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Wednesday, January 16, 2019

Who Should Pay to Clean Up Water? 

According to this report, Gavin Newsom, governor of California, has “proposed a tax on drinking water * * * to help disadvantaged communities clean up contaminated water systems. Newsom’s plan for a “safe and affordable drinking water fund,” included in the new governor’s first budget proposal, attempts to revive an idea that died in the Legislature last year.”

The idea of taxing drinking water both surprised and puzzled me. It surprised me, because taxing drinking water might be close to taxing the air that a person breathes. It puzzled me, because it is logistically difficult, if not impossible, to determine how much of the water that a person purchases, from a water utility supplying a building or in the form of bottled water, is used for drinking rather than washing, bathing, or watering lawns and plants.

So, as I usually do when I read or hear something that doesn’t quite make sense, I did a bit of research. According to this report, the proposed drinking water fund would need an initial $25 million. Though details on the source of the funding are unclear, last year’s proposal would have imposed a 95 cent monthly tax on residential utility customers, and fees on dairy producers and feedlot operators. That monthly tax and those fees are not a “tax on drinking water.” The headlines that so claim are flat out wrong.

Though several groups have expressed opposition to the enactment of a new tax, for various reasons, my concern is that a tax intended to clear up water ought to be imposed as a fee on those who have dirtied the water. Taxing residential homeowners and renters, almost none of whom are responsible for the dirty water in question, would require them to pay for the misdeeds of others. If imposing a dirty water fee on businesses and activities that pollute water requires those entities to increase the prices they charge customers, then the true cost of their products and services would be borne by those who use those products and services. A tax that shifts the burden of pollution from the polluters to those who are not polluters is unwise. It also happens to be one of the reasons that some of the opponents of the proposal have taken the position they have taken.

Monday, January 14, 2019

No Tax Break Until Taxpayer Promises Are Fulfilled 

Although most tax breaks, especially those for “creating” jobs, are handed out before the recipient does what the recipient promises to do in exchange for the tax breaks, I have advocated holding back tax breaks until the recipient actually does what the tax break requires. I have explained this position in posts such as How To Use Tax Breaks to Properly Stimulate an Economy, How To Use the Tax Law to Create Jobs and Raise Wages, Yet Another Reason For “First the Jobs, Then the Tax Break”, and When Will “First the Jobs, Then the Tax Break” Supersede the Empty Promises?

Now comes news that the New Jersey program providing tax breaks to corporations that promise to create jobs in the future lacks oversight, and that New Jersey has “failed to hold companies accountable for the jobs and investments they promised.” The news follows an audit by the state’s comptroller, whose office was unable to verify the 3,000 jobs that the tax break recipients claimed to have created or kept. Among the recipients of these tax breaks were companies that promised to stay in, or move to, Camden while creating jobs. The agency charged with implementing the program did not establish a method to determine if the tax breaks generated the economic benefits that were promised. Nor did it set up a method to verify the claimed job creation.

I have been a critic of the Camden promised-jobs tax giveaway, writing about the flaws in posts such as The Tax Break Parade Continues and We’re Not Invited, and previously in When the Poor Need Help, Give Tax Dollars to the Rich, Fighting Over Pie or Baking Pie?, Why Do Those Who Dislike Government Spending Continue to Support Government Spenders?, When Those Who Hate Takers Take Tax Revenue, Where Do the Poor and Middle Class Line Up for This Tax Break Parade?, and Another Flaw in the New Jersey Tax Break Giveaway. Although New Jersey’s governor has proposed replacing the expiring tax break giveaway program with one that limits the tax breaks and monitors them more closely, it seems to me that the better approach is to simply let the program expire. But if these sorts of promised-job tax breaks are to continue, the process should be reversed, and companies that want to claim the tax break should be required first to produce iron-clad evidence that jobs have been created.

