Save the date, November 13, 2003, for the ’s 1 National Conference and Annual Dinner TAX FEATURES www.taxfoundation.org July/August 2003 Volume 47, Number 2 “Jock Taxes” Spread to Other Professions As State and City Governments Maximize Revenue Routine Business Travel Triggers Liability in Many States

State and city governments are trying to maxi- full report on line at: mize revenue by extending their income tax- www.TaxFoundation.org/jocktax.html es to nonresidents who just work for a few days in their states, according to a new report “Jock Taxes” Spread Rapidly, but Not Just to Jocks from the Tax Foundation. (Top Income Tax Rate Shown for Each Location) Economist David Hoffman explains that Alberta states started with “jock taxes” 12.5% Pro Team and Jock Tax because it was politically Pro Team but No Jock Tax popular to tax young, fa- WA None No Pro Teams Currently mous, high-income ath- MT ND Subject to Jock Tax ME letes but are now target-

OR MN VT ing all workers who 9% 7.85% NH MA ID 5.3% cross their borders. SD WI NY 6.85% The report was re- WY 6.75% CT MI RI leased to coincide with 4.1%* PA IA NJ 2.8% NV NE 6.37% ’s I N OH All-Star Game in Chicago. UT I L 7.5% DE 3.4%* MD 7% CO 3%* WV CA 4.75% is the only state 4.63%** KS VA 9.3% MO that forgives the tax on visit- 6% KY DC NC 9% ing athletes if their home TN 8.75% AZ OK None states do not tax Illinois ath- 5.04% NM AR SC letes. That lets players from Tex- GA as, , and Washing- MS AL 6% ton off the hook. All other visitors TX LA have to pay Illinois taxes first, AK None 6% Puerto then apply for a credit against FL Rico None 20% taxes due in their home states. HI Despite its fair treatment of

* Tax base is federal AGI with modifications. ** Tax base is federal taxable income. See Jock Tax on page 6 In this issue: FRONT & CENTER

Everyone’s a Jock Now 1 Federal Taxing and Helping Americans Save for Spending by State 2 Rep. Cardin on the the Future Nation’s Need for Better Pensions 4 New Publications 6 Foundation Message 7 Rep. Benjamin L. Cardin (D-MD), Ways and Means Committee Miscellany 8 4-5 2 Federal Tax and Spending Patterns Benefit Some States, Leave Others Footing the Bill

Some states feast at the expense of State,” Moody points out that during sent to the U.S. Treasury. The District’s others, according to the Tax Founda- fiscal 2002, taxpayers in New Mexico share of federal largesse amounted to tion’s annual analysis of federal taxing benefited the most from the give-and- $58,347 for every man, woman and and spending patterns. take with Uncle Sam. child. That is more than nine times the national average, and it includes Federal Spending by State for Each Tax Dollar Sent to over $8,000 per person in grants, over $19,000 per person in FY 2002 procurement, and over Ten highest ratios of spending to tax $24,000 per person in Ten lowest ratios of spending to tax federal wages. None of WA 87¢ NH this has prevented VT 66¢ ME District lawmakers MT ND $1.13 $1.34 $1.67 $2.07 from blaming their OR MN 98¢ 77¢ MA fiscal woes on the ID WI 75¢ $1.31 SD 88¢ NY federal government. $1.61 85¢ RI WY MI $1.08 $1.06 88¢ PA CT IA 65¢ States That Help NE $1.23 $1.09 NV NJ $1.19 IL OH Others 74¢ IN $1.03 DE 62¢ UT 77¢ $1.00 85¢ $1.14 WV If some states are CA CO $1.82 VA MD 76¢ 78¢ KS MO $1.50 $1.22 beneficiaries, then $1.13 $1.34 KY $1.50 DC some must be benefac- NC $6.44 TN $1.07 tors — those states AZ OK $1.26 $1.21 NM $1.52 AR SC where so much is collect- $2.37 $1.55 $1.34 ed in federal taxes that any feder- MS AL GA $1.89 $1.64 $1.01 al spending they receive is over- LA TX $1.48 whelmed. 92¢ For decades, New York was AK $1.91 FL the biggest payer in the annual $1.01 comparison of taxes to spending,

