Friday, January 19, 2018

Makers and Takers, Red and Blue, Federal Tax Deductions and State Taxes 

William Baldwin has taken a look at the impact of the recently enacted limitation on the deduction of state and local taxes for federal income tax purposes. In Financial Sinkhole States in the Trump Tax Era, he concludes that the reduction in the deduction is equivalent an increase in the cost of living for people residing in states that have relatively higher taxes. This, in turn, he suggests, will stimulate relocations from those states to states with relatively lower taxes. He focuses on eight states that he calls sinkhole states because the population dependent on the state, namely state government employees, welfare recipients, and retired state employees receiving pensions, exceed the number of “population feeding it.” Baldwin computes the “population feeding it” by calling the folks in that group “makers” and then explaining that, “The maker count is the sum of private-sector employment and federal employment. These are the people whose taxes pay the bills to keep the state government going.” So clearly he considers the state taxes paid by state government employees and retirees to be irrelevant, and those individuals to be something other than makers. His computations do not take into account the value of the services rendered by state employees. Nor do they take into account the burdens imposed by those among the “population feeding it” when they rely on state-funded benefits or engage in fraudulent and dangerous activities that threaten the lives and economic security of the state’s residents. His use of the terms “makers” and “takers,” along with his use of the phrase “productive workers” to describe non-government employees, reveal the underlying assumptions driving his analysis.

What Baldwin overlooks is the application of “makers and takers” analyses to the states themselves. Baldwin identified eight states where he concludes the takers are driving out, or will drive out in greater numbers, the takers. Those states are Alaska, California, Connecticut, Illinois, Louisiana, Mississippi, New York, and West Virginia. Four are “red” states and four are “blue” states. Keep in mind that almost all “blue” states are considered to be places where the new limitation in the state and local tax deduction will, in effect, increase the cost of living there, while almost all “red” states engage in the “low tax” approach that devalues government and idolizes the so-called free market private sector.

On closer examination, as demonstrated by WalletHub’s 2017’s Most & Least Federally Dependent States, it turns out that the four “red” states in Baldwin’s list – Alaska, Louisiana, Mississippi, and West Virginia – rank among the most federally dependent states, ranking 2, 5, 12, and 23. On the other hand, the four “blue” states on his list – California, Connecticut, Illinois, and New York – rank among the least federally dependent states, ranking 34, 42, 46, and 47. In other words, the “red” states can pull off their “come here, taxes are low, but services are high” campaigns because federal money pours into those states from “blue” states whose residents finance the low-tax ride that “red” state residents enjoy. This isn’t a new revelation. In The Colors of Making and Taking and More Tax Colors, I explored the disparity between the states that held to progressive tax and economic policies and those that held to regressive tax and economic policies.

The flow of money from “blue” states to “red” states is one of the primary reasons Republican-controlled Congresses don’t cut federal spending as their majority members promised during campaigns. When they get to Washington and see where the money goes, they realize that following through on their promises will cause “red” states to face a choice between eliminating services or raising taxes. I touched on this inconsistency, at the state level, in Why Do Those Who Dislike Government Spending Continue to Support Government Spenders?.

The recent tax legislation increases the extent to which “blue” states fund “red” states. Although litigation has been threatened and political maneuvering is underway, it is unlikely that much will change until the next step in Baldwin’s scenario is underway. Let’s suppose he is right, and taxpayers flee “blue” states for “red” states to reduce their tax burdens. The “blue” states will need to raise taxes even more, or cut services, or both. Eventually, the people Baldwin and others call “takers” will also leave the “blue” states and flock to the “red” states, which by then will be turning purple and even blue, as they face the consequences of “blue” state funding disappearing as “blue” states sink into the holes Baldwin predicts will swallow them up. When the “blue” states fall into the mess that Baldwin and others predict, the “red” states will go down with them.

There are those who rejoice at the clever way in which the recent tax legislation puts “blue” state taxpayers at a disadvantage. It is yet another salvo in the ongoing economic war between “red” and “blue” states. Every time someone points to New York or California as examples of how progressive tax and economic policies are failures, someone else points to Kansas and Louisiana as examples of how regressive tax and economic policies are failures. Those who are rejoicing at the prospect of “blue” states and their accompanying tax and economic policies failing ought to pause and consider the cost of such an outcome, and remember that there are “red” states in even worse economic condition. Once those “blue” states go down as Baldwin and others predict or hope or expect or worry, the “red” states will not be unscathed. Insularity is not a viable economic or tax policy option in a global world. That approach went out the window many decades ago.

