Initial guidance issued on Sec. 83(i) deferral election for private company equity grants

IRS Tax News – Initial guidance issued on Sec. 83(i) deferral election for private company equity grants
The IRS issued initial guidance on the application of Sec. 83(i), which allows certain employees to defer recognition of income attributable to the receipt or vesting of qualified stock.
Source: IRS Tax News – Initial guidance issued on Sec. 83(i) deferral election for private company equity grants

Does Your State Have a Throwback or Throwout Rule?

Tax Policy – Does Your State Have a Throwback or Throwout Rule?

This week’s state tax map examines states that have a throwback or throwout rule in their corporate tax code. Throwback and throwout rules are not widely understood, but they have a notable impact on business location and investment decisions.

For purposes of corporate taxation, multistate businesses are required to apportion their income among the states in which they operate. Most apportionment formulas assign weighting among three factors–property, payroll, and sales–to determine the amount of income taxed by each state in which the business operates. The goal of apportionment is to prevent double taxation of corporate income, but there is wide variation among states in how apportionment formulas are designed. For example, some states weight the three factors equally, while others weight the sales factor more heavily or use it as the only factor.

Varying state corporate income tax practices sometimes result in businesses having what is known as “nowhere income,” or income that is not taxed by any state. States with throwback or throwout rules seek to counter this phenomenon by requiring 100 percent of profits be apportioned among states. As such, businesses with nowhere income are required to “throw” that income “back” into a state where it will be taxed, even though that income was not earned in that state.

Although throwback rules are more common, three states adopt what are known as throwout rules. The difference is in how the “nowhere income” is treated. In both cases, the state is looking at a fraction: the amount of sales associated with the state over total sales. With a throwback rule, “nowhere income” is placed in the numerator (the amount apportioned to the state). With a throwout rule, it is removed from the denominator (the amount of total sales). Both increase in-state tax liability, though throwback rules are more aggressive than throwout rules.

Because two or more states can potentially stake claim to “nowhere income,” rules are needed to determine where that income should go, injecting another layer of complexity into already complicated state corporate tax structures. Throwback and throwout rules discourage investment and are inconsistent with the purpose of apportionment, which is to tax the share of a company’s income reasonably associated with that state—not to tax revenue clearly associated with other states just because those states choose not to tax that income.

States with corporate income taxes are nearly evenly divided between those that have a throwback or throwout rule and those that do not. The map below shows throwback rules in 22 states and the District of Columbia, as well as throwout rules in three states.

Does Your State Have a Throwback or Throwout Rule?

Errata: An earlier version of this blog post mentioned only throwback rules. The post has been revised to include throwout rules.


Source: Tax Policy – Does Your State Have a Throwback or Throwout Rule?

The Economic and Distributional Impact of the Trump Administration’s Tariff Actions

Tax Policy – The Economic and Distributional Impact of the Trump Administration’s Tariff Actions

Key Findings

  • The Trump administration has imposed $42 billion worth of new taxes on Americans by levying tariffs on thousands of products.

  • Outstanding threats to impose further tariffs mean Americans could see additional tax increases up to $129 billion.

  • Tariffs are regressive, placing a higher burden on lower-income households.

  • The $42 billion of tariffs imposed so far are estimated to reduce after-tax incomes by 0.30 percent on average. This negative effect is more pronounced for households in the middle and lowest quintiles, reducing their after-tax incomes by 0.33 percent.

  • For taxpayers in the middle quintile, this represents a decrease of $146 in after-tax income.

  • If threatened tariffs are all imposed, after-tax income for households in the bottom and middle quintiles would fall by an additional 1.04 percent, higher than the average decrease of 0.92 percent.

Introduction

The Trump administration has imposed new tariffs on steel, aluminum, washing machines, and thousands of other products that American businesses and consumers buy from China. Tariffs have been imposed as the result of various trade investigations that concluded injury to U.S. industries, national security threats, and unfair trade practices.[1] These tariffs will increase the tax burden on Americans, falling hardest on lower and middle-income households, and reduce economic output, employment, and wages.

Background

Tariffs are a type of excise tax that is levied on goods produced abroad at the time of import. They are intended to increase consumption of goods manufactured at home by increasing the price of foreign-produced goods.

Though tariffs may afford some short-term protection for domestic industries by shielding them from foreign competitors, they do so at the expense of others in the economy, including consumers and other industries, resulting in less economic output on net.

