Minnesota House and Senate at Odds Over Gas Tax Increase

Minnesota House and Senate at Odds Over Gas Tax Increase

Tax Policy – Minnesota House and Senate at Odds Over Gas Tax Increase

The Minnesota House of Representatives and Senate have each passed an infrastructure funding bill, but the two chambers have very different ideas of how to generate additional revenue for road and bridge repairs. The sticking point? Whether to increase the excise tax on gas.

Currently, Minnesota’s gas tax is 28.6 cents per gallon (cpg), the 29th highest in the country. The keystone of the House bill, House File 1555, is a 20-cent gas tax increase, phased in over four years. After the phase-in is complete, this bill would index the gas tax for inflation on an annual basis. While slightly less aggressive than the two-year phase-in proposed by Governor Tim Walz (DFL) in his fiscal year (FY) 2020-2021 biennial budget, the House proposal has met resistance from Senate Republicans. If increased to 48.6 cpg, Minnesota’s gas tax would become the fourth-highest in the country.

Minnesota gas tax increase

In addition to increasing the gas tax, House File 1555 would increase the Motor Vehicle Sales Tax rate from 6.5 to 6.875 percent, increase the motor vehicle registration tax rate from 1.25 to 1.5 percent of the car’s base value, and adjust the depreciation schedule used to determine a vehicle’s base value (making it less generous than under current law).

As an alternative, the Senate passed an amended version of the House bill with language from Senate File 1093. This bill would avoid a gas tax increase by instead increasing the electric vehicle surcharge from $75 to $200, creating a hybrid vehicle surcharge of $100, and transferring revenue from the general fund to the Trunk Highway Fund.

The House refused to concur with the Senate amendment, and a conference committee is being formed to reconcile differences between the bills. As the conference committee looks for a path forward, policymakers will first need to determine how much new revenue for infrastructure is warranted, as the House and Senate bills have different revenue targets. When it comes to how that revenue is raised, user taxes and fees remain the key.

In general, gas taxes, as well as electric and hybrid vehicle user fees, are all good sources of revenue for infrastructure (compared to alternative tax types), as they adhere relatively well to the benefit principle, or the idea in public finance that taxes paid should relate to benefits received. Indexing the gas tax for inflation can help the tax better keep pace with the real costs of road upkeep without having to rely so heavily on periodic, sharp spikes in the statutory gas tax rate. Finally, like all final products and services for personal consumption, cars ought to be subject to the state sales tax, with general sales tax revenue dedicated to the general fund. While transfers from the general fund to the transportation fund are commonplace in many states, they weaken the link between taxes paid and benefits received. Where transportation user taxes and fees are available, general fund transfers ought to be avoided.


Source: Tax Policy – Minnesota House and Senate at Odds Over Gas Tax Increase

Republican Study Committee Budget Contains Important Tax Policy Proposals

Tax Policy – Republican Study Committee Budget Contains Important Tax Policy Proposals

The Republican Study Committee (RSC) released its Fiscal Year 2020 Budget this week, and it includes a number of tax policy changes. Among the most important are proposals to make the Tax Cuts and Jobs Act’s (TCJA) individual and expensing provisions permanent, shorten depreciation schedules, create universal savings accounts (USAs), and eliminate tax extenders.

Make the TCJA’s Individual Tax Rates and Deductions Permanent

The TCJA significantly lowered individual income tax rates, but the provisions behind these reduced rates are scheduled to expire at the end of 2025. According to the Tax Foundation Taxes and Growth model, making the TCJA’s individual provisions permanent would boost long-run GDP by 2.2 percent, long-run wages by 0.9 percent, and add 1.5 million full-time equivalent jobs. But that growth comes at a cost. It would reduce federal revenue by $165 billion annually on a conventional basis and by $112 billion annually on a dynamic basis.

Read more about making the individual income tax cuts permanent here.

Permanence for Full and Immediate Expensing of Investments

Expensing—the immediate deduction of the full cost of a company’s investments—was one of the TCJA’s most pro-growth provisions, removing the previous tax treatment’s disincentive to invest. These provisions are scheduled to be phased out, beginning in 2023. At the same time, the TCJA limited the ability of firms to immediately deduct their research and development costs. Starting in 2022, companies will have to amortize these costs over five years. The RSC budget would make the TCJA’s expensing provisions permanent and cancel the switch to amortization, allowing firms to properly write off business expenses in the future.

Read more about full expensing here, and about R&D amortization here.

