Tip of the Hat to Wyden, Wag of the Finger to Bradbury on Tax Breaks

Steve Novick

In the tradition of Stephen Colbert … it’s my very first edition of Tip of the Hat / Wag of the Finger! Today’s topic is ‘tax breaks and statewide candidates.’  Today I am tipping my hat to Ron Wyden, who is proposing a job-creating attack on one of the biggest, most problematic Federal corporate tax breaks, the deferral of taxation on profits American multinationals make in other countries (a break which filters down to the State level as well) … and wagging my finger at Bill Bradbury, who is offering up the complete fantasy that we can solve our State budget problems by cutting $2 billion in unnamed tax expenditures.

Full disclosure: My former campaign manager is now running Ron Wyden’s re-election campaign and I have endorsed John Kitzhaber. But I also have a long history of calling for abolition of the foreign profits deferral and of warning fellow Democrats about various incarnations of the tax expenditure fantasy – which might fairly be called the Left’s version of the Right’s “waste fraud and abuse” fantasy.

First, Ron Wyden. Under current American tax law, an American multinational that makes profits overseas does not pay American taxes on those profits until it brings the money home. That creates an incentive to do business in overseas tax havens, move jobs to overseas tax havens, and keep money in overseas tax havens.  It also creates an incentive for companies to play games with numbers – for example, engage in intra-corporate transactions that have the effect of artificially increasing the amount of profits attributed to the corporation's operations in the low-tax foreign country and decreasing the amount attributable to American operations. (The multinational gets to deduct the taxes it pays to the other country, so the deferral only matters if it’s doing business in a lower-tax country.) 

In his recent tax reform bill, submitted with Republican Senator Judd Gregg, Ron would eliminate the deferral. He’d also reduce the official corporate profits tax rate.  Which is all right with me; right now the U.S. officially has one of the highest profits tax rate in the world (a great talking point for the right wing), but what corporations actually pay bears no relationship to that official rate.  Promoting American job growth and taking away a right-wing talking point at the same time … that’s what I call a win-win.

Ron’s bill – or, alternatively, a State bill that would disconnect Oregon from the ‘deferral’ part of the Federal tax code – would generate about $33 million per biennium of tax revenue for the State of Oregon. I think that if Ron doesn’t succeed at the Federal level, our Legislature should do that disconnect. $33 million is real money. I also think (based on my review of the State Tax Expenditure Report’s comments on the issue) that the Legislature should at least consider eliminating the special tax break for like-kind exchanges of real estate, a special break for certain complex real estate transactions. That would be another $22 million.

But beyond that, when I go through the State’s Tax Expenditure Report – which I have done, thoroughly and repeatedly, numerous times since 1997 - I don’t see many obvious tax break targets. Which is why I’m very frustrated by Bill Bradbury suggesting that he can fund schools and other services by cutting $2 billion in ‘tax expenditures,’ without making any attempt to explain WHICH $2 billion in tax expenditures. 

The fact is that the biggest tax expenditures are mostly things like the home mortgage interest deduction, and the exemption of employee health benefits from taxation. I don’t hear Bradbury taking on the home mortgage interest deduction, or proposing taxing employee health benefits as income. (The BETC is an unusual case of a tax expenditure that did become – justifiably – a juicy political target.) 

What Bradbury is doing is saying (I’m quoting his web site): “Currently, the state forgoes about $30 billion in tax revenue per biennium, more than the spending for education, health care and public safety combined. As Governor, I will work to reduce this lost revenue by 5 percent, either through the Legislature or through the voters by ballot measure.” 

Well, my friends, that is exactly as intellectually barren a statement as Chris Dudley’s statement that he will set aside 3% of the State budget in a rainy day fund without saying what parts of the budget he would actually cut.  If we don’t accept right-wingers blithely asserting that it’s easy to cut 5%, or 3%, of the budget for services, without specifics, we shouldn’t accept progressives blithely saying that we can easily cut 5% of the tax expenditures, without specifics.

I would add that in a way, Bradbury’s talking point is an insult to our bold legislators, like Phil Barnhart and Ginny Burdick, who bit the bullet and passed the bills that became Measures 66 and 67. If there were $2 billion in wasteful tax breaks lying around, wouldn’t Barnhart and Burdick have cut them?