HI inspiring Daniel Patrick Moynihan $1.57 and the Kennedy School of Gov- ernment to launch their annual ref- All taxpayers know that the federal New Mexico received $2.37 in erence book on taxes and spending government uses tax and spending federal outlays for every $1.00 the (www.ksg.harvard.edu/fisc99) more policy to redistribute money from state’s taxpayers sent to Uncle Sam. than 25 years ago. In recent years, citizens with high incomes to those Only one other state got a 2-1 ratio — however, other states have eclipsed who make little, but geographically North Dakota where Uncle Sam spent New York for the “blessing” of being based income redistribution is less $2.07 for each tax dollar. Other big the state that gives far more than it well known. In the newest edition of winners were Alaska ($1.91), receives. one of the Tax Foundation’s most pop- Combining the third highest tax ular reports, Senior Economist Scott full report on line at: burden per capita with the ninth low- Moody compares the federal tax bur- www.TaxFoundation.org/ est federal spending, New Jersey had den in each state with the Census taxingspending.html the lowest federal spending-to-tax ratio Bureau’s most recent data (2002) on (62¢). Other states that had low federal federal spending in each state. The Mississippi ($1.89), and West Virginia spending-to-tax ratios in FY 2002 are result is a ranking of which states got ($1.82). See table on page 3. Connecticut (65¢), New Hampshire the best deal in 2002 from Uncle Sam’s (66¢), Nevada (74¢), Massachusetts tax and spending policies. The District of Columbia (75¢) and (76¢). Though not comparable as a state, Federally Favored States the District of Columbia is by far the Changing Ranks In No. 124 of the Tax Foundation’s biggest beneficiary of federal spending: The state that raised its ratio the Special Report series, titled “Federal In 2002 it received $6.44 in federal most over the past ten years is Alaska, Tax Burdens and Expenditures by outlays for every dollar its taxpayers where federal spending rose from 3

$1.26 to $1.91 for each dollar in taxes. residents on Social Security, Medicare — Connecticut stands out — pay This 65¢-increase beats out North Da- and other large federal entitlements much higher federal taxes per capita kota, where federal spending increased are bound to rank fairly high. Similarly, because of the income tax’s progres- 53¢ per dollar of tax, Hawaii (43¢ the high spending levels in Virginia, sive structure. The citizens in these more spending per tax dollar), and Maryland and the District of Columbia high-income, high-tax states do not West Virginia (38¢ more spending per are explained by the predominance of always live better or save more than tax dollar). federal employees. people in low-income, low-tax states States where the ratio dropped On the tax side of the equation, because the cost of living is usually most are Colorado and Massachusetts. states with higher incomes per capita that much higher or more. Colorado has seen its federal spending- to-tax ratio fall 28¢ from $1.06 in FY 1992 to 78¢ in FY 2002. Massachu- Federal Spending by State Per Dollar of Federal Tax setts’s has dropped 27¢. Fiscal Years 1992 and 2002

