Tax Foundation Tax Watch, Fall 2011

8/3/2019 Tax Foundation Tax Watch, Fall 2011

1/20

What Do CorporationsReally Pay in Income Tax?

Tax Foundation Economist William McBrideDiscusses the Corporate Tax Burden at

a Capitol Hill Briefng

GUEST COLUMNIST: Setr Jh Thue (R-S.D.)Fundamental Tax Reform is the Key to Economic Prosperity

Fall 2011


2/20ii TAXWatch Fall 2011

STAFF

Scot Hodge

Presiden

Carer DeWitVice Presiden, Developmen

Scot DrenkardAnalys

Liz DunlapDevelopmen Associae

Alicia HansenEdior and Analys

Joseph HenchmanVice Presiden,

Legal and Sae ProjecsNick KasprakProgrammer and Analys

Laura LiebermanLaw Clerk, Summer 2011

David LoganEconomis

Will McBrideEconomis

Richard MorrisonManager o Communicaions

Mark RobynEconomis

Michael VoglerManager, Governmen Aairs& Corporae Developmen

FAll 2011 InTernS

JiaQi Bao

enzing sering

Tax Watch (ISSN 1552-924X) is publishedour times per year by the Tax Foundation in

Washington, D.C., a nonproft, nonpartisanresearch organiation that has monitoredtax policy at the ederal, state and locallevels since 1937.

The Tax Foundation is a 501(c)(3) nonproftorganiation that relies on tax-deductiblecontributions or support.

Please send correspondence to: AliciaHansen, Editor at Tax Watch, National PressBuilding, 529 14th Street, N.W., Suite420, Washington, D.C. 20045.

Visit us on the web at www.taxoundation.orgor call (202) 464-6200.2011 Tax Foundation

What Does It Mean to Have a

Fair Tax Code?

We are proud o the act that we have been advocating the same principles o

sound tax policy or the past 74 years. We believe that taxes should be neutral

to economic decision making; they should be simple, transparent, and stable;

and they should promote economic growth.

But shouldnt taxes be air too? I was asked recently.

Hmm, well, thats a trickier one. You see, air-

ness tends to be in the eye o the beholder.

Billionaire Warren Buett believes its unair that

he pays 15 percent on his vast capital gains and divi-

dend income while his secretary pays the normal in-come tax rate on her salary. I guess it hasnt occurred

to Buett that taxing corporate income twice once

as prots and a second time as dividends is unair.

President Obama, like many liberals, believes that

the tax code should be used to correct income inequal-

ity. To them, a air tax code is one that has progres-

sively high tax rates on upper-income taxpayers and

redistributes income to the poor through tax credits.

But now that 51 percent o American households

pay no ederal income taxes, is it air that they enjoy

the benets o government but pay nothing or its

costs? And is it air that millions o those nonpayers

still get a cash reund check rom the IRS in the orm

o a reundable tax credit?

Speaking o air share, taxpayers making over

$200,000 now pay 50 percent (hal) o all income

taxes even though they earn 26 percent o all income.

In other words, their share o the tax burden is twice

their share o the nations income. Is that air?

The fat tax will x all this, argues our riend Steve

Moore in a recent Wall Street Journal editorial titled Flat is the New Fair. He quotes

Dick Armey as saying that Obamas mantra that billionaires should pay the same tax

rate as janitors may be the catalyst to sweeping tax reorm.

I hope Armey is right.

Over the next 12 months, lets work together to make tax reorm a dening issue in

the presidential election and a top legislative issue in 2013.

Sincerely,

Scott A. Hodge

President

Message rom the President

Now that51 percento American

households payno ederal incometaxes, is it airthat they enjoythe benefts ogovernment butpay nothing orits costs?


3/20

Fall 2011 TAXWatch

|Center or Federal|Fiscal Policy

2 Wha Do U.S. CorporaionsReally Pay in axes?

3 American Jobs Ac Unlikelyo Produce Many Jobs

ax Foundaion Presidenesies on Pro-Growhax Reorm

4 Warren Buets ProposalsHide elling ruhs

5 axes Te Cure-All or Deci

and Deb Reducion? Capiol Hill Brieng on Repariaion

Te rillion Dollar Question

6 10 Reasons America Needs aModern Corporae ax Sysem

|Center or State|Fiscal Policy

7 Landmark Corporae Sudy:How Does Your Sae Comparewih Your Neighbors?

ax Foundaion: Your Sourceor Fac Checking

8 Local Income axes on he Wane

9 2012 Sae Business ax ClimaeIndex Coming Soon

New Repor Explains Complexiieso Unemploymen Insurance axes

10 ax Foundaion Repor HelpsTwar Proposed MinnesoaIncome ax Increase

ennessee and Arizona Lead heCounry in Sales ax Raes

Fall 2011

11 On he Road: Speaking o

Sae-Based Groups and esiyingBeore Sae Legislaures

|Center or|Legal Reorm12 Paid a Cancelled ax? You Should

Ge a Reund!

Limi on Sae ax OverreachingPasses Key Congressional Commitee

13 Te Batle Rages On:

Caliornia vs. Amazon.com

|Highlights14 Mee JiaQi Bao and enzing

sering, Our Fall Inerns

Corporae ax Reorm Key Issueor Economic Growh

|Tax Foundation| In the News

15 Websie rac: Unique Visiorsper Monh

16 By he Numbers

ax Policy Podcas Highligh

|Guest Columnist17 Senaor John Tune (R-S.D.)

Fundamental ax Reform Is theKey to Economic Prosperity

The Tx Foundtion is n independent, nonprtisn nd nonprot reserch institution

ounded in 1937 to educte txpyers, poicymkers nd the courts on sound tx

poicy. Our economic nd poicy nysis is guided by undment tx principes

tht shoud serve s touchstones or sound tx poicy everywhere.

IN THIS ISSUE

5

7

17


4/202 TAXWatch Fall 2011

Ceter fr Feder Fsc Pcy

The topic o corporate income

taxation does not intrigue most

people. However, recent reports

have brought a renzy o unwanted

attention to certain companies, claiming

they pay zero taxes or even receive money

back rom the IRS. These reports arebased on the nancial statements o a

small sample o large corporations, with

the inaccurate implication that large

corporations generally pay too little tax.

In a recent Special Report, we

looked at IRS data on all corporate tax

returns (about 1 million protable

C-corporations), and ound that the

eective U.S. ederal corporate tax rate is

about 26 percent. This is the average rate

over the most recent 15 years o data,

during which time the ederal statutory

rate has been 35 percent.

Despite the introduction o a

number o corporate loopholes, or tax

expenditures, over this 15-year period, the

eective rate has remained airly stable.

This is because the tax expenditures, atleast on the corporate side, amount to

relatively little. We nd that the sum

total o all corporate tax credits, i.e. the

so called below-the-line tax preerences,

reduces the eective rate by a mere one or

two percentage points.