Shorten Depreciation Schedule for Structures

While the TCJA enacted 100 percent bonus depreciation for certain short-lived business investments it did not grant the same treatment to private structures, which comprise 70 percent of all private sector capital stock. Businesses must depreciate their investments in residential structures over a 27.5-year schedule and in nonresidential structures over a 39.5-year schedule. Since capital outlays must be deducted over a long period, businesses may decide not to make an investment.

Shortening these schedules would allow businesses to deduct more of their investment costs from their taxable income in present value terms, which would reduce their tax liability and encourage new investment.

Read more about the expensing of structures here.

Create Universal Savings Accounts

USAs are simple, all-purpose accounts available to anyone, with no restrictions on either the timing or purpose of withdrawals. Unlike many savings accounts, savings are taxed only once and are not full of complicated restrictions, making them a valuable savings option, especially for low-income individuals. The RSC would create USAs with an annual contribution cap of $10,000. USAs were also included in the House Ways and Means Committee’s Tax Reform 2.0 package last year.

Read more about Universal Savings Accounts here.

Eliminate Extenders

The “tax extenders” are a set of tax provisions that have been temporarily continued for more than a decade. Most of the extenders were made redundant by the TCJA or are narrow provisions favoring specific industries. Furthermore, because they are often authorized retroactively, they do little to encourage economic growth. The RSC budget would eliminate the extenders, ending Congress’ ritual of prolonging these temporary provisions.

Read more about extenders here.


Source: Tax Policy – Republican Study Committee Budget Contains Important Tax Policy Proposals

U.S. Businesses Pay or Remit 93 Percent of All Taxes Collected in America

U.S. Businesses Pay or Remit 93 Percent of All Taxes Collected in America

Tax Policy – U.S. Businesses Pay or Remit 93 Percent of All Taxes Collected in America

There have been a number of recent media reports highlighting that the 2017 Tax Cuts and Jobs Act reduced the tax bills for many U.S. corporations. Setting aside the debate over whether a low tax bill is fair, what is missed in such stories is that American businesses are critical to the tax collection system at every level of government—federal, state, and local. Businesses either pay or remit more than 93 percent of all the taxes collected by governments in the U.S. Without businesses as their taxpayers and tax collectors, American governments would not have the resources to provide even the most basic services.

In 2017, Organisation for Economic Co-operation and Development (OECD) economist Anna Milanez measured the amount of taxes that businesses in 24 countries contributed to the overall tax collection system. The U.S. was found to be one of the most “business dependent” tax systems in the industrialized world.[1]

business pay fair share, do corporations pay their fair share in taxes? business tax collections , business fair share taxes

There are two ways that businesses contribute to government coffers: taxes they pay directly (their legal tax liability) and taxes they collect and pay on behalf of others (their legal tax remittance liability).  

The taxes that businesses are directly liable for are corporate and noncorporate business income taxes, the employer portion of Social Security contributions (including self-employment taxes), as well as property and excise taxes.[2] As the chart shows, these taxes totaled $1.3 trillion at all levels of government in 2014. This represented nearly one-third (28.9 percent) of total tax collections in the U.S. that year.

Business income taxes were the largest category of direct taxes to government coffers. In 2014, corporations and noncorporate businesses, such as LLCs and S corporations, paid $606 billion in income taxes, or 13.5 percent of all taxes paid that year. The second-largest category of taxes paid by businesses was the employer share of Social Security taxes, which totaled $530 billion, or 11.8 percent of all taxes paid that year.[3] Excise taxes paid by businesses totaled $165 billion, just 3.7 percent of all taxes.

As significant as is the direct fiscal contribution of American businesses, they play an even larger role for governments by collecting taxes and remitting them on behalf of others. The OECD study identified three main categories of remitted taxes: withholding taxes on labor and capital income; the employee-share of Social Security taxes; and, sales or value-added taxes (VATs).

By far, the largest of these responsibilities is withholding and remitting the income taxes that wage earners owe on their paychecks. Few, if any, salaried or hourly workers withhold money from their own paycheck and send it to the Internal Revenue Service (IRS) every two weeks. The government has placed this routine task on employers to ensure that there is a steady stream of tax payments in the government’s coffers to pay its bills. According to the OECD, withholding taxes totaled over $2 trillion in 2014, some 45.7 percent of all taxes collected that year.

