AT States CP 2 - Michigan 7 2023 BFHGR

AFFIRMATIVE
AT States---No Funding
States can’t fund the plan, and would have to strip every other measure to do so
Korpi 10, Director of Research and Collective Bargaining Services, American Federation of State, County and Municipal Employees (Kerry, THE IMPACT OF CONGRESSIONAL LEGISLATION ON STATE AND LOCAL GOVERNMENT REVENUES, https://www.govinfo.gov/content/pkg/CHRG-111hhrg55940/html/CHRG-111hhrg55940.htm)//BB
We have heard a lot about the recent couple of difficult years. Back in the years 2002 to 2005, we were seeing a fiscal crisis in state and local governments that, at that time, was the worst that I had seen in my years at AFSCME. And, little did we know then, it would be nothing compared to what we are seeing now. In the last couple of years, our members have experienced layoffs, furloughs, wage freezes, wage cuts, and we expect more fiscal trouble in the next 2 fiscal years. This certainly puts a strain on our members, but also puts serious strains on the public services and the people that they work for. The demand for food stamps, unemployment insurance, employment services, TANF, Medicaid, the need for child-welfare services, have all increased dramatically in this downturn. And systems that were stretched before this crisis have reached a breaking point. And the role of other public services in a bad economy may not be quite as obvious, but they are just as important--public safety, parks and recreation; libraries have become a place where people search for jobs. And they are closing and shortening hours and putting a lot of people at real hardship. So when we talk about taxes, I think it is important to remember what those taxes pay for. What we are also seeing are major policy changes enacted as a result of the budget crisis. In some states, there are fewer school days. As Governor Douglas mentioned, several states are releasing inmates en mass early, before they serve their sentences. Now, these policies certainly shouldn't be set in stone, and there is room to debate them. But we probably shouldn't just change them because we have run out of money. In addition to making budget cuts, states are biting the bullet and raising taxes by some $32 billion recently. But state and local governments are running out of options for dealing with the continuing budget problems. The American Recovery and Reinvestment Act was tremendously helpful. It closed some 30 percent to 40 percent of the deficits that states expect from 2009 to 2012. And we thank the House and the Senate for passing the $26 billion extension of FMAP, and we urge you to quickly reconcile the two versions of the bill so that these can get to states. We also urge you to continue recovery funding for schools. There was funding included in the Jobs for Main Street Act, passed by the House, and also in representative George Miller's Local Jobs for America Act, which we strongly support as well. And I want to join other speakers in strongly urging you not to restrict state's options at this critical time. There is a temptation in Congress and in states to use state-tax systems to protect particular industries, particular new or emerging industries, so that they can grow and thrive. And while that intention may be good and admirable, the result is many state- tax systems that we're good in the 1930's are completely inadequate for the 21st century. And it means that state-tax systems capture less and less economic activity over time, and those sectors that are taxed foot the bill. So in closing, we urge you to do what only the Federal Government can do, and continue to provide relief so that states and local governments can provide the services we need to get our economy on track. And we also urge you to allow them the flexibility to do what they can do to get their own budgets back on stable footing. And thank you again for calling this hearing, and for inviting me here.