Instead, it is the oreign tax credit

generally not considered a tax expendi-

ture that explains almost the entirety o

the reduction in the eective rate rom

35 percent to 26 percent. The oreign tax

credit is a credit or (most) taxes paid

to oreign governments, and represents

about $100 billion per year. When we

include this as a measure o oreign taxes

paid, and include the oreign income

o U.S. corporations, i.e. both deerred

and non-deerred, the overall eectivecorporate income tax rate is about 33

percent, very close to the statutory rate o

35 percent. Further, taking into account

oreign taxes explains much o the vari-

ance in eective rates across industries

and by company size.

How does the U.S. compare interna-

tionally in terms o the corporate eec-

tive tax rate? To answer this, we issued

another report that surveys the 13 most

recent studies on the matter, and ound

that despite a variety o methodologies,

the results are remarkably similar: the

U.S. not only has one o the highest statu-

tory corporate rates in the world, it also

has one o the highest eective rates. The

average eective corporate tax rate in the

U.S. is 27 percent, versus an average o

about 20 percent in other countries. The

U.S. consistently ranks among the ve

highest eective rates. Typically, the U.S.

ranks second only to Japan, which not

by coincidence is also the only developed

nation with a higher statutory rate than

the U.S.

Recent Special Reports on the corporate tax

rate: U.S. Corporations Suer High Eective

Tax Rates by International Standards, www.

taxoundation.org/publications/show/27609

html and Beyond the Headlines: What Do

Corporations Pay in Income Tax?, www.tax

oundation.org/publications/show/27596.htm

New Studies Go Beyondthe Headlines

By Wm McBrde

Contribution o Various Credits in Reducing EectiveU.S. Corporate Income Tax Rate, as a Share o Taxable Income


5/20

Fall 2011 TAXWatch


On September 8th, 2011, Presi-

dent Obama presented the

$447 billion American Jobs

Act to encourage businesses to hire new

workers and stimulate spending. The key

tax measures in the American Jobs Act

include hiring incentives or new work-

ers, a 50% payroll tax cut or workers,and a business investment incentive that

allows or 100% expensing o qualiying

business deductions.

A review o the academic literature

suggests that the proposed policies

will have little, i any, impact. Indeed,

because these temporary tax measures

would be oset by some $460 billion

in permanent tax increases, the whole

package might do more harm than good.

Much o the problem with the

Presidents tax proposals stems rom

their temporary nature. Households and

corporations dont make the kind o

economic decisions the administration

is hoping to see based on temporary tax

policy changes. Many Americans will

choose to pay o debt or save their addi-

tional wages rom a payroll tax cut, while

income saved by business could very well

go to similar priorities.

The tax incentive portion o the

Presidents plan would deliver ew jobs

and little economic growth, and the

$460 billion in permanent tax increases

that pay or the tax cuts mean the plan

may end up doing much more economic

harm than good.

Read Academic Research Suggests That the

American Jobs Act Will Produce Few Jobs

at www.taxoundation.org/publications/

show/27632.html/.

American Jobs ActUnlikely to Produce

Many JobsBy Dvd S. lg

Tax Foundation President Testifeson Pro-Growth Tax Reorm

On Sept. 14, Tax Foundation President Scott A. Hodge testied beore the House

Budget Committee on The Need or Pro-Growth Tax Reorm. His presenta-

tion addressed both the individual and corporate sides o the ederal tax code

and provided suggestions or reducing complexity, increasing competitiveness, and

spurring economic growth. Heres an excerpt rom his testimony:

Since 1937, the Tax Foundation has been guided by the immutable principles

o sound tax policy which state that taxes should be neutral to economic decision-

making; they should be simple, transparent, and stable; and they should promote

economic growth. In other words, an ideal tax system should do only one thing: raise a

sucient amount o revenues to und government activities with the least amount o

harm to the economy.

By all accounts, the U.S. tax system is ar rom that ideal. In act, the economic

research suggests that the U.S. corporate and individual tax systems are undermining

the nations long-term economic growth.

OECD economists studied the impact o taxes on economic growth across the largest

capitalist nations and determined that high corporate and personal income tax rates are

the most harmul taxes or long-term economic growth. This should be a red fag because

when it comes to corporate taxes, the U.S. has a Neiman Marcus tax system while the

rest o the world has moved toward a Wal-Mart model o corporate taxation.

Now, with deerence to Warren Buett, OECD research has also ound that the U.S.

has the most progressive income tax burden among the leading industrialized nations.

The top 10 percent o U.S. taxpayers pay a larger share o the income tax burden than do

their counterparts in any other industrialized country, while low-income Americans have

the lowest income tax burden o any OECD nation. In act, roughly hal o all house-

holds pay no income taxes ater taking their credits and deductions. The research shows

that the more a country tries to make an income tax system progressive, the more it

undermines the actors that contribute most to economic growth such as investment,

risk taking, entrepreneurship, and productivity.

Tax Foundation President Scott A. Hodge

testifes beore the U.S. House o

Representatives on tax reorm

continued, next page




There is clearly a tension in the U.S. between

the desire or a simpler tax code and one that en-

sures airness and equity. So I would suggest that

we develop a new way o thinking about equity in

the tax code. We should strive to build consensusaround these basic concepts:

An equitable tax system should be ree o most

credits or deductions and not micromanage

individual or business behavior.

An equitable tax system should apply a single,

fat rate on most everyone equally. That way,

every citizen pays at least something toward

the basic cost o government.

An equitable tax code should be simple and

it should have dramatically lower rates than

we have today in the low 20s by most

accounts and the government could stillraise the same amount o revenues.

I believe that such a tax code would actually

generate a more predictable and stable revenue

stream to und government programs as opposed

to the roller coaster revenues we have today. And,

most importantly, such a tax code would be con-

ducive to long-term economic growth, which is

one o the keys to xing the long-term scal crisis

acing the country.

Read the ull testimony, Tax Reorm: The Key to

a Growing Economy and Higher Living Standards

or All Americans, at www.taxoundation.org/

publications/show/27613.html or watch a video

o the hearing at http://budget.house.gov/

HearingSchedule/#9142011.

Warren Buetts ProposalsHide Telling TruthsBy Dvd S. lg

Our responses to Warren Buetts highly

publicized New York Times op-ed calling

or tax increases on the mega-wealthy

were succinct and eective, picked up by the Wall

Street Journal, the Financial Times, Forbes.com and

Commentarymagazine, among others. The blog posts also spurred additional

requests or media commentary; our interviews and analysis were heard

around the country and seen around the world on various stations. Everyone

wanted to know more about our criticism o Buetts proposal.

Mr. Buett believes that he and his wealthy riends are under-taxed.However, Mr. Buetts actions and the acts tell the real story:

Mr. Buett chose to leave most o his ortune to the Bill & Melinda Gates

Foundation and, thus, avoided an estate tax that could potentially give 55

percent o his wealth to Uncle Sam. Moreover, keeping that wealth actively

working in the private sector would generate decit-reducing tax revenues

indenitely.

Mr. Buett seems to orget that capital gains and dividends taxes are a

double tax on corporate income. The combined tax rate o 50 percent on

dividends is the ourth-highest combined dividend rate in the industrial-

ized world. Ironically, we had the eighth-highest combined rate under

Bill Clinton.

