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Saturday, September 25, 2021

New "Taxcast" Examines Finance vs. the Environment

 The newest edition of the "Taxcast" podcast takes on two big environmental topics this month. First, John Christensen of the Tax Justice Network discusses with host Naomi Fowler how high levels of financialization of an economy degrades the environment.

Second, an even more challenging question is whether growth itself is now threatening the environment and, if so, what to do about it. Anthropologist Jason Hickel tackles this issue in his segment of the Taxcast.

Both segments are well worth your time. If you, like me, prefer to spend less time and read the transcript, see the link below.

Taxcast podcast

Transcript

Friday, June 25, 2021

United States and European Union Agree to End Tariff War Over Subsidies to Boeing and Airbus

On June 15th, the United States and the European Union announced an agreement to finally solve their decades-long dispute over subsidies given to Boeing and Airbus. This was followed by a parallel agreement with the United Kingdom on June 17th, since the UK is part of the Airbus consortium, but has exited the European Union.

The accord provides for a five-year truce on the WTO-approved tariff war between the two sides. In 2019, the World Trade Organization gave the United States permission to impose tariffs on $7.5 billion worth of EU exports per year due to its subsidies to Airbus. Then in 2020, the WTO approved countervailing EU tariffs on $4 billion of U.S. exports due to subsidies to Boeing.

The Biden administration and the European Union agreed to a four-month halt to these tariffs in March; they had cost EU exporters $2.2 billion and U.S. exporters $1.1 billion in 2019-20. The five-year cease-fire is the fruit of negotiations between the two parties since then, which concluded with two days of discussions in Brussels between U.S. Trade Representative Katherine Tai and European Commission Executive Vice-President Valdis Dombrovskis, the Commissioner for Trade.

The agreement establishes a working group, chaired by Tai and Dombrovskis, that will make concrete proposals to ensure that both sides provide financing to their large civil aircraft (LCA) manufacturer only on market terms and not provide subsidies via research and development programs. These principles will apply to all levels of government, including state and local.

I liked the last point of the main agreement: “8. The two sides will continue to confer on addressing outstanding support measures.” In other words, as I suggested in another blog, Boeing continues to enjoy “favorable tax treatment,” as Governor Jay Inslee put it, in Washington state, which may need to be adjusted going forward. In addition, while the Evergreen State’s subsidies for 787 production were ended early and 777X subsidies were canceled in advance, Boeing may well have subsidies in South Carolina, Missouri, or Kansas that might need to be addressed in this phase.

In addition, the European Union and United States will work together against non-market intervention in the LCA  market by other countries (read: China). This is consistent with President Biden’s actions to repair relationships with U.S. allies and rally as many of them as possible to a shared struggle against Beijing.

If this truce holds, it would finally bring an end to the longest-running dispute of the WTO era. The United States filed its first complaint against Airbus subsidies in 2004, while the European Union filed a complaint against U.S. subsidies to Boeing the following year. While 17 years is already a long time, in fact the original slate of WTO agreements in 1995 was supposed to have a Boeing-Airbus agreement within it. Indeed, my personal copy of the draft legislation for Congress to approve joining the WTO, which I received from the Office of the U.S. Trade Representative, has a page marked where that agreement was expected to be placed.

But it didn’t happen then. No agreement was reached moving into the new century, and then the WTO complaints were filed. Now, at last, the dispute has been stopped and may be on the verge of solution. Moreover, subsidies in Washington have been stopped (though not repaid), subsidies in other states will draw more scrutiny, and in the future Boeing will not be in a situation to shake down states for billions of dollars.

 

Cross-posted from Good Jobs First.

Thanks to my Good Jobs First colleague Greg LeRoy for suggesting this topic and making valuable editorial suggestions.

Saturday, June 12, 2021

Big week on the tax reform front

 Tax has been in the news a lot in the past week. With good reason, since "Taxes are what we pay for a civilized society," as U.S. Supreme Court Justice Oliver Wendell Holmes eloquently put it. There are three main elements to fixing taxes, and there have been big developments in all of them. In this post, I want to look at all three together to show the breadth of the problems with taxation in the United States.

The first two lie in the realm of what's "perfectly legal," as the title of David Cay Johnston's 2005 best-seller so aptly put it. The third, of course, is tax evasion.

The first, corporate tax avoidance, saw a huge development June 5th as the Group of Seven agreed to a U.S. proposal (thanks, Janet Yellen!) for a 15% minimum corporate income tax. This would make it irrelevant that so much corporate income is "earned," via transfer pricing, in tax havens. There are still some details to work out, and it has to pass Congress, but a bill on taxation should be subject to the Senate's reconciliation procedure, allowing it to pass with a simple majority. According to the Biden administration's budget, this should yield an average of $50 billion a year in new tax revenue over the next 10 years.

The second area needing reform is individual tax avoidance. On June 8, Pro Publica released what it called the first installment of "The Secret IRS Files," data on thousands of the country's richest individuals over more than 15 years that show how they legally get away with paying tiny amounts of tax even as their wealth increases by billions of dollars. Jeff Bezos of Amazon paid no federal income tax in either 2007 or 2011, and he even took a $4000 child tax credit in 2011 because he had no income.