I am not alone in criticizing the New Jersey program in question. According to the news report, criticism has arisen from across the political spectrum. It was not unnoticed that the tax breaks were handed out “to companies with strong political connections.” Criticism was probably strengthened by the fact that more than $8 billion in tax breaks were handed out, almost all to companies awash in cash and profits. And surely it was strengthened by the news that some companies were overpaid even if they met their promised investment and job creation promises.

Savvy individuals and companies put money into escrow or other third-party accounts when the payment of the money depends on the performance of services or the delivery of property. There is no reason that a similar approach cannot be used when it comes to tax breaks, with a thorough review by a third party of companies’ claims that they have already performed what they promised to perform. Broken promises should not be part of a tax system.

Friday, January 11, 2019

Another Weak Defense of the Soda Tax 

Though it had been a while since I last wrote about the Philadelphia soda tax, no sooner had I published my latest commentary in Imagine a Soda Tax Turned into a Health Tax, addressing the closing of a grocery store, than there appeared a Philadelphia Inquirer commentary arguing that the closure was not on account of the soda tax. As readers of this blog know, although its advocates continue to praise its existence, the soda tax fails to get my support because it is both too narrow and too broad. It applies to items that ought not be subjected to this sort of “health improvement” tax, and yet fails to apply to most of the food and beverage items that contribute to health problems. Very little of its revenues are directed into health improvement efforts. Though I haven’t paid much attention to the tax during the past year or so until last week, I had written about the soda tax since 2008, in posts such as What Sort of Tax?, The Return of the Soda Tax Proposal, Tax As a Hate Crime?, Yes for The Proposed User Fee, No for the Proposed Tax, Philadelphia Soda Tax Proposal Shelved, But Will It Return?, Taxing Symptoms Rather Than Problems, It’s Back! The Philadelphia Soda Tax Proposal Returns, The Broccoli and Brussel Sprouts of Taxation, The Realities of the Soda Tax Policy Debate, Soda Sales Shifting?, Taxes, Consumption, Soda, and Obesity, Is the Soda Tax a Revenue Grab or a Worthwhile Health Benefit?, Philadelphia’s Latest Soda Tax Proposal: Health or Revenue?, What Gets Taxed If the Goal Is Health Improvement?, The Russian Sugar and Fat Tax Proposal: Smarter, More Sensible, or Just a Need for More Revenue, Soda Tax Debate Bubbles Up, Can Mischaracterizing an Undesired Tax Backfire?, The Soda Tax Flaw in Automotive Terms, Taxing the Container Instead of the Sugary Beverage: Looking for Revenue in All the Wrong Places, Bait-and-Switch “Sugary Beverage Tax” Tactics, How Unsweet a Tax, When Tax Is Bizarre: Milk Becomes Soda, Gambling With Tax Revenue, Updating Two Tax Cases, When Tax Revenues Are Better Than Expected But Less Than Required, The Imperfections of the Philadelphia Soda Tax, When Tax Revenues Continue to Be Less Than Required, How Much of a Victory for Philadelphia is Its Soda Tax Win in Commonwealth Court?, Is the Soda Tax and Ice Tax?, Putting Funding Burdens on Those Who Pay the Soda Tax, and Imagine a Soda Tax Turned into a Health Tax.

In that recent Philadelphia Inquirer commentary, Ptah Gabrie argues that the closure of the Shoprite was due to other factors. After pointing out that the owner of the grocery store purchased a mansion four years ago and owns other stores that turn a profit, Gabrie cites a study claiming that some Philadelphians were shifting from sugary beverages to bottled water. Aside from the fact that the financial condition of the store’s owner has nothing to do with the fact that the store’s revenues are insufficient to cover the cost of purchasing the items it sells and paying for utilities, insurance, workers’ salaries, and other costs, the decrease in soda consumption has not necessarily translated into reductions in residents’ weight or an increase in residents’ health. Perhaps the sweetness lacking in bottled water is being offset by consumption of more cake, pies, cookies, and doughnuts.

Gabrie claims that the store closed because it lacks a liquor license. Yet even if having a liquor license would have permitted the store to remain open, does not the sale of alcoholic beverages contribute to health problems?