While the top 1 percent o taxpayers earn 20 percent o the nations in-come, they currently pay nearly 40 percent o the income taxes. Thats a

greater share o the burden than the bottom 90 percent combined (thats

everyone earning under $100,000).

Lets not orget that when the top marginal income tax rate was 70 per-

cent in 1980, the rich paid 20 percent o all income taxes. Yet now, when

the top marginal rate is 35 percent, they pay twice that.

Finally, while the tax burden on the rich has been growing, the burden on

low- and middle-income Americans has been shrinking. By most accounts

roughly 50 percent o American households pay no income tax at all.

Contrary to Mr. Buetts and President Obamas perceptions, Ameri-

cas wealthiest taxpayers are paying a disproportionate share o the income

tax burden. Beore we ask the rich to pay more, perhaps we should ask

those who are paying nothing to contribute at least somethingto the basic

cost o government.

Read the blog posts that generated all the media attention:

Warren Buetts Proposed Tax Hikes Would Provide Insignifcant Revenue

http://taxoundation.org/blog/show/27547.html

Warren Buetts Call or Higher Taxes on the Rich Doesnt Fit the Facts

http://taxoundation.org/blog/show/27542.html

The Statutory U.S. Corporate Tax RateCompared to OECD Averages 1981 to 2010

continued rom page 3


7/20

Fall 2011 TAXWatch


The Proper Role oTaxes in Defcit and

Debt ReductionBy Dvd S. lg

With the White House and Congress cur-

rently embroiled in a debate over how to

reduce the nations decit and debt, the

experience o other countries can provide helpul ev-

idence about the most eective methods or budget

reorm. Countries that have aced similar nancial

situations have ound that decit reduction plans

based on spending cuts rather than tax increases are

ar more likely to succeed.The most successul reorm eorts put all spending

programs on the table, not a select ew programs. But

contrary to the conventional wisdom in the U.S., the

international experience indicates that pairing spend-

ing cuts with tax cuts can produce meaningul decit

reduction and improved economic perormance.

In successul reorm eorts, reducing expenditures

accounted or approximately 80 percent o the improve-

ment in the decit. By contrast, decit/debt reduction

attempts driven by tax increases overwhelmingly ailed

to correct imbalances and slowed economic growth.

Perhaps the most dramatic result o the litera-

ture is that the most successul decit reduction

plans have not only included spending cuts, but ac-

companying tax decreases as well. Pro-growth strate-

gies have seen consistently better results around the

world, as countries have reduced the tax burden on

the private sector and brought public expenditures

into line with available revenues.

Read about the defcit reduction experiences o Sweden

and the U.K. in The Proper Role o Taxes in Defcit and

Debt Reduction at www.taxoundation.org/publica-

tions/show/27491.html.

On September 19th Tax Foundation President Scott Hodge presided over a

lively discussion o corporate tax policy on Capitol Hill, ocusing on how

the U.S. government should treat prots earned abroad by American

companies. Meeting in the Rayburn House Oce Building, dozens o staers rom

Congressional oces came to hear the requently diering viewpoints o the three

panelists on the repatriation o corporate income and whether Congress should

implement a tax holiday to encourage companies to bring prots back rom abroad.

The panel o policy experts included Douglas Holtz-Eakin, American Action

Forum President and ormer Congressional Budget Oce Director; Walter

Galvin, Vice Chairman o the global manuacturing and technology company

Emerson; and Chuck Marr, Director o Federal Tax Policy at the Center on

Budget and Policy Priorities. Holtz-Eakin argued in avor o a repatriation tax

holiday, consistent with his recent study or the U.S. Chamber o Commerce,

The Need or Pro-Growth Corporate Tax Reorm: Repatriation and Other Steps

to Enhance Short- and Long-Term Economic Growth. Marr argued against a tax

holiday, while Galvin emphasized the burden o competing, as an American com-

pany, against international rivals with substantially lower corporate tax rates.

REPATRIATION:

TheTRillion DollaR QuestionBy Rchrd Mrrs

Two o the Hill Briefng

panelists: (l-r) Douglas

Holtz-Eakin, President,

American Action

Forum and ormer

Congressional Budget

Ofce Director, with

Walter Galvin, Vice

Chairman, Emerson

Congressional staers and others

gather to listen to a panel discussion

on repatriation

State with the highest percentage otaxpayers who itemize: Maryland, 49.1%

Lowest: West Virginia, 18.4%

www.txoundtion.org/bog/show/27633.htm




Over the past two decades or so, the majority o our major

trading partners have been moving toward a undamen-

tally dierent model o taxing business income. The basic

tenets o this new model are lower tax rates and the exemption o

oreign earnings.

In the past our years alone, 75 countries have cut their cor-porate tax rates to make themselves more competitive. And, as the

OECD reports, there has been a gradual movement o countries

moving rom a credit [worldwide] to an exemption [territorial]

system, at least in part because o the competitive edge that this can

give to their resident multinational rms.

The U.S. remains ar behind on both o these trends. Not only

do we have the second-highest overall corporate tax rate among the

leading industrialized nations at over 39 percent only Japan has a

higher overall rate but we are one o the ew remaining countries

to tax on a worldwide basis.

Our largest trading partners Canada, Great Britain, and

Japan have already taken steps to make themselves more competitive.

For example, Great Britain lowered its corporate tax rate on April 1 o

this year rom 28 percent to 26 percent as a rst step toward the goal

o a 23 percent rate in 2014. On January 1, Canada lowered its ederal

corporate tax rate rom 18 percent to 16.5 percent. Next year the rate

will all to 15 percent. Japan was scheduled to cut its overall corporate

rate by 5 percent until the tragic earthquake derailed the governments

legislative agenda. Japans move would have let the U.S. with the

highest overall corporate tax rate in the industrialized world.

As important as dierences in tax rates are, however, the method

o taxing oreign prots matters as well. Canada, Great Britain, and

Japan have all eectively moved toward a territorial or exemption

orm o taxing the oreign prots o their multination rms. Indeed,

o the 34 OECD member nations, 26 have either a ull territorial

system or exempt at least 95 percent o oreign earnings rom repa-

triation taxes. The U.S. remains the only country in the OECD with

a worldwide system and a corporate rate above 30 percent.

Read our Special Report Ten Reasons the U.S. Should Move to a

Territorial System o Taxing Foreign Earnings at www.taxoundation.org/

publications/show/27268.html.

10 ReasonsAmerica Needs a ModernCorporate Tax SystemBy Sctt a. Hdge

Ten Reasons the U.S. ShouldMove to a Territorial Systemo Taxing Foreign Earnings

1. Parity. The U.S. system must be aligned withour global trading partners.

2. The experiences o Japan and Great Britainare lessons or the U.S.

3. The premise o the worldwide tax system capital export neutrality (CEN) is obsolete

when subsidiaries have access to global

capital markets and can sel-und their

expansion with retained earnings.