While our employers are withholding income taxes on our wages, they are also deducting Social Security taxes from our paychecks and submitting those payments to the IRS on our behalf. Those payments totaled more than $479 billion in 2014, some 10.7 percent of all taxes collected.

In many countries, VAT collections and remittances dwarf most all other revenues paid by businesses, but not in the U.S. The U.S. does not have a VAT, but most states and local governments levy sales taxes on the purchase of goods and some services. In 2014, U.S. firms collected and remitted roughly $354 billion in sales taxes on behalf of consumers, comprising 7.9 percent of all taxes that year.

The OECD estimated that American businesses collected and remitted nearly $2.9 trillion in taxes on behalf of workers and consumers in 2014, or 64.2 percent of all taxes levied by governments that year. Interestingly, the U.S. relies more on businesses to collect and remit taxes on workers and consumers than any other country measured by the OECD. The only country that came close to matching the U.S. was New Zealand, where remittances totaled 63 percent of overall tax collections.

When we combine the 64.2 percent share of taxes businesses collect and remit with the 28.9 share of taxes they pay directly, it totals 93.1 percent of all taxes in the U.S. collected by every level of government. According to the OECD estimates, only the Netherlands, in which businesses pay or remit 94.8 percent of all taxes, relies more on businesses as taxpayers and tax collectors than does the U.S.

The OECD figures show that businesses are essential for the collection of government revenues in the U.S. It is fair to say that governments at all levels would collapse were it not for the businesses large and small that incur considerable expenses to pay, collect, and remit taxes on behalf of themselves and other taxpayers.

The OECD data shows that governments in the U.S. have structured the tax system to effectively shift the lion’s share of the cost of complying and administering the cost of the tax system to private businesses. It would be difficult to calculate how many tax collectors governments would have to hire to replace the efforts of the more than 35 million businesses in America that perform tax collection and payment services on behalf of government. These substantial compliance costs should not be forgotten when we consider whether businesses pay their fair share of taxes.


[1] For more detail on the Milanez study, see Scott A. Hodge, “Contrary to ‘Fair Share’ Claims, Businesses are Central to Tax Collection Systems,” Tax Foundation, May 16, 2018, https://taxfoundation.org/fair-share-businesses-central-to-tax-collections/.

[2] Milanez was unable to estimate property tax payments for U.S. businesses because of data constraints. For all other countries, property taxes on businesses contributed an average of 1.1 percent of total collections. See Anna Milanez, “Legal Tax Liability, Legal Remittance Responsibility and Tax Incidence: Three Dimensions of Business Taxation,” OECD Tax Working Papers No. 32, 2017, 32, https://www.oecd-ilibrary.org/docserver/e7ced3ea-en.pdf?expires=1556811960&id=id&accname=guest&checksum=FDDAD82CC8C9502707C7909211460050.

[3] In this instance, Milanez is only measuring the legal incidence of payroll taxes, the portion directly paid by businesses. In a later chapter, she discusses the economic incidence of Social Security taxes, which largely fall on workers in the form of lower wages. 


Source: Tax Policy – U.S. Businesses Pay or Remit 93 Percent of All Taxes Collected in America

Taxable Income vs. Book Income: Why Some Corporations Pay No Income Tax

Tax Policy – Taxable Income vs. Book Income: Why Some Corporations Pay No Income Tax

The introduction of Senator Elizabeth Warren’s (D-MA) “Real Corporate Profits Tax” has put a spotlight on the differences between book income, or the amount of income reported by corporations on their financial statements, and the tax code’s definition of income upon which the corporate income tax is assessed. Senator Warren, among others, argues that firms maximize the profits reported to shareholders while minimizing their taxes owed to the federal treasury.

Firms report their book income to shareholders via their publicly-available financial statements. The ways that firms calculate their book income is dictated by U.S. accounting standards, set in large part by generally accepted accounting principles. Taxable income, however, is set by the policy process. While it seems that these two definitions should be similar, they are quite different. Large corporations are required to reconcile their book and taxable income annually. While the two values should be similar, they can vary widely for many companies.

Examining two key provisions of the U.S. federal tax code can help explain the difference between the two definitions of income and highlight why book income is not the right definition upon which to base our tax code.

Net Operating Losses

A corporation’s profit cycle does not always align with the calendar (or tax) year. Imagine a company with $50 in losses in January and $100 in income in July. We would all agree that this company only made $50 in the year; their book and taxable income measures are equivalent.

