Taxes

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The Week in Public Finance: Unbalanced Budgets, Alaska's Tax Battle and Creditor Complaints

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A roundup of money (and other) news governments can use.
BY  | JULY 15, 2016

Unbalanced Budgets

Fiscal 2017 isn't starting off so well for some states.

In Mississippi, officials announced they need to withdraw up to $63 million from the rainy day fund to cover declining revenues that left it with an $85 million budget shortfall. The announcement came just two days after the legislature removed the state’s restriction on how much it can withdraw from the fund in any given year. It reduces the state’s savings to just 1.4 percent of its general fund budget. Both moves drew criticism from Moody’s Investors Services.

Pennsylvania this week was placed on a credit watch by Standard & Poor’s rating agency for passing a budget that failed to offer a spending plan for more than $1 billion of it. Lawmakers eventually agreed on a revenue plan, but it still requires borrowing more than $200 million from a separate state fund.

Moody’s also criticized Kansas this week for yet another shortfall. We recently mentioned that Kansas is one of four states in a recession, according to federal economic data. Its total tax revenue was more than 7 percent short of what it expected for fiscal 2016. The state has struggled to meet its revenue expectations ever since lawmakers approved income tax cuts in 2012 and 2013.

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The Week in Public Finance: Defending Wall Street Fees, Ranking Property Tax Rates and More

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A roundup of money (and other) news governments can use.
BY  | JUNE 17, 2016

Defending Wall Street Fees

The performance fees that public pension plans pay private equity and hedge fund managers are coming under scrutiny. Some say the high fees aren’t worth the returns on investment and complain that many costs remain hidden. Those two points were part of a critical report last month by the right-leaning Maryland Public Policy Institute on Maryland’s hidden Wall Street fees.

Now, the Maryland State Retirement Agency has issued a lengthy response questioning the institute’s conclusions. In a letter published this month by Executive Director R. Dean Kenderdine and Chief Investment Officer Andrew C. Palmer, the system’s officials attack the institute’s methodology while defending its own financials.

Maryland reported paying $85 million in performance fees in 2014, but according to the report it may have actually paid more than $250 million. The policy institute made that estimate by comparing Maryland’s disclosed performance fee rate against the rate of performance fees disclosed by New Jersey, which has a similarly sized alternative investment portfolio and fairly comprehensive fee disclosure policy.

But Kenderdine and Palmer say Maryland's $85 million in reported fees are accurate because New Jersey has been “much more aggressive in its pacing of investments.” In other words, the private equity funds New Jersey invests in are designed to start producing returns soon after the pension puts money in the fund. Maryland’s private equity funds, however, haven’t hit that so-called harvesting period when investments are sold and managers receive performance fees from that profit, said Kenderdine and Palmer. So the performance fees are smaller but could theoretically be larger in the coming years.

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The Week in Public Finance: Punishment for Illinois, Budget Battles and New Jersey's Win

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A roundup of money (and other) news governments can use.
BY  | JUNE 10, 2016

A Battle Over Illinois’ Downgrade

Illinois was downgraded this week to two steps above junk status by Moody’s Investors Service. The downgrade is largely due to the state’s inability to pass a budget for the past year and a half. A political stalemate has crippled lawmaking in the state and Illinois -- already the lowest-rated state -- is being docked now with a Baa2 rating. The state’s current budget gap has only worsened over the past year. The structural budget deficit, including what Illinois is supposed be spending on pensions but isn’t, amounts to 15 percent of total general fund expenditures, Moody’s said. A day after the Moody's downgrade, Standard & Poor's also downgraded Illinois.

Apparently unperturbed by the fact that its overwhelming debt is what got it into this pickle, Illinois plans to borrow a half-billion in bonds later this month. The downgrade will likely increase the interest rate Illinois will have to pay on those bonds and impact the state’s outstanding $26 billion in debt.

Not long after the downgrade, the world’s largest money manager said investors should boycott Illinois’ upcoming sale.