A recently published study which reviews tariff changes across 151 countries from 1963 to 2014 provides modern-day evidence of the negative effects of tariffs. The research finds that tariff increases lead to less output and productivity and more unemployment and inequality.[2] These negative effects are magnified when tariffs are increased during expansions and in advanced economies.[3]

Ultimately, tariffs result in net decreases in productivity, output, and income; consumers lose more than producers gain, resulting in a net loss to the economy.

Overview of Trump Administration Tariffs

The Trump administration has increased taxes on Americans by imposing nearly $42 billion worth of tariffs. These include the following:[4]

  • 25 percent tariff on imported steel, which amounts to about a $7.3 billion tax increase.
  • 10 percent tariff on imported aluminum, which amounts to a nearly $1.7 billion tax increase.
  • Doubled steel and aluminum tariffs on Turkey, which is a tax increase of roughly $0.34 billion.
  • 25 percent tariff on $50 billion worth of imports from China, which amounts to a $12.5 billion tax increase.
  • 10 percent tariff on $200 billion worth of imports from China, which amounts to a $20 billion tax increase.
  • Tariffs on washing machines, which amount to about a $0.15 billion tax increase.[5]

The administration has also threatened to impose $129 billion in additional import duties, which would include new tariffs on automobiles and auto parts as well as escalated tariffs on imports from China.[6] These include:

  • 25 percent tariff on Chapter 87 auto imports, which amounts to a roughly $73.1 billion tax increase.
  • 25 percent tariff, up from the 10 percent tariff, on $200 billion worth of imports from China, which amounts to a tax increase of $30 billion.
  • 10 percent tariff on approximately $267 billion of additional imports from China, which amounts to a $26.7 billion tax increase.

Economic Impact of Trump Administration Tariffs

The imposition of a tariff diverts resources away from more efficient producers to less efficient producers. Tariffs can raise the cost of parts and materials, which would raise the price of goods using those inputs and reduce private-sector output. Tariffs also result in consumers paying more for goods than they would have otherwise. Price increases such as these reduce the after-tax value of both labor and capital income; as tariffs reduce the return to labor and capital, they incentivize Americans to work and invest less, which leads to lower output.

According to the Tax Foundation model, the tariffs imposed so far by the Trump administration would reduce long-run GDP by 0.12 percent ($30.4 billion) and wages by 0.08 percent and eliminate 94,300 full-time equivalent jobs.

Table 1. Impact of Tariffs Imposed by the Trump Administration
Source: Tax Foundation Taxes and Growth Model, April 2018
Tariff Revenue (billions $2018) $41.95
Long-run GDP -0.12%
GDP (billions $2018) -$30.43
Wages -0.08%
FTE Jobs -94,300

If the administration moves ahead with its threats to impose additional tariffs, long-run GDP would fall by 0.38 percent ($94.4 billion) and wages by 0.24 percent, and 292,600 full-time equivalent jobs would be eliminated. These losses would be in addition to those in Table 1.

Table 2. Impact of Tariffs Threatened by the Trump Administration

Source: Tax Foundation Taxes and Growth Model, April 2018

Tariff Revenue (Billions $2018) $129.83
Long-run GDP -0.38%
GDP (Billions $2018) -$94.38
Wages -0.24%
FTE Jobs -292,600

Distributional Impact of Trump Administration Tariffs

The distributional effects of a tariff (the economic burden it places on households across income levels) tend to be regressive, burdening lower-income households more than higher-income households.

Tariffs are taken out of business revenue before it is distributed as compensation to factor inputs (workers and capital). This creates a wedge between what workers and capital produce and the amount they receive; in other words, a wedge between the consumer price and the producer price.

Tariffs ultimately fall on the factors of production and reduce taxpayer labor and capital income.  This occurs either by raising prices or reducing wage and capital income. Tariffs tend to be regressive because the average shares of income sources burdened by tariffs are higher for lower-income taxpayers.[7]

Our estimates of the distributional impact of the Trump administration tariffs show that lower and middle-income households experience relatively larger drops in after-tax income.