4. The worldwide tax system violates the benetprinciple o taxation.

5. The U.S. maintains a territorial tax system ororeign-owned companies but a worldwide

system or U.S. companies. Moving to a ull

territorial system will level the playing eld.

6. The compliance cost o the current system isexcessively high relative to companies oreign

activities and the revenues raised rom taxing

oreign-source income.

7. Our current system traps capital abroad thelockout eect.

8. Our high corporate tax rate and worldwidesystem makes it cheaper or companies to

take on debt rather than use their own prots

to und their growth.

9. The current system dissuades global companiesrom headquartering in the U.S.

10. Eliminating deerral nearly killed theU.S. shipping industry.


9/20

Fall 2011 TAXWatch

Ceter fr Stte Fsc Pcy

Business location decisions and debates over state and local tax policy will be

enhanced with our landmark new study that allows, or the rst time, an

apples-to-apples comparison o business tax burdens across all the 50 states.

Tax Foundation economists designed seven model rms o dierent types and

worked with experts at KPMG, a respected audit, tax, and advisory rm, to calculate

total tax bills or each rm in each state. All taxes were included: corporate income

tax, property tax, sales tax, unemployment insurance tax, and other business taxes.

Each rm was calculated twice in each state: once as a new rm able to take advan-

tage o any targeted tax incentives oered by a state, and once as a mature rm usu-

ally not eligible or such programs.

State and local taxes are a large business cost and they vary widely by state. This

comprehensive calculation o the real-world tax burden aced by representative rms

will help policymakers better understand and address their competitive position, help

business better evaluate where to operate or invest, and help the general public better

understand the relative tax competitiveness o the 50 states.

The Tax Foundation/KPMG 50-State Model Business Competitive Tax Cost Study will be

available soon on our website.

The Tx Foundtion/KPMG 50-Stte Mode Business

Competitive Tx Cost Study

COMING SOON:Landmark CorporateStudy: How Does YourState Compare?

TAX FOUNDATION:

Your Source or

Fact CheckingBy Sctt Drekrd

As the heat o the Republican pri-

mary turns up, it is hard to know

which claims to trust. Recently

under re is the new Texas business tax,

which replaced the 4.5% ranchise tax

with a 1% margins tax.

Governor Rick Perry claims the tax

is a success because it reduced the

statutory rate, but Tax Foundation VicePresident o State and Legal Projects Joe

Henchman set the record straight or

an ABC News reporter: I think Perrys

margin tax in Texas is a destructive type o

tax. You have taxes being levied on taxes

based on how many levels o production a

product has. It basically encourages people

to orm conglomerates purely or tax

reasons, which is economically destructive.

You have these taxes pyramiding on each

other so the eective rate is higher.

The report was also extensively quoted

in an article in the New American: With

the Texas margin tax collecting ar less in

revenue than expected, causing signicant

conusion and compliance costs, resulting

in signicant litigation and controversy

over cost o goods sold denitions, and

acing calls or substantial overhaul and

even repeal, it should not be used as a

model tax reorm or any other state.

Read the study at www.taxoundation.org/

publications/show/27544.html.

Percentage o nonpayers (tax lerswho owe no ederal income tax) who

earn more than $100,000/year: 0.3%

ww.txoundtion.org/bog/show/27661.htm




NEW STUDY:

Local Income Taxeson the WaneBy Jseph Hechm

Local taxes on wages and income, largely concentrated in a small handul o

states, are on the wane nationwide, according to our August report on local

income taxes. The current total o4,943 local income tax jurisdictions has

been declining slowly in recent years, with some existing local income tax rates

also alling.

The report, authored by Joseph Henchman and Jason Sapia, gives some background

on where these city, county, and school district taxes came rom and details recent

developments as well. Local income taxes arose during the Great Depression: declining

property tax revenues caused by rising oreclosures orced local governments to look

or other revenue sources.

The rst local income taxes emerged in Philadelphia in 1939 as the city sought

to avoid bankruptcy. They spread gradually to select cities in Ohio (1946), Kentucky

(1947), Missouri (1948), and Michigan (1962). New York City and Baltimore adopted

municipal income taxes in 1966.

Over the past ew decades, the number o local income taxes has declined, and

although there are exceptions, the rates at which these taxes are imposed have

The number o local income

taxes and the rates at which they

are imposed have both dropped

over the past ew decades.

Tax Foundaion Exhibis a NCSL Conference

At the National

Conerence or

Stte legstures

legstve Summt

S at, Tax

Foundation Economist

David S. Logan talks

to visitors at the Tax

Foundations display

table

dropped as well. For example, Philadel-

phias wage tax in 1995 was 4.96% or

residents and 4.31% or nonresidents.

It has gradually dropped to the cur-

rent 3.928% or residents and 3.498%

or nonresidents, and urther cuts are

expected in the medium to long term. In

New York, the State Senate voted in June

2011 to exempt small businesses rom the

city-wide 0.3% Metropolitan Transporta-tion Authority (MTA) payroll tax and

phase it out completely by 2014.

Not every locale is trending in the

same direction. Portland, Oregon, and

Reading, Pennsylvania, or example, have

seen recent increases. For those states

that still have them, we note that ocials

need to ensure that these taxes do not dis-

courage economic development or drive

out mobile workers and businesses. O-

cials must also be careul not to impose

excessive compliance costs associated with

these taxes.

Read the ull report at www.taxoundation.

org/publications/show/27575.html.

Weve taken our popular table o

historical income tax rates andadjusted the brackets or infation.The highest marginal tax rate in history

was 92%, which applied to income

over $200,000 in 1952 and 1953. Intodays dollars, that threshold is about

$1.7 million.

View the revised chrt, with both nomin nd

inftion-djusted brckets or every yer since 1913

t www.txoundtion.org/txdt/show/151.htm.


11/20

At the amerc

legstve

Exchge Cu

au Meetg

in New Orleans, T

Foundation Vice

President o Lega

& State Projects

Joseph Henchma

speaks about sol

tions to online sta

sales tax issues

Joe Henchman atends ALEC annual conference

Fall 2011 TAXWatch


New Report Explains Complexitieso Unemployment Insurance Taxes

Businesses Fce Higher Txes s Sttes ExhustTrust Funds nd Incur Interest Pyments

By Jseph D. Hechm

Unemployment insurance taxes can be dicult or the average

taxpayer and even or policymakers to understand. With the

unemployment rate above 9 percent and states acing large loan re-

payments and signicant scal stress, this issue is especially important now.

Our new Background Paper explains the intricacies and current problems o

the unemployment insurance tax system and outlines options or reorm.

Over the past two years, 34 states and the U.S. Virgin Islands haveexhausted their unemployment insurance trust unds and borrowed rom

the ederal government to pay unemployment benets. Twenty-seven states

now have outstanding balances totaling $37.3 billion. Beginning on

September 30, 2011, states must pay approximately $1.3 billion in interest

on those outstanding balances. Businesses and employees in the aected

states will also ace increases in ederal unemployment insurance tax rates

as a result o those ederal loan balances.

This may be an appropriate time or the ederal government and the states

to contemplate signicant changes to the unemployment insurance tax system.

