Friday, March 05, 2010
TAX CREDITS HAVE MULTIPLE INTERPRETATIONS
The Governor has proposed a moratorium on certain tax credits in the State of Oklahoma. He suggests that doing so would add some $300 million to funds available to alleviate shortages of up to $900 million in next year’s budget for the state. Some republicans in legislative leadership positions are squealing as though their pig had been stuck. Should this make us wonder why?
First of all, we need to be sure that we understand the meaning of tax credits. Is this the same as tax deductions? Is a tax credit the same as a tax break? Are tax credits handed out to everybody, or are tax credits restricted only to persons or companies who meet certain criteria? Are tax credits fair? Is a tax credit the same as a tax cut? These are all good questions.
Perhaps we should start with the last question first. Is there a difference between a tax credit and a tax cut? The answer is “No,” not as far as the negative effect on state revenue available to meet the state’s needs. Tax credits are tax cuts. The major difference is that the tax credit is a not a cut in taxes for everyone. They are selective – just for those who are defined to be qualified for the tax credit. Everybody else pays the tax.
This brings up the second question: Are tax credits fair? The answer is, “No.” Tax credits are given only to those who are especially defined by legislators as deserving of them. Everybody else pays the tax as levied. For tax credits to be handed out, supposedly the receiving person or business is doing something of high priority for the good of the state. What kind of good thing? Perhaps they started a new business, brought a job to town, put insulation in an attic, bought farm equipment or supplies, bought an electric vehicle, added a job to their business, and the like. Tax credits work just like tax exemptions.
It should be understood that every tax break of any kind is set up to serve a special interest group, usually one with a voting bloc, hired lobbyists, and big campaign donors. By definition these are unfair to others.
Have you seen a listing on your state tax return lately showing all the credits and rebates for which you (or your more favored friends) might be individually qualified? The list is long, but our legislature just keeps adding to it. And our revenue keeps shrinking. Tax credits can become quite chilling to state income.
A tax deduction is not the same, although tax deductions can add up to big money. A tax deduction is an authorized subtraction from a person’s income, or a company’s net profits, to determine net taxable income. It is a deduction from the income upon which a tax rate is then levied. Thus the cost of a tax deduction to the state is around 5% or less than its cost would be as a tax credit. Authorized deductions have been growing, but not at the rate of credits. Most deductions go to nearly everybody, while others go to a few. Some beneficiaries would prefer that you remain confused about the difference.
While we are not discussing tax rates at any length, we should also understand that not all income is taxed alike, i.e. not the same rate as a worker’s earned income from a job. Growth in wealth, i.e. capital gains (property or intangibles sold at a profit) may be taxed at much lower rates. It is important to be aware that payroll taxes, such as social security and Medicare, paid by all workers, are not paid on income from capital gains. That is nearly a 10% federal/state tax break, in addition to the lower rate levy.
Unrealized capital gains (gains in market value, but retained and not sold), may not be taxed at all by either the state or federal government. Without inheritance taxes, most unrealized capital gains will never be taxed at all from generation to generation to generation. That is one way family wealth is accumulated, kept, and increased.
Another concept, more difficult to accept, is that a tax cut or a tax credit has the same effect on the state as an expenditure. Thus, in making a decision to grant (or continue) a tax credit, a legislator should ask himself, “Would I spend taxpayers’ dollars to buy this value?” It means the same to the state’s finances, because every dollar in income given away as a tax credit is the same as giving away a collected state dollar to that company or person. The real question is: “Is it in the state’s interest to give this dollar away to these people for this purpose?” Often that answer becomes, “No!”
That question becomes further complicated during a period of revenue shortfalls which causes budget cuts for schools, prisons, child welfare, senior services, children’s food programs, mental health treatment, and all kinds of services needed by citizens. Legislators should ask, “Is this tax break really important enough for us to continue to take money away from vital state services and give it to these companies or this class of people. Which is more important to the welfare of the citizens of the State of Oklahoma?
Some of the general categories into which some existing tax credits fall include the following, according to the Oklahoma Policy Institute:
Corporate tax credits, inc. jobs -- $120 Million; Used car dealers excise tax -- $70 Million; Agriculture sales tax exemptions -- $64 Million; Oil and gas incentive rebates -- $57 Million; Livestock, out of state deals -- $48 Million
Sales of advertising -- $48 Million; Corp. tax cr., rural venture capital -- $45 Million; Manufacturers property taxes -- $45 Million; Other venture capital -- $27 Million.
The listing above is only a partial one. For a much more complete listing, the reader is referred to the Oklahoma Policy Institute’s website. A listing of the Governor’s recommendations for a moratorium is also available on the internet.
The point made here is that the number and the dollar amounts of tax credits and tax breaks are significant enough to be outright stupefying. It is high time that questions were raised about these. It is time that a careful scrutiny, free of political bias, is made of all these drags on the state’s treasury and economy.