Even pulling every tax lever at the state level fails to generate sufficient revenue to cover existing shortfalls
***this card is cut really long to demonstrate that the good paragraph of this card is about ALL state taxes being implemented simultaneously
David Gamage 22, Professor of Law, Indiana University—Bloomington, Maurer School of Law. Darien Shanske, Professor of Law, UC Davis School of Law. Gladriel Shobe, Associate Professor of Law, BYU Law School. Adam Thimmesch, Professor of Law, University of Nebraska College of Law (“Weathering State and Local Budget Storms: Fiscal Federalism with an Uncooperative Congress,” Journal of Law Reform, https://mjlr.org/journal/weathering-state-and-local-budget-storms-fiscal-federalism-with-an-uncooperative-congress/)//BB
II. State Corporate Income Tax Reforms We propose in this Part a number of reforms to state corporate income taxes.48Although we specifically focus on the state corporate income tax in this Part, many of our proposals apply to the taxation of business income more broadly (i.e., strategically decoupling from the tax cuts provided in the Tax Cuts and Jobs Act of 2017 and in the CARES Act) and will apply equally to states’ taxation of business income by sole proprietors and pass-through entities.Portions of this Part consist of revised and elaborated reforms first proposed in: Darien Shanske, Reuven S. Avi-Yonah & David Gamage, Reforming State Corporate Income Taxes Can Yield Billions, Medium (May 13, 2020), https://medium.com/whatever-source-derived/reforming-state-corporate-income-taxes-can-yield-the-states-billions-5a79f3d22f9b [https://perma.cc/59YM-WCU4]. Before proceeding, though, we recognize that a skeptic might note that state corporate income taxes represent only about 3 percent of state tax revenues, or about $45 billion per year.49U.S. Census Bureau, 2017 State & Local Government Finance Historical Datasets and Tables, https://www.census.gov/data/datasets/2017/econ/local/public-use-datasets.html [https://perma.cc/2DK9-4MCE] (Oct. 8, 2021) (under the “2017 State & Local Government” heading, choose the file labeled “U.S. Summary & Alabama and Mississippi”; the amount is calculated from Table 1 in that file). To put this in perspective, the initial estimates of states’ increased revenue needs caused by the recent COVID-19 economic crises were well over $100 billion annually.50See Leachman & McNichol, supra note 14; Davidson & Harrison, supra note 14. We thus fully acknowledge that the corporate income tax reforms we propose in this Part would not lead to a doubling or tripling in corporate income tax collection. Nevertheless, the reforms we propose in this Part have the potential to address at least significant portions of states’ revenue needs. For instance, moving to worldwide combination has been reasonably estimated to have the potential to raise about $17 billion per year.51Richard Phillips & Nathan Proctor, A Simple Fix for a Billion Loophole: How States Can Reclaim Revenue Lost to Tax Havens, Inst. on Taxation & Economic Pol’y (Jan. 17, 2019), https://Itep.Org/A-Simple-Fix-For-A-17-Billion-Loophole/ [https://perma.cc/W9SQ-5K3X]. That is a significant amount even on its own. Several of the other reforms below are of similar magnitude. To be sure, recession conditions might suppress some of these revenue projections—but maybe not by much, given that many firms remain quite profitable. Further, once states put these reforms in place, not only will state revenues bounce back faster during future economic recoveries, but also state governments may be able to borrow against these anticipated future revenues to meet immediate revenue needs during a downturn.52See infra Part V. That the numbers here can be large should not be too surprising; the yield of the state corporate income tax has fallen sharply over the last few decades, even relative to the decline in federal corporate income taxes.53See, e.g., Michael Mazerov, NCSL Task Force on State and Local Taxation, Legislators: Don’t Feel Guilty about Taxing GILTI, Ctr. on Budget & Pol’y Priorities, at 5 (2018), http://www.ncsl.org/Portals/1/Documents/Taskforces/GILTI.pdf [https://perma.cc/RL2E-8QUJ]. In a sense, the reforms we propose would serve to partially restore the state corporate income tax bases to their prior levels. For those still skeptical, here is another—albeit noisy—data point regarding the money that most states have left on the table, from New Jersey’s experience: 54State of New Jersey, Summary of Budget Recommendations for the Fiscal Year 2021: Budget in Brief 42–44 (2020), https://www.state.nj.us/treasury/omb/publications/21bib/BIB.pdf [https://perma.cc/F2KC-6GQ2]. Corporate business tax does not include energy tax. Figure 1. New Jersey’s Corporate Business Tax (in Billions) This chart demonstrates extraordinary growth in New Jersey’s corporate income tax after it passed several sensible reforms: in 2018, the state conformed to the global intangible low-taxed income regime under the federal Tax Cuts and Jobs Act of 2017 (TCJA), taxed 5% of the repatriation, moved to combined reporting (for 2019), and imposed a 2.5% corporate income tax surcharge for 2018 and 2019 (1.5% for 2020–21).55Assemb. B. 4202, 218th Leg., Reg. Sess. (N.J. 2018). To be sure, the actual 2020 numbers might be lower because of the pandemic, and any number of other factors bespeak