Tax Day: What Do We Pay For, and Who Pays?

Tax Day is a good day to remind ourselves that taxes allow our state to make investments that benefit our economy and all Maryland’s residents, and that we must continue to work to make our tax code fairer.

What Do Our Taxes Pay For?

Taxes pay for important public services such as schools and health care that also help the state’s economy thrive. Residents and businesses alike depend on roads, bridges, and safe communities. Taxes make these investments possible.

Residents’ federal taxes mainly pay for national defense and major public programs such as Social Security, Medicare, Medicaid, and the Children’s Health Insurance Program. The largest items in the state budget include education, health care, transportation, and public safety.

Who Pays?

While the investments that taxes pay for play a large role in the lives of Maryland residents, the tax code itself plays an equally important role in determining who pays for these investments, and how much.

There are elements to the tax code that are beneficial for working Marylanders but others that favor the rich and well-connected. Like virtually every other state in the country, Maryland residents with moderate and low incomes pay a larger share of their incomes in taxes than do wealthy residents.

Source: Institute for Taxation and Economic Policy

Note: Data includes sources of family income for non-elderly taxpayers

In this regard, the tax code perpetuates and exacerbates inequality, which is particularly troubling as earnings for the wealthy in Maryland have increased while they have stagnated or declined for working Marylanders.

Unfortunately, the General Assembly has compounded this problem by raising the income exemption for the estate tax, allowing millionaires to withhold a higher level of income from estate tax filings. And although state lawmakers were unwilling to index the minimum wage to inflation during the 2014 legislative session, they passed legislation that has the withholding level for the millionaire estate tax eventually rise with inflation.

Thankfully, there are elements of the tax code in Maryland that benefit working families. Maryland has its own Earned Income Tax Credit (EITC) for people who work at low-wage jobs which complements the federal EITC and helps reduce inequality and lift residents out of poverty. This year, the General Assembly approved an expansion of the state EITC which will help the state’s workers keep even more of their money and further reduce poverty and inequality. This was an important victory for working Marylanders.

Maryland also employs a graduated rate income tax structure that rises with earnings, helping ensure that the wealthy pay their fair share. Maryland increased tax rates for high earners in 2012. Research shows that high-income residents do not leave a state in response to taxes (instead moving for family, job, and weather reasons. Indeed, Maryland remains the wealthiest state in terms of household income and the state with the most millionaires per capita.

Like the wealthy, large corporations operating in Maryland are not paying their fair share in taxes. Lawmakers failed to close a loophole that allows companies to avoid state taxes, and Maryland can do more to make sure its tax incentives are targeted toward moderate and low income residents that need them most.

As another Tax Day comes and goes, residents and lawmakers should be mindful that while taxes are necessary to pay for investments in Maryland’s residents and economy, there remains a need to improve the tax code so that it is fairer and promotes broad prosperity. 

Study Finds Many Large Corporation are Not Paying their Fair Share; Proposed Legislation Would Help

While state lawmakers in Annapolis discuss cutting important services and investments in an effort to balance Maryland’s state budget, we got further evidence today that large, profitable corporations are able to avoid paying their fair share of state taxes that support those services and investments. According to a new report, the 269 Fortune 500 companies that disclose their state income tax payments were able to avoid paying taxes on more than half of their profits. Some companies managed to not pay any state income taxes.

The list of companies that are able to avoid paying their fair share in taxes includes major companies that Maryland residents do business with every day. Marylanders support these companies when they go out to eat (Yum! brand restaurants like Pizza Hut and Taco Bell), surf the web (Yahoo, Facebook, Priceline.com), or pay their utility bills (Verizon, PG&E, Pepco, Comcast). Besides supporting such corporations with their business, Maryland tax dollars pay for the roads and bridges, communication systems, public safety, and educated workforce that these companies rely on. Yet they and many others that do business in Maryland are able to avoid paying for the services that they enjoy.

Between 2008 and 2012, these 269 companies paid state income taxes equal to less than 3.1 percent of their U.S. profits, less than half the average state corporate tax rate. As a result, these companies avoided paying $73.1 billion in state corporate income taxes over the five years the report covers. In 2012 alone, 25 companies paid no state income tax.

Source: Citizens for Tax Justice and the Institute for Taxation and Economic Policy (click to enlarge)

During the current legislative session, lawmakers in Annapolis have proposed a number of tax changes, some of which are better than others. This report’s findings are another sign that the General Assembly ought to consider tax reform that ensures large and profitable corporations operating in the state pay the legal tax rate.

Often, companies are able to dodge state corporate taxes through a shell game of creative accounting. As we have previously argued, Maryland can reduce such practices by instituting “combined reporting,” which would treat a parent company and its subsidiaries as one corporation for state income tax purposes. Doing so would provide a more complete and accurate accounting of the profits corporations earn from their activities in Maryland, limiting their ability to use tax avoidance tactics.

Maryland would collect tens of millions of dollars in additional revenue through combined reporting, Maryland’s Department of Legislative Services estimates. Multiple pieces of legislation put forward during the current session would enact combined reporting; state lawmakers need only to vote in favor of one of them.