10-yr Change How Can States React? Expenditures Federal spending on defense and in Spending Change Per Dollar of Taxes Per Dollar Ranking in other procurement dollars are often FY 1992 FY 2002 of Tax FY 1992 FY 2002 Rank funneled to the states of powerful Total $ 1.00 $ 1.00 – – – – congressmen, and state governments Alabama $ 1.39 $ 1.64 + 26¢ 7 7 0 can grab more federal grant money by Alaska 1.26 1.91 + 65 14 3 – 11 skillfully — some would say slavishly Arizona 1.17 1.21 + 3 19 22 + 3 Arkansas 1.28 1.55 + 27 13 10 – 3 — manipulating their spending to California .93 .76 – 16 38 45 + 7 comply with federal regulations. Colorado $ 1.06 $ .78 – 28¢ 26 42 + 16 However, demography is at least as Connecticut .68 .65 – 2 49 49 0 Delaware .72 .85 + 13 48 41 – 7 influential as politics. States with more Florida 1.08 1.01 – 7 24 33 + 9 Georgia 1.00 1.01 + 1 32 32 0 Hawaii $ 1.14 $ 1.57 + 43¢ 21 9 – 12 Idaho 1.25 1.31 + 6 16 18 + 2 Publication Summary Illinois .72 .77 + 4 47 44 – 3 General: Special Report No. 124; ISSN Indiana .83 1.00 + 17 41 34 – 7 1068-0306; 12pp.; $10 or $50/yr. for 6 Iowa 1.05 1.23 + 18 28 20 – 8 issues on varied fiscal topics Kansas $ 1.05 $ 1.13 + 8¢ 27 25 – 2 Kentucky 1.20 1.50 + 29 18 13 – 5 Title: Federal Tax Burdens and Expendi- Louisiana 1.29 1.48 + 19 11 14 + 3 tures by State Maine 1.48 1.34 – 14 4 16 + 12 Maryland 1.25 1.22 – 3 15 21 + 6 Author: J. Scott Moody Massachusetts $ 1.01 $ .75 – 27¢ 31 46 + 15 Date: July 2003 Michigan .83 .88 + 6 42 38 – 4 Minnesota .77 .77 – 1 44 43 – 1 Subject: Calculation of how much each Mississippi 1.84 1.89 + 5 2 4 + 2 state’s citizens pay in federal taxes, Missouri 1.25 1.34 + 9 17 17 0 including adjustments for federal taxes Montana $ 1.46 $ 1.67 + 21¢ 5 6 + 1 collected in other states. The tax burden Nebraska 1.07 1.19 + 12 25 23 – 2 in each state is then compared to fed- Nevada .74 .74 0 45 47 + 2 New Hampshire .74 .66 – 8 46 48 + 2 eral funds that are spent in each state. New Jersey .66 .62 – 3 50 50 0 Tables: Federal Tax Burden, Total and New Mexico $ 2.08 $ 2.37 + 29¢ 1 1 0 Per Capita, FY1934–2003; Federal Tax New York .86 .85 – 1 40 40 0 Burden by State and Rank, Selected North Carolina .95 1.07 + 13 33 29 – 4 North Dakota 1.54 2.07 + 53 3 2 – 1 Fiscal Years, 1970–2003; Federal Tax Ohio .94 1.03 + 9 34 31 – 3 Burden by State, Per Capita and Rank, Oklahoma $ 1.30 $ 1.52 + 22¢ 10 11 + 1 Selected Fiscal Years, 1970–2003; Oregon .94 .98 + 4 36 35 – 1 Federal Tax Burden by State, Type of Pennsylvania 1.02 1.09 + 7 30 27 – 3 Tax and Rank, FY2002; Federal Tax Rhode Island 1.10 1.08 – 2 23 28 + 5 Burden by State and Type of Tax, Per South Carolina 1.29 1.34 + 5 12 15 + 3 Capita and Rank, FY2002; Federal Ex- South Dakota $ 1.31 $ 1.61 + 30¢ 9 8 – 1 Tennessee 1.11 1.26 + 15 22 19 – 3 penditures by State, Type of Expenditure .93 .92 0 37 36 – 1 and Rank, FY2002; Federal Expendi- Utah 1.17 1.14 – 3 20 24 + 4 tures by State and Type of Expenditure, Vermont .94 1.13 + 19 35 26 – 9 Per Capita and Rank, FY2002; Federal Virginia $ 1.39 $ 1.50 + 11¢ 8 12 + 4 Tax Burdens and Expenditures Per Washington .89 .87 – 2 39 39 0 Capita as a Percentage of the U.S. West Virginia 1.44 1.82 + 38 6 5 – 1 Wisconsin .82 .88 + 7 43 37 – 6 Average, FY1992 and FY2002; Adjusted Wyoming 1.02 1.06 + 4 29 30 + 1 Federal Expenditures Per Dollar of Taxes District of Columbia $ 5.86 $ 6.44 + 58¢ – – – by State, FY1992 and FY2002 Sources: Census Bureau; Tax Foundation’s “State–by–State Tax Burden Allocation Model.” 4