So far in 2018, the Trump administration has imposed $42 billion worth of tariffs, which we estimate will reduce after-tax incomes by 0.30 percent on average. This negative effect is more pronounced, however, for households in the lowest and middle quintiles, reducing their after-tax incomes by 0.33 percent. This represents a decrease in after-tax income of $146 for taxpayers in the middle quintile (40% to 60%). The reduction for households in the top 1 percent income range is a smaller 0.23 percent.

Table 3. Distributional Impact of Imposed U.S. Tariffs

Source: Tax Foundation Taxes and Growth Model, April 2018

Income Percentile Change in After-Tax Income
Lowest Quintile (0% to 20%) -0.33%
Second Quintile (20% to 40%) -0.32%
Middle Quintile (40% to 60%) -0.33%
Fourth Quintile (60% to 80%) -0.32%
Top Quintile (80% to 100%) -0.28%
All -0.30%

Addendum:

80% to 90% -0.31%
90% to 95% -0.30%
95% to 99% -0.29%
99% to 100% -0.23%

If the administration further escalates by imposing the threatened tariffs of $129.8 billion, after-tax incomes would drop further, falling by 0.92 percent on average. Again, households in the lowest and middle quintiles would see a larger drop in their after-tax income, which would fall by 1.04 percent if the threatened tariffs were imposed. For households in the middle quintile (40% to 60%) this represents a decrease in after-tax income of $453.

Table 4. Distributional Impact of Threatened U.S. Tariffs

Source: Tax Foundation Taxes and Growth Model, April 2018

Income Percentile Change in After-Tax Income
Lowest Quintile (0% to 20%)

-1.04%

Second Quintile (20% to 40%)

-1.00%

Middle Quintile (40% to 60%)

-1.04%

Fourth Quintile (60% to 80%)

-0.99%

Top Quintile (80% to 100%)

-0.86%

All

-0.92%

Addendum:

80% to 90%

-0.94%

90% to 95%

-0.94%

95% to 99%

-0.89%

99% to 100%

-0.72%

Table 5 combines imposed and threatened tariffs to show the distributional impact of all the Trump administration tariffs.

Table 5. Combined Distributional Impact of Imposed and Threatened U.S. Tariffs

Source: Tax Foundation Taxes and Growth Model, April 2018

Income Percentile Change in After-Tax Income
Lowest Quintile (0% to 20%) -1.37%
Second Quintile (20% to 40%) -1.32%
Middle Quintile (40% to 60%) -1.37%
Fourth Quintile (60% to 80%) -1.31%
Top Quintile (80% to 100%) -1.14%
All -1.22%

Addendum:

80% to 90% -1.25%
90% to 95% -1.24%
95% to 99% -1.18%
99% to 100% -0.95%

Conclusion

The burden of higher tariffs will fall disproportionately harder on lower and middle-income households than on upper-income households. The administration has already imposed a $42 billion a year tax increase on Americans, which will reduce after-tax incomes by 0.33 percent on average. Acting on the threats to impose an additional $129.8 billion in annual tariffs would further reduce after-tax incomes, falling by an average of 0.92 percent.

Modeling Notes

The Tax Foundation modeled the impact of tariffs with our Taxes and Growth model.[8] In the Tax Foundation’s model, tariffs are treated as a targeted excise tax on the tradable sector which ultimately fall on U.S. labor or capital and result in lower output. To model the distributional impact, we passed the tax backwards as reductions in factor income, which reduced the returns to both labor and capital income. In modeling the tariffs, we did not account for the potential reaction of foreign countries, nor the additional losses in welfare from having taxes with uneven impacts across sectors, both of which could result in additional economic effects.


[1] Chad P. Bown and Melina Kolb, “Trump’s Trade War Timeline: An Up-to-Date Guide,” Peterson Institute for International Economics, Dec. 1 2018, https://piie.com/blogs/trade-investment-policy-watch/trump-trade-war-china-date-guide.

[2] Davide Furceri, Swarnali A. Hannan, Jonathan D. Ostry, and Andrew K. Rose, “Macroeconomic Consequences of Tariffs,” International Monetary Fund, October 2018, https://www.imf.org/en/News/Seminars/Conferences/2018/02/08/~/media/86D385E4118244D88B2D6C1DADAF29C8.ashx.

[3] Ibid.

[4] See Erica York and Kyle Pomerleau, “Tracking the Economic Impact of U.S. Tariffs and Retaliatory Actions,” Tax Foundation, June 22, 2018, https://taxfoundation.org/tracker-economic-impact-tariffs/.