When these large companies are able to pay less than their fair share in taxes on their profits, small businesses and families are left to make up the difference to pay for important public services and investments like schools, health care and public safety that benefit everyone in the state. State lawmakers ought to enact reforms that prevent tax avoidance and level the playing field for small businesses in Maryland that pay their fair share.

Major US Corporations Not Paying their Fair Share in Federal Taxes

Maryland residents filling out their tax forms and paying their monthly utility bills might be surprised to find out that one of the companies that 526,000 of them write checks to has been dodging its fair share.

The utility company actually has received more money from the federal government than it paid in taxes over the past five years -- for an effective tax rate of negative 33 percent – according to a new report.

Pepco is far from alone. It is one of 26 Fortune 500 companies, including Boeing, General Electric, Priceline.com, and Verizon, that paid no taxes at all in the last five years, despite combined profits of $170 billion, according to research by the Institute for Taxation and Economic Policy and Citizens for Tax Justice. Their study of  288 highly profitable companies and found that one third paid a tax rate of less than 10 percent between 2008 and 2012. The average effective tax rate of all 288 companies analyzed in the study was 19.4 percent, barely more than half the statutory federal corporate income tax of 35 percent.

Source: Citizens for Tax Justice and the Institute for Taxation and Economic Policy

(Click to Enlarge)

The Maryland General Assembly is considering closing loopholes in the state’s corporate income tax; Congress should do the same.  The “Tax Dodgers” report proposes steps lawmakers can take to close these loopholes, emphasizing the need to  require companies to disclose in which states they pay taxes, and how much.  This will both assist Congress in holding companies accountable for their fair share of federal taxes and  help states close their own tax loopholes.

This is not simply a matter of playing by the rules. Like individuals and families, businesses benefit from what taxes pay for, like an educated and healthy workforce, reliable transportation systems to move their products, and the expectation of a clean air and water.  The point is not to demonize companies, but to make sure they pay their fair share for the public services and investments that help them prosper.

Tax Free Holiday Not a Good Deal

Starting this Sunday, August 12th, through the following Saturday, August 18th, Marylanders will be able to purchase certain clothing items costing less than $100 without paying the state's 6% sales tax (you can find more information about the holiday here). However, it's not as good a deal as it sounds.

The sales tax holiday was established in 2007 as a way to help families with back-to-school expenses and to promote Maryland retailers. At the time, legislators thought that the state was on track for budget surpluses and could afford the lost revenue. The recession derailed that plan, and the state is still struggling to recover. Now, the sales tax holiday is a loss the state can ill afford.

Estimates are that the sales tax holiday costs the state treasury about $10 million in lost revenues. That's enough money to provide 1,000 families with emergency housing assistance, or state college scholarships for 4,000 students. And it comes as the state begins to grapple with how to fix the remaining $400-500 million structural deficit in the FY 2014 budget.

Since 1997, at least 20 states and the District of Columbia have held tax holidays. They mostly involve clothes, computers, school supplies, and appliances. Florida extended tax holidays to hurricane-preparedness items. Yet many experts don't think stores benefit much from sales tax holidays. Research has found that in many cases removing sales taxes for a few days affects the timing of purchases rather than the volume. Business might be up during a sales tax holiday, but it goes down at other times as people shift their purchases to the tax-free days. One Florida study even showed that retailers raised prices (or lowered their normal discounts) during the tax holiday so they took 20 cents out of every dollar customers saved on taxes.   

Tax holidays can be confusing too. In Maryland the purchase of clothing under $100 will be tax free; but if you exchange the item after the tax holiday you have to pay tax on the new item (unless you exchange it). If you get a rain check and redeem it after the tax-free week, you'll have to pay tax. The store can’t break up something that’s normally a set (like selling the parts of a suit separately) to get the prices of the individual components under $100 and sell them tax-free. And the tax holiday doesn't apply to accessories, like belts, scarves and neckties.

More importantly, the sales tax holiday provides little relief to low-income Marylanders who are less able to shift the timing of their purchases to coincide with the sales tax holiday.

A better way to help families struggling to stay afloat would be to reform the tax system in Maryland to ensure the long-term revenue needed for services like education, health care, and job training that help people make their own way, take risks, and be productive. Asking out-of-state web-based retailers  to play by the same rules as those on Maryland's main streets would be an excellent start.

Is the sales tax holiday worth it? It provides a little excitement and free promotion for retailers. It gives government officials something to claim credit for. It may help families a little bit with back-to-school shopping, but few shoppers would get excited about a “giant 6%-off sale,” which would amount to the same thing. It costs us, as citizens, real money from our state treasury during a time when Maryland is cutting public services and can ill afford to make the hole we are trying to dig out of even deeper.

The bottom line is the tax holiday is not a good use of our limited resources. Interestingly, both the progressive Institute on Taxation and Economic Policy and the conservative Tax Foundation agree with me.  While the tax holiday might help consumers and businesses a little bit, a strong economy and safety net will help them more. That takes public investment and those investments take money.  There are more direct, less costly ways to help retailers and working families. We can’t afford to be spending money on gimmicks like tax holidays when we still have high unemployment and foreclosure rates, and losses of revenue needed for education and healthcare.