Wednesday, January 17, 2018

Oh, Those Bonus Payments! Much Ado About Almost Nothing 

Two weeks ago, in Those Tax-Cut Inspired Bonus Payments? Just Another Ruse, I explained the deceptiveness of the big deal being made of $1,000 bonus payments to employees in efforts to justify the tax legislation giveaway to corporations and oligarchs. I argued that the $1,000 bonus will be dwarfed by the consequences of the spending cuts that the Congress will enact in order to reduce the deficit caused by its sellout of America. A bit later, in That Bonus Payment Ruse Gets Bigger, I repeated my criticism, noting that the at least some of the employers handing out bonus payments were laying off employees, cutting purchase orders, and increasing prices charged to customers. If the tax cuts were what their advocates claimed they are, the recipients of the tax cuts would have no need to la off employees, cut purchase orders, or increase prices charged to customers. They are doing those things because they are plowing the tax cut funds into the wallets and off-shore bank accounts of people already drowning in the money to which they are addicted.

In several of my posts, I have referred to these bonus payments as crumbs. Indeed, when compared to the size of the tax cuts received by the employers, the bonus payments amount to one, two, perhaps five percent of the tax cut money. It’s like that when the gluttons dominate the buffet table.

Now comes news that required me to find a word that describes a piece of bread smaller than a crumb. I did not succeed, unless a molecule or an atom qualifies, but at that stage the substance isn’t bread. Perhaps speck might suffice.

What sort of news caused be to think about bread pieces smaller than crumbs falling from the table? It turns out, according to many reports, including this one from Business Insider, that the $1,000 bonus payments being made by Walmart – an employer that also is laying off workers – are limited to employees with at least 20 years of service. Most Walmart employees haven’t accrued that much time. The bonus is smaller for employees with less service time. Though Walmart has not publicized how much of a bonus payment is being made to an employee with a particular number of years of service, it did explain, as reported in several places, including ThinkProgess, that the bonus payments will total $400 million. Walmart has roughly 2.1 million employees. Simple arithmetic tells us that the average bonus is $190. That’s a far cry from $1,000. If $1,000 is a crumb, and it is, considering the size of the tax cuts, $190 is, at best, a speck.

Years ago, when I was a child and I found a nickel, someone said to me, “Don’t spend it all in one place,” and laughed. It would be cruel to give the same smart-aleck advice to the unfortunate person who gets a $50 or $100 bonus from an employer who stands to enjoy an $18 billion benefit from this latest trickle-down scam that even its inventor has admitted is a failure.

Monday, January 15, 2018

Fixing State Tax Problems Caused by Federal Tax Changes 

Several weeks ago, in So What About Those State Taxes? Surprise?, I pointed out that “The recently enacted federal tax legislation not only affects federal income tax liability but also changes state income tax liability for most taxpayers living or working in states with an income tax,” because “Most state income taxes are linked in some way to the federal income tax system.” A little more than a week ago, in What Losing Federal Personal and Dependency Exemptions Does to Michigan (and Other) Taxpayers , I described the uncertainty facing Michigan as legislators, economists, and tax professionals debate whether it is necessary to amend the state’s tax laws to prevent Michigan taxpayers from losing the Michigan personal and dependency exemption deduction. I pointed out that necessary or not, it would be wise to clarify the matter.

It seems that Michigan’s governor and legislature is taking the sensible and careful route. According to various stories, including this Detroit News article, the governor is proposing legislation to set the Michigan exemption independent of federal tax law. The legislature appears willing to enact the proposal, though it would not be surprising if it was tweaked a bit, because getting the numbers just right not only is difficult in terms of computation but also challenging in terms of the meaning of “just right.” The Lieutenant Governor explained that the proposal probably reduces tax revenue a little bit, in contrast to the $840 million tax increase that Michigan taxpayers would otherwise face in 2018 and the $1.6 billion increase they would face in 2019. For many taxpayers, the state tax increase that would otherwise occur would more than wipe out the mere pittance of a federal income tax decrease that most Americans will see.