Pro Publica calculated a "true tax rate" for each of the 25 wealthiest individuals in the United States. This metric equals tax paid divided by growth in wealth for the year. For the top 25 as a whole, over the five years 2014-2018, their wealth increased by $401 billion. However, they only paid $13.6 billion in income taxes for those five years, for a true tax rate of just 3.4%. The two worst offenders both had rates less than 1%: Warren Buffett at 0.10% and Jeff Bezos at 0.98%.

The biggest problem making tax avoidance so easy for the rich is that income tax can only be charged, thanks to the U.S. Supreme Court decision Eisner v. Macomber (1920), when assets are sold, not when they increase in value. This is a problem because, as Thomas Piketty discusses in Capital in the Twenty-first Century, unrealized capital gains are income in an economic sense, and not taxing them makes it impossible to carry out a truly progressive income tax. This leads to the need for a tax on capital. As he puts it, "...only a direct tax on capital can correctly gauge the contributive capacity of the wealthy" (p. 525).

But wait, there's more! What happens if a rich person doesn't sell the stock they own? When they die, the heirs get to have a new cost basis for the stock, equal to the price on the decedent's death, so no tax gets paid on the increase in value at all. This is called the "step-up basis of capital gains on death," and all by itself it is estimated to cost the federal government $40.26 billion in FY 2022, not to mention the smaller additional amount for states with state income taxes. Since state individual income tax revenues came to $390 billion in 2018 versus $1.718 trillion of federal individual income tax revenues, $9 billion would be a good ballpark estimate for the loss to state governments.

The third area is tax evasion, both corporate and personal, the illegal stuff: Non-reporting, non-payment, underreporting, underpayment, hiding assets in tax havens and not declaring the income based on them, and much more. The IRS estimated the tax gap, the difference between tax owed and tax paid, to be $450 billion in 2006 and $458 billion on average for 2008-2010. The Treasury Department, extrapolating from the most recent IRS estimate covering 2011-2013, estimated the 2019 gross tax gap (before late payments and enforcement actions) of $584 billion, which comes to 2.7% of 2019 gross domestic product.

In the June 9th New York Times, five Treasury Secretaries (four Democrats and one Republican) point out that the Internal Revenue Service today has the lowest number of auditors in the postwar era. That shows just how much the agency has been crippled, by design, in its ability to fight tax evasion. The authors all endorse President Biden's proposal to spend $80 billion over the next decade to step up enforcement and improve the general quality of service at the IRS. It's worth noting that we don't know whether something is "perfectly legal" unless a tax return is audited. Plenty of corporations and individuals push the envelope and chalk up losses as a cost of doing business. And with audit rates falling in recent years, that cost is similarly falling.

You will notice that tax evasion is the biggest piece of the pie. Although no one thinks $8 billion a year will wipe out the tax gap, putting money into enforcement has a strong return on investment. I wonder if maybe even more money should go into it.

This was a great week on the tax front: A gigantic expose on the tax system the 1% enjoy, a potential landmark deal on corporate taxes, and a prominent bipartisan push for fighting tax evasion. We have to convert all three into concrete wins, but we've got to remember to celebrate the small successes along the way, too.

Tuesday, October 13, 2020

Update on Boeing Subsidies

Whaddaya know? Just four days after I mentioned that Boeing did not repay the billions it had already received from the 2003 Washington subsidy package (h/t Greg LeRoy), the World Trade Organization approved EU retaliation for these subsidies in the form of $4 billion per year of tariffs on U.S. goods.

 Predictably, Boeing and the U.S. government are crying foul, saying it wasn’t fair to allow tariffs on a subsidy that had already been terminated, but not acknowledging that the company had already received about ¾ of the tax breaks the state provided for in 2003, or approximately $2.4 billion in nominal terms at the originally reported figure of $160 million per year. Note that the Times continues to report this figure as $100 million per year, while CNBC reported that the company saved $200 million in 2018 due to the tax breaks, so YMMV. In any event, it’s still a lot of money.

 Moreover, when Boeing announced the end of 787 production in Washington, Governor Jay Inslee said that the company’s “favorable tax treatment” in the state needed to be reconsidered. According to the Seattle Times, the main tax breaks saved the company $1.4 billion in 2014-2019. You can see why the European Union and Airbus complain that Boeing is still being subsidized.

 Don’t forget that Airbus is also subsidized. The WTO authorized the United States to impose $7.5 billion in tariffs annually on EU products over “launch aid” given to Airbus in the form of low-interest loans and about $4 billion in grants. As several of the New York Times interviewees noted, the dueling, WTO-approved tariffs may finally create the impetus to negotiate an end to the Boeing-Airbus subsidy war. Time will tell.