Helping Americans Save for FRONT & CENTER the Future by U.S. Representative Benjamin L. Cardin (D-MD)

People in America do not save A recent AARP study found that It also will provide temporary enough. Over the next decade, we as a less than half of baby boomers save for relief to multi-employer plans — nation will face a retirement crisis as retirement regularly. plans for those who work for multiple 70 million baby boomers begin to According to the 2002 Retirement employers such as in the building retire in 2010. Confidence Survey, 44% of retirees age trades — from recent stock market In the meantime, we are facing 60 or older have saved $75,000 or less losses and create more ways for small large budget deficits and a low national for their retirement and 11% have employers to offer retirement plans. personal savings rate, all of which place saved nothing. Increasing the coverage of employ- enormous strains on traditional retire- Social Security is the primary er-sponsored retirement plans helps ment programs such as Social Security. source of income for 44% of retirees. retirement savings because these plans It’s time for Congress to help Unfortunately, the average Social Secu- have been shown to provide the most Americans understand the importance rity annual income in 2002 was effective and least expensive savings of saving for retirement and to make $12,096 for men and only $9,288 for tools to workers. That is because there the process easier. I recently intro- women. are fewer decisions to be made with duced The Pension Preservation and These savings figures need to an employer-sponsored plan and there Savings Expansion Act, HR 1776, with change and one of the most important is less individual risk with a defined benefit employer-sponsored plan in which the employer — not the em- ployee — bears the risk of investment. In 2001, out of 151 million American workers, only 65 In an employee-sponsored plan, em- million participated in an employer- or union- ployees can save by default, choosing to have their retirement savings de- sponsored pension or retirement plan. This problem ducted automatically from their pay. This pension reform measure also is particularly acute for people who work for small will make it less daunting to start the business. ... Only 20% of small businesses offer planning process later in life by in- creasing contribution limits and catch- retirement plans. up contribution limits to allow people closer to retirement to save more mon- Rep. Rob Portman (R-OH) to build on ways to do that is to ensure that every ey when they can afford to save more. past legislation we have authored by American has access to a pension plan. Another important consideration - providing greater retirement savings In 2001, out of 151 million Ameri- particularly for millions of Americans opportunities for millions of American can workers, only 65 million participat- who earn less and therefore have less workers. ed in an employer- or union-sponsored disposable income - is finding the mon- First, and perhaps most impor- pension or retirement plan. This prob- ey to start savings. This is particularly tant, is the challenge of getting people lem is particularly acute for people true for people who will need the to understand the importance of sav- who work for small businesses em- money the most when they reach re- ing. Too many Americans worry about ploying fewer than 25 workers. Only tirement — lower-income people and saving for retirement, but few actually 20% of small businesses offer retire- women. plan in a way that will provide them ment plans. Women age 65 and older make up with the retirement they want and Employer-sponsored plans pro- 58% of all Social Security beneficiaries deserve. vide low-administration options for and approximately 71% of beneficia- employees. HR 1776 will encourage ries age 85 and older. According to the the maintenance and creation of em- Social Security Administration, Social Rep. Ben Cardin has been a Member ployer-sponsored plans by: addressing Security comprises 51% of the total of the House Ways and Means Com- defined benefit funding problems by income of women age 65 or older. In mittee since 1989 and represents setting a responsible funding rate to contrast, Social Security benefits com- Maryland’s Third Congressional Dis- replace the now-defunct 30-year Trea- prise only 37% of the retirement in- trict in the House of Representatives. sury bond rate. come of elderly men, and only 34% of 5 elderly couples’ income. In addition, 26% of