlighted new findings from the Congressional Budget Office that concur with our analysis of the reasons for Medicare Part D’s lower-than-expected costs.
  • On the safety net, Will Fischer pointed out how House Budget Committee Chairman Paul Ryan’s anti-poverty plan could undercut rental assistance programs’ effectiveness and put substantial numbers of vulnerable families at risk for homelessness.
  • On Social Security, Kathy Ruffing highlighted recent updates to our chart book and a paper on Social Security Disability Insurance.

We released papers on best practices for state revenue forecasting, a new policy that makes it easier for community eligibility schools to participate in the E-rate program, and findings from the 2014 Medicare trustees’ report.  We also updated our chart book on Social Security Disability Insurance.

CBPP’s Chart of the Week:

A variety of news outlets featured CBPP’s work and experts recently. Here are some highlights:

Nine myths about the social safety net, annotated
Washington Post
August 7, 2014

States Watching Congress on Internet Access Taxes
Stateline
August 5, 2014

Don’t miss any of our posts, papers, or charts — follow us on Twitter and Instagram.

Five Ways That States Can Produce a More Trusted and Reliable Revenue Estimate

August 7, 2014 at 12:10 pm

Update, August 7: We’ve updated this post to correct the number of states in which forecasting meetings are closed to the public.

Every state estimates how much revenue it will collect in the upcoming fiscal year. A reliable estimate is essential to building a fiscally responsible budget and sets a benchmark for how much funding the state can provide to schools and other public services. Yet, as our new report highlights, some states forecast revenues using faulty processes that leave out key players and lack transparency.

While there is no one right way to forecast revenues, research and experience suggest that states benefit from the following common-sense practices.

  • The governor and legislature should jointly produce a “consensus” revenue estimate. More than half the states (28) employ such a “consensus” process. In the other 22 states and the District of Columbia, either the governor and legislature produce competing forecasts (a recipe for gridlock and political infighting) or one branch of government is left out of the official process, which may reduce the revenue estimate’s value as a trusted starting point for writing the state budget.
  • The forecasting body should include outside experts. Including experts from academia or business, along with economic and budgeting experts from within the government, widens the economic knowledge available to the forecasting body and can improve how well a forecast is trusted. While more than two-thirds of the states draw on outside experts, 15 states do not.
  • The forecast and its assumptions should be published and easily accessible on the Internet. Most states follow this practice, but seven do not, leaving their estimates less transparent to anyone who is not directly involved in the forecasting process.
  • Meetings of the forecasting body should be open to the public. In 21 states and the District of Columbia, forecasting meetings are closed to the public, unnecessarily diminishing the trust that the forecasts might otherwise engender.
  • Estimates should be revised during the budget session. Reviewing earlier estimates to adjust them for changing economic circumstances can improve their accuracy. Fifteen states do not regularly review their estimates during the course of the budget session.

Together, these components create a strong, reliable revenue estimate. For example, a professional and open revenue estimating process makes revenue forecasts more transparent and accessible to the public and a broader group of legislators, which can lead to a healthier and more democratic debate and greater fiscal discipline.

States wishing to improve their revenue estimating practices have a number of models, since many states have adopted practices that produce a more trusted forecast (see map). Thirteen states employ all five of the best practices identified by our research and can serve as models for the rest of the country. One state — Arkansas — does not use any of the five best practices, and 11 others employ only one or two. These states, in particular, could benefit from adopting the better revenue estimating practices that many other states use.

Click here for the full report.

Community Eligibility Poised to Help Millions More Students

August 7, 2014 at 11:11 am

More than 1.8 million students attended schools in 11 states last year that offered community eligibility, according to new data from the U.S. Department of Agriculture (see chart).  Community eligibility, which allows high-poverty schools to offer breakfast and lunch to all students at no charge without having to process meal applications, is now available nationwide, enabling schools in all 50 states to become hunger free.  Eligible schools have until August 31 to sign up for the coming school year.

More than 28,000 schools nationwide qualify for community eligibility.  School districts across the country have already adopted community eligibility for next year, including those as varied as Dallas, Texas; Kansas City, Missouri; and Yakima, Washington.  More districts are signing up every day.

Community eligibility gives school districts serving high-poverty areas a rare opportunity to fight child hunger.  As schools in the states that already have adopted it have learned, community eligibility is a proven tool to help children receive the healthy meals they need to learn and thrive.