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Voices Speaking

November 3, 2015

Combined Reporting: Fair Taxation for Shared Prosperity

Declining revenue projections – contributing to Connecticut’s increasing budget deficit – illustrate why recent legislation to raise revenue by making business taxation more equitable was the right course for the state to take, even as some big corporations step up their attacks.

After a decade of serious discussion, the Connecticut General Assembly wisely conformed our state’s corporate income tax policy to that of 24 other states and D.C. – including every other New England state – by adopting a common sense policy known as mandatory combined reporting.

Despite the legislature’s decision to adopt combined reporting, some corporations that exploit its absence to avoid paying their fair share are making a last-ditch effort to convince policymakers to reverse the decision.

That would be a mistake. Let’s remember again why we adopted combined reporting:

  • Combined reporting nullifies a host of tax-avoidance strategies in one fell swoop, some of which can’t be stopped in any other way. Among the worst of these strategies is offshore profit shifting, using international tax havens to avoid state and federal taxes. This practice has increased dramatically over the past 35 years, with 20 percent of all U.S. corporate profits now booked in offshore havens, a tenfold increase since the 1980s.  In Connecticut alone, Fortune 500 companies hold $185 billion in offshore profits, with 64% of those holdings attributable to one company: General Electric (which has the second largest amount of profits held offshore by any U.S. company). Only in California and New York do Fortune 500 companies hold more profits in offshore tax havens.

  • Combined reporting levels the playing field for small businesses that typically operate as a single corporation or otherwise lack the resources to shift profits to out-of-state subsidiaries. The absence of combined reporting creates an artificial advantage for the large multistate corporate competitors. The Small Business Administration has reported that “states with combined reporting rules tend to have more small business activity.”
  • Combined reporting raises revenue needed to help preserve critical public services – many of which benefit businesses, like schools that produce skilled workers – and arrests future erosion of the corporate income tax base.

Connecticut companies seeking to maintain their competitive advantage argue that combined reporting will hurt state economy, but evidence is to the contrary:

  • From 2000 to 2014, 10 of the 15 states that had the best record of retaining manufacturing jobs required combined reporting, while just two of the 15 states that lost the greatest share of manufacturing jobs were combined reporting states.
  • A 2010 Voices analysis of 37 for-profit companies with more than 1,000 employees found that 32 (85%) of these companies already operated in states with mandatory combined reporting and 27 of these companies operate in five or more combined reporting states.
  • The more than 1,200 Connecticut companies that already elect combined reporting make up just 3 percent of total returns, while representing 46.3% of total state corporate tax liability.
  • Along with 24 other states and D.C., including every state in New England, combined reporting exists in so-called business friendly states, such as Texas, Utah, and Arizona.

Combined reporting closes tax-avoidance strategies, is small-business friendly, and raises much-needed revenue for the public good.  If pressure from a small number of large corporations seeking to maintain their unfair advantage over small- to medium-sized businesses succeeds in killing combined reporting it will be a big step backward for Connecticut. Every company that wants to benefit from all that Connecticut has to offer, including our highly educated workforce and our enviable quality of life, should contribute their fair share in return.

See the full policy brief here.

 

 

Issue Areas:
Budget and Tax, Family Economic Security
Tags:
budget, combined reporting, Connecticut, taxes
September 23, 2016

Investing in Connecticut: taxes and economic prosperity

If you read what some commentators are saying about our state, you might think that Connecticut having one of the nation’s highest standards of living is just an accident. To mark the anniversary of the income tax last month, observers presented a story of doom and gloom entirely attributable to state income taxes.

What these columns are missing, however, is any thought to what those taxes translate into in terms of services, investments and economic prosperity. Grover Norquist, for instance, pointed to Texas and Florida – which have no state income taxes – as examples of what states can accomplish if they liberate themselves from the responsibility of investing in the future. Well, let’s take a look.