An alternative, reducing state income tax rates, has little support because it would cause some Michigan taxpayers to face tax increases, some to face tax decreases, and the rest to maintain close to the status quo. Proponents of the exemption restoration consider it to be the simplest, and fairest, solution. It is.

This problem affects many more states than Michigan. Louisiana, for example, as I discussed last week in State Tax Increases Cut the Tax Cuts faces similar issues. By relying on federal adjusted gross income, taxable income, exemptions, or other items, states are at the mercy of whatever the Congress does. Would it make sense, as a few states have done, to avoid relying on federal items in computing state income tax? Yes and no. Doing so avoids the chaos bred by the latest trickle-down Congressional nonsense. But it leaves each state with the legislative, administrative, and judicial burden of resolving each definition and each issue independently. Even the states that separately compute state taxable income rely on federal definitions of certain underlying items.

This is a story that will grow, as more and more state revenue departments finish their analyses and present their findings to state governors and legislatures. And it will continue to grow as state legislatures consider how to react. Unfortunately, most taxpayers aren’t paying attention to these issues.

Friday, January 12, 2018

What Funds Social Security and Why Does It Matter? 

Reader Morris directed my attention to a letter to the editor of the Santa Cruz Sentinel. Helena Robertson claims that “Social Security is not funded through federal taxes,” and the newspaper used that claim as the headline for the letter. Robertson explained that “Social Security is financed through a dedicated payroll tax. . . interest earnings . . . revenue from taxation of OASDI benefits . . . and reimbursements from the General Fund of the Treasury.” Though Robertson’s litany of the sources of funding for Social Security is essentially correct, she is wrong in concluding that the payroll tax to which she refers is not a federal tax. It indeed is a federal tax. It is not a federal income tax, which perhaps is what Robertson was trying to say. My guess is that Robertson was trying to provide a foundation for dealing with the upcoming attacks on Social Security, along with Medicare and Medicaid, that will be justified by a hypocritical concern about the federal budget deficit and accumulated federal debt. Robertson’s point, which she did not articulate but which every American above the age of 12 needs to understand, is that deficits caused by cuts in federal income taxes ought not be reduced by cutting spending funded by federal payroll and self-employment taxes. That stunt is just another piece of the plan by which the wealthy oligarchs running the country scheme to take even more from the poor and middle class.

Wednesday, January 10, 2018

State Tax Increases Cut the Tax Cuts 

Two weeks ago, in So What About Those State Taxes? Surprise?, I pointed out that “The recently enacted federal tax legislation not only affects federal income tax liability but also changes state income tax liability for most taxpayers living or working in states with an income tax,” because “Most state income taxes are linked in some way to the federal income tax system.” Last week, in What Losing Federal Personal and Dependency Exemptions Does to Michigan (and Other) Taxpayers , I described the uncertainty facing Michigan as legislators, economists, and tax professionals debate whether it is necessary to amend the state’s tax laws to prevent Michigan taxpayers from losing the Michigan personal and dependency exemption deduction. I pointed out that necessary or not, it would be wise to clarify the matter.

Now comes a story out of Louisiana describing the adverse effect on Louisiana taxpayers of the tax legislation enacted in Washington, D.C. According to the story, there are two major effects that will cause most, if not almost all, Louisiana taxpayers to face automatic state tax hikes. First, Louisiana permits its taxpayers to deduct the federal income taxes that they pay. Any Louisiana taxpayer whose federal income tax liability decreases will have a lower state deduction, and thus a higher state taxable income and resulting higher state income tax. Second, Louisiana permits its taxpayers to deduct some of their federal itemized deductions. To the extent that a Louisiana taxpayer shifts from itemizing deductions for federal income tax purposes to claiming the federal standard deduction, that taxpayer will lose the itemized deductions that otherwise would be deducted on the Louisiana income tax return.

The Louisiana legislature could ameliorate these effects by amending state tax law to permit taxpayers to deduct, for example, 110 percent or 120 percent of federal income tax liability. It could increase the Louisiana standard deduction, or permit deduction of itemized deductions that would have been claimed on the federal income tax return had the 2017 legislation not been enacted.

