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Corporate Taxes are Being Eroded by Tax Incentives and Tax Avoidance Measures

April 20, 2012

Filed under: Budget & Tax,Taxes — Tags: , , , — admin @ 8:24 AM

In the final part of our series about tax day, we will explore how corporate tax loopholes and corporate tax incentives have eroded corporate taxes and jeopardize the public services that make our economy strong.

Much of the tax day attention is usually paid to individual income taxes.  However, individuals and corporations alike benefit from our state’s infrastructure, education systems, court systems, and other state services that make Mississippi’s economy strong.  Thus, corporations should also pay taxes maintain those investments.  However, last year PEER found that 8 out of 10 corporations in Mississippi pay no state income tax.  Some of those corporations do not pay income tax because they legitimately have no profit to pay taxes on or they receive credits that have lowered their taxes to zero.   Others are not paying taxes by taking advantage of tax avoidance measures.

Corporate Tax Breaks

Corporate tax breaks are programs that allow corporations to reduce or eliminate their taxes.  These programs are designed to encourage business activity, but their benefits can be offset by reducing state revenue and limiting investment in state services like education and workforce development that are also vital to the economy.

Furthermore, the true benefits of corporate tax incentive programs are unclear.  Public disclosure about the programs is lacking.  In most cases the public does not even know simple details about the incentives such as or how many corporations are receiving the incentives and how much they cost.  More importantly, data are not available on how many jobs are actually created from the programs and the quality of those jobs.

At the very least, MS should publish information on which companies are receiving tax breaks and whether or not the policies are have the intended impact on jobs.

Corporate Tax Loopholes and Tax Avoidance

Another ways corporations avoid paying taxes is by taking advantage of loopholes in the tax code.  Corporations employ tax avoidance measures like shifting income to related corporations in other states.   More details about how corporations do this can be found in this blog post.

Closing loopholes would not only help support our state services, it would help level the playing field for local businesses that don’t have out of state subsidiaries and must pay taxes on their full profit.

Corporations succeed when they are surrounded by an educated workforce and a well-functioning infrastructure – both of which require public investment funded by taxes and remain essential building blocks of a well-functioning economy.

Author: Sara Miller, Senior Policy Analyst

Inequality Hurts Us All—Our Tax System Shouldn’t Make This Worse

April 19, 2012

Filed under: Budget & Tax,Taxes — Tags: , , — admin @ 12:52 PM

Our state is a better place when we all do well.  Unfortunately, our current tax system makes inequality in our state worse by taxing working-poor families deeper into poverty.

Mississippi’s state income tax threshold, the amount at which persons start having to pay income taxes, has fallen below the federal poverty line since 2005 (See Figure 1, below).

Each year, the federal poverty line rises due to increases in the cost of living.  Last year, the federal poverty line rose by $698 from $22,113 to $22,811 for a family of four, while Mississippi’s income tax threshold had no adjustment. Without any adjustment for inflation, more and more individuals living below the federal poverty line will be required to pay state income taxes.


In 2011, a number of states exempted low-income families from state income tax and a many other states offered refunds to low-income working families through Earned Income Tax Credits. 404,394 Mississippians claimed the federal Earned Income Tax Credit (EITC) in 2011 which brought an additional $1.5 billion into our state.¹

A state EITC would reduce the income taxes owed and provide a wage supplement for over 360,000 working families living in or near poverty in Mississippi.  Research has shown that most families use the EITC to pay for necessities, home repairs, maintaining/replacing vehicles needed to commute to work, and obtaining additional education or training to boost their employability and earning power.²

Inequality hurts us all.  Our state tax system shouldn’t make this worse—especially when we have the ability to adjust our tax system to reflect the realities of working families in our state through a state-level Earned Income Tax Credit.