Ron Wyden has taken a bold step – one that will alienate many big, powerful interests – toward changing the Federal tax code in a way that would encourage job growth in America, rather than in overseas tax havens. Bill Bradbury has offered up $2 billion in fools’ gold. I honor Bill for being out there with us on the front lines for Measures 66 and 67; that was real.  What he’s saying about tax expenditures. Is fantasy. 

Comments

  • grudging apology (unverified)
    (Show?)

    When I first heard Wyden was working with Gregg on tax reform I assumed it would be a right wing proposal and I was a little too quick to attack the proposal. I frequently find Wyden's insistence on working with the right wing exasperating, and I let him and his proposal have it pretty good. But if he is really eliminating deferral in this proposal and convinced Gregg to go along, that is huge news. I don't remember the Oregonian reporting that in their story on the Wyden bill. There is no single tax policy more responsible for the outsourcing of American jobs than deferral.

    If you have your facts straight Mr Novick, I was wrong. With Wyden's seniority, at least we now know that eliminating deferral will be in play when Congress gets around to fixing the Bush tax cuts.

    Can we get Blumenauer to come out for ending deferral? He is becoming an important guy on the Ways and Means Committee.

  • (Show?)

    I too applaud the Wyden proposal. When I worked at Intel years ago we made a studied effort to ensure that all our profits were earned in Malaysia where we had a 20 year tax holiday. If the corporate tax rate could be reduced the real beneficiary will be small C corporations that don't have full time tax accountants and overseas subsidiaries. In fact a lot of the companies that fought M66/67 like restaurants and construction companies and their trade groups like the ORA and AGC should get on board.

  • JonB (unverified)
    (Show?)

    this may be a bit tangential to this subject, but I wanted to note that I just released a new report calling for greater transparency and accountability of tax expenditures in Oregon.

    One of the value-added features of it is that I created a google doc spreadsheet you can download of all tax expenditures in Oregon that corporations can benefit from. Part of my point is that the state should be doing that with the TER instead of just posting it as a pdf document.

    Better understanding of the effectiveness of tax expenditures is in my opinion the first step in determining if any, and which ones, could be eliminated or changed.

  • David (unverified)
    (Show?)

    Bradbury's proposal, in truth, is only partial fantasy. I too have been through the tax expenditure book and I would agree that finding $2 billion in easy or even moderately difficult tax break eliminations is a monumental task. But it doesn't mean that we should give up on the task. There is real reform of the tax expenditures that is long overdue and I would applaud Senator Burdick and Representative Barnhart for instituting a blanket sunset on all tax expenditures to that we can have that conversation.

    While there isn't $2 billion to be had there, we also shouldn't dismiss the idea as total fantasy, but should instead, put it in perspective as a great part of the whole solution. What size the part is, remains to be seen, but I am certainly willing to admit that it's probably, at best, 25% of the solution. Just as 66 & 67 were not the whole solution but only part of it, we do a disservice if we simply dismiss the idea out of hand.

    So I will say a "Tip of the hat" to you Steve for calling Bill to task on the decided lack of depth in his proposal, but a "wag of the finger" to you for not acknowledging that there is some substance here. Some substance that I know you agree with given your work on this issue in the past.

  • (Show?)

    Some good info Steve, thanks. My only point would be that 66/67 were part of a package of gap filling moves, some of which I thought did in fact involve some closing of loopholes. So I think the idea of an implicit insult on the Leg maybe takes things too far.

    Question: are those expenditure subtotals biennium based or annual? Ie, should we be doubling the example amounts you cite?

  • (Show?)

    I would add that in a way, Bradbury’s talking point is an insult to our bold legislators, like Phil Barnhart and Ginny Burdick, who bit the bullet and passed the bills that became Measures 66 and 67. If there were $2 billion in wasteful tax breaks lying around, wouldn’t Barnhart and Burdick have cut them?

    I don't disagree with your basic premise, Steve, but one point worth making is that the legislature placed a sunset on every tax credit during the last session, which should make it much easier for future to eliminate wasteful tax expenditures (presumably every one will have to be looked at and justified before it is continued).