Gabrie also claims that home delivery cut into the revenue of the store in question, and points out that the store did not offer home delivery. Is there any evidence that the number of shoppers at the store decreased because they were using home delivery from other sources, rather than on account of shopping across the city boundary?

Gabrie suggests that a new ShopRite roughly two miles away might be the reason that revenue declined at the closed store. Yet again there is a question of whether shoppers chose to go to that store rather than to a store across the city boundary. It is interesting to speculate, but empirical evidence would be much stronger.

Gabrie asks why, if the soda tax is causing shoppers at stores near the city boundary to shift their shopping to stores outside the city, has the Aldi store not closed. There are several possibilities. One is that the store also is not doing well but its owner is hanging on, hoping for a turnaround. Another is that many of the clientele of that store are not habitual soda drinkers and thus do not see the point in taking their shopping out of the city.

Gabrie writes, “New taxes will always be opposed by the corporations that stand to lose profits and by people who mindlessly oppose any progressive means of changing the way we live.” My opposition is not based on lost profits but on the disconnect between the soda tax and the articulated goal of making people healthier. As I’ve pointed out in previous posts, the soda tax reaches items that are healthy, and fails to reach most items that are not healthy. Gabrie adds, “Taxation is the only way to push people on the fence to the healthy side. Just look at the tobacco industry.” That’s too much of an overstatement. There are, for example, workplace incentives in the form of bonus payments and gym reimbursements that are positive reinforcements of healthy behavior.

Gabrie then claims, “It is a fact that soda and sugary beverages cause diabetes.” It was when I read this statement that I decided I really did need to respond. The fact is, as explained by a variety of sources, including the University of Rochester Medical Center, eating too much sugar does not cause diabetes. According to the American Diabetes Association, “Type 1 diabetes is caused by genetics and unknown factors that trigger the onset of the disease. Type 2 diabetes is not caused by sugar, but by genetics and lifestyle factors.” The Mayo Clinic adds that gestational diabetes is caused by the placenta producing hormones that make cells more resistant to insulin. According to these and other sources, it’s not the sugar that causes diabetes but the weight that the sugar can add to a person’s body mass, so it’s not just sugar and certainly not just soda that adds the weight. That brings us back to the inconsistency between a tax on selected healthy and unhealthy beverages but the lack of a tax on unhealthy food items that can be just as much a risk for adding diabetes-inducing body weight. How many of the advocates of the soda tax would support a bacon tax, a fried food tax, or a saturated fat tax?

Wednesday, January 09, 2019

If It’s Real Property, It Should Be Subject to the Real Property Tax 

As reported in this article, the Pennsylvania Commonwealth Court has held that the land on which billboards are placed is subject to the real property tax even though the billboards themselves are not because of an exemption in the tax law for signs. The taxpayers have argued that the exemption for signs, which includes billboards, should also apply to that land.

Though generally it is easy to distinguish real property from personal property, there are items that appear to be one but that are the other. Billboards are one example. Unlike a portable trailer carrying a sign, which can be easily moved from place to place, a billboard structure is affixed to the land and not easily moved. Thus, but for the exemption in the statute, the billboard would be treated as part of the land, and thus, as real property. This is why a building is considered real property. Applying the same reasoning, the legislature also enacted exemptions for wind turbines and silos. Yet the legislature has not enacted exemptions for cell-phone towers despite enacting one for amusement park rides, so there is a bit of subjectivity in the drawing of the line between real and personal property.

Those who claim that the exemption for the billboard should extend to the land on which it sits claim that the Commonwealth Court decision will make things “taxable because there’s a rent being derived by the landlord or the property owner.” But that is not the basis for treating the land as real property despite the existence of personal property, the billboards, on the land. In fact, the position of the land owners is the position that, if extended, would open the door to the elimination of the real property tax on all but raw land. Should the land on which a person parks vehicles be exempt from the real property tax because vehicles are not subject to the real property tax? Should the land on which a person places patio furniture be exempt because furniture is not real property?

