Tax Policy – Maine’s Water Extraction Tax Proposal Is Poor Tax Policy
Lawmakers in Maine’s 129th legislature have proposed a bill (HP 797) to impose an excise tax of 12 cents per gallon on water extraction performed by each bottled water operator that extracted more than 1 million gallons of groundwater or surface water in the previous calendar year. This plan purports to stimulate the economy of rural Maine, and credits new revenue to the Water Trust Fund.
Specifically, 65 percent of the revenue would be earmarked to develop high-speed broadband infrastructure. The remaining 35 percent would be directed to provide tuition grants for postsecondary education for up to two years.
The proposal for a water extraction tax, which is not a new idea in Maine, is poor tax policy because it is nonneutral and unstable, and it would open the way to taxing renewable resources.
Three previous bills in Maine’s legislature attempted to impose similar excise taxes at various rates and for various purposes; all were rejected. In 2009, HP 191 was proposed to tax water at one cent per gallon; in 2015, HP 127 would also have imposed a water extraction tax of one cent per gallon; and in 2017, HP 356 aimed to tax water at a rate of one cent per 25 gallons extracted. Revenue allocation varied for each bill. The proposals included programs to finance watershed and water quality protection, lake water quality monitoring, water testing, tax relief for local residents and municipalities, and programs for K-12 education.
A tax on water extraction would mark the first time the Maine legislature taxed a renewable resource, opening a new frontier of tax policy without a clear justification. That is not the only reason why taxing water extraction is questionable public policy. Although it easy to administer such a tax on a very small base of producers, it is a highly discriminatory tax that targets a small number of companies in a single industry without the normal justifications for an excise tax. This violates the principle of tax neutrality because the tax is so narrowly targeted upon certain companies. Furthermore, taxing such a small base of companies violates the principle of tax stability by attaching government programs to a volatile and uncertain revenue source depending on the operations of a small handful of businesses.
Poland Spring is the only company in Maine that would be subjected to such taxation. As a landowner, however, the company currently owns the rights to access water according to Maine law. The public expenditures planned for the water tax are not directly related to Poland Springs or even to water usage generally, putting this tax in contradiction with the benefit principle of tax policy.
The company currently has three bottling plants operating in Maine, where they have hundreds of jobs. Ironically, the stated purpose of the bill is to secure the economic future of rural Maine. However, the bill attempts to do so in a way that could negatively impact rural jobs and reduce the economic competitiveness of Maine’s rural communities.
The arguments in favor of traditional severance and extraction taxes are not justified in the case of water extraction because water is a renewable resource.
Severance and extraction taxes are often imposed on the extraction of nonrenewable natural resources, such as crude oil and natural gas, on the grounds that it encourages resource conservation. Sometimes the tax is imposed to “price-in” the externalities caused by extracting and using such resources, and the tax revenue gained can be used to mitigate the effects of those externalities. Furthermore, revenue generated from a severance tax might be used to address intergenerational inequity given that resources, once depleted, are not accessible for future generations. However, these issues are not relevant with regards to drinking water extraction because water is a renewable resource that is not being depleted.
In addition, taxing one form of water usage creates a nonneutral tax code with respect to water-related economic activity. There is no tax imposed on other types of water usage such as agricultural irrigation, power production, mining, and golf course irrigation. In fact, such water usage is sometimes subsidized by governmental utility authorities as a matter of public policy so that the water price can be kept artificially low. On the other hand, bottled water companies bear the full cost of their bottling infrastructure and transportation.
If rural broadband infrastructure and post-secondary education are state priorities, they should be funded by a stable and neutral revenue source. The logic behind traditional extraction taxes does not apply to the bottled water industry. Furthermore, the funding for efficient infrastructure and education should aim to meet the benefit principle of taxation. That is, people should pay taxes based on the benefits they receive. Taxing the extraction of water does not make sense as an excise tax and does not make sense as a mechanism to finance rural broadband and public education.
Source: Tax Policy – Maine’s Water Extraction Tax Proposal Is Poor Tax Policy
Tax Policy – Corporate Tax Reform Comes to Arkansas
On Friday, legislators in Arkansas introduced Senate Bill 576, which would dramatically increase the competitiveness of Arkansas’s tax code. Based on recommendations from the Arkansas Tax Reform and Relief Legislative Task Force, the bill would overhaul Arkansas’s corporate income tax code.
The bill includes several key reforms to the corporate income tax. First, the bill would repeal the state’s throwback rule. Arkansas uses a double-weighted sales formula to apportion corporate income, but it also uses a throwback rule, meaning that firms with “nowhere income” must “throw it back” into their state calculations, increasing their state tax liability. The bill couples throwback repeal with a move to a single sales factor apportionment structure.
Additionally, this bill would dramatically expand Arkansas’s net operating loss provisions. Arkansas is an outlier among states, allowing firms to carry forward their losses for only five years. The bulk of states allow carryforwards for 20 years. Net operating losses are incredibly important for start-up firms and firms with volatile incomes. Net operating losses ensure that firms are taxed on their actual income, not an overinflated income level due to discontinuity between calendar years and tax years. Senate Bill 576 would expand net operating losses to 20 years, bringing Arkansas in line with other states.
According to the Tax Foundation’s State Business Tax Climate Index, these changes will improve Arkansas’s tax competitiveness from 46th to 44th overall. Arkansas’s corporate income tax structure would improve from 40th to 30th with these changes. If we add in the previously passed individual income tax cuts, the state’s overall score improves to 43rd.