¹http://www.eitc.irs.gov/central/eitcstats/

²Timothy M. Smeeding, Katherin Ross Phillips, and Michael A. O’Connor, The Earned Income Tax Credit:  Expectation, Knowledge, Use, and Economic and Social Mobility. http://ideas.repec.org/p/max/cprwps/13.html

Author: Francinia D. McKeithan, Policy Analyst/ SFAI Policy Fellow

What Do Tax Breaks for Millionaires Cost in Mississippi?

April 16, 2012

Filed under: Budget & Tax,Income & Working Families,Taxes — Tags: , — admin @ 11:41 AM

Today, the United States Senate will be voting on the “Buffett Rule.”   The “Buffett Rule” is the principle that the tax system should be reformed to reduce or eliminate situations in which millionaires (households earning $1 million or more annually) pay lower effective tax rates than many middle-income people.

Only around 210,000 taxpayers – a bit over 1 of every 1,000 – would face higher federal taxes if the measure were enacted, according to the Tax Policy Center.

The National Women’s Law Center shared information on how these tax breaks affect the Federal government as shown in the graphic below.

Here are two examples of how these issues play out in our state.    

  • Child Care Assistance— There are currently 12,964 working Mississippians on the waiting list for child care services.  The waiting list occurred primarily in response to the expiration of $31 million in American Recovery and Reinvestment Act funds.  The funds were used to clear the waiting list in October 2009.
  • Home Delivered Meals— The Aging and Adult Services unit served 1,743,698 individual meals and another 358,790 congregate meals in FY11; however another 2,910 individuals remain on the program’s waiting list.

Taxes are important to all Mississippians, not just because they represent a portion of their paychecks, but also because they fund the public structures that provide the foundation for creating jobs and building a strong economy.  Our state’s tax system should be equitable and adequate, taxing all individuals based on their ability to pay and taxing our citizens in such a way that we are able to build and support the structures that we all depend on each day.

Author: Francinia D. McKeithan, Policy Analyst/ SFAI Policy Fellow

Mississippi’s State Income Tax has High Impact on Low Income Families

April 4, 2012

Filed under: Budget & Tax — Tags: , , , , , , — admin @ 1:46 PM

With the tax filing deadline of April 17th approaching, many Mississippians have already filed their state and federal taxes or will soon be doing so.  A recently updated report from the Center on Budget and Policy Priorities, The Impact of State Income Taxes on Low-Income Families in 2011, highlights three facts that you may not know about Mississippi’s State Income Tax.

Three things you may not know about Mississippi’s Income Tax:

1. Mississippi is one of 10 states in which a family of three, with an employed person working full-time at the minimum wage, actually owed taxes in 2011.

2. Our state currently taxes the income of working Mississippians more heavily than in the early 2000’s. The income tax threshold (the point below which a family owes no income tax) for families of four has fallen compared to the federal poverty line. Without adjustment, the gap between the state’s income tax threshold and the federal poverty line will increase annually (See Figure 1) and there will be more individualsliving below the federal poverty line that will be required to pay state income taxes.

3. In Mississippi, the income tax on families of four with poverty-level incomes has risen faster than inflation from $0 in 1994 to $103 in 2011.

Simply getting rid of the income tax is not an option. Instead, the solution is to tailor the tax codes to reflect the realities of working families. In 2011, a number of states exempted poor and near-poor families from state income tax and a many other states offered refunds to low-income working families through Earned Income Tax Credits.  Another way our state can reflect the reality of working families is by updating the state’s tax structure.  For instance, a new rate of 6% on taxable income over $45,000 and 7.5% on income over $100,000 would bring in an estimated $117 million through the personal income tax.

Taxes are essential to our state.  They provide funding for education, health care, and public safety— systems we all rely upon daily. With a balanced approach, that includes both spending cuts and new revenues, we will be better equipped to make Mississippi a stronger state for the generations to come.