[5] The administration has also imposed tariffs on solar panels and washing machine parts, which are not included in the $0.15 billion figure.

[6] Erica York and Kyle Pomerleau, “Tracking the Economic Impact of U.S. Tariffs and Retaliatory Actions.”

[7] Joseph Rosenberg, “The Distributional Burden of Federal Excise Taxes,” Tax Policy Center, Sept. 2, 2015, 15, https://www.taxpolicycenter.org/sites/default/files/alfresco/publication-pdfs/2000365-the-distributional-burden-of-federal-excise-taxes.pdf.

[8] Tax Foundation, “The Tax Foundation’s Taxes and Growth Model,” April 11, 2018, https://taxfoundation.org/overview-tax-foundations-taxes-growth-model/.


Source: Tax Policy – The Economic and Distributional Impact of the Trump Administration’s Tariff Actions

South Carolina: A Road Map For Tax Reform

Tax Policy – South Carolina: A Road Map For Tax Reform

Below is a brief excerpt from South Carolina: A Road Map For Tax Reform. To download our full reform guide, click the link below.

Download The Full Book

Introduction

Two decades before he published his famous treatises on government, John Locke’s Fundamental Constitutions of Carolina were adopted as the governing document of provincial Carolina. Voltaire praised the document, encouraging his readers to “behold Carolina, of which the wise Locke was the legislator,” but the early constitution bore few marks of the philosophy for which the Enlightenment giant would later become known.

A feudal document, it upheld the prerogatives of the proprietors. Indeed, it granted them extremely broad powers; unlike the constitutions with which we are now most familiar, it did not operate as any significant check on political power. Whereas the U.S. Constitution, more than a century later, would establish a government of enumerated powers based in no small part on Lockean principles, the constitution Locke wrote had such a strong assumption of governmental authority that it never even mentions the power to tax. It simply wasn’t necessary to spell that out.

Not until South Carolina’s postbellum Constitution of 1865 did the state’s governing charter first impose any limitation on the taxing power, and not until the twentieth century did anything approaching South Carolina’s modern system of taxation come into view. And it was partly due to the boll weevil.

The destruction wrought by the boll weevil reverberated throughout the state, with farmers’ livelihoods destroyed and state revenues–already buffeted by an economic downturn after the conclusion of the First World War–plummeting. In response, lawmakers adopted an individual income tax, an inheritance tax, and a motor fuel tax, the first time the state created taxes on anything other than property and the privilege of doing business. Today, that income tax features the highest top marginal rate in the Southeast, and the highest effective rates in the region for many wage earners.

The sales tax would arrive in the 1950s, followed eventually by a proliferation of local option sales taxes—for property tax relief, for capital projects, for school district funding and education capital improvements, for transportation, and tourism development. The entire property tax system would be remade multiple times, most recently with the controversial implementation of Act 388. A robust, and often byzantine, system of fees in lieu of taxes has emerged to offset an otherwise deeply uncompetitive property tax system for many businesses. Meanwhile, local governments choose among a bevy of tourism- and accommodation-related taxes, each with their own strictures.

The problems with South Carolina’s tax code are not, ultimately, questions of revenue. South Carolina is by no means a high tax state in the main, though it can feel that way for certain taxpayers. The problems, rather, come down to questions of tax structure. This book is intended to help policymakers identify ways to make the state’s tax code more competitive.

In the following pages, we examine South Carolina’s economy, outline the existing tax structure, and offer recommendations for reforming the tax code. We seek to identify what the state does well and to point out opportunities for improvement. Underlying our analysis is the goal of enhancing South Carolina’s competitive standing and a commitment to the principles of sound tax policy—that, to the greatest extent possible, taxes should be simple, transparent, neutral, and stable, and that the best tax structures are those with broad bases and low rates.

In the course of our research, we pored over South Carolina’s tax code, dusted off old tax studies, reviewed the economic literature, and examined successful reforms implemented by other states. First and foremost, however, we talked to South Carolinians: state and local government officials, business leaders, and everyday taxpayers alike. The insights and perspectives of those who actually interact with South Carolina’s tax system inform every page of this book.