Options include eliminating the rewall between administrative costs and ben-

ets, reducing cross-subsidies through greater use o experience ratings (dier-

ing tax rates based on employers layo history), more ace-to-ace job training

and advising, adopting elements o state workers compensation programs, and

experimenting with individual accounts to encourage saving.

Read the ull report at www.taxoundation.org/publications/show/27673.html.

New Edition o StateBusiness Tax Climate

Index Coming SoonBy Mrk Rby

Tax competitiveness is an important aspect o

state and local scal policy. The Tax Founda-

tions State Business Tax Climate Index (SBTCI)

is an annual report that helps lawmakers, the media,

and individuals gauge how their states tax system

stacks up against the competition.

The ideal tax system is simple, transparent, stable,

and neutral towards dierent types o businesses. A

tax system riddled with politically motivated preer-ences will cause businesses to make decisions or tax

reasons instead o sound economic undamentals.

The tax systems that score best in the SBTCI are those

that avoid economic distortions, levy low tax rates on

broad tax bases, and treat all taxpayers the same.

Taxes matter to business. Business taxes aect

business decisions, jobs, location, competitiveness,

and the economy. Most importantly, taxes diminish

prots, an eect which is passed on to shareholders,

workers, and consumers. Thus a state with a bet-

ter business tax structure will be more attractive to

business investment and more likely to experience

economic growth.

The economy is increasingly characterized by mobile

capital and labor, and many companies have the abil-

ity to locate where they have the greatest competitive

advantage. State lawmakers are oten tempted to lure

business with lucrative tax incentives and subsidies

instead o relying on a broad, neutral tax system.

However, i a state needs to oer tax incentive pack-

ages, it is most likely a sign o an uncompetitive overall

business tax climate. A ar more eective approach is to

systematically improve the business tax climate or the

long term so as to improve the states competitiveness

and give it an edge in generating economic and employ-

ment growth.

The SBTCI analyzes ve important areas o taxation:

major business taxes, individual income taxes, sales

taxes, unemployment insurance taxes, and property

taxes. While not all o these taxes are direct business

taxes, they all aect business competitiveness.

Keep your eyes open or the next edition o the State

Business Tax Climate Index.




Tennessee and Ariona Leadthe Country in Sales Tax RatesBy Sctt Drekrd

While much attention gets drawn to statewide sales tax rates, many people

are only vaguely aware o county- and city-level sales taxes, which can

have palpable impacts on the overall sales tax rate consumers pay. Our

recent report Ranking State and Local Sales Taxes calculates the average local tax

rate and brings these oten-neglected rates to the attention o taxpayers.

For example, Colorado, despite having the relatively low statewide sales tax

rate o 2.9%, has an average local rate o 4.58%, which makes its combined rate

two and a hal times as high. Other notable combined state and average local rates

include Tennessee, with the nations highest rate at 9.43%, and Arizona, with the

number two rate o 9.12%.The highest combined rate in a single locality is ound in Tuba City, Arizona,

which has a combined state and local rate o 13.725%. This rate is composed o

a 6.6% state tax, a 1.125% Coconino county tax, and an additional 6% tribal tax

levied by the ToNaneesDizi local government.

Read the ull report at www.taxoundation.org/publications/show/27023.html.

Tax FoundationReport Helps ThwartProposed MinnesotaIncome Tax Increase

By Sctt Drekrd

On the eve o the Minnesota

government shutdown in July,

we published a timely piece

reviewing the proposed tax increases

by Gov. Mark Dayton that would have

aected income earnings over $85,000.

While his proposal claimed to exemptsmall businesses rom the tax hike, our

analysis ound that doing so would

promote bad investment decisions

and tax avoidance as taxpayers would

be encouraged to syphon income into

pass-through entities.

Ater the 20-day government shut-

down (which eventually ended over voter

discontent that grocery stores and bars

could not renew their liquor licenses),

Minnesota policymakers ollowed the

advice o the Tax Foundation, and no

income tax increases were included in the

budget deal.

Read more at http://taxoundation.org/

research/show/27406.html.

Sales Tax: Combined State and Average Local RatesTax Year 2011

SOURCE: Tx Foundtion ccutions; Ses Tx Ceringhouse; 2010 Census

NOTE:Three sttes evy mndtory, sttewide, oc dd-on ses txes t the stte eve: Ciorni (1%), Uth(1.25%), nd Virgini (1%). Hwii, New Mexico, South Dkot, nd Wyoming hve brod ses txes tht

so ppy to mny services. These sttes rtes re not directy comprbe to other sttes rtes. Due to dt

imittions, tbe does not incude ses txes in oc resort res in Montn.

The largest stable source o ederal

revenue is the payroll tax. Payrolltaxes are the second-largest source

o revenue, and more stable thanpersonal and corporate income tax

revenues, which fuctuate with theeconomy.



13/20

Fall 2011 TAXWatch


Q&A in North CarolinaOver 100 North Carolina residents gathered

or a tax reorm symposium series in Winston-

Salem, Raleigh, and Wilmington on September

15. Our Vice President or Legal & State Projects,

Joseph Henchman, spoke briefy on North

Carolinas tax standings (16th highest state-local

tax burden and higher than neighboring states,

9th worst business tax climate and worse than

neighboring states, high gas taxes). At each

stop, he and panelists rom other organizations

like the National Taxpayers Union, Americans

or Tax Reorm, Americans or Fair Taxation,

and the Civitas Institute answered dozens o

questions rom the audience.

Common question topics included the

prospect o higher ederal taxes on capital

gains and investment dividends, the estate

tax, how to design a pro-growth sales tax

or North Carolina, and the debate over

the FairTax national sales tax and prebate

proposal, and tax reorm generally.

Louisiana Public Forumson Tax Reorm

During the August Congressional recess,

Tax Foundation Economist William McBride

traveled to southwest Louisiana to speak at

a series o public orums set up by Senator

David Vitter and Representative Je Landry.

The overarching topics were the ederal debt

crisis, the debt ceiling negotiations, and the

new super committee set up to deal with it.

McBride spoke about how comprehensive tax

reorm could address not only the debt crisis

but also the larger problem o economic stag-

nation and chronic unemployment. Speci-

cally, he spoke o the benets o lowering the

corporate income tax rate and more generally

o lowering taxes on capital income.

Testiying on Sales Tax

Holidays in IndianaIn September, Vice President or Legal &

State Projects Joseph Henchman testied to

the Indiana Study Committee on Economic

Development about our research on sales tax

holidays. Our work shows that the holidays

do not promote economic growth or sig-

nicantly increase consumer purchases, and

create compliance diculties or tax code

compliance, inventory management, and

ecient labor allocation. Rather than picking

winners and losers among dierent products

or short periods o time, policymakers should

ocus on genuine, permanent tax relie.

More on sales tax holidays at www.tax

oundation.org/publications/show/26533.html.

Testimony on BusinessTaxes in IllinoisOn July 19 Tax Foundation Economist Mark

Robyn testied beore Illinois legislators

regarding the states business tax structure.