caution in extrapolating too far from one state’s experience. Nevertheless, this chart indicates that—consistent with other data, some of which we discuss below—the state corporate income tax can be reformed in sensible ways that yield significant revenue. It is not a good thing, in our view, that states have let their corporate income taxes wither when there is so much to be gained from straightforward reforms. States should broaden their corporate tax bases, period; in a crisis, however, the failure to do what should have already been done represents an opportunity. States need only engage in some ordinary good tax housekeeping to revive their corporate income taxes. Critically, the corporate tax should be part of the mix because it is, at least in part, a progressive tax.56The incidence of the corporate income tax is an enduring mystery, but the common assumption is that it is roughly progressive—that is, that it falls at least substantially on the owners of capital as opposed to workers. See, e.g., Edward G. Fox, Does Capital Bear the U.S. Corporate Tax After All? New Evidence from Corporate Tax Returns, 17 J. Empirical Legal Stud. 71, 72 (2020); David Gamage & John R. Brooks, Tax Now or Tax Never: Political Optionality and the Case for Current-Assessment Tax Reform 25 (Indiana Legal Stud. Rsch. Paper No. 437, 2021), https://ssrn.com/abstract=3801164 (“[M]ost analysts consider [the corporate income tax] to be at least somewhat progressive.”). As discussed earlier, those hardest hit by crises are typically at the bottom of the income distribution. Though there is certainly a case to be made for raising money somewhat regressively in order to spend it progressively, we should not start with such taxes if there is other low-hanging fruit. The reforms we propose, in a thumbnail sketch, are as follows: A. Shift to mandatory worldwide combination.57For further development of this argument, see generally Darien Shanske, White Paper on Eliminating the Water’s Edge Election and Moving to Mandatory Worldwide Combined Reporting, 89 Tax Notes State 1181 (2018). Multinational corporations are still shifting domestic profits abroad.58See infra Section II.A. States can counter this by (reasonably) including these foreign subsidiaries in their corporate tax base. B. Conform to GILTI.59For further development of this argument, see generally Darien Shanske & David Gamage, Why States Should Tax the GILTI, 91 State Tax Notes 751, 751–54 (2019); Darien Shanske & David Gamage, Why States Can Tax the GILTI, 91 State Tax Notes 967, 967–70 (2019); Darien Shanske & David Gamage, States Should Conform to GILTI, Part 3: Elevator Pitch and Q&A, 94 Tax Notes State 121, 121–24 (2019). The TCJA made a half-hearted attempt to combat income shifting. Though moving to worldwide combination would be better, conforming to GILTI at the state level is the minimum measure that a state should take. C. Strategically decouple.60These proposals were first presented in shorter form in: Darien Shanske, Adam Thimmesch, & David Gamage, Strategic Nonconformity, State Corporate Income Taxes, and the TCJA: Part II, 97 Tax Notes State 123, 123–25 (2020). The TCJA and the CARES Act provided a wide range of corporate tax cuts from which states should consider decoupling. D. Income tax surcharge.61The proposals offered in this Section and the three that follow were first presented in Shanske et al., supra note 48. A handful of major corporations will likely be very profitable over the next few years. States should add a temporary income tax surcharge to tax some of these profits. E. Suspend some tax credits. States have been generous in giving large corporations credits reducing their corporate income tax.62See infra Section II.E. Credits of this magnitude were probably never prudent, but given the current crises, it is a particularly apt time to suspend these credits. F. Reform the sales factor. States generally divide the income of multijurisdictional corporations based on their share of a corporation’s sales.63Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159 (1983). Some taxpayers have become skilled at manipulating the location of sales, but there are ways to make the formula harder to game. G. Expand the corporate income tax to include all large businesses. For decades, there has been a shift to the use of noncorporate business entities.64William F. Fox & LeAnn Luna, Do Limited Liability Companies Explain Declining State Corporate Tax Revenues?, 33 Pub. Fin. Rev. 690, 715–16 (2005). It has never made sense that only corporations pay taxes at the entity level. This should be corrected. H. Other reforms. States should, at times, strategically conform to federal tax changes, such as repatriation. A. Mandatory Worldwide Combination States have long confronted the problem of how to tax the income of a multistate business. In general, as a matter of constitutional law, each state can tax only income generated in the state,65See, e.g., Franchise Tax Bd., 463 U.S. 159. but how does one calculate that for an integrated multistate business like a railroad or Apple? If one asks a taxpayer to determine the state in which an integrated multistate business generated income, that taxpayer will naturally argue that most of the business’s income is generated in a low-tax or no-tax state. States arrived at an especially effective