Bramwell's Lunch Beat: Drop in Income Taxes Catches Many States by Surprise

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House votes to give small business quicker tax writeoffs
Richard Rubin of Bloombergwrote on Thursday that small businesses would be able to write off capital purchases more quickly under a $73.1 billion tax reduction passed yesterday by the House.

Under current law, businesses can get immediate writeoffs, without spreading deductions over several years, on purchases of up to $25,000. The benefit is phased out for companies with more than $200,000 in capital purchases.

According to Rubin, the bill would raise those amounts to $500,000 and $2 million, the levels in place in 2013, and would index them to rise with the inflation rate. The proposal also would make it easier for companies to take the writeoff for spending on real property, heating and air conditioning units, and off-the-shelf software.

The House also passed a bill on Thursday that would make it easier for some businesses organized as S corporations to sell certain assets and make charitable contributions. That measure would also extend lapsed provisions indefinitely. It would add $2.1 billion to budget deficits over the next decade, Rubin wrote.

The Obama administration has threatened to veto both measures over the costs of the tax breaks not being offset.

Size of income tax drop surprises US states – study
A report issued on Thursday from the Rockefeller Institute of Government found that most states were surprised by the size of the drop in their personal income tax collections this April, even though they had expected a decline.

According to the study, personal income tax revenues in April were 15.8 percent, or $7.9 billion, below the same month in 2013, Reutersreported. From January through April, income tax collections fell 7.1 percent from the same period in 2013, Rockefeller found. Out of the 38 states for which data is available 33 registered declines. Altogether 41 states collect personal income taxes.

Because income tax collections were lower than expected, states could have to cut revenue forecasts for the budgets they are currently finalizing.

From January through April, Ohio registered the largest income tax drop from the same period a year earlier, at 31.1 percent, followed by North Dakota at 28.1 percent and Kansas at 24 percent, Reuters reported, according to the report. The large declines were also caused by legislated tax changes.

Cantor shock stalls offshore corporate tax break in Congress
Reuters also reported on Thursday that with House Republicans in turmoil after the defeat of Majority Leader Eric Cantor (R-VA) in a primary election this week, lobbyists and policy analysts said a $95 billion tax break proposal that would bring foreign profits home, known as the offshore corporate income tax holiday, was losing momentum.

The offshore income tax holiday had been gathering some support, but Cantor's defeat in the Virginia primary election damaged that, observers said. The proposal, which calls for short-term tax breaks to pay for road repairs, frustrates some conservatives who oppose more government spending and believe tax breaks should be permanent, not a one-time holiday, Emily Stephenson and Patrick Temple-West wrote on Thursday.

“Any controversial legislation … is not going to happen in a post-Cantor world because now every single member is afraid of every vote,” said Henrietta Treyz, a policy analyst at financial firm Height Analytics, according to the article. “Those especially that still have primaries to go through are very, very wary of taking any difficult votes.”

Senate Finance Committee Chairman Ron Wyden (D-OR) said eBay Inc.’s bringing offshore profits home in April might deter lawmakers from endorsing the tax holiday.

“Why have a special tax break when a major American company … brought [cash] back without a break?” he told reporters on Thursday, according to the article.

[For additional reading on the tax holiday proposal, check out this article by Brian Faler of Politico.]

Rule makers tighten accounting for ‘repos’
On Thursday, the Financial Accounting Standards Board (FASB) issued a new accounting rule that updated financial reporting guidance for repurchase agreements. Michael Rapoport of the Wall Street Journalexplained yesterday how Lehman Brothers Holdings Inc. and MF Global Holdings Inc. used that now-closed accounting loophole to make themselves appear healthier before they collapsed.

“Lehman used transactions it called ‘Repo 105s’ that were accounted for as sales to take $50 billion in assets off its balance sheet and make itself look less leveraged, particularly in 2007 and 2008, according to a report by Lehman bankruptcy examiner Anton Valukas. Lehman collapsed in September 2008,” Rapoport wrote.

“MF Global had billions of dollars in repos to maturity, which extended the duration of its repo financing so that it matured at the same time as the securities it used as collateral,” he continued. “That arrangement enabled the firm to avoid having to repeatedly refinance its borrowings, and it allowed for sale treatment under which MF Global could record profits on the transactions immediately.

“But MF Global’s trades were backed by risky European sovereign debt, and that helped prompt regulatory concerns, ratings downgrades, and margin calls – demands that MF Global put up more cash to cover losses on its investments – that played a role in the firm’s October 2011 collapse once it ran short of funds.”

How Obama can increase taxes on carried interest
According to University of San Diego law professor Victor Fleischer, all President Obama has to do to change the tax treatment of carried interest is make a phone call to the US Treasury Department.

“The administration has increasingly relied on executive branch rule-making authority to make policy without waiting for a gridlocked Congress to act,” he wrote for New York Times DealBook on Thursday. “The White House has made significant changes to education policy, immigration policy, environmental standards and climate change policy, and, most recently, student loans. And it has the legal authority to unilaterally change the tax treatment of carried interest.”

Picketers protest potential Walgreens reincorporation
About 20 picketers gathered on Wednesday morning outside the Walgreens flagship store in Chicago’s Loop to protest a potential Walgreens reincorporation in Switzerland – a move that one new report alleges will allow the company to avoid paying billions of dollars in taxes, Megan Crepeau of RedEye Chicagoreported.

“I didn’t get this card from Switzerland. I got it right here. Walgreens is an Illinois company,” William McNary, co-director of Citizen Action Illinois, said as he held up his Walgreens rewards card in front of the crowd, according to the article.

The report, a joint effort from Americans for Tax Fairness and Change to Win, accuses Deerfield, Illinois-based Walgreens of attempting to move its corporate address to Switzerland to reduce its tax rate from about 30 percent to 20 percent – which, the report claims, could save Walgreens $4 billion over five years, Crepeau noted.

A merger with Swiss company Alliance Boots could open the door for Walgreens to re-headquarter, at least on paper, in Switzerland.

In a blog post countering the report, the Washington, DC-based Tax Foundation said the $4 billion calculation is based on the assumption that Walgreens would bring certain foreign earnings back to the United States, and that even as a Swiss company, Walgreens would be taxed on its American earnings.

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About Jason Bramwell

About Jason Bramwell

Jason Bramwell is a staff writer and editor for AccountingWEB. He has nearly 20 years of experience in print and online media as a journalist and editor.


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