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Cost of Tax Breaks for States, Localities May Be Exposed

If approved, a new rule would make it easier for groups to challenge the tax exemptions that state and local governments get from the feds.
BY  | JUNE 7, 2016

A proposed change in financial rules would shed more light on what the federal government gives up in tax breaks to state and local governments. If approved, it could provide ammunition to groups that want to reduce those benefits as a way of eliminating the federal budget deficit.

The new rule, proposed by the Federal Accounting Standards Advisory Board (FASAB), would require the feds to include in annual financial reports the "revenue impact" (but not a precise calculation) of all Washington's lost revenue from tax breaks. The U.S. Treasury Department already estimates the cost of these expenditures, but they aren't included in federal annual financial reports.

According to the Treasury Department, the provision that lets filers deduct their state and local income and property taxes from the income they declare to the federal government cost $84 billion in lost revenue just this year. An additional $32 billion accounts for state and local governments' much-beloved tax exemption for municipal bonds, which critics have been trying to repeal for years.

But the largest federal deduction by far is the one employers get for their contributions to employee health insurance premiums and medical care. That cost the feds $211 billion in lost revenue this year. For perspective, the federal budget is a little under $4 trillion, while the budget deficit is a little over $500 billion.

Nonprofits' Tax-Exemption Battle Moves to the Courts

Legislative attempts to tax nonprofits have fallen short. But recent legal challenges could present a financial problem for nonprofits and a financial boost for governments.
BY  | JUNE 2, 2016

Faced with tight budgets and in search of new sources of revenue, municipalities increasingly have been eyeing the tax-exempt status of nonprofits. Legislators say that universities' record-high endowments and the corporate-like structure of nonprofit hospitals is making it harder and harder to swallow giving these institutions a tax break.

While many of the legislative attempts to start taxing nonprofits have failed, recent legal challenges have proved more promising. If the trend continues, it could present a financial problem for nonprofits and a financial boost for governments. So far, the focus of both legislation and legal action has been on hospitals and higher education institutions, but some worry they could spill over to smaller nonprofits and charities.

The dollars at stake are significant. According to a 2009 study by the Congressional Research Service, property tax exemption is worth $17 to $32 billion nationwide.

Also driving these challenges is the issue of tax fairness. Many nonprofits fork over an annual PILOT, or Payment In Lieu of Taxes, to help offset the governments' loss of revenue. But residents in the vicinity of hospitals or universities often feel that they still end up paying higher taxes to compensate for the revenue lost to nonprofits' exemptions.

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The Week in Public Finance: Special Sessions, Chicago's Pension Deal and a Historically Giant Tax Break

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A roundup of money (and other) news governments can use.
BY  | MAY 27, 2016

Special Session Begins in Alaska

After failing to agree on a budget for the 2017 fiscal year, Alaskan legislators met this week to begin a special session. The state is one of a handful that has yet to pass a budget for the upcoming year, which starts in five weeks for most. But Alaska is arguably in the toughest position.

Lawmakers extended their regularly scheduled session but still failed to decide how or whether to enact fiscal reforms that would close its structural budget deficit. According to Standard & Poor’s, the continued “impasse risks a government shutdown starting on July 1 when the state's new fiscal year begins.”

The cause of Alaska’s woes is simple: The prolonged drop in oil prices has hammered its budget, which largely relies on oil revenue. To meet expenses, the state has drawn out of its substantial rainy day fund over the past two years. As a result, its top AAA credit rating was stripped away in January.

The solutions, however, are not so simple. Gov. Bill Walker wants to completely revamp Alaska’s revenue system, which includes implementing the state’s first income tax in more than three decades and significantly reducing the annual stipends that residents receive from oil revenue. Instead Walker wants to funnel more of that revenue into a new state investment fund to support the budget. Still, legislators disagree about how many -- if any -- of those proposals to adopt, and many still want to tap into the state's rainy day fund again to balance the budget.