Author: Francinia D. McKeithan, Policy Analyst/SFAI Policy Fellow

Updated: HB1396 Takes Advantage of Mississippi’s Working Families

April 2, 2012

Filed under: Budget & Tax — Tags: , , , — admin @ 9:22 AM

This is updated information to the March 30th post on HB 1396

HB1396 represents the types of policies that keep Mississippi and its families from moving ahead and should not be supported. HB1396 significantly drives up the cost of small loans made by small loan companies which are used by working families.

Example:
Compared to the more expensive $1,500 loan under the current statute, this act will increase the current allowable costs on (interest and fees) by $884.88.

***HB1396 changes the fee structure on installment loans making them more expensive.***

On the more expensive $1,500 loan with a term of 24 months, the cost of the loan without credit life insurance is $2,954.88 under the existing statute.  HB1396 will increase the allowable cost by $884.88 (see chart below).


On a monthly basis, HB1396 will increase the costs of making loan payments on the more expensive $1,500 loan by $36.87. For families already in the financial position to need this product, $37 could be the difference between having enough money for gas to go to work and not making it.

One rationale for pursuing this bill has been that the small loan companies have been affected by the recession.  However, in 2010, there were 517 small loan companies licensed in the state of Mississippi with nearly $795 million in loans outstanding.  Clearly, someone is able to make these loans.  The rationale also ignores the fact that Mississippi’s working families have been hurting as well – and this bill will cause further harm.

For more information on HB 1396, see our Fact Sheet.

Author: Ed Sivak, MEPC Director

State General Fund Revenue Estimate: FY 2012 Revised and FY 2013

March 27, 2012

Filed under: Budget & Tax — Tags: , , , , , — admin @ 9:44 AM

Last Tuesday, State Economist Darrin Webb shared the State’s General Fund Revenue Estimate for FY 2012 (revised) and FY 2013 with the Legislature.  The table below includes a breakdown of these revenue estimates.  The total revised General Fund Revenue Estimate for FY 2012 is approximately $4.8 Billion and $4,761 Billion for FY 2013. The estimate stayed roughly the same.

Since the last revenue update, the economy has been growing.  However, this growth is at a slow pace and remains vulnerable to shock.  Additionally, Dr. Webb stressed that even if the nation does not enter a recession, there is still a chance that Mississippi will—the state has experienced four consecutive years of declining employment.

While it is encouraging to see that revenues are projected to exceed original estimates, there are ways that our state can take a more balanced approach. Opportunities for revenue growth include: Updating the state’s sales tax base to include more services, funding and implementing the hiring and retention of auditors and collectors for the Department of Revenue, and closing corporate loopholes by supporting HB970.

A copy of the full document can be found here

Author: Francinia D. McKeithan, Policy Analyst/ SFAI Policy Fellow

 

Budget Reform with Performance Based Budgeting, Part Three

March 19, 2012

Filed under: Budget & Tax,Performance Based Budgeting — admin @ 2:41 PM


In our first two posts on Performance Based Budgeting we discussed some basics about the budget reform and some concerns about its implementation.  In the final post in our series, we will talk about what’s happening with Performance Based Budgeting in Mississippi and in other states.

 

As discussed in the first post of the series, according to the National Association of State Budget Officers, twenty five states use some kind of performance budgeting.  Mississippi currently collects some performance information that is reported by state agencies to the Joint Legislative Budget Committee annually on their agency budget request.

A proposed bill in the House (and one that died in the Senate), expand Mississippi’s Performance Based Budgeting efforts.

Bill Highlights:

  • Require the Governor to develop an annual state strategic plan that includes a “vision, mission and philosophy for state government” and “statewide goals and benchmarks for achievement”
  • Require agencies to develop individual plans that correspond with the state plan that include “achievement goals for each functional area of state government”
  • Establish a system of performance audits and evaluations to determine whether agencies have met their prescribed goals,
  • Require production of a Budget and Assessment Report prior to the legislative session that reports on agency performance measures
  • Reduce the number of appropriation bills to nine—each corresponding to a “functional area” of government in the strategic plan.