Should we really be giving the state’s money away while state services are suffering?
Dr. Edwin E. Vineyard, AKA The Militant Moderate
First of all, we need to be sure that we understand the meaning of tax credits. Is this the same as tax deductions? Is a tax credit the same as a tax break? Are tax credits handed out to everybody, or are tax credits restricted only to persons or companies who meet certain criteria? Are tax credits fair? Is a tax credit the same as a tax cut? These are all good questions.
Perhaps we should start with the last question first. Is there a difference between a tax credit and a tax cut? The answer is “No,” not as far as the negative effect on state revenue available to meet the state’s needs. Tax credits are tax cuts. The major difference is that the tax credit is a not a cut in taxes for everyone. They are selective – just for those who are defined to be qualified for the tax credit. Everybody else pays the tax.
This brings up the second question: Are tax credits fair? The answer is, “No.” Tax credits are given only to those who are especially defined by legislators as deserving of them. Everybody else pays the tax as levied. For tax credits to be handed out, supposedly the receiving person or business is doing something of high priority for the good of the state. What kind of good thing? Perhaps they started a new business, brought a job to town, put insulation in an attic, bought farm equipment or supplies, bought an electric vehicle, added a job to their business, and the like. Tax credits work just like tax exemptions.
It should be understood that every tax break of any kind is set up to serve a special interest group, usually one with a voting bloc, hired lobbyists, and big campaign donors. By definition these are unfair to others.
Have you seen a listing on your state tax return lately showing all the credits and rebates for which you (or your more favored friends) might be individually qualified? The list is long, but our legislature just keeps adding to it. And our revenue keeps shrinking. Tax credits can become quite chilling to state income.
A tax deduction is not the same, although tax deductions can add up to big money. A tax deduction is an authorized subtraction from a person’s income, or a company’s net profits, to determine net taxable income. It is a deduction from the income upon which a tax rate is then levied. Thus the cost of a tax deduction to the state is around 5% or less than its cost would be as a tax credit. Authorized deductions have been growing, but not at the rate of credits. Most deductions go to nearly everybody, while others go to a few. Some beneficiaries would prefer that you remain confused about the difference.
While we are not discussing tax rates at any length, we should also understand that not all income is taxed alike, i.e. not the same rate as a worker’s earned income from a job. Growth in wealth, i.e. capital gains (property or intangibles sold at a profit) may be taxed at much lower rates. It is important to be aware that payroll taxes, such as social security and Medicare, paid by all workers, are not paid on income from capital gains. That is nearly a 10% federal/state tax break, in addition to the lower rate levy.
Unrealized capital gains (gains in market value, but retained and not sold), may not be taxed at all by either the state or federal government. Without inheritance taxes, most unrealized capital gains will never be taxed at all from generation to generation to generation. That is one way family wealth is accumulated, kept, and increased.
Another concept, more difficult to accept, is that a tax cut or a tax credit has the same effect on the state as an expenditure. Thus, in making a decision to grant (or continue) a tax credit, a legislator should ask himself, “Would I spend taxpayers’ dollars to buy this value?” It means the same to the state’s finances, because every dollar in income given away as a tax credit is the same as giving away a collected state dollar to that company or person. The real question is: “Is it in the state’s interest to give this dollar away to these people for this purpose?” Often that answer becomes, “No!”
That question becomes further complicated during a period of revenue shortfalls which causes budget cuts for schools, prisons, child welfare, senior services, children’s food programs, mental health treatment, and all kinds of services needed by citizens. Legislators should ask, “Is this tax break really important enough for us to continue to take money away from vital state services and give it to these companies or this class of people. Which is more important to the welfare of the citizens of the State of Oklahoma?
Some of the general categories into which some existing tax credits fall include the following, according to the Oklahoma Policy Institute:
Corporate tax credits, inc. jobs -- $120 Million; Used car dealers excise tax -- $70 Million; Agriculture sales tax exemptions -- $64 Million; Oil and gas incentive rebates -- $57 Million; Livestock, out of state deals -- $48 Million
Sales of advertising -- $48 Million; Corp. tax cr., rural venture capital -- $45 Million; Manufacturers property taxes -- $45 Million; Other venture capital -- $27 Million.
The listing above is only a partial one. For a much more complete listing, the reader is referred to the Oklahoma Policy Institute’s website. A listing of the Governor’s recommendations for a moratorium is also available on the internet.
The point made here is that the number and the dollar amounts of tax credits and tax breaks are significant enough to be outright stupefying. It is high time that questions were raised about these. It is time that a careful scrutiny, free of political bias, is made of all these drags on the state’s treasury and economy.
Should we really be giving the state’s money away while state services are suffering?
Dr. Edwin E. Vineyard, AKA The Militant Moderate