unmarried elderly women de- pend on Social Security for their only source of income. Women also live longer and build up less in lifetime earnings than men. We can’t provide all of the money needed to secure a happy retirement for every American, but HR 1776 would help by expanding and making permanent a tax credit for low- and moderate-income people to put money into an Individual Retirement Account (IRA), 401(k) plan (including a SIMPLE 401(k) plan), 457 plan, 403(b) plan, Roth IRA, SIMPLE IRA, or Simplified plans and providing greater notice annuity, providing a guaranteed retire- Employee Pension plan. requirements for employees about ment income over a lifetime. This pro- The IRS has estimated that this their employers’ management of their vision would give people a tax exclu- important credit has already been retirement plans. sion of up to $2,000 on a portion of used by more than 4 million people in Finally, in an era in which Ameri- their annuitant income every year. 2002. cans are living longer, we need to re- HR 1776 also contains provisions This legislation also addresses the think the age at which we require designed to fight leakage from the issue of the portability of retirement withdrawals from retirement plans. retirement system by facilitating de- plans. Today, the average American This legislation would create greater fault rollover options for departing changes jobs between four to eight financial security during retirement by employees, which will significantly times during the course of his or her increasing the minimum required dis- expand the existing program to match career. As Americans — particularly tribution from age 70 to 75. The cur- employees with their lost retirement women and younger Americans — rent law was adopted in 1962 at a time plan benefits. change jobs more often and leave and when life expectancy was 70.1 years. Americans face a myriad of chal- re-enter the workforce, they need According to the Department of lenges when they sit down to plan for retirement savings that can move with Health and Human Services, in 2001 their retirement. Policy makers must them, and that will fit their families’ life expectancy for Americans had learn to face these challenges along needs. increased to 77.2 years. Today, Ameri- with their constituents, or find them- This new measure would improve cans are living more than seven years selves confronted with a generation of portability of retirement savings. It longer than they did in 1962 when the people who are not financially pre- would ensure an employee’s ability to 70-1/2 minimum required distribution pared for their future. roll over after-tax contributions and rules were put in place. This is a The Pension Preservation and Sav- permit direct rollovers from workplace change that has been recommended by ings Expansion Act will provide the retirement plans to Roth IRAs. It also both the Joint Committee on Taxation next step in the ongoing effort to pro- would allow rollovers directly to a (who actually advocate getting rid of vide Americans with greater savings spouse’s retirement plan, allowing the minimum required distribution opportunities. couples to balance their savings and rules in total), and by the AARP. act more as a single financial unit. The One of the biggest problems con- measure also will allow greater porta- fronting retirement policy is the need bility for non-spousal rollovers. to protect the long-term security of If the Enron and WorldCom scan- retirement assets during retirement. dals have taught us anything it is that There has been a move towards Americans who have employer-spon- lump-sum distributions of retirement sored plans often do not have enough plans. This trend is disturbing because information to make informed deci- many Americans are taking their mon- sions. This is particularly true for low- ey out of their retirement and not and moderate-income Americans who using it for their long-term, living-on are much less likely to be able to af- funds. To ensure that people do not ford financial advice. out-live their savings, we have to find The Tax Foundation invites national HR 1776 would provide pre-tax ways to encourage Americans to take leaders from all perspectives to con- savings for independent financial ad- annuitant retirement. tribute columns to Tax Features. T h e vice for employees, increasing the HR 1776 will provide incentives opinions expressed are not always attractiveness of employer-sponsored for taking retirement savings as an those of the Tax Foundation. 6