The South Carolina Chamber of Commerce commissioned the Tax Foundation to prepare a review of the South Carolina tax system and recommend possible solutions, and this book is the result. While they supported our study, they did not direct our study or any of our recommendations. We offer our thanks to the many South Carolinians of all walks of life who met with us as we worked on this book. It is our hope that this book will help reform a robust and much-needed debate about the future of the state’s tax code.

A Menu of Tax Reform Solutions

Corporate Taxes

South Carolina’s corporate income tax is imposed at a low rate, with a base heavily carved out by incentives. Many firms face little or no liability under the corporate income tax, but for others, the tax’s treatment of capital investment, combined with an antiquated capital stock tax in the form of the corporate license fee, can be an impediment to growth. Our recommendations would create a more neutral corporate tax environment which avoids penalizing capital expansion.

Improving Treatment of Capital Investment. While a number of states follow the federal government in allowing the full and immediate expensing of machinery and equipment purchases, South Carolina instead relies on an inefficient and eligibility-limited tax credit for qualified investment. A more neutral tax code would allow all corporations to fully deduct the cost of their machinery and equipment purchases in the first year.

Conforming to Federal Treatment of Net Operating Losses. Federal law now provides for unlimited net operating loss carryforwards, capped at 80 percent of tax liability in any given year. Policymakers might consider conforming to federal treatment for simplicity’s sake.

Shifting to Market Sourcing of Service Income. South Carolina has followed the recent trend of adopting single sales factor, which is popular in part because it exports a significant portion of tax liability to out-of-state firms. Oddly, however, the state continues to source service income based on the location of income-producing activity—which is, essentially, an emphasis on payroll and property for services, but sales for manufacturing and production. These policies are at cross-purposes. The state should consider aligning its policies.

Reviewing Business Tax Incentives. A growing number of states have established panels, commissions, or ad hoc committees to review tax incentives periodically. Given South Carolina’s heavy reliance on tax credits, periodic evaluation to assess return on investment is advisable.

Repealing the Antiquated Corporate License Fee. South Carolina’s corporate license fee generates little revenue but is harmful for highly capitalized businesses and is imposed without regard to ability to pay. Policymakers should consider phasing out the tax.

Individual Income Tax

South Carolina’s individual income tax features a high top marginal rate and produces high effective rates for many middle-class taxpayers and small businesses which are structured as pass-through entities and are subject to the individual income tax. Our recommendations are focused on creating a more regionally competitive individual income tax.

Lowering and Flattening Rates and Brackets. For a single filer at every level of taxable income above $70,500, South Carolina features either the highest or second-highest income tax burden in the Southeastern United States. Policymakers should consider consolidating rates and brackets, and perhaps even adopting a single-rate income tax with a more generous standard deduction. We offer several options, with flat rates ranging from 4.65 to 5.7 percent (based on the inclusion or exclusion of other policies), along with an across-the-board rate reduction within the current graduated rate structure.

Addressing Anomalies within the Graduated Rate Structure. If policymakers retain a graduated rate structure, they should consider fully eliminating the marriage penalty–ameliorated but not eliminated by a credit–which increases tax liability for joint filers and adopting full (not partial) inflation indexing to avoid “bracket creep,” where a greater share of taxpayers’ income is subject to higher rates over time.

Capping the Earned Income Tax Credit (EITC). The earned income tax credit can be a valuable tool for providing low-income family assistance structured in a way that rewards and facilitates work, particularly if lawmakers opt to adopt a single-rate income tax. However, if the EITC is permitted to expand to 125 percent of the federal amount–an amount intended to offset far higher federal tax liability–the median household in South Carolina will be just on the cusp of having any income tax liability in South Carolina. The new EITC may be a positive development, but it should not be allowed to phase all the way up to an unprecedented 125 percent of the federal EITC.

Rolling Back Tax Incentives. Some of South Carolina’s tax incentives are barely claimed at all, and others fall far short of their objectives, but they create administrative costs by their mere existence. While individual income tax credits only carve out the tax base slightly, a cleanup of the existing credit structure is appropriate.

State and Local Sales Taxes

The state’s sales tax is imposed on an extremely narrow base that exempts many goods and most services, a holdover from an earlier era. Our proposals would modernize the sales tax, bringing it in line with today’s economy.