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The Week in Public Finance: Muni Credit Trends, the Next Round of Tax Reforms and More

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A roundup of money (and other) news governments can use.
BY  | MAY 20, 2016

What’s Going on With Muni Credits?

The trend of local governments only seeking out one credit rating for bonds is growing. Now, one in five bonds issued in the municipal market has just a single credit rating assigned to it, according to data from Municipal Market Analytics (MMA).

This can be attributed to several factors. For one, fewer individual investors -- the biggest users of credit ratings information -- are directly purchasing muni bonds, so the demand for multiple ratings has lessened. Also, agencies are increasingly giving different ratings to the same bond, which “undermines the notch-by-notch value of individual rating assignments," said MMA analyst Matt Fabian.

Along with this trend is another one: A significant portion of municipal issuers are worse off than they were at the end of the Great Recession. By the measure of PNC Capital Markets analyst Tom Kozlik, 20 percent of state and local governments have seen their underlying credit quality decline -- some significantly so.

Kozlik blames this on one key fact: governments' inability to balance their revenue and spending to live within their means. “Also,” Kozlik adds, “some state and local governments still have not grasped the scale, costs and risk that pension liabilities and other post-employment benefits still pose to credit quality and fiscal balance.”

In South Dakota, a Test Case for Online Sales Taxes

Provoked by legislators, online retailers have filed a lawsuit against the state that could have taxing consequences nationwide.
BY  | MAY 3, 2016

In a lawsuit that could have taxing consequences nationwide, online retailers are suing South Dakota for trying to collect a sales tax from them. If the suit makes it to the U.S. Supreme Court -- as many believe it will -- governments would finally get an answer to their long-awaited question of whether they can collect a sales tax from online purchases.

South Dakota lawmakers essentially provoked the suit by passing a law they knew would be challenged by retailers. The law allows the state to collect a sales tax on Internet purchases from remote retailers who have a so-called “economic presence” in the state. Retailers had to start complying with the law by May 1. It challenges a 1992 Supreme Court case that ruled states can only tax retailers who have a physical presence there.

“[Lawmakers] were intent on getting this to the U.S. Supreme Court, and we are obliging that intent,” said Steve DelBianco, executive director of NetChoice, a trade association promoting e-commerce and one of the plaintiffs in the lawsuit against South Dakota.

In Online Sales Tax Fight, States Adopt New Tactics

States are passing laws that -- they hope -- will lead to lawsuits that land the issue before the U.S. Supreme Court.
BY  | MAY 2016

Tired of waiting for Congress to approve a tax on Internet sales, nearly two dozen states are moving to pass bills or change regulations in ways that deliberately invite lawsuits from Internet retailers. The goal? Landing the issue before the U.S. Supreme Court.

On May 1, South Dakota became the first state to implement new legislation allowing it to collect a sales tax from out-of-state retailers who sell products over the Internet to South Dakotans. Because the legislation calls for an expedited path for judicial challenges, experts believe the law will produce a crucial first test case that the nation’s top court could take up as soon as the end of this year.

Putting the issue of taxing online sales before the courts is part of a new coordinated effort by state legislators across the country. All told, 34 bills in 22 states have been introduced this year that would allow states to collect sales taxes from remote retailers, according to the National Conference of State Legislatures. About a half-dozen of those bills have moved forward in some fashion.

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Panama Papers Unlikely to Lead to Reforms in Corporation-Friendly States

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A recent document leak revealed that four states were targeted by a Panamanian law firm to hide assets.
BY  | APRIL 13, 2016

States like Delaware and Nevada have long been criticized by transparency advocates for allowing Americans to use them as tax havens. But a recent document leak revealed that such corporation-friendly states may be helping foreign nationals hide potentially illicit assets as well.

Earlier this month, 11.5 million confidential documents were leaked from a Panamanian law firm, exposing how some of the world's richest people hide assets in shell companies to avoid paying taxes. It’s the largest leak in history, and among the so-called Panama Papers' many revelations was that the seventh most popular place to set up shell corporations was in Nevada.