But it is unlikely that the Louisiana legislature will take steps to shield its taxpayers from this “looks good at first, isn’t so great after further review” situation. Why? Louisiana presently faces a billion-dollar budget deficit. Revenue increases are welcome. How much of an increase in state taxes will the federal tax legislation generate? Computations are underway, but officials already are using the word “significant.”

What is given by one hand is taken away by the other. Too many Americans don’t look at both hands. What a shame.

Monday, January 08, 2018

That Bonus Payment Ruse Gets Bigger 

A bit more than a week ago, in Those Tax-Cut Inspired Bonus Payments? Just Another Ruse, I explained the deceptiveness of the big deal being made of $1,000 bonus payments to employees in efforts to justify the tax legislation giveaway to corporations and oligarchs. I argued that the $1,000 bonus will be dwarfed by the consequences of the spending cuts that the Congress will enact in order to reduce the deficit caused by its sellout of America.

But it’s worse that I thought. At least we are being given the opportunity to see through the charade.

As reported in various stories, including Fortune article, Southwest Airlines plans to give its employees a $1,000 bonus. According to this Bloomberg report, the bonus will cost Southwest $70 million, while the tax changes will add between $1 billion to $1.5 billion to the airline’s bottom line. “Here, employee, have a crumb.” Worse, the same report describes Southwest’s decision to delay some of its Boeing orders, causing one analyst to describe it as a bad day for Boeing. I wonder how many Boeing employees will be getting a pink slip.

It’s not just employees getting the short end of the deal. According to various reports, including this one, Comcast plans to deliver $1,000 bonuses to its employees. Generous? At the same time, it also is being reported that Comcast is raising its rates. So its customers apparently are paying for those bonus payments. Why is there a need to raise rates if a huge infusion of cash is coming in from that corporate rate cut?

In the meantime, employees of non-profit employers aren’t getting a bonus. This includes government employees. That’s right. Those police officers, fire fighters, EMTs, non-profit institution health care workers, and others who are no less deserving of a bonus will face not only an empty bonus envelope but risk pay cuts and being laid off, as the tax cut giveaway will require cuts in federal financial support of state and local services.

When I see posts on facebook about people who voted for the cabal running the federal government lamenting the broken promises, stressing over things like cuts in funding for programs that keep people alive with food and health care, and crying, “This isn’t what I voted for. This isn’t what I expected,” I cringe. Was it that difficult to pay attention and let knowledge push out the ignorance. Did these people not hear what Michael Bloomberg told the nation?

It amazes me how some people can remain so devoted to those who treat them so badly. Politics has become one huge dysfunctional relationship.

Friday, January 05, 2018

What Losing Federal Personal and Dependency Exemptions Does to Michigan (and Other) Taxpayers 

Last week, in So What About Those State Taxes? Surprise?, I pointed out that “The recently enacted federal tax legislation not only affects federal income tax liability but also changes state income tax liability for most taxpayers living or working in states with an income tax,” because “Most state income taxes are linked in some way to the federal income tax system.”

A reader pointed me to a Detroit Free Press article explaining that the changes to federal income tax law will increase state income tax liabilities for Michigan taxpayers by $1.4 billion. The principal reason for this impact is the loss of federal personal and dependency exemptions in the federal income tax law. Under current Michigan income tax law, the computation of Michigan taxable income begins with federal adjusted gross income, is increased and decreased by a variety of adjustments, and is decreased by $4,000 for each personal and dependency exemption claimed on the taxpayer’s federal income tax return, as illustrated by the Michigan income tax form.

Of course, this last-minute development has caused Michigan politicians to examine and discuss what to do about the situation. Many suggest doing something to prevent this outcome, including enacting a Michigan exemption not tied to the federal income tax system. Others want to lower the rate, but face opposition from advocates for higher tax relief for the poor and middle class. Still others want the state to let its tax revenue increase, because they predict that it will be needed to offset expected cuts in direct and indirect federal financial assistance to states.