Recently, Mike Morrissey, a Texas official, testified to the House Appropriations committee on Texas’s experience with Performance Based Budgeting.  He stressed the difficulty of creating quality performance measures and in prioritizing which of those measures that are included in appropriations bills and cautioned against selecting too many or too few measures.

The Pew Center on the States, an advocate of Performance Based Budgeting, has studied how it has been used in four other states in their report, Trade-Off Time .  Those states are Indiana, Maryland, Virginia, and Utah.   Each of those states has used Performance Based Budgeting to inform policymakers and find ways to improve state government efficiency.  However, as noted in the report, one approach does not fit all scenarios.  Performance Based Budgeting does not always mean less funding for poor performance and more funding for better performance.

According to the authors, “In some cases, leaders provided less money to initiatives that were performing well, which contributed to improved efficiency. Conversely, in order to follow through on their initial promise, decision makers invested more resources into some programs that had not yet met
their goals.”

The bottom line is that Performance Based Budgeting can enhance budget transparency and be a useful tool for budget reform in Mississippi.  Much depends on its implementation, however.  Broadly used, Performance Based Budgeting could even be used to judge the effectiveness of our state’s tax expenditures.  Performance measures must be defined carefully.  Performance Based Budgeting should be used with the acknowledgement that it is one piece of the puzzle for creating a responsive budget, but that it cannot replace discussions around state needs and priorities.

Co-authored by:
Sara Miller, Senior Policy Analyst and Francinia D. McKeithan, Policy Analyst/ SFAI Policy Fellow

House Bill 970 Would Help Curb Tax Avoidance

March 15, 2012

Filed under: Budget & Tax — Tags: , , , , — admin @ 8:48 AM

House Bill 970 would not allow corporations to deduct payments to related corporations that are not for legitimate business expenses. Closing this loophole would bring in an additional $30 million for the state of Mississippi.

Tax Avoidance: How does it work?

Some corporations set up a related corporation in another state that “owns” an intangible asset of the company, such as their logo.  They then pay royalties to that related corporation and deduct those royalties so that their profit, or taxable income, seems lower in Mississippi at tax time.  House Bill 970 would not allow deductions of these royalty payments, or payments for other purposes, unless there is a legitimate business reason for them beyond tax avoidance.

Several years ago, Mississippi closed a similar loophole that allowed businesses to deduct royalty payments to a holding company in another state that essentially did nothing other than own intangible assets.  However, businesses found another loophole by moving the intangible asset to companies in other states that had some real business operations.  Since the royalty payments to operating entities located in other states were eligible for deduction from corporate taxable income, corporations  simply moved the ownership of the intangible assets, such as the logo, to operating entities in other states—but for no business purpose other than tax avoidance.

Why should we close this loophole?

  • The bill is not a tax increase, instead it would limit tax avoidance by corporations who should already be subject to the income tax.  Last year, PEER found that 8 out of 10 corporations in Mississippi pay no state income tax.  Some of those corporations do not pay income tax because they legitimately have no profit to pay taxes on or they receive credits that have lowered their taxes to zero.   However, some are not paying taxes by taking advantage of tax avoidance measures.
  • The bill would help level the playing field for local businesses that don’t have out of state subsidiaries and must pay taxes on their full profit.
  • Recent polling by Better Choices Mississippi found that a majority of Mississippians favor closing corporate tax loopholes.  Three out of five Mississippians support a balanced approach to building a budget that includes raising some revenue. Of those supporting a balanced approach, 60% favor closing corporate loopholes as a means for collecting additional revenue.

Individuals and corporations alike benefit from our state’s infrastructure, education systems, court systems, and other state services.  During these tough budget times, we should be making sure that we maximize revenue collections that should already be owed to our state.  House Bill 970 would help address some of the challenges in collecting our taxes and help curb tax avoidance.