The poverty rate in Connecticut is fourth lowest in the nation. In Texas and Florida it’s much higher. Connecticut is fourth in the share of the population holding a graduate or professional degree. Florida and Texas are well below the national average. In only three states do a higher percentage of people lack health insurance than in Florida; one of them is Texas, which leads the nation in this shameful statistic. Meanwhile only nine states have a lower share of people without health insurance than Connecticut. You get the point. Connecticut may have higher taxes, but that is because the state invests in the services essential to sustained economic success.

If Connecticut were to follow a low-road model, it would jeopardize the competitive advantage it has in a highly educated and highly productive workforce that is attractive to high-wage and high-skill employers, who in turn benefit from a return on the investment of their business tax dollars in the form of roads, bridges, and other public infrastructure, safe neighborhoods, and education.

But Norquist and other commentators are not just wrong about what makes a state’s economy strong; he also errs when he and others claim that taxes in Connecticut drive residents to leave.  Norquist inaccurately characterizes a net loss of roughly 8,000 households per year as an escape from the state income tax. In fact, net annual movement from Connecticut declined steadily in the first 10 years after the tax was enacted – hardly consistent with Norquist’s argument. And, more than eight in 10 of the households that left Connecticut between 1992 and 2014 were replaced by households moving in. If taxes are as significant a driver of state-to-state moves as Norquist wants to believe, why would so many people be moving to Connecticut?

In fact, 38 percent of all residents leaving the state moved to Florida, the leading destination for virtually all northeastern and rustbelt states – including New Hampshire, which doesn’t have any broad-based income tax. Common sense says many of these people leaving Connecticut are retirees seeking warmer weather, who likely would move regardless of Connecticut tax levels.

Norquist errs again when he asserts that those who moved out of the state took billions of dollars of income with them, further depleting the state’s finances. It’s a claim that former Tax Foundation economist Lyman Stone has written rests “on an egregiously wrong use of the data” by analysts who “have either failed to perform the most basic due diligence . . . or else actively mislead their readers.”  Think about it: the vast majority of people who leave a state hold jobs that will be filled by people joining the labor force from within the state or moving in, resulting in no “loss of income” at all.

You can throw as many arguments you want against the wall and none of them stick. Connecticut is a better place to live because of the public investment that comes from everyone pitching in for the common good. Neither residents nor businesses are “damaged” by our state’s income tax. To the contrary, it’s the children growing up in poverty in states that don’t invest in shared prosperity and quality of life that will have a hard time reaching their full potential.

Issue Area:
Budget and Tax
Tags:
Connecticut, education, insurance, investments, services, taxes
July 13, 2017

Infographic: a Better Approach to the State Budget

The state budget is the clearest statement of Connecticut's policy priorities. Connecticut needs a balanced approach that combines strategic spending with new revenue. See the our infographic below and full Revenue Options brief for more detail.

Click here to download the PDF.

Issue Area:
Budget and Tax
Tags:
budget, Connecticut, priorities, revenue, taxes
February 6, 2018

Guest Post: February Federal Update

Deborah Stein, the Network Director of the Partnership for America's Children

This article is a guest post by Deborah Stein, the Network Director of the Partnership for America's Children. It provides some much-needed context to the issues in front of Congress this month, and how they can impact children and families in Connecticut.

Things are happening at lightning speed in DC, so here is a brief update on where things stand.

February 8 Funding Deadline

The current continuing resolution (CR) expires Thursday, February 8. Congress is not expected to reach a spending deal for the rest of the year by that deadline. The open issue remains whether to raise domestic spending (that, is the overall sequestration cap) as much as defense; the bill cannot pass the Senate without Democratic votes since it needs 60 votes to raise the sequester caps, and the Democrats are fighting for increased domestic spending. There is no indication that Congress is close to reaching a deal on sequestration caps for non-defense spending.  Once they reach a deal, they can finish up FY 2018 appropriations, probably in one giant Omnibus bill. It's not clear how much time it will take to write the Omnibus once the caps are set.