Broadening the Sales Tax Base. A well-structured sales tax applies to all final consumer purchases, both goods and services, while exempting business inputs. South Carolina’s sales tax falls far short of this goal, and in an increasingly service-oriented economy, it erodes further each year. We offer a menu of base-broadening options to enhance the stability of the sales tax and generate additional revenue that could be used to reduce the sales tax rate or pay down reforms elsewhere.

Eliminating Impediments to Online Sales Tax Collections. Although South Carolina is moving forward with remote sales tax collections, the state is not fully in accord with the provisions commended by the Supreme Court in the Wayfair v. South Dakota case. The state should take the steps necessary to pass the “Wayfair Test,” such as adopting uniform definitions and providing lookup software, which will reduce compliance costs for sellers (and thus likely increase compliance) while providing the state greater protection against a legal challenge.

Excluding Business Inputs. South Carolina policymakers have long recognized the importance of excluding business inputs from the sales tax base to avoid tax pyramiding, but efforts to expand the scope of these important exemptions have been piecemeal, targeted at specific industries, and sometimes only made available to particularly large purchasers. We recommend eliminating eligibility requirements for exemptions and working to improve the overall treatment of business inputs in the sales tax code.

Property and Related Taxes

Act 388 remade the property tax landscape in South Carolina—and not in an entirely positive way. The exceedingly light taxation of some classes of property has resulted in heavy, uncompetitive burdens on others. Some businesses get the benefit of specially negotiated deals, while others face one of the nation’s highest tax burdens on industrial and manufacturing property. Our solutions involve reducing distortions in the property tax, creating a more competitive system and putting local–and particularly school–finance on a firmer footing.

Addressing the School Operating Costs Differential. The exclusion of the millage associated with school operating costs from taxes on primary residences yields extremely attractive effective rates for those properties, but at a cost in overall state competitiveness and, ultimately, in the ability to ensure appropriate levels of school funding. We propose options for rebalancing some of the inequities between different classes of property.

Narrowing Disparities in Assessment Ratios. South Carolina’s current property classification schedule imposes widely disparate assessment ratios on different classes of property, then exempts select property owners from feeling the brunt of those disparities. All residences should face the same assessment ratio, and, at the very least, the manufacturing and business personal property ratios require a downward adjustment.

Reforming Property Tax Limitations. Assessment limitations create serious inequities, tie the hands of local governments, and influence decisions about whether to improve or sell a property. We offer a range of options for relaxing or even repealing the assessment limitation while maintaining the protections of a rate limitation.

Reducing Reliance on Personal Property Taxes. South Carolina imposes tangible personal property taxes on business machinery, equipment, and other movable property. These taxes are nonneutral and impose high compliance costs. We list options for reducing reliance on, or even eliminating, the taxation of tangible personal property.

Business License and Accommodations Taxes

South Carolina’s local business license taxes are unusually onerous, imposing significant compliance costs on many businesses. A tangle of accommodations taxes adds to the complexity of local tax regimes. Our recommendations seek to bring about simplification and a reduction in compliance costs.

Simplifying Business License Tax Compliance. Many businesses are required to remit business license taxes to multiple–sometimes many–jurisdictions, which can be an arduous process. We offer suggestions for streamlining the process, including moving to uniform tax cycles and classification schedules, but also suggest housing collection authority in the Secretary of State’s office, creating a single point of collections but with the state agency operating only as a payment processor for local governments without ever depositing the moneys in a state account.

Granting Greater Local Authority over Accommodations and Hospitality Taxes. Local governments already stretch the bounds of what accommodations and hospitality taxes are permitted to fund. The existing constraints sometimes force governments to levy more or higher taxes than they would otherwise, since some available revenue is tied up and can only be put to lower-priority expenditures.

Comprehensive Reform

Most of our proposals can stand on their own, providing policymakers with discrete ways of improving the competitiveness of each element of the state’s tax code. Often, however, successful tax reform is more comprehensive in nature, which is not only good policy but often good politics, including additional stakeholders and facilitating a broader rebalancing of the code.

In some cases, moreover, it may be strictly necessary: reduced reliance on a counterproductive tax may require offsets elsewhere in the system. Therefore, while we intend this book to facilitate conversations about priorities within each tax type, it is also important to illustrate the ways that they can complement each other. A broader sales tax base, for instance, would raise additional revenue at both the state and local levels, which could be used to pay down reforms to other taxes.