Illinois passed large personal and corporate

income tax hikes at the beginning o 2011.

This made the state less competitive or busi-

nesses, and many businesses let or threat-

ened to leave the state.

In states with burdensome business

taxes, it is common or policymakers to

oer generous, targeted tax breaks to keep

businesses rom heading or greener pastures.

In such a system, Robyn argued, politically

powerul companies get special treatment

while smaller or immobile companies are

stuck with the bill. Illinois should move

towards low tax rates and a broad tax base, a

system which benets all businesses equally.

Pennsylvania Testimony

On August 23 Tax Foundation Economist

Mark Robyn testied beore the Pennsylvania

House Majority Policy Committee regard-

ing possible improvements to the states

business tax climate. Robyn testied about

how the good parts o Pennsylvanias tax

structure are weighed down by a poor

corporate tax structure. His suggestions

included improving the states treatment

o business losses, accelerating the phase

out o the states burdensome and outdated

capital stock tax, and scaling back on costly,

ineective, and distortionary corporate

tax breaks.

ON THE ROAD:

Speaking to State-Based Groups andTestiying Beore State Legislatures

As usual, our analysts have been busy traveling to states where their expertise is

requested. In August, analyst Scott Drenkard participated in a roundtable discussion

on local soda tax proposals in Seattle. He and Joseph Henchman were in town for the

annual meeting of the State Policy Network, where Henchman spoke on state tax trends.

Economist Mark Robyn spoke on state tax reform at the annual meeting of the Wyoming

Taxpayers Association in Cheyenne in October. He and Henchman will soon speak to the full

meeting of the National Taxpayers Conference in Miami.

Following are some more of our recent speaking engagements, including congressional

testimony in three states.



Ceter fr leg Refrm

Limit on State TaxOverreaching PassesKey CongressionalCommittee

Less than three months ater our Vice

President or Legal & State Projects,

Joseph Henchman, testied on the issue,

the U.S. House Judiciary Committee approved

the Business Activity Tax Simplication Act

(BATSA) on a bipartisan voice vote on July 7.

The bill, H.R. 1439, would establish that

businesses could only be subject to corporate

income tax and business activity taxes instates where they have property or employees

or at least 15 days in a year.

This physical presence standard is the

historical norm, but many states have recently

pushed or economic presence standards,

which tax businesses on a variety o dier-

ent thresholds based on where customers are

located, sales occur, goods or services travel

through the state, or other actions.

Co-sponsors Rep. Bob Goodlatte (R-VA)

and Rep. Bobby Scott (D-VA) spoke in avor o

the measure. Rep. Judy Chu (D-CA), a ormer

member o Caliornias tax administration

board, proposed an amendment that would

change the legislations eective date rom 2012

to 2022. Six Democrats joined all present Re-

publicans to reject the amendment. A voice vote

occurred by similar margins to reject an amend-

ment to strike the 15-day minimum threshold.

Henchman testied on BATSA and other

proposals to limit state tax overreaching that

harms interstate commerce. While income

tax should be paid by those who work or live

in a jurisdiction, Henchman said, the costs o

unnecessary compliance outweigh the benets

rom income tax obligations kicking in at

minimal levels o activity.

The measure now moves to the ull House

o Representatives.

Read the ull testimony at http://judiciary.house.

gov/hearings/hear_04132011_2.html.

Taxpayers Who Pay

a Cancelled TaxShould Get Reundsarmour v. City o Indinpois

By Jseph Hechm

We led a brie with the U.S. Supreme Court on September 9 asking

them to hear a case involving a city that gave tax reunds to some

taxpayers but not others.

The case involves the Indianapolis city sewer tax, which taxpayers had to pay

either in full or in installments. In 2005, the city reduced the tax and orgave alluture obligations by taxpayers paying in installments. Taxpayers who paid in ull

requested a prorated reund but were denied.

The city claims that by not providing reunds to those who paid in advance, they

are saving administrative costs and helping low-income taxpayers. Our brie rejects

those arguments, noting reund processing o any kind is costly but necessary, and

that the policy does not benet poor taxpayers exclusively or even primarily. I poor

taxpayers do benet disproportionately, it is only by chance, we write.

As we note: When governments act arbitrarily in their tax procedures, scarce tax-

payer resources must be allocated to cumbersome compliance procedures. Without the

ability to make reasonable predictions about tax climates and resource allocation, mak-

ing important business decisions becomes more dicult and reduces business activity.

For many citizens, paying taxes is one o the ew ways that they interact with the gov-

ernment. Tax policy widely perceived as unusual and unair threatens to oster a general

disenchantment with the government, creating tensions between the law and citizens.

While the City waived its opportunity to respond to these arguments, the Su-

preme Court on September 14 instructed the City to le a response. We hope the

Court will take the case and reverse the Citys arbitrary reund policy.

Read more on the Armour case here: http://www.taxoundation.org/research/

show/27604.html


15/20

Fall 2011 TAXWatch

Ceter fr leg Refrm

When a consumer buys something online, in

many cases that consumer is not charged

sales tax by the online retailer. The U.S.

Supreme Court has ruled that, to prevent disruptions

to interstate commerce, a state may orce only those

businesses with a nexus (substantial connection)

with the state to collect its sales tax.

Otherwise, the Court held in its 1992 case Quill

Corp. v. North Dakota, businesses would ace an

enormous burden o complying with numerousseparate sales tax jurisdictions (over 9,600 as o

2011) with ever-changing bases and rates. Thus,

only businesses with employees or property in a state

usually collect a states sales tax, even i the employees

or oces are not directly involved in soliciting sales in

the state.

Some states have sought to make their taxes more

uniorm (although not simpler) with the Stream-

lined Sales Tax Project, and its associated ederal bill

that would let them require sales tax collection rom

out-o-state companies, the Main Street Fairness Act.

Other states have sought to assert that out-o-state

companies actually are in-state i they pay reerral

commissions, laws known as Amazon laws or click-

through nexus laws. Such laws havent raised revenue

and have led to lengthy legal challenges.

Caliornia adopted such a law in July, leading to

an eort to repeal it at the ballot box, and nally a

compromise was hammered out between the state and

Amazon.com. The state will back o rom requiring

collection or a year, and in return Amazon.com is

going to develop a physical presence in the state with

new acilities.

Does this mean that other states can get the

same deal? Unlikely, as Amazon had wholly-owned

subsidiaries in the state that made its non-presence

argument tricky, and because o the sheer size o

Caliornias consumer market.

That doesnt mean great things arent possible,

however. I something can be devised that simplies

state sales taxes, and makes sure that neither brick-

and-mortar businesses nor online businesses ace

unequal obligations or compliance burdens, it could

be a winner. I negotiations in the Golden State

presage a deeper discussion about how we have a air

sales tax that doesnt result in states exceeding their

taxing powers and harming interstate commerce, its

a good step.

Read more at http://www.taxoundation.org/blog/

show/27664.html.