solution to this problem. Instead of asking a multistate business to divide up its income, some states ask the business to report all of its income, including income nominally earned abroad, and then apportion some of the income to each state by means of a formula.66Id. The most common modern formula uses the percentage of sales within a state because, among other reasons, the location of a firm’s customers is more fixed than a firm’s other assets.67 . Darien Shanske, A New Theory of the State Corporate Income Tax: The State Corporate Income Tax as Retail Sales Tax Complement, 66 Tax L. Rev. 305, 312–14 (2013); State Apportionment of Corporate Income, Fed’n of Tax Adm’rs (Jan. 2021), https://www.taxadmin.org/assets/docs/Research/Rates/apport.pdf [https://perma.cc/J3SS-7869]. So how much of Apple’s total income is generated in a given state under this system? The answer is the same percentage as the percentage of Apple’s sales within that state. Note that this method—mandatory worldwide combination—eliminates the incentive to shift income to a low-tax jurisdiction. It does not matter where the income is nominally earned because it all goes in the same pot and is multiplied by the usual formula (percentage of sales) to apportion the income.68See generally Jerome Hellerstein & Walter Hellerstein, State Taxation ch. 8 (2020) (discussing the apportionment of corporate income for purposes of the state income tax). The U.S. Supreme Court has upheld mandatory worldwide combination twice.69Barclays Bank PLC v. Franchise Tax Bd. of Cal., 512 U.S. 298, 321–31 (1994); Franchise Tax Bd., 463 U.S. at 196. After the first win for the states, in 1983,70Franchise Tax Bd., 463 U.S. at 196. U.S. trading partners pressured the federal government, which in turn pressured the states, not to use mandatory worldwide combination. The states capit­ulated and offered—and still offer—multinational corporations what is called a “water’s-edge” election, which, for the most part, allows corporations not to combine income earned abroad.71Shanske, supra note 57, at 181–82. That is, as to which income of a multinational is domestic and which foreign, the water’s edge election allows a corporation to force the state to accept its accounting. Naturally, the availability of a water’s-edge election encourages multinational corporations to shift income abroad to escape state taxation. Eliminating this election could therefore allow states to tax a substantial portion of the income that multinational corporations continue to shift to low-tax jurisdictions. As noted above, one respected estimate is that states could raise about $17 billion through moving to worldwide combination.72Phillips & Proctor, supra note 51. B. Conforming to GILTI Global Intangible Low-Taxed Income (GILTI) is a category of income added to the federal tax code by the TCJA.73I.R.C. § 951A. GILTI is income nominally earned by the foreign subsidiary of a U.S. corporation that federal tax law deems to have been earned someplace else, such as the United States.74See id. In other words, by means of a formula, the federal corporate income tax uses GILTI to combat the same income-shifting problem that is targeted by worldwide combination. Though there is some complexity, all a state with a corporate income tax has to do is subject GILTI to state corporate tax, and then that state would also be combatting income stripping. The state can then use the same formula that it would ordinarily use to divide up the income of a multinational corporation.75See generally Darien Shanske, How the States Can Tax Shifted Corporate Profits: An Application of Strategic Conformity, 94 S. Calif. L. Rev. 251 (2021) (discussing the various complexities). A state cannot conform to GILTI and adopt worldwide combin­ation; the two are substitutes because both are attempts to ferret out shifted income. A state could offer taxpayers a choice between the two. Between worldwide and GILTI, worldwide is better from the state’s perspective because it simply includes all the income of a multinational corporation without the intrusion of the complicated federal formula for picking out suspect income. That said, conforming to GILTI may be easier politically (and, arguably, administratively), as it requires little more than adding a sentence to the state corporate income tax code that the state is conforming to a provision of the federal tax law meant to combat income shifting. This conformity could raise a lot of revenue; the Penn Wharton Budget Model estimates $382 billion in total GILTI for 2020.76Global Intangible Low-Taxed Income, 2020–2030: Estimates for the U.S. and Massachusetts, Penn Wharton Univ. of Pa. Budget Model (Feb. 25, 2020), https://budgetmodel.wharton.upenn.edu/estimates/2020/2/25/gilti-2020-2030-us-ma [https://perma.cc/FQ5Z-F983]. If states were to follow the federal government and tax half of GILTI, and do so at a 5% rate, then the taxes would yield almost $10 billion annually. To be sure, this is an estimate—and a pre-pandemic estimate at that, like all the estimates we provide. That said, broadening the base in this way is sound tax policy. The ensuant revenue will remain substantial even during a recession given that some firms, quite possibly with a lot of GILTI, are likely to remain profitable.77A related—and comp

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