Jock Taxes from page 1 “exec tax,” though that is changing. New taxes on salaried employees who Jersey has recently started taxing visit- spend only a few days traveling in the workers visiting from states with no ing lawyers, causing no great outcry. state for business. jock tax, Illinois is less forgiving to its ♦ The tax imposes an unrealistic own athletes, refusing credits for out- administrative burden. Travelers can Publication Summary of-state jock taxes paid. During last end up filing dozens of state and city year’s All-Star Game in Milwaukee, income tax returns. General: Special Report No. 123; ISSN 1068-0306; 12pp.; $10 or $50/yr. for 6 Chicago Cub Sammy Sosa paid both issues on varied fiscal topics Wisconsin and Illinois taxes on his Conclusion: Abolish the Jock Title: State and Local Income Taxation daily income. At present, no other state Tax and Reform Nonresident of Nonresident Professional Athletes refuses credits. Income Taxation Spreads to Other Professions The jock tax has spread from Cali- In Alberta, Canada, and in Puerto Author: David K. Hoffman fornia to 20 states and half a dozen Rico, the jock tax is even levied at a Date: July 2003 cities, as well as Puerto Rico and Alber- separate, higher rate than for other ta. Professional athletes are the most residents. An effort to establish such a Subject: Discussion of the recent trend for state governments to extend their famous but by no means the only tar- separate rate in Colorado in 2002 for- income taxes to selected nonresidents, gets. Hoffman gives three major rea- tunately failed. a trend that started with professional sons the jock tax is ill-conceived: New Jersey is now taxing visiting athletes. ♦ The tax is poorly targeted. Ad- attorneys. Cincinnati is imposing its Tables: Salaries and Jock Taxes of vertised as one that hits only ultra-rich municipal income tax on entertainers Major League Baseball All-Star Game athletes, the jock tax has quickly and has even proposed extending it to Participants, 2003; Individual Income spread to many people with moderate all workers that enter the city. In Mis- Tax Rates in States with NFL, NBA, NHL incomes, such as trainers and scouts, souri, state officials are creating a con- or Major League Baseball Franchises; and to other professions. stituency for higher jock taxes by The Complex Obliga- ♦ tions of Three Professional Athletes; The tax is arbitrary. Profession- “earnmarking” the revenue for popular Salary Ranges of Non-Athletic Members als in other occupations with compara- programs. of Professional Athletic Teams; Statisti- ble incomes over their working lives, A reasonable approach to nonresi- cal Comparison of the Incomes and such as doctors and corporate execu- dent taxation would not include jock Taxation of Athletes and Airline Pilots tives, are not penalized by a “doc tax” or taxes or any attempt to levy income New Editions of Foundation Reference Books

A Taxpayer’s Guide to Federal with the seventh edition of A Taxpay- The 37th edition will provide the Spending, Fiscal Year 2004 er’s Guide to Federal Spending. It uses data to answer: ♦ The detailed account information the same terminology as the Budget, so Do the wealthy pay their share and historical tables of the President’s you can refer to it with confidence in of income tax? official communications. Organized by ♦ Which states tax the least? 2004 Budget have been available since ♦ March, but most department, agency, program area, and What are of the Budget is individual expenditure account, the the trends in local Taxpayer’s Guide to Federal Spending property tax? still being debat- Facts and Fig- ed by Congress. boils more than 2,500 pages down to ures on Govern- As anyone one tenth of that size, but you won’t miss a thing. ment Finance in- who has exam- ined the official cludes material Budget of the Facts & Figures on Government from out-of-print government docu- U.S. Government Finance, 37th Edition realizes, it’s a When rhetoric about tax and ments and private sources. For librar- frustrating docu- spending policies is so often full of Facts and Figures A Taxpayer’s ies looking to fill ment if you want sound and fury, it’s a relief to see a on Government Guide to Federal Finance the gap left by the Spending, Fiscal to see how the volume full of facts. Published regular- Year 2004 federal govern- ly since 1941, Facts and Figures on ISSN 0071-3678 discontinuation of 37th Edition the Census Bu- ISSN 1528-0381 ment spends our Government Finance brings together Summer 2003, 345 pp. reau’s Government ISBN 1-884096-19-0 tax dollars. data on public finance at all levels of David Hoffman, ed. Ed.: Matthew Lutz Finance The Tax government, with comparisons of Hard: $65 (s/h inc.) series, Summer 2003 ISBN 1-884096-17-4 nothing else will 262 pp. Foundation taxing and spending levels spanning a Paper: $45 (s/h inc.) do as well. Paper $40 (s/h inc.) makes it easier century. ISBN 1-884096-18-2 7