CALIFORNIA & AMAzON.COM:

States Seeking Online Sales Taxes

By Jseph Hechm

The U.S. has the ourth-highest overall taxrate on dividend income (including taxationat both the corporate level and individual

level) among the largest industrializedcountries in the OECD, at 52.1 percent.

Only Denmark (56.5 percent), France(57.8 percent) and the United Kingdom(54 percent) tax dividends at a higher rate.




Hghghts

JiaQi BaoAter graduating summa cum laude

with dual degrees in nance and

accounting rom Arizona State

University Barrett Honors College,

JiaQi received a study abroad scholar-

ship to a graduate program at Tsinghua University in

Beijing. While living overseas, she worked as a research

assistant at infuential think tanks and research institu-

tions such as the National Development and Reorm

Commission and Tsinghua University China Center or

Financial Research. JiaQi plans to attend Arizona State

Universitys Master o Accountancy program and pursue

a career in policy research and philanthropy.

Tening TseringTenzing holds a Master o Science

degree in Economics rom Oklahoma

State University, where he previously

served as a Research and Teach-

ing Associate. He plans to pursue a

career in economic and policy analysis, and joins the Tax

Foundation with eagerness to move towards that goal. In

his spare time, Tenzing enjoys writing. His writing can be

read in Muse India and Centre Colleges publication, The

Vantage Point.

We are able to provide our internship program thanks to the

generous support o our donors. Please consider supporting our

internship program by visiting www.TaxFoundation.org/support.

Tax Foundation Continues toWork Toward Corporate Tax Reorm

By Mche Vger

2011 has been an exciting year or cor-

porate tax reorm. As the Manager o

Corporate Development, I have the op-

portunity to work alongside proessionals

representing some o the worlds most

infuential and innovative corporations.

This summer we responded to

the heated rhetoric rom some media

outlets and lawmakers claiming that even with one o the highest corporate

tax rates in the world, U.S. corporations are somehow not paying their air

share. While its true that a small handul o corporations dont pay a large

tax bill every year, policymakers should not base tax reorm eorts on those

anomalies. The high U.S. corporate rate is detrimental to the vast majority o

businesses, especially to small and medium business owners.

We recently published two in-depth Special Reports on the high rates

that corporations pay, and in September, Tax Foundation President Scott

Hodge testied beore the U.S. House o Representatives Budget Committee

on corporate and individual tax reorm.

We have also visited with members o Congress and their sta to discus

corporate tax reorm, and last month we moderated a widely attended pane

or congressional staers on the question o repatriation. We are continuin

our popular Hill briengs this month, with one titled Beyond the Headlin

What Do Corporations Pay in Income Tax?

Our work on corporate tax issues is widely cited by media outlets, help

ing to deray the recent media renzy over corporations allegedly low tax

burdens and helping to set the stage or meaningul corporate tax reorm

We sincerely appreciate the hard work and unding o our corporate

donors and ask that you continue that support as we celebrate our 75th

Anniversary in 2012. Thank you.

Tax Foundation74thAnnual Dinner

Thursday, November 17, 2011Mayflower Renaissance

REMAINING SPACE VERY LIMITED

Conac Liz Dunlap a (202) 464-5108

Jim Carter, Director o Government Relatio

Economic Policy at Emerson Electric, discu

corporate tax policy with Michael Vogler

Tax Foundation President

Scott Hodge (third rom let

with our 2010 Distinguishe

Service Award recipients:

Congressman Paul D. Ryan

James W. Owens, Chairman

and Chie Executive Ofcer

Caterpillar; and Congressm

John S. TannerPhoo from las years Annual Dinner


17/20

Fall 2011 TAXWatch

Tx Fudt the news

The ollowing are excerpts rom a

ew o our recent media citations

and interviews. For a more complete

listing o the thousands o citations

we receive annually, please seeour website list at http://www.

taxoundation.org/press/.

Bloomberg, September 22

Local and state sales taxes add signi-

cantly to the amount consumers pay

or everyday goods, with Tuba City, Arizona,

charging 13.725 percent, the most o any

municipality, the Tax Foundation reported.

Tennessee has the highest com-

bined sales-tax rate at 9.43 percent, the

oundation reported today. Arizona ol-

lowed with 9.12 percent; Louisiana, 8.84

percent; Washington, 8.79 percent; and

Oklahoma, 8.66 percent. The ounda-

tion calculated the liabilities by averaging

all local sales taxes in each state, giving

added weight by population, and combin-

ing the average with the statewide rate.

Time.com

September 27

In recent years, many states and even some

cities have set up departments whose job

it is to entice Hollywood executives to use

their region to shoot motion pictures or

television shows because o the jobs these

productions attract. The Tax Foundation

estimates that states doled out $6 billion in

these subsidies over the past decade.

There is near-unanimous agreement

among independent economists that tax-

payers are the losers in these arrangements.

Film tax credits ail to live up to their

promises to encourage economic growth

overall and to raise tax revenue, TaxFoundation economist Joseph Henchman

recently wrote. States claim these incentives

create jobs, but the jobs created are mostly

temporary positions, oten transplanted

rom other states. Furthermore, the competi-

tion among states transers a large portion o

potential gains to the movie industry, not to

local businesses or state coers.

Fox NewsSunday, September 25

Chris Wallace, host: But i you are [a]

businessman, you are thinking ve

years down the road, 10 years down the

road. So, the idea, well, I may get a $1,000

tax cut in 2012, but Im going to get $2

trillion o tax increases over the next de-

cade doesnt isnt likely to make them go

out and hire more people.

I also want to get back to this issue

o air share, which you [David Ploue]

keep talking about. Put it up on the screen.

According to the nonpartisan Tax Founda-

tion, the 1 percent o households with the

highest incomes pay 38 percent o ederal

income taxes. The top 10 percent pay 70

percent o ederal income taxes. Mean-

while, 46 percent o households pay no

ederal income tax at all.

And the president thinks that the

wealthy arent paying the air share?

New York Times, September 12

The Tax Foundation reports that a re-

view o actual Internal Revenue Service

corporate tax return data shows that while

the largest corporations in America (those

with assets larger than $2.5 billion) rep-

resent a tiny raction o all corporations,

they pay an overwhelming share o all

ederal corporate income taxes.

Web Trafc: How the Tax Foundation Stacks upAgainst Other Tax Policy Groups



Tx Fudt the news

National Public Radio, September 28

Economist Will McBride o the Tax

Foundation says some o [Republican

presidential candidate Herman] Cains

ideas make a lot o sense. A national

sales tax, or instance, would mean

taxing people or the things they con-

sume, which means theyd spend less

and save more. And McBride says a

higher savings rate would benet the

economy long-term.

When you tax saving and invest-

ment you are taxing growth, essentially,

and you want to encourage thrit, not

discourage it, he says.

But McBride also voices a concern

expressed by a ew conservative politi-

cians. Theyre wary o the government

imposing a new tax o any kind and they

worry that Cains 9 percent would drit

higher over time.

It sounds good in theory but we have

to think about the prospective political

situation and that would be to raise the

rates, McBride says.