Friday, October 9, 2020

Boeing Moves More Jobs from Washington State to South Carolina

As first reported in The Wall Street Journal, Boeing is ending production of the 787 Dreamliner at Everett, Washington, and moving it to its newer facility in North Charleston, South Carolina. The company says this is the most efficient approach to reducing production of the jet from 10 per year to six per year in response to falling demand due to the coronavirus pandemic. 

Moving production to South Carolina means that more than 1,000 Boeing workers at its Everett plant will likely lose their jobs as they no longer have a model to build.

This development marks the latest step in Boeing's long-term assault on its unionized Washington workforce. When the state legislature there approved its $3.2 billion ($2 billion present value) subsidy deal for the 787 in 2003, legislators there were under the impression that they had “won” the project, that Boeing was now required to build all 787s in Washington. They were shocked and angered when the company announced that it would set up another assembly line in “right-to-work” South Carolina, complete with some $900 million in incentives, creating a plant that remains non-union to this day.

In large part, this new move became possible because this February, the company asked Washington to end the 2003 subsidy package, which had been ruled an unlawful subsidy by the World Trade Organization and upheld by WTO's Appellate Body (click on "Summary of key findings") in 2012. After getting hammered by the European Union in WTO compliance proceedings, Boeing decided it would clean its slate to be better positioned to attack EU-based Airbus for the subsidies it has received. The United States notified the WTO Dispute Settlement Body in May that Washington had terminated the subsidies in March. With no subsidy from Washington, the company no longer felt obligated to produce any 787s there. Note that there has been no indication that Boeing gave back the approximately $160 million a year it had received already under the 2003 subsidy deal.

According to the company, it did not receive any incentives to bring the remaining 787 production to South Carolina. That would be the right approach for Boeing to take if it wants to avoid further hassle with the World Trade Organization. Of course, we have seen plenty of examples where subsidies have been discovered long after a project was first announced. Think Foxconn in Wisconsin or Nissan in Mississippi. Call me cynical, but I wouldn't put it past Boeing to find a way to get a subsidy for the “new” jobs in South Carolina. After all, from 2003-2012, the company had net negative state income taxes overall nationally.

Between the runaway jobs and the World Trade Organization subsidy rulings, if there were ever a time and a company calling for no development subsidies, Boeing is it in 2020.

Cross-posted with Good Jobs First.

Thanks to Greg LeRoy for suggesting this article and for editorial improvements.

Tuesday, September 15, 2020

Report Shows Huge Cost of Tax Breaks to South Carolina Public Schools -- Up 31% in Two Years

 My colleagues at Good Jobs First released a new report today showing that South Carolina public schools are losing high, and rapidly rising, amounts of potential revenue to property tax abatements controlled solely by county governments.

Thanks to Government Accounting Standards Board (GASB) Statement #77 adopted in 2015, governments that passively lose income to "tax abatements" are required, in their Comprehensive Annual Financial Reports, or CAFRs, to list the total losses annually. Passive losses occur when they are the result of the actions of another governmental unit. The most common scenario for this comes about when a municipal or county government gives a property tax break to a company, and overlaying taxing units (school, library, or ambulance districts, for example) are required to also waive their portion of the property taxes abated.

“The Revenue Impact of Corporate Tax Incentives on South Carolina Public Schools” shows that in South Carolina, these passive losses are happening with a vengeance. The state's public school districts collectively lost a total of $423 million to property tax abatements in fiscal year (FY) 2019. That's 31% more than in 2017, an absolute increase of $99 million in just two years.

Some of the biggest losses were in the poorest school districts, as measured by the percentage of students eligible for free or reduced-rate lunches. Six of these districts lost more than $2000 per student, including four that had majority Black plus Latino student populations.

“Our members struggle to teach in crumbling schools with poor heating and cooling systems and a lack of reliable internet connections,” said South Carolina Education Association President Sherry East. “It baffles me to continuously hear we don’t have enough money to fund our schools, yet this report shows we are diverting huge pots of money that could be available if we just consider tax reform in South Carolina.” (From the Good Jobs First press release.)

 This situation has been developing for over 20 years. Reporter Jay Hancock of The Baltimore Sun described South Carolina in 1999 as having "crumbling" schools that sometimes flooded in rainstorms. Despite the problems apparent even then, the state has continued to be an aggressive pursuer of new companies (Boeing and Alenia/Vought are two Megadeal-sized example).

What can be done? The report's top recommendation is to exclude school districts from any incentive deal. This is what California did in 2012-2014 when then-Governor Jerry Brown spearheaded the abolition of tax increment financing (TIF) and signed off on a much-modified version that prohibited the use of school funds in TIFs, as well as allowing all other overlaying jurisdictions to opt out.

The second recommendation is to cap the duration (currently up to 40 years!) and cost of tax abatements, to at least reduce their outsize impact on schools. Finally, better transparency from county and municipal governments on the costs and outcome measures of subsidies can lead to improved policy in the future.

The research here is part of Good Jobs First's updating of its landmark 2018 report, The New Math on School Finance, which was the first to use GASB-77 data to address the impact of tax incentives on school budgets.

Note to the reader: I was not part of this research. But stay tuned...