The House is currently developing a fifth stopgap funding bill to keep the government open for six more weeks through March 23, which would take it past the expected date that Congress must raise the debt ceiling. Reports say that this will be a "clean" CR, with level funding on nearly all programs and nothing attached to it such as health extenders (community health centers and home visiting) or DACA.

The House stopgap funding bill may not come out until as late as Tuesday morning, February 6th. This late release is worrisome since the Democrats have their retreat Wednesday through Friday. Moreover, it's uncertain whether this CR will be passed by the House or Senate since Democrats want a deal on DACA and the House Freedom Caucus does not want to pass any more CRs. Though a number of members of Congress have expressed confidence that there will not be another shutdown, reaching a deal on another CR is not guaranteed at this point.

Debt Ceiling

The Congressional Budget Office said this week that the U.S. will hit the debt ceiling in early March and be forced to default on its obligations unless the debt ceiling is raised and it can borrow more funds. The Treasury Department separately urged Congress to raise the limit by the end of February.

Congressional leaders have said they prefer to pair the debt-ceiling vote with other must-pass measures like the government spending bill. However, if the proposed CR passes, the government risks default if Congress waits until after the March 23 deadline of the next CR to raise the debt ceiling.

In past debt ceiling fights, conservatives have tried to tie raising the debt ceiling to changes to budget rules such as Balanced Budget proposals. It is not clear whether they will try to do that this time.

Congress Likely to Avoid Reconciliation Process in FY 2019

Reports from the Republican Retreat indicate that congressional Republicans might forgo including reconciliation instructions in their FY2019 Budget Resolution (remember, the Budget Resolution, which is not a law, sets for the rules for all budget legislation for the fiscal year, and reconciliation is the fast track process that only requires 51 votes in the Senate). They were expected to use the expedited budget reconciliation procedure to pass cuts to entitlement programs benefiting children and families, much as they used reconciliation to pass the tax bill in December 2017. There was also a possibility they would consider using reconciliation to take another shot at repealing the ACA. At this point, it looks like neither of these will happen.  This is very good news, if it proves true, and is a strong testament to the success of the fight to save the ACA and Medicaid last year.
 

Issue Area:
Budget and Tax
Tags:
Congress, Federal, taxes, Trump
November 28, 2018

How State and Local Fiscal Policies Impact Racial Equity

The Center for Budget and Policy Priorities has released a new report about how state and local fiscal policies impact racial equity and makes recommendations to overcome longstanding inequities. Michael Leachman, Senior Director of State Fiscal Research, in a blog post, explains:

“States and localities can do more to help undo the harmful legacies of racism and the damage of continuing racial bias and discrimination, a major new Center report finds. If state policymakers can design their budget and tax policies to better address these harms and create more opportunities for people of color, state economies would be more equitable and likely stronger, which in turn could benefit many state residents of all backgrounds.

States and local governments account for nearly half of all domestic public-sector spending, and most of the funding for education and certain other investments important for economic growth. As such, how states and localities raise and spend revenue, including what services they finance, has major implications for racial and ethnic equity. Yet, while people of color have made progress in many areas in recent decades, state and local fiscal policies too often haven’t contributed to that progress and, instead, have extended or cemented racial disparities in power and wealth.”

(Continue reading here).

The report highlights a number of ways that states, including Connecticut, can mitigate racial inequities, such as expanding tax credits for low-income families, ensuring sufficient funding for public schools, and improving the budget rules that artificially restrict the ability of policymakers to fund critical services for children and families.   

Connecticut took an important step in improving racial equity with the passage of  S.B. 256 this year.  Under this new law, legislators may request a racial and ethnic impact statement of any proposed legislation, recognizing the need to evaluate bills through a racial equity lens. 

Issue Area:
Budget and Tax
Tags:
budget, disparities, income tax, property tax, taxes

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