Chicago Tribune, June 23

M

any companies also watch statistics

rom the nonpartisan Tax Founda-tion. Last all, that group ranked Illinois

business tax climate at 23rd nationwide

or 2011. But with the income tax hike,

expect Illinois to all even urther behind

Indiana. And expect another cross-

border rival or employers, Wisconsin, to

improve as Republican lawmakers make

strides against that states tax burden.

We hope the review ordered by [House

Speaker Michael] Madigan and [Senate

President John ] Cullerton isnt just a stunt

to defect all the criticism that has raineddown on them, and on Quinn, since

together they raised income taxes.

Washington Post, August 9

T

here is a mild kerufe brewing over

Marylands upcoming sales tax holiday,which starts Sunday.

State comptroller Peter Franchot told the

Baltimore Sun: It benets the retail stores

in Maryland, which provide 70 percent o

the jobs. Most importantly, it helps the citi-

zens, many o whom have been hammered

by the recession, to get a little relie.

Critics, including the conservative Tax

Foundation, argue that sales tax holidays

dont spur economic growth: Sales tax

holidays introduce unjustiable govern-

ment distortions into the economy with-out providing any signicant boost to the

economy.

Total media citations and interviews

rom January through September2010: 1,887

Total media citations and interviewsrom January through September

2011: 2,470

Increase rom 2010 to 2011:31%

Radio interviews in 2011 through

September: 85

TV interviews and citations in 2011

through September: 115

By The Numbersa cmprtve k t 2011 med ctt

Tax Policy Podcast

Manager o Communications Richard Morrisonrecently interviewed George Runner, member othe Caliornia Board o Equalization, on recent develop-

ments in Caliornia tax policy. Runner, a ormer state

Senator, discussed the debate over online retailers andthe states Amazon law, the property tax legacy o

Proposition 13, and the protections aorded by the

Golden States Taxpayer Bill o Rights.

When asked about a proposal by Los Angeles Mayor

Antonio Villaraigosa to loosen the property tax limitations created by Proposition 13 in

1978, Runner replied:

It comes down to the act that theres this misguided idea that somehow the state

and local governments are owed more money because taxpayers ocused now on

business taxpayers, on the property tax arent paying their air share, and as a result o

that, i theyd just pay their air share, government would have enough money. I kind

o back away a little bit at that discussion and say, hey look, government has enough

money. These are tough times or everybody and they ought to be tough times or gov-

ernment too, and government just needs to react to the revenues that are coming in.

The act is Caliornia is the sixth highest taxed state in the nation, and in property

tax were about in the middle. So this eort to then try to go ater businesses and have

them reassessed dierently than homeowners is only going to drive Caliornia to be

one o the highest property tax states also. And again, the lens that I look through all

these issues on is, Will this increase employment in Caliornia or will this decrease

employment in Caliornia? And I dont think anyone could doubt, i youre going to go

to business landowners and ask them to pay a higher property tax, that that is not going

to create a new job. That is only going to create less jobs in the state o Caliornia.

Listen to recent Tax Policy Podcasts at http://taxoundation.org/podcast/.


19/20

Fall 2011 TAXWatch

Guest Cumst

America stands at a crossroads. We

ace near-record unemployment, a

stagnant economy, and a struc-

tural scal imbalance that threatens the

well-being o Americans today as well as

uture generations.

President Obama recently outlined

his solution: a Stimulus 2.0 consisting o

short-term, temporary tax incentives and

new spending, paid or with higher taxes on

entrepreneurs and job creators.

I disagree with the presidents approach.

Rather than new short-term hal measures,

Americans need permanent reorms that

provide certainty. Americas entrepreneurs

need to plan and invest or the uture. And

our nancial markets need to know that

Washington is serious about tackling our

ederal decit and putting our nations

nances on sound ooting. There are many

steps we must take, but perhaps none is

more crucial to our nations uture prosper-

ity than undamental tax reorm.

Comprehensive tax reorm can do more

than any other single step to make America,

and American businesses, more competi-

tive in the global economy, thus raising

U.S. wages and our standard o living over

time. Additionally, tax reorm can help to

address our ever-expanding budget decit by

unleashing economic activity that will raise

ederal tax receipts, albeit at lower tax rates.

Consider the example o the Tax Reorm

Act o 1986, the last time

our government ad-

opted serious tax reorm.

Through leadership and

political courage, President Reagan made

possible a tax overhaul that lowered tax rates

substantially, reducing the top marginal rate

rom 50 percent to 28 percent and signi-

cantly broadening the tax base. Our nation

experienced continued prosperity and strong

economic growth ollowing these reorms

and ederal tax revenues nearly doubled dur-

ing the 1980s. While the national decit hit

a high o 6 percent o Gross Domestic Prod-

uct in 1983, it ell to 3.1 percent by 1988,

ater the 1986 reorms had taken eect.

The case or pro-growth tax reorm is

even stronger today. Our tax code has grown

considerably and become a complex maze o

special interest provisions and temporary

tax measures. But America now aces much

more intense global competition or jobs

and investment than it did 25 years ago.

Today, multinational corporations can place

the next cutting-edge research and develop-

ment or manuacturing acility anywhere

rom Bangalore to Sao Paolo to Shanghai.

Unortunately, our tax code still operates as

i this competition or jobs and investment

is irrelevant.

Americas combined state and ederal

corporate tax rate is the second-highest in

the developed world, topping out at nearly

40 percent. Even Russia,

at 20 percent, and China,

at 25 percent, are lower.

Since 1998, the aver-

age corporate tax rate o

advanced economies has

dropped by 19 percent,

while the U.S. rate has

risen by 1 percent.The U.S. has also lost

ground as other countries

have modernized how

they tax earnings rom

outside their borders. Among the top eight

economies in the world, only the U.S.

taxes its businesses on their income earned

outside o the country, above and beyond

taxes paid to the country in which it was

earned. This handicaps American busi-

nesses competing with oreign companies

in the global market. By some estimates,

as much as $1.5 trillion in earnings by

American companies could be reinvested

in our economy i our tax system did not

impose a double tax.

Enacting undamental tax reorm in

the current environment in Washington

will not be easy, just as the 1986 reorm was

prolonged and contentious. It will require

the same ingredients that were necessary 25

years ago, but that are today in short supply:

presidential leadership and a willingness by

Congress to make some dicult decisions.

The good news is that weve done it beore.

For the good o the country, we can and

must nd a way to do it again..

The Tax Foundation invites national leaders

rom all perspectives to contribute columns to

Tax Watch. The opinions expressed are those

o the authors and not necessarily those o the

Tax Foundation.

Senator John Thune (R-S.D.)

Fundamental Tax ReormIs the Key to Economic ProsperitySenator Thune serves on the Agriculture, Nutrition & Forestry Committee,

the Budget Committee, the Commerce, Science & Transportation Committee,

and the tax-writing Finance Committee. Since 2009, Thune has also served

as the Chairman o the Senate Republican Policy Committee. A native

o Murdo, South Dakota, he received his undergraduate degree at Biola

University and his Masters degree in Business Administration rom the

University o South Dakota.


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Tax Foundation Tax Watch, Fall 2011