But what happens if those transactions occurred at a different time? Imagine that the firm has $50 in losses in July and then $100 in income in the subsequent January. Here, the company would not be taxed in the first year but would be taxed on the full $100 in sales in the second year. A net operating loss (NOL) would allow them to “carry forward” their $50 loss in year one to reduce their income in year two, so their tax liability now reflects the original example.

NOLs allow firms to smooth out their taxable income to better reflect their actual economic profits, or their revenue minus costs. Without the NOL, this firm would pay twice as much in tax liability, simply because their sales and losses did not fit neatly within the calendar year.

Example Tax Calculation With and Without Net Operating Losses

Without a Net Operating Loss

 

Year One

Year Two

Income

-$50 $100

Tax Liability (21 percent rate)

$0 $21
     

With a Net Operating Loss

 

Year One

Year Two

Income

-$50 $100

Income with Carryforward

-$50 $50

Tax Liability (21 percent rate)

$0 $10.50

NOLs are particularly important for firms in volatile or seasonal industries or for firms that haven’t reached profitability yet. (Companies can carry their losses forward indefinitely, but their NOLs in any one year are limited to 80 percent of their taxable income.)

Capital Investment

Traditionally, the tax code has been biased against capital investment. Firms that used labor to produce their products and services can immediately deduct the full labor costs, but firms that used capital were only allowed to deduct a portion of their investments. This process is known as depreciation.

Book income, in general, follows the idea of depreciation. Accounting standards in the U.S. require that firms only deduct a portion of a capital expenditure as a current year expense.

In contrast, a firm’s economic profit calculation does not distinguish between a labor expense or a capital expense. Firms should be able to deduct either expense immediately from their revenue, meaning that the tax code should be neutral to a firm’s investment decision. Policymakers have moved in recent years to correct this imbalance. The Tax Cuts and Jobs Act allows firms to immediately deduct short-lived assets until 2022, when the policy begins phasing out.

This movement towards full expensing means that many companies—particularly in capital-intensive industries—have little to no taxable income, while their book income still appears quite large. Moving to taxing book income would increase the cost of investment, by reducing a firm’s ability to deduct its costs.

Conclusion

Book income and taxable income can differ in other ways too. Foreign income earned by multinational corporations is another area of divergence.

Combining these provisions can mean that a firm can appear to be profitable on its financial statements, but also mean that it pays little or no federal income tax.

Senator Warren’s new proposal to establish a 7 percent surtax on large companies has reignited a debate over the proper way to measure a firm’s profitability. Book income, while used to measure a company’s financial performance, is not ideal for calculating a firm’s taxable income. Book income raises the cost of investment and penalizes firms with losses that don’t fit with the calendar year.

The current definition of taxable income is far from perfect, but it surely beats the alternative.


Source: Tax Policy – Taxable Income vs. Book Income: Why Some Corporations Pay No Income Tax

How High are Other Nations’ Gas Taxes?

Tax Policy – How High are Other Nations’ Gas Taxes?

The U.S. federal government funds infrastructure projects through the highway trust fund. This trust fund receives revenue mainly from the excise tax on gasoline and uses the revenue to pay for transportation projects through grants to state and local governments.

The taxes and spending associated with the highway trust fund are based on the benefit principle of taxation, which states that what one pays to the government should be connected to the benefits one receives.

Currently, the federal government levies a $0.184 per gallon tax on gasoline. In addition, state and local governments levy an average gas tax per gallon of about $0.34. This is an average combined rate of about $0.52 a gallon as of 2019, down slightly from $0.56 a gallon in 2017 and close to the amount levied in 2015.

The U.S. combined gas tax rate is lower than rates in other industrialized countries. According to data from the Organisation for Co-operation and Economic Development (OECD), the average gas tax rate among the 36 advanced economies is $2.24 per gallon. In fact, the U.S.’s gas tax is the second lowest (Mexico is the only country without a gas tax) and has a rate 25 percent lower than that of the next highest country, Canada, which has a rate of $0.74 a gallon.

On top of excise taxes, all OECD countries levy their value-added tax (VAT) on gasoline consumption. In the United States, only a few states (California, Connecticut, Georgia, Illinois, Indiana, Michigan, and New York) levy an additional sales tax on gasoline purchases. This means that the difference between taxes paid on gasoline in the United States and other OECD countries is even larger than the data on just excise taxes implies.