  • Patrick Story (unverified)
    (Show?)

    Sal,

    "The legislature placed a sunset on every tax credit . . . ."

    But they extended the BETC sunset from next year until, if memory serves, 2014. Is that really placing a sunset, or is it eliminating one?

  • JonB (unverified)
    (Show?)

    Sal, it was every STATE INCOME tax credit. There are still a lot of tax expenditures that are PROPERTY tax breaks that don't have sunsets. And we also need to be looking at the federal tax breaks that we are connected to. HB 2067 was a great start in getting some more accountability through more sunsets, but there are a lot more that aren't sunsetted.

  • (Show?)

    JonB - Thanks for making that clarification.

  • tomw (unverified)
    (Show?)

    Okay, this is a naive question, but you quote Bill saying the state is forgoing tax revenues but take him to task for calling out tax expenditures. Isn't there a difference? Not that he said so, but couldn't this also include the federal matching funds that we often don't get because the legislature won't pony up the $1 to get $2? Honestly want to know.

  • Stephen Amy (unverified)
    (Show?)

    It's about fifteen years too late for Ron Wyden as regards tweaking the federal tax code in a way which might encourage more employment in the United States.

    For years I followed the Jobs With Justice directives and asked Sen. Wyden to oppose free-trade agreement after agreement. The answer from the staff usually was, "Ron's a free-trader."

    And this tweaking of the code will not do anything to curb the proliferation of sweatshop labor. Sure, companies will now have to pay a fair tax on profits earned overseas, but they still will go where they can get desperate people to work for practically nothing because, tax or no, there's nothing like low-overhead.

    You know, the 1972 Republican platform called for protecting US jobs against the influence of cheap overseas labor. Ron Wyden is too far to the right to agree with Richard Nixon's GOP platform!

    Ron Wyden is emblamatic of why the Democratic Party don't mean squat, anymore.

  • Stephen Amy (unverified)
    (Show?)

    I'm sure you've all heard Thom Hartmann's advocacy of return to the type of tariffs for trade that existed for most of the history of the United States. Such a step would really protect U.S. jobs.

    But then Hartmann occasionally has Ron Wyden on the show, and they discuss something other than trade policy. And Hartmann concludes the interview by saying "Ron Wyden- one of the good guys".

    I think if Wyden's ass isn't kissed, then he will freeze you out. I think he's secure enough in his incumbency that he will not give access to anyone who does not show a degree of obeisance.

    Could be why BlueOregon is always praising him- they want to have access to the Senator.

  • (Show?)

    Steve, I see a global economy in which most economic growth during the next few decades will take place outside the US. For our Oregon economy to grow, and for there to be good jobs here, we need to sell more of our goods and services in those foreign markets. I don’t see the multinational corporation tax change you propose as helping.

    For examples, I saw one estimate that 80 percent of global growth in the next few decades will be in emerging markets, think BRIC (Brazil, Russia, India, China) plus a few others. With 1.3 billion people, China alone has more than four times as many people as the United States. With a GDP approaching $5 trillion, China now has an economy about one-third the size of the $14 trillion US economy. But China’s economy is now growing much more rapidly than ours. Various recent forecasts estimate that China’s economy will be as large as the US economy in 2027, or 2032, or 2035. Two forecasts for 2050 have estimated China’s economy as either 20 percent larger than or twice as large as the US economy.

    These large, growing markets are big economic opportunities for Oregon. We need to structure our tax (and education) system to go after these markets. We can go after these markets either with corporations headquartered in Oregon (or elsewhere in the US) or through corporations headquarter abroad. I think it is to our advantage to have multinational corporations headquartered in Oregon (or the US). I see the tax change you (and Wyden) propose as giving multinational corporations financial incentives to move either abroad or to another state (if only Oregon imposes such a tax).

    As I understand the tax rules, and I’m no tax expert, the international rules are similar to rules between states. Oregon taxes profits made in Oregon, we don’t tax profits made in California, even for corporations headquartered in Oregon. That’s the general rule between states, as I understand it. Why should Oregon treat profits made in China, or elsewhere abroad, any different than profits made in California?