Below, we offer four packages of comprehensive reforms, ranging from a highly aggressive overhaul of the state’s tax code to modest competitive improvements, with ideas drawn from the pages that follow. These are only four of many possible permutations, but they illustrate how a comprehensive plan could come together. We offer projections for how each plan would improve the state’s ranking on our State Business Tax Climate Index. State-level provisions are designed to be roughly revenue neutral unless otherwise noted, and the referenced sales tax base-broadening options are outlined in Chapter 5.

Option A

This approach is highly aggressive and would require significant political will. It contemplates outright repeal of the corporate income tax and its outmoded counterpart, the corporate license fee. It also simplifies and cuts the individual income tax. These reforms would be paid for by substantial sales tax base broadening, though, notably, without adding grocery purchases back into the sales tax base. (Should legislators wish to consider the taxation of groceries, at a full or partial rate, this would provide greater flexibility in considering the inclusion of other base broadeners.) This plan would also see the gradual reintroduction of the school operating cost millage onto owner-occupied real property, to help offset the cost of other property tax reforms designed to make the overall system more competitive. Option A includes:

  • Full repeal of the corporate income tax and the antiquated corporate license fee;
  • Adopting a 4.75 percent single rate individual income tax with a $12,000 standard deduction (for single filers) and the retention of the personal exemption;
  • Freezing the earned income tax credit at 2018 levels, while repealing other individual income tax credits and deductions;
  • Meaningfully expanding the sales tax base as outlined in Sales Tax Base-Broadening Option C (see Chapter 5) to offset the above reductions and repeals;
  • Implementing the reforms necessary to ensure that the state’s remote sales tax collections are legally compliant;
  • Gradually phasing the school operating costs millage back onto owner-occupied residential property;
  • Phasing the assessment ratio for nonowner-occupied real property down to 4 percent, in line with primary residences;
  • Extending the current phasedown of the manufacturing and industrial property assessment ratio to 8 percent;
  • Exempting property newly placed in service from tangible personal property taxation, reducing reliance on the tax over time; and
  • Creating a single point of collections and administration for the business license tax.

Option B

This option also contemplates sweeping reform, though it keeps the corporate income tax in place. Its rate would be reduced to 4 percent, while the individual income tax would be set at a flat rate of 5 percent. Other provisions are similar to those in Option A, except that sales tax base broadening is not as aggressive and local property tax reform is somewhat attenuated. Option B includes:

  • Lowering the corporate income tax rate to 4 percent;
  • Conforming to the federal policy of full expensing of machinery and equipment purchases;
  • Repealing the antiquated corporate license fee;
  • Adopting a 5 percent single rate individual income tax with a $12,000 standard deduction and the retention of the personal exemption;
  • Freezing the earned income tax credit at 2018 levels, while repealing other individual income tax credits and deductions;
  • Introducing modest sales tax base broadening (Sales Tax Option A) to raise enough revenue to help pay for the individual and corporate income tax cuts, full expensing, and corporate license fee repeal;
  • Implementing the reforms necessary to ensure that the state’s remote sales tax collections are legally compliant;
  • Extending the current phasedown of the manufacturing and industrial property assessment ratio to 8 percent;
  • Exempting property newly placed in service from tangible personal property taxation, reducing reliance on the tax over time; and
  • Creating a single point of collections and administration for the business license tax.

Option C

This approach focuses on a more competitive individual income tax and the reform of the least attractive elements of business taxation. It pairs an attractive 5.2 percent flat individual income tax with modest sales tax base broadening and a smattering of other reforms. Option C includes:

  • Conforming to the federal policy of full expensing of machinery and equipment purchases;
  • Repealing the antiquated corporate license fee;
  • Adopting a 5.2 percent single rate individual income tax with a $12,000 standard deduction and the retention of the personal exemption;
  • Freezing the earned income tax credit at 2018 levels, while repealing other individual income tax credits and deductions;
  • Taxing recreational services and admissions (or a smattering of smaller personal services and consumption goods) to raise enough revenue to help pay for the individual income tax cuts and business tax reforms;
  • Implementing the reforms necessary to ensure that the state’s remote sales tax collections are legally compliant;
  • Extending the current phasedown of the manufacturing and industrial property assessment ratio to 8 percent;
  • Exempting property newly placed in service from tangible personal property taxation, reducing reliance on the tax over time; and
  • Creating a single point of collections and administration for the business license tax.