Without data on what the gas tax revenue is used for across the OECD, it’s hard to make a direct comparison between the U.S. and other countries. For instance, the Netherlands, which has the highest gasoline excise tax in the OECD ($3.36 a gallon), may only use a small fraction of the revenue for roads. The rest may be used for other government spending. If this is the case, its gas tax doesn’t conform to the benefit principle as strictly as it does in the United States. In other words, the Netherlands’ gas tax is high not because the country spends more on roads but because it chooses to tax gas more.

OECD Gas Excise Tax Rates (Per Gallon), 2017
Country Tax Per Gallon

Source: “Consumption Tax Trends 2018,” Organisation for Co-operation and Economic Development

Australia $1.17
Austria $2.10
Belgium $2.58
Canada $0.74
Chile $1.69
Czech Republic $2.08
Denmark $2.63
Estonia $2.19
Finland $2.97
France $2.78
Germany $2.79
Greece $2.99
Hungary $1.69
Iceland $2.68
Ireland $2.51
Israel $3.17
Italy $3.11
Japan $1.91
Korea $2.62
Latvia $1.86
Lithuania $1.85
Luxembourg $1.97
Mexico $0.00
Netherlands $3.36
New Zealand $1.79
Norway $2.85
Poland $1.67
Portugal $2.78
Slovakia $2.19
Slovenia $2.41
Spain $1.97
Sweden $2.73
Switzerland $2.81
Turkey $2.47
United Kingdom $2.82
United States $0.56
Average OECD $2.24

Excise taxes on gasoline have fallen in American dollars in most of the OECD since 2013. The average gas excise tax fell from $2.62 in that year to $2.24 in 2017. Iceland raised its gas excise tax by 36 percent, from $1.97 per gallon in 2013 to $2.68 in 2017, the largest gas tax increase in the OECD. By contrast, Turkey, Canada, Israel, and Norway experienced large reductions in their gas tax levies. In many cases, as with Turkey and Israel, the country’s currency depreciated between 2013 and 2017, lowering the value of the tax in American dollars. In others, such as Canada, policymakers reduced the excise tax rate on gasoline.


Source: Tax Policy – How High are Other Nations’ Gas Taxes?

The Lowered Corporate Income Tax Rate Makes the U.S. More Competitive Abroad

The Lowered Corporate Income Tax Rate Makes the U.S. More Competitive Abroad

Tax Policy – The Lowered Corporate Income Tax Rate Makes the U.S. More Competitive Abroad

One of the most significant provisions in the Tax Cuts and Jobs Act (TCJA) was the reduction of the U.S. corporate income tax rate from 35 percent to 21 percent. Lowering the corporate rate was a pro-growth policy, and its importance is especially apparent from an international perspective.

Previously, America’s combined statutory corporate income tax rate, combining state and federal corporate income taxes, was 38.9 percent. This rate was the highest among all Organisation for Economic Co-operation and Development (OECD) countries and had long been well above the OECD average. As the following figure illustrates, while the top corporate income tax rate in the U.S. was virtually constant for decades, other OECD countries repeatedly cut their top corporate rates, making their economies more competitive and more attractive to investment. As a result of the TCJA, however, the U.S. now has a combined corporate income tax rate more in line with that of other OECD countries.

Top corporate income tax rate, United States vs OECD, 1983-2018 U.S. corporate tax rate

Over time, the reduction of the corporate income tax rate will incentivize new investment and lead to additional economic growth. A lower corporate rate will make the U.S. more attractive for companies by increasing after-tax returns on investments and will discourage companies from shifting profits to low-tax jurisdictions. The Tax Foundation’s Taxes and Growth model estimates that lowering the corporate rate will increase long-run GDP by 2.6 percent, increase worker pay, and grow the U.S. capital stock as more investments become profitable.

However, while the U.S. corporate income tax rate is far below what it used to be, many countries’ rates are lower still. As the following figure shows, 22 OECD countries still have statutory corporate income tax rates below that of the U.S. The new combined U.S. corporate rate of 25.7 remains above the OECD average of 23.8 percent and is just below the GDP-weighted average of 26.5 percent.

Statutory corporate income tax rates, OECD nations, U.S. Statutory corporate income tax rate

In other words, while the U.S. corporate income tax rate is no longer the highest among other OECD countries, it is still only in the middle of the pack. If the trend of recent decades continues, other countries will continue to reduce their corporate rates in the future. But for now, the TCJA has put the U.S.’s corporate tax rate in line with the average among OECD nations.


Source: Tax Policy – The Lowered Corporate Income Tax Rate Makes the U.S. More Competitive Abroad