FOUNDATION MESSAGE

Tax Cuts: Are Corporate tions with taxable income less than $10 Income Tax Rates Next? million per year. According to the Ways and Means This fall, Congress will continue its con- frozen at 35 Committee, 99.7 percent of all corpora- tentious debate over how best to comply percent. tions would be eligible for this lower with the World Trade Organization’s A recent rate. What this statistic overlooks, howev- ruling against a particular provision of academic study er, is that the largest corporations in U.S. international tax law. also found that Scott A. Hodge America—the remaining 0.3 percent of The WTO said that a rule granting the effective President all corporations—generate 80 percent of favorable tax treatment to manufacturing corporate tax Tax Foundation all taxable corporate income. Excluding export profits—once called the Foreign rate—the rate the largest companies from the new Sales Corporation (FSC) and now the companies pay lower rate greatly minimizes the eco- Extraterritorial Income Exclusion (ETI)— after deductions and credits—is also nomic effects of the plan. constituted an illegal tax subsidy. The higher in the U.S. than in the EU: 24 One of the most interesting propos- punishment is extreme: $4 billion in percent in 2001 compared to an average als incorporated into the Thomas bill trade sanctions by the European Union if of 20.4 percent in the EU. That’s a rever- would give companies a six-month win- Congress fails to repeal it. sal from 1990, when the effective U.S. dow to bring profits earned abroad back Not surprisingly, the proposed legis- rate was 23 percent compared to 25.6 into the U.S. at a tax rate of 7 percent lative fixes have split lawmakers into percent in the EU. instead of the normal rate of 35 percent. different camps. What is surprising is It is clear that the corporate rate Earlier versions introduced in the House that nearly half the members of the should be cut substantially for the U.S. and Senate set the tax rate on repatriated House of Representatives—evenly split economy to remain competitive in the earnings at 5.25%. between Democrats and Republicans— global market. Unfortunately, each of the Experts agree that the high U.S. back proposals that include a cut in the proposals pending in Congress are too corporate tax rate discourages U.S. com- corporate income tax rate. narrowly focused to benefit the entire panies from “repatriating” foreign-earned Considering how heated the debate economy. profits and reinvesting them into the U.S. over President Bush’s plan to cut the top The plan with the largest number of economy. marginal tax rate on individuals from co-sponsors is the bi-partisan Job Protec- A study produced by economists at 39.6 percent to 35 percent (two-thirds of tion Act of 2003 introduced by Repre- JPMorgan Securities Inc. estimates that those affected were business owners), it sentatives Phil Crane (R-IL) and Charlie the promise of a 5.25 percent tax rate is welcome to see a bipartisan recogni- Rangel (D-NY). With 136 co-sponsors, could prompt U.S. companies to bring tion that the U.S. corporate tax rate is divided equally between the parties, the home as much as $300 billion in foreign- out of step with our global competitors. bill would repeal the current-law FSC/ earned profits, now sitting off shore. It’s been 17 years since Congress cut ETI tax benefit and replace it with a As attractive as that may sound to the statutory corporate tax rate. That was deduction for manufacturers that reduc- lawmakers, tax purists worry that these when the Act of 1986 re- es their effective tax rate from 35 to 31.5 type of “amnesty” programs can create duced it from 46 to 34 percent, well percent. the expectation of future amnesties and, below the 42 percent average rate of While clearly a step in the right thus, dampen the normal repatriation of OECD developed countries. (In the U.S., direction, the legislation benefits only foreign earnings. On the other hand, if state corporate tax rates made up most manufacturers, who comprise just 16 this temporary tax cut proves to be wild- of the difference.) percent of private sector GDP. Excluding ly successful, lawmakers could be con- A table comparing international tax 84 percent of the domestic economy vinced to make it permanent. rates can be found at http://www. from this lower tax rate contradicts the The time is right for a broad-based TaxFoundation.org/internationaltax/ principle of tax neutrality and diminish- cut in the U.S. corporate income tax rate corptax.html. es the economic benefits. to bring it closer to the OECD average. The corporate rate stayed at 34 The leading competitor of the While the individual income tax cuts percent until the Clinton Administra- Crane/Rangel legislation is The American have buoyed the consumer economy, the tion’s first budget raised it to 35 percent. Jobs Creation Act of 2003, introduced by intermediate business economy remains Meanwhile, tax competition among de- Bill Thomas (R-CA), Chairman of the stalled. To be sure, some will worry about veloped countries was driving world- House Ways and Means Committee. increasing the deficit. But this would be a wide rates down. By 1994, the U.S.’s 35 Along with reforming many obsolete small and temporary price to pay for a percent rate was above average, and now components of the U.S. international tax U.S. economy that is more attractive to the average OECD statutory rate stands code, the Thomas bill would cut the do business in and to export from. at 29 percent while we’ve remained corporate rate to 32 percent for corpora- 8