What caught my attention was a dispute about the impact of the loss of the federal personal and dependency exemptions. Many Michigan tax experts agree that with that loss, taxpayers will be claiming zero exemptions on their federal income tax returns and thus will enter zero on their Michigan income tax returns where it requests the “Number of exemptions claimed on” the federal return. Yet one economist argues that the elimination of the federal personal and dependency exemption deduction simply means that it has been reduced to zero for purposes of computing federal income taxes but that it has not been eliminated. This economist informed the Michigan Department of Treasury that no legislative action is required and that “Michigan's income tax payers will not lose their state income tax exemptions ... and will not be subjected to a large income tax hike.” He might be correct. According to Michigan Compiled Laws section 206.30(2), the Michigan exemption deduction is based on the “number of personal or dependency exemptions allowable on the taxpayer's federal income tax return pursuant to the internal revenue code.” Section 151(d)(5), as enacted by section 11041 of Public Law 115-97 reduces the federal exemption amount to zero and then provides that “For purposes of any other provision of this title, the reduction of the exemption amount to zero under subparagraph (A) shall not be taken into account in determining whether a deduction is allowed or allowable, or whether a taxpayer is entitled to a deduction, under this section.” Though it is modified by “For purposes of any other provision of this title,” and not “For all purposes, including state income tax computations,” the reference in Michigan law to the “number of personal or dependency exemptions allowable on the taxpayer’s federal income tax return” should be sufficient to preserve the Michigan deduction.

Two concerns for Michigan are apparent. First, the instruction on the Michigan income tax return and the explanation in the instruction booklet that refer to exemptions “claimed on the taxpayer’s federal income tax return” need to be changed. Why? Because taxpayers will not be claiming exemptions on the federal return. The reference will need to be to exemptions “allowable for federal income tax purposes,” or, “exemptions that would be claimed on the federal income tax return if the federal exemption amount were other than zero.” I doubt that the revised Form 1040 will still include a line for personal and dependency exemptions so that all taxpayers can insert a meaningless zero. It is possible that the revised Form 1040 will continue to ask for identification of dependents for other purposes, but it also is possible that the request for dependency information will be relocated to forms for credits or which that information is necessary. It is likely that identification of personal exemptions, in contrast to dependency exemptions, will be requested. And that leads to the second concern. Michigan taxpayers, along with those in other states with similar statutory and instruction language, will need to figure out what their federal personal and dependency exemptions would have been had the federal income tax law not been changed, even though they don’t necessarily need to do that when filling out their federal income tax returns. Developers of tax preparation software surely are not overjoyed.

All of this further reinforces the inescapable fact that the Congress did a slipshod job of dealing with tax “reform” and “simplification.” It did not reform the tax law nor did it simplify the tax law. It simply let the donor class, the 150-some families that now run the country, grab whatever they could grab in step one of a multi-step “return to feudalism and call it free market capitalism” plan that ought to be called “socialism for the oligarchy.”

Wednesday, January 03, 2018

Just When I Thought Congress Had Reached Rock Bottom When It Comes to Taxes . . .  

Like most Americans, I do not hold Congress in high regard. Actually, I think the Congress has failed miserably in meeting its obligations to serve America. It has increasingly focused on serving the desires of those who fund their election campaigns.

When it comes to taxation, the quality of tax legislation, policy aside, has decreased over the past several decades. The number of technical amendments that are required continues to increase. Mistakes are rampant. Ambiguous terminology propagates wildly. Bewilderment among tax professionals grows and grows, as making sense of what is written in the legislation becomes more and more of a challenge with decreasing likelihood of success and widening frustration.

One particular pair of provisions illustrates the incompetence of how Congress deals with taxation. In the recently enacted legislation is a new section 864(c)(8) and a new section 1446(f). Section 864(c)(8) provides that a nonresident alien individual’s or foreign corporation’s gain or loss from the disposition of a partnership interest is effectively connected with the conduct of a trade or business in the United States to the extent that the person would have had effectively connected gain or loss had the partnership sold all of its assets at fair market value. The new provision applies to dispositions occurring after November 26, 2017. New section 1446(f)(1) provides that if any portion of the gain on disposition of a partnership interest would be treated under new section 864(c)(8) as effectively connected with the conduct of a trade or business within the United States (“effectively connected gain”), then the transferee must withhold a tax equal to 10 percent of the amount realized on the disposition. There is an exception if the transferor provides an affidavit to the transferee stating that the transferor is not a foreign person. The Treasury is authorized to issue regulations or guidance necessary to carry out the purposes of new section 1446(f), including application of the exception. New section 1446(f) applies to sales, exchanges, or other dispositions occurring after December 31, 2017.