Option D

This approach is more modest. It makes very limited changes to the sales tax base and phases in an across-the-board individual income tax rate reduction over time. That rate reduction is not offset but is instead intended to be phased in subject to revenue availability. Option D includes:

  • Conforming to the federal policy of full expensing of machinery and equipment purchases;
  • Repealing the antiquated corporate license fee;
  • Phasing in a 1 percentage point across-the-board individual income tax rate cut over time, subject to revenue availability;
  • Lifting the 4 percent cap on inflation indexing;
  • Replacing the joint filers credit with a doubling of bracket width for joint filers which fully eliminates the marriage penalty;
  • Adding personal care services, household maintenance, and newspapers to the sales tax base;
  • Implementing the reforms necessary to ensure that the state’s remote sales tax collections are legally compliant;
  • Exempting property newly placed in service from tangible personal property taxation, reducing reliance on the tax over time; and
  • Creating a single point of collections and administration for the business license tax.

The above options would result in the following changes to South Carolina’s rankings in our State Business Tax Climate Index, compared to the current system.

  Overall Corporate Individual Sales U.I. Tax Property

Current System

35th 19th 34th 34th 27th 27th

Option A

5th 1st 10th 32nd 27th 12th

Option B

13th 10th 11th 32nd 27th 12th

Option C

14th 16th 11th 33rd 27th 12th

Option D

21st 16th 21st 34th 27th 12th

Above is a brief excerpt from South Carolina: A Road Map For Tax Reform. To download our full reform guide, click the link below.

Download The Full Book


Source: Tax Policy – South Carolina: A Road Map For Tax Reform

A Chicago Commuter Tax Would Drive Business Out of the City

Tax Policy – A Chicago Commuter Tax Would Drive Business Out of the City

A forthcoming spike in pressure on Chicago’s public employee pension system has mayoral candidates turning anywhere and everywhere for funding to make hundreds of millions of dollars in additional retirement payments. The latest proposal? A tax on the wages of those working in Chicago but living outside city limits.

Bill Daley, among the candidates vying to replace retiring Mayor Rahm Emanuel, on Wednesday raised the possibility of creating several new taxes, including a commuter tax that would require nonresidents to send wage income taxes to City Hall.

The city’s high cost-of-living, including its already hefty tax burden, is one reason many Chicago employees commute in the first place. Each day, hundreds of thousands of individuals travel into Chicago or greater Cook County for work, including tens of thousands from Indiana. However, Chicago itself has seen several years of population decline, and even many suburbanites have become disenchanted enough to leave. Recent data from the U.S. Census Bureau shows net out-migration from Cook County and each of the surrounding “collar” counties.

A tax targeting suburban commuters would incentivize many employed in Chicago to seek work closer to home, and a departing workforce would give Chicago businesses more reason to think seriously about relocating to fiscally greener pastures. Ironically, Daley’s discussion of a commuter tax was part of a speech laying out his platform to increase Chicago’s population by over 280,000 people by the year 2030.

A Chicago Tribune editorial sheds light on why commuter taxes are so appealing to politicians: by definition, none of the people who pay a city’s commuter taxes can effect change to city leadership with their vote; instead, they’re left to vote with their feet.

While proponents of commuter taxes see them as a way to ensure nonresidents pay for the public benefits they receive while working in a city, it’s important to remember that nonresidents already pay a significant share of taxes in Chicago, including parking taxes and steep sales taxes. Further, Chicago is already known for exporting its tax burden to nonresidents. In 2008, SmartMoney magazine cited Chicago as the U.S. city with the highest tax burden on travelers.

Further, commuter taxes have lackluster track records in the other major cities in which they are levied. In a 2011 report, Chicago Inspector General Joseph Ferguson noted that a commuter tax in Philadelphia resulted in job loss in the city, and the major cities that do levy a commuter tax (Philadelphia, Cleveland, and Detroit) are all characterized by population decline and economic stagnation.

While it is tempting for local governments that are strapped for cash to look for ways to export their tax burden to nonresidents, this practice is legally dubious and creates unintended consequences that drive away employees and businesses. Ultimately, tax exporting gives constituencies a false and unsustainable sense of security, creating a temporary illusion that residents can benefit from additional public goods and services while someone else bears the cost.


Source: Tax Policy – A Chicago Commuter Tax Would Drive Business Out of the City