Author: Sara Miller, Senior Policy Analyst

Adequate Tax Collections are Vital to Economic Growth

March 8, 2012

Filed under: Budget & Tax — Tags: , , , , — admin @ 8:14 AM

A new report from the Institute on Taxation and Economic Policy refutes the notion that no-income tax states are performing better economically than higher income tax states.  The report, called “High Rate Income Tax States Are Outperforming No-Tax States” compares the nine highest income tax rate states with the nine states with no income tax in three key economic measures.

Anti-tax groups often tout the ability of low or no taxes to spur economic growth while proposing tax cuts.  However, as the figure shows below, these claims have not been realized.

Key Economic Indicators for Nine “High” Income Tax States and Nine No Income Tax States 2000-2010

The report also provides a critique of research by Arthur Laffer that claims to show that the nine no-income tax states are performing better than other states.  According to the report, Laffer’s research fails to account for revenue from natural resources and for population trends that are not attributable to taxes.

Adequate tax collections are vital to, rather than detrimental to, economic growth.
Tax cuts are not the answer for Mississippi’s economic growth. Public investments in education, workforce development, and other quality of life areas are essential for a state’s economic competitiveness and prosperity.

Author: Sara Miller, Senior Policy Analyst
Source: MEPC analysis of data from the Institute on Taxation and Economic Policy

5 FUNDAMENTALS OF TANF

February 21, 2012

Filed under: Budget & Tax,Income & Working Families — Tags: , , , , — admin @ 8:59 AM

On the national level, there continues to be discussion over the ability of social assistance programs to insulate families from unemployment, underemployment and periods of economic hardship during the economic downturn. A recent Mississippi Public Broadcasting segment explains that many areas of Mississippi have seen increased enrollment in SNAP (formerly food stamps) among families that have never before applied for benefits.

Temporary Assistance for Needy Families (TANF) likewise provides emergency assistance to families with children to cover basics like rent, transportation, food or utilities. The TANF program supplies temporary cash welfare to very low-income families with children that are facing a financial emergency. Today’s post highlights key information on TANF eligibility, enrollment and benefits.

5 FUNDAMENTALS OF TANF IN MISSISSIPPI

  • Eligibility. In Mississippi, a family with one adult and two children earning less than $458 per month is eligible for TANF assistance. Eligible families must meet work and job search requirements during their participation in TANF. Like most states, Mississippi has a 60-month lifetime limit on family eligibility for TANF benefits.
  • Enrollment. In late 2011, 12,272 families received support through TANF. Very low-income children make up the bulk of TANF recipients, representing 71% of the overall caseload.
  • TANF and Poverty. In 2010, 643,880 residents lived in poverty while 25,301 were enrolled in TANF. The TANF caseload equaled 3.9% of the state’s residents living in poverty. Nationally, the number of individuals receiving TANF is the equivalent of 9.5% of individuals living below the poverty line.
  • TANF and the State Budget. In FY 2010, TANF payments represented 0.1% of the state budget.  Mississippi distributed $20 million in TANF support in FY 2010, the bulk of which comes from federal funds.
  • Benefit Levels. Fourteen states have TANF benefit levels below $300 per month for a family of three. Mississippi is one of these states, and as the chart below shows, Mississippi’s benefit level for a family of three is $170 a month, the lowest in the nation.

The recession brought an uptick in recipients as families turned to TANF during periods of unemployment. However, TANF benefits now cover a smaller share of critical family needs, such as housing or utilities than they did in the late 1990s. As the state and nation continue to face a strained budget environment, it remains important that resources are protected from programs like SNAP, TANF or child care vouchers.

These programs and others that make up the social safety net are instrumental for many families struggling to make ends meet while working hard across Mississippi.

Author: Sarah Welker, Policy Analyst
Sources: U.S. Department of Health and Human Services, Mississippi Department of Human Services, Center on Budget and Policy Priorities, and Urban Institute’s Welfare Rules Data Book.
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