Ideally, Arkansas would also consider lowering its corporate income tax rate, another task force recommendation. Hopefully, future General Assemblies will adopt this recommendation.
As we’ve argued in the Arkansas Democrat-Gazette, in many ways, Arkansas’s tax code has fallen behind by standing still. The state has been surpassed by competitors, such as Georgia, Kentucky, and Missouri, in implementing tax reform. Arkansas needs to improve its code to be competitive.
The bill also makes changes outside of the corporate income tax. Namely, the bill would adopt the so-called “Wayfair checklist” regarding the taxation of remote sellers. Frequently mischaracterized as a tax increase, codifying the “Wayfair checklist” ensures proper administration of the state’s tax code. Now, remote sellers would be required to collect and remit sales taxes in Arkansas if they have more than $100,000 in sales or 200 transactions.
Arkansans have always legally owed use tax on remote purchases, including those made on the internet. But federal case law prohibited Arkansas from forcing out-of-state sellers to collect and remit the tax on consumers’ behalf. Instead, Arkansas consumers had to fill out a Consumer Use Tax form, but very few did. Following the U.S. Supreme Court’s Wayfair decision, Arkansas can now require certain remote sellers to collect the tax, and this bill would ensure that Arkansas follows those guidelines.
The Arkansas General Assembly continues to consider recommendations made by the Arkansas Tax Reform and Relief Legislative Task Force. This package of recommendations would significantly improve the state’s tax code.
Source: Tax Policy – Corporate Tax Reform Comes to Arkansas
IRS Tax News – First-year challenges of TCJA implementation require broader penalty relief
Despite generally lower tax bills, many taxpayers are seeing smaller-than-expected refunds — or no refunds at all. And some taxpayers are now subject to underwithholding penalties, despite limited relief from the IRS.
Source: IRS Tax News – First-year challenges of TCJA implementation require broader penalty relief
Tax Policy – Senators Introduce Legislation to Fix the Retail Glitch
Today, Senators Pat Toomey (R-PA) and Doug Jones (D-AL) introduced a bill that would fix the “retail glitch.” The legislation addresses a clerical error in the Tax Cuts and Jobs Act (TCJA) that prevents investments in qualified improvement property (QIP) from qualifying for bonus depreciation. This error significantly increased the after-tax cost of making QIP investments, and reportedly caused businesses to delay, and even turn down, investment opportunities that they otherwise would have pursued.
QIP investments include improvements to the inside of commercial buildings: projects such as new flooring, lighting fixtures, sprinkler systems, or other types of remodeling and interior improvements. The TCJA intended to consolidate the various categories of QIP that existed under old law into a new category with a 15-year cost recovery period. This would also have allowed QIP investments to be eligible for the 100 percent bonus depreciation provision created under the new law.
However, as written, the TCJA mistakenly excluded QIP from 100 percent bonus depreciation by leaving the cost recovery period unassigned, which results in a greater tax burden than under previous law. The infographic below shows how costly this mistake is.
Senators Toomey and Jones’ new bill would assign QIP a 15-year cost recovery period (and a 20-year alternative depreciation schedule cost recovery period), making these investments eligible for bonus depreciation. Importantly, the changes in this bill would take effect as if they were included in the original TCJA. And because the TCJA was scored as though QIP were eligible for the new provision, this fix does not increase the original cost of the new tax law.
Fixing the retail glitch would mean businesses no longer face more restrictive cost recovery treatment for investments in qualified improvement property than before tax reform.
Source: Tax Policy – Senators Introduce Legislation to Fix the Retail Glitch
Tax Policy – Is Increasing the Capital Gains Tax Rate the Right Way to Generate Revenue?
In February, billionaires Warren Buffett and Bill Gates suggested increasing taxes on the wealthy to pay for policies that would help people without market skills keep pace in an increasingly specialized economy. Both have proposed increasing tax rates for capital gains as one potential way to generate revenue for this purpose.
Long-term capital gains, or appreciation on assets held for more than one year, are taxed at a lower rate than ordinary income when realized. For instance, the top individual income tax rate for individuals making more than $510,300 in 2019 is 37 percent, while the highest rate at which capital gains are taxed is 23.8 percent. This 23.8 percent top rate comes from the 20 percent rate for individuals with long-term capital gains over $434,550, as well as the 3.8 percent net investment income tax for individuals with modified adjusted gross income over $200,000.
One thing to recognize is that this reduced rate partially compensates taxpayers for double taxation. By the time taxpayers invest their income, that income has already been taxed by both the payroll and personal income taxes. The capital gains tax then places an additional layer of taxation on any returns in the investment purchased with after-tax income when taxpayers realize, or sell, their asset with a capital gain.
You shouldn’t look at this double taxation in isolation, because taxpayers who invest in capital gains get the benefit of deferral, making capital gains relatively more attractive from a tax standpoint compared to other investments. As my colleague Kyle Pomerleau points out:
The effective capital gains tax rate is already relatively low compared to the effective tax rate on other sources of capital income such as dividends and interest. This is mainly because individuals can delay realizing their capital gains, which reduces the present value of the tax burden.
This means the double taxation placed on capital gains isn’t mitigated just by the reduced rate, but also by the taxpayer’s ability to choose when they want to pay taxes on the capital gain. Taxpayers would still have this ability to time their capital gains realizations even if the reduced rate were increased.
Eliminating the reduced rate on capital gains would raise revenue, but it would also increase the cost of capital and the marginal tax rate on savings and investment—meaning that this might not be the best trade-off for policymakers.
Source: Tax Policy – Is Increasing the Capital Gains Tax Rate the Right Way to Generate Revenue?