    I do not see such a tax change as bringing many jobs home. If it is cheaper to produce or provide services abroad using foreigners, it remains cheaper if, in reaction to the new tax, the corporation moves its headquarters abroad. If they stay in Oregon (or the US), they may just pay the tax (assuming their product or service is still profitable abroad after such taxes). Or, if it is no longer profitable, they stop production or providing the service. Some other competitors will probably pick it up. No jobs move.

    We’re not talking about goods made abroad and shipped to the US for sales. We’re talking about goods and services sold abroad. I don’t know whether in determining “profits” that it matters where the costs were created (here or abroad).

    Under what conditions might they bring those jobs (the ones abroad producing the now taxed profits) back to Oregon? I can’t think of any, but welcome your and others thoughts.

  • (Show?)

    Taxation on repatriation doesn't encourage the export of jobs, just reported profits. Multinational companies headquartered in high tax countries want to keep expenses at home and recognize their profits abroad. Since there are lots of ways to produce this outcome even where recognition isn't delayed, eliminating this provision won't matter very much.

    Lowering the US corporate tax rate probably will. (Oregonians might wonder why pay a higher proportion of their total state tax payments to other state governments than the inhabitants of any other western state).

    This is not a criticism of Wyden-Gregg, which would be a huge improvement on the status quo.

  • Who is insulting who? (unverified)
    (Show?)

    ONE

    John Kitzhaber -- does absolutely nothing to help pass Ballot Measures 66 and 67, selfishly calculating that should the measures fail, support for tax increases could harm his chances in November.

    Bill Bradbury -- sticks his neck out like a leader and actively supports Ballot Measures 66 and 67.

    Steve Novick -- claims Bradbury has insulted Barnhart and Burdick, the legislators who put forward the tax increases.

    Obvious question: how do Barnhart and Burdick feel about Kitzhaber's apathy on M66 and M67? Maybe...insulted?

    TWO

    John Kitzhaber -- talks about a sales tax again at Lake Oswego debate with Bradbury

    Bill Bradbury -- based on years of experience as a legislator, suggests a thorough re-examination of tax expenditures with the aim to reduce them by 5%

    Steve Novick -- no comment on Kitzhaber, but says Bradbury is in fantasy land.

    Obvious question: does anyone think a sales tax is gonna happen in Oregon? So who's in fantasy land?

    THREE

    You won't find any comments here from Steve Novick about Kitzhaber's position that our education model is broken, when is fact Kitzhaber appointed the commission that created the Quality Education Model.

    You won't find any comments here from Steve Novick about John Kitzhaber not bothering to vote in November 2007 when land use planning in Oregon was in danger of extinction, and when a cigarette tax proposal if passed would have extended health care to thousands of Oregon children (a measure even Novick took time out from his Senate campaign to work for).

    The reason: consider the source. Novick has endorsed Kitzhaber for governor. That's why you're getting a one-sided account falsely claiming Bradbury has insulted legislators and dwells in fantasy land, and entirely ignoring Kitzhaber's own ineptitude.

    The motivation: SELF INTEREST. Novick has calculated, like some folks with a good deal of money, that Kitzhaber is likely to win, and being on Kitzhaber's good side come January 2011 may be quite beneficial to....Steve Novick.

    While I applaud all of Novick's efforts to pass M66 and M67, when he takes a side in a primary race, he's a hack with hyperbole. Blue Oregon deserves better posts than this.

  • bradley (unverified)
    (Show?)

    There is a large distance between Novick having a preference and qualifying as "a hack."

  • Zarathustra (unverified)
    (Show?)

    Maybe it's just me, but this post and run style has me feeling that the finger is always being wagged at the BO readership.

  • surefoot (unverified)
    (Show?)
    <h2>Senator Wyden has been in the Senate for a time, and all the while the U.S. economy has decline, it time for Oregon to replace him. Being antiwar, can anyone tell me why the senator went to a funeral of a Black Water Contractor? Senator best ability seem to be vote counting so he can stay out of harms way.</h2>

connect with blueoregon