Taxpayers and others affected by these new provisions have informed Treasury and the IRS that compliance without guidance presents significant practical problems. There are a variety of situations in which a transferee will be unable to determine whether it must withhold under new section 1446(f). If dispositions take place through a broker, the broker is permitted to withhold on behalf of the transferee but without guidance, brokers are unable to do so.

The solution advanced by the Treasury, explained in IRS Notice 2018-18 is to suspend withholding under new section 1446(f) with respect to publicly traded partnership interests. It intends to issue regulations or guidance in the future, and those rules would be prospective. They also will include transition rules to allow sufficient time to prepare systems and processes for compliance.

Putting aside the question of whether the Treasury can suspend withholding required by the Internal Revenue Code, consider how practical reality meant nothing to the Congress when it enacted these new provisions. It enacted, in late December, withholding requirements effective on January 1. Though it provided for the issuance of regulations and guidance, it assumed that regulations and guidance could be produced in several days, and during a holiday period. That cannot happen, and any member of Congress involved in drafting or voting on tax legislation has an obligation to understand that it takes months, and sometimes years, to analyze provisions, identify issues, allow for public comment, and propose, let alone adopt, regulations or guidance. Worse, the Congress assumed that transferees, brokers, and their bookkeepers, accountants, and tax professional advisors, together with their programmers, could put together the necessary procedures and software in that same period of several days.

This is what happens when a Congress, in a rush to satisfy greedy donor oligarchs, throws together a mish-mash of provisions that have not been vetted, have not been subject to public scrutiny, have not been drafted with comments from those who are affected, have not been aired in public hearings, and that have been jammed down the throat of a nation the overwhelming majority of whose citizens opposed the sloppy and ill-advised greed-grab.

Considering that a good bit of the newly enacted legislation poses similar problems, both in terms of interpretation and application as well as in redesign of software and business operating procedures, will the Treasury suspend enforcement of those provisions while it tries to put together regulations and guidance in a feeble attempt to fix the mess that the Congress has created? Should it? Does the Congress even understand this issue? Or is it too busy getting instructions from its handlers for the next batch of badly written and ill-advised legislation?

Is it any wonder that Americans hold its Congress in such low esteem? Is it not sufficiently shocking to Americans that the members of Congress, aside from a few brave but outshouted and outvoted members, doesn’t really care what Americans think?

Monday, January 01, 2018

Getting Tax Cut Benefits to Those Who Need Economic Relief: A Drop in the Bucket But Never a Flood 

A reader pointed me to a Detroit Free Press article explaining that the Michigan Public Service Commission has directed regulated public utilities to analyze the impact of the recently enacted federal income tax cuts on their financial position and to propose how the tax savings will generate reductions in utility bills for consumers. This is an important, though in the scheme of things minor, outcome of the recent legislation. It is important because if corporations and businesses getting tax cuts reduced prices across the board, consumers – the largest and most important component of a capitalist economy – would benefit and in turn spend their cost savings to spark genuine, in contrast to bubbled, economic growth. It is minor because regulated public utilities are a tiny piece of the economy.

Imagine if corporations and businesses were required to use their tax cuts to reduce the prices of their goods and services rather than using them to engage in mergers, buy back stock, increase dividends, or toss bonus crumbs to some employees while axing thousands of jobs. Not only are those sorts of regulations going to be enacted, the same folks who brought us the tax cuts favoring the oligarchy also have on their agenda the elimination of every regulation they can find a way to trash. These folks praising the evisceration of the EPA and its regulations haven’t yet disclosed how they expect Americans to deal with filthy air and polluted drinking water. I’m sure the wealthy think they will be able to avoid those consequences for themselves. Just imagine what the deregulation of public utilities will do to most Americans. So that drop in the bucket of shifting tax cuts to consumers might not last very long.

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