Biden Slams Amazon as Prime Example of a Broken Tax System

Plus, states prepare for the next recession

Biden Slams Amazon as Prime Example of a Broken Tax System

Democratic presidential candidate Joe Biden took aim Thursday at the way companies pay taxes in the U.S., citing Amazon as an exemplar of a deeply flawed system that allows billion-dollar companies to pay little or nothing in federal income taxes.

“I have nothing against Amazon, but no company pulling in billions of dollars of profits should pay a lower tax rate than firefighters and teachers,” Biden tweeted. “We need to reward work, not just wealth.”

Amazon has been aggressive in pushing back against criticisms of its tax payments, and it quickly replied to Biden, saying that it invests heavily in the U.S., pays all the taxes it owes and assumes that the former vice president’s complaint is really about the tax code and not the company itself.

Is Biden right? Biden cited data from a recent study by the left-leaning Institute on Taxation and Economic Policy that showed that at least 60 large U.S. companies paid no taxes last year, a large increase over the year before that appears to be driven by the 2017 Republican tax overhaul, which lowered the corporate tax rate while providing new write-offs for business investments.

The Wall Street Journal’s Richard Rubin took another look at the numbers on Friday, concluding that we can’t know for sure what the company’s tax rate was in 2018 since its returns are private, but the available data suggests that the tech giant had a tax rate of about 8% over a longer period of time, between 2012 and 2018 — not zero, but low nevertheless. The low rate was likely due to high levels of investment and write-offs for employee stock grants, Rubin said, which the company used to lower its tax burden.

So what’s the problem? CNBC’s Ylan Mui argued Friday that the spat “perfectly sums up the battle over America’s new tax code.” While the Tax Cuts and Jobs Act was supposed to supercharge the economy via big cuts and new incentives — and, according to Republicans, pay for the lost revenue through faster growth and the return of earnings from overseas — “that scenario has yet to materialize,” Mui said. GDP growth has been better than expected, but only marginally so, and it’s come at the price of soaring budget deficits and worse-than-projected shortfalls in corporate tax revenues (see below).

“Well that’s what happens when you cut the rate by 40%,” the Tax Policy Center’s William Gale told Mui. “You would need heroic growth to make up the difference.”

Inviting a Democratic challenge. The big drop in corporate tax receipts could be “giant headache for Republicans” in the 2020 election, Mui said, opening the door for Democratic politicians to use the GOP tax law and the companies that benefited from it as “political punching bags” in the months ahead.

Number of the Day: An $11 Billion Drop in Corporate Tax Collections

“Federal tax payments by big businesses are falling much faster than anticipated in the wake of Republicans’ tax cuts, providing ammunition to Democrats who are calling for corporate tax increases,” writes Politico’s Brian Faler.

Corporate tax receipts so far this year are down by $11 billion, or nearly 9%, extending last year’s 31% slide. The Congressional Budget Office projected in January that corporate tax receipts would rebound this year and rise by $40 billion, or 20%. That’s not happening.

“Analysts agree they can’t yet explain the decline in corporate tax payments,” Faler says. “They have a host of theories though, such as businesses making wider-than-expected use of the law’s expanded breaks for business investments. It may also be an unexpected side effect of President Donald Trump’s trade wars.”

Meanwhile, according to the CBO, taxes paid by individuals rose 4% last year and are up 3% so far this year thanks to higher salaries and wages.

Flush with Tax Revenue, States Prepare for the Next Recession

U.S. states got hammered by the Great Recession, but they’re now better prepared than ever for the next economic downturn, according to a report released Thursday by the National Association of State Budget Officers.

More than half the states report their fiscal 2019 revenue collections coming in ahead of projections, and that number is expected to grow. Buoyed by such rising tax collections, state governments have been padding their rainy-day funds, which have grown to an estimated $68.2 billion and are projected to reach $74.7 billion by the end of fiscal 2020. Though fiscal conditions still vary significantly by state, the median rainy-day fund now covers about 7.5% of general fund spending, the highest on record and up from 1.6% in fiscal 2010.

While the bolstered rainy-day funds should help states avoid steep spending cuts in an eventual recession, many states have already tightened their fiscal belts.

In half of the states, general fund spending levels for fiscal 2019 are already below where they were in fiscal 2008, after adjusting for inflation. Nine states have spending levels for fiscal 2019 that are more than 10% below their pre-recession peak, the report says, while seven states will have expenditures more than 10% above 2008 levels. “This variation is due to a combination of factors, including demographic trends, regional disparities in economic performance, significant fluctuations in oil and gas prices for energy-rich states, and fiscal policy decisions,” the report says.

Bloomberg’s Amanda Albright reports that states — and local governments — have been more reticent to borrow, even if that means public works projects go undone.

“The decade-long economic expansion has left surpluses where there were once deficits, interest rates are veering back toward more than half-century lows and there’s hundreds of billions of dollars of spending needed to refurbish roads, sewers and public transportation systems,” Albright writes. “Yet around the country, governments are showing little interest in borrowing money, cautious that a recession that by some measures seems overdue could resurrect the years of austerity that followed the last one.”

The purse strings have loosened, though, as state coffers have been replenished. States boosted spending by an estimated 5.8% in fiscal 2019, the fastest year-over-year growth since 2007. And the recent growth in tax collections has led governors to propose moderate additional increases of 3.7% for fiscal 2020. All but three states have proposed spending hikes, with governors proposing increases totaling $30.8 billion, including $14.1 billion in new money for K–12 education and $3.6 billion for higher education, the state budget officers' report says.

Even so, the report warns that “all states to some extent are facing long-term spending pressures in areas ranging from fixed costs such as health care and pension contributions to adequately funding education and infrastructure.”

Your Prize for Making It Through the Week

A baby giraffe was born at the Cleveland Metroparks Zoo back in April. “While he was born small for a typical male giraffe at 101 pounds, he has been fully integrated into the giraffe herd and has gained approximately 70 pounds,” the zoo said in launching a public “naming opportunity” for the no-longer-so-little guy. The names being considered are Kidogo, Bomani and Mosi. Voting for them requires a donation that the zoo says will go toward helping protect giraffes in the wild. If you don’t feel like donating, you still might like these cute pictures.

The zoo says the winning name will be announced on June 21, 2019 — which is World Giraffe Day, the longest day of the year.

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