TAX FEATURES© Tax Foundation in the Foundation Web Site Adds Tax Features© (ISSN 1069- News International Tax Section 711X) is published bi-monthly by the Tax Foundation, an State finances have dominated tax-related International taxes are a hot topic in Washing- independent 501(c)(3) organization chartered in the news since the spring ended with President ton because legislation reforming them must District of Columbia. Annual Bush’s signature on another federal tax cut. pass soon. If not, the World Trade Organiza- subscriptions are $15. The California screamin’ has been so loud tion will slap $4 billion worth of trade sanc- that it seems more like a national mud-wres- tions on the U.S. Joseph O. Luby, Jr. tling match than a state recall vote. The Tax The two most talked-about legislative Chairman, Program Committee Foundation’s new State Business Tax Climate solutions are the Thomas and Crane-Rangel Michael P. Boyle Index has been prominently featured in the proposals, but Senator Hatch has recently Vice Chairman, Program Committee news as proof that California state lawmakers introduced a competing bill. have made a hash of their state’s economy. People who want to know the issue can Scott A. Hodge President Cited by The Wall Street Journal, The Detroit find it presented in a comprehensible fashion News, and The Business Journal, on the Tax Foundation’s web site at Bill Ahern the new index ranked California as having www.TaxFoundation.org/internationaltax.html. Editor & Communications Director the second worst business tax climate in the The pages include international compari- nation. sons of tax rates and import/export data, a glos- Alicia Hansen Staff Writer Our annual comparison of federal taxing sary of terms used in international tax debate, to federal spending in each state also made a an overview of how the dispute over U.S. inter- J. Scott Moody big splash this year. New Jersey has the dubi- national tax code provisions went against us, Senior Economist ous distinction of getting only 62¢ back in commentary by experts in academia, and dispas- David Hoffman spending for every $1 sent to Washington, as sionate explanations of some contentious issues Economist the New York Daily News pointed out. like repatriation and corporate inversions. Tax Foundation (202) 464-6200 (202) 464-6201 Fax Planned Gifts to the Tax Foundation www.TaxFoundation.org The Foundation’s mission sounds simple: ♦ Giving stocks or bonds [email protected] telling the truth about taxes to taxpayers, ♦ Giving assets such as a life lawmakers and the media. insurance policy or real estate But considering how many people do ♦ Remembering the Tax Foundation in not want the truth told, the job is always your will difficult, and it would be impossible with- The Tax Foundation is a 501(c)(3) organi- out your generous support. zation, so all contributions are tax-deductible. The Tax Foundation does not receive For more information on ways to ensure government funds, so we rely on you. your support of the Tax Foundation contin- Here are some ways that you can help: ues, call Julie Burden, Director of Develop-

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