More than 1,000 companies have used Nevada to hide their money. Delaware, South Dakota and Wyoming also emerged as popular places to stash cash.

Some of these states actively market themselves as quick and easy places to set up corporations. Take Nevada. Its website points visitors to its WhyNevada.Com to find out “why NV ranks as a top state for commercial filings," highlighting its favorable tax structure. Meanwhile, Delaware’s most recent financial report touted another record year for the number of new entities registered in the state. Delaware’s 1.1 million registered corporations outnumber the people who actually live there.

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The Week in Public Finance: Court Strikes Down Chicago Pension Reforms, Pennsylvania Ends Budget Standoff and More

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A roundup of money (and other) news governments can use.
BY  | MARCH 24, 2016

What Will Chicago Do Now?

The Illinois Supreme Court on Thursday ruled unconstitutional Chicago’s attempt to reduce its massive pension liabilities.

The decision, which affirms lower court rulings, doesn't come as a big surprise given that the state's highest court issued a similar ruling 10 months ago regarding Illinois’ proposed pension cuts. Still, it’s a blow to Chicago and its mayor, Rahm Emanuel, who had hoped the cuts would save the city hundreds of millions of dollars. Chicago is short $20 billion across five pension plans (including public schools), and the poor financial health of the retirement system has resulted in downgrades from credit ratings agencies.

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The Week in Public Finance: States Dare Online Retailers to Sue, a Local Government Shutdown Threat and More

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A roundup of money (and other) news governments can use.
BY  | FEBRUARY 26, 2016

Don't Like It? Sue Me

Tired of waiting for Congress to approve a tax on Internet sales, more than a dozen states -- including Alabama, South Dakota and Utah -- are moving to pass bills or change regulations in ways that deliberately invite lawsuits from Internet retailers. The goal? Landing the issue before the U.S. Supreme Court.

Alabama, for its part, will start enforcing an old law it says allows it to tax out-of-state sellers. The state will audit companies that don’t file returns.

“We’re confident that some remote sellers will not comply and therefore it will lead to litigation,” Alabama Deputy Revenue Commissioner Joe Garrett told The Wall Street Journal. “We have been very open about what we’re doing.”

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The Complicated Business of Evaluating Tax Incentives

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Massachusetts, like many states, uses tax credits to attract companies. But also like many states, it struggles to track the effectiveness of these programs.
BY  | FEBRUARY 25, 2016

States give out billions to businesses and corporations each year in tax breaks to keep them within their borders. But tracking how these tax incentives are spent -- and whether they even work -- has been an incredibly tricky business.

Back in 2000, Good Jobs First, which follows corporate tax subsidies, released a report that looked at 122 audits of state economic development programs in 44 states. What it found was that auditors were having trouble doing their jobs because "they are hampered by lack of data and objectives."

The climate has improved somewhat since then, says the group's president, Greg LeRoy. But it's been a long, state-by-state slog.

What the Federal Tax Code Reveals About State Revenues

States often adopt the same tax policies as the feds, but should they?
BY  | FEBRUARY 18, 2016

Late last year, Congress approved a tax relief package that extended many credits and exemptions. For the sake of consistency, states typically adopt the same credits and exemptions.

But some states choose to be more connected to the federal tax code than others, meaning they have more policy decisions to make when Congress changes its rules.

Take Maine, for example. Lawmakers there are caught in a battle over whether to adopt Congress’ extension of the so-called bonus depreciation, which lets businesses deduct half of their equipment investment in a given tax year, rather than deduct the depreciated value over a period of time. The exemption was enacted for a specific, short-term purpose: to provide an economic stimulus during the recession. But Congress has extended it on a limited basis through 2019. Gov. Paul LePage and other Republicans want the state to follow the feds through 2019, but Democrats want to limit the program and use the savings to give $23 million to schools.