Another argument offered by the land owners and their representatives is the claim that the legislature intended to exempt the land from the real property tax. But the statute refers to “sign or sign structure” and not to “signs and the land on which they are situate.” If the legislature intended to exempt the land, which I doubt, the legislature needs to amend the statute to express in clear terms what it presumably intended. In effect, the legislature said, “In the absence of the exemption, the value of the billboard would be included in the value of the land for purposes of computing the real property tax because the billboard is affixed in the same way a building is affixed to the land, but because we have a soft spot in our hearts for the owners of the billboards, who often do not own but rent the land, we will treat the billboard differently from the way a building is treated.” That leaves the land as land, and subject to the tax.

So why would someone look at a statute that refers to a “sign or sign structure” and conclude that it applies to land? Perhaps for the same reason that someone tries to find a way of getting out from chores assigned by a parent. Perhaps for the same reason that some people, when there is an emergency or a call for volunteers, slink down in the chairs or turn away rather than pitching in.

Monday, January 07, 2019

Imagine a Soda Tax Turned into a Health Tax 

It has been a while since I last wrote about the Philadelphia soda tax. As readers of this blog know, although its advocates continue to praise its existence, the soda tax fails to get my support because it is both too narrow and too broad. It applies to items that ought not be subjected to this sort of “health improvement” tax, and yet fails to apply to most of the food and beverage items that contribute to health problems. Very little of its revenues are directed into health improvement efforts. Though I haven’t paid much attention to the tax during the past year or so, I have written about the soda tax since 2008, in posts such as What Sort of Tax?, The Return of the Soda Tax Proposal, Tax As a Hate Crime?, Yes for The Proposed User Fee, No for the Proposed Tax, Philadelphia Soda Tax Proposal Shelved, But Will It Return?, Taxing Symptoms Rather Than Problems, It’s Back! The Philadelphia Soda Tax Proposal Returns, The Broccoli and Brussel Sprouts of Taxation, The Realities of the Soda Tax Policy Debate, Soda Sales Shifting?, Taxes, Consumption, Soda, and Obesity, Is the Soda Tax a Revenue Grab or a Worthwhile Health Benefit?, Philadelphia’s Latest Soda Tax Proposal: Health or Revenue?, What Gets Taxed If the Goal Is Health Improvement?, The Russian Sugar and Fat Tax Proposal: Smarter, More Sensible, or Just a Need for More Revenue, Soda Tax Debate Bubbles Up, Can Mischaracterizing an Undesired Tax Backfire?, The Soda Tax Flaw in Automotive Terms, Taxing the Container Instead of the Sugary Beverage: Looking for Revenue in All the Wrong Places, Bait-and-Switch “Sugary Beverage Tax” Tactics, How Unsweet a Tax, When Tax Is Bizarre: Milk Becomes Soda, Gambling With Tax Revenue, Updating Two Tax Cases, When Tax Revenues Are Better Than Expected But Less Than Required, The Imperfections of the Philadelphia Soda Tax, When Tax Revenues Continue to Be Less Than Required, How Much of a Victory for Philadelphia is Its Soda Tax Win in Commonwealth Court?, Is the Soda Tax and Ice Tax?, and Putting Funding Burdens on Those Who Pay the Soda Tax.

In the meantime, as summarized in this article, academic and business researchers have studied the impact of the tax. Advocates of the tax and opponents of the tax have found reasons to support and object to each of the studies, almost always reflecting an alignment between their views and the outcome of the study. Generally, it appears that stores have passed some or all of the tax on to customers, sales of beverages containing soda have dropped, and some customers have shifted their shopping to locations outside the city where the tax does not apply, causing sales at stores outside the city limits to increase.

Now comes news that the owner of a Shoprite grocery store in West Philadelphia will close. The owner has explained that because of the soda tax, revenue at the store has dropped from $30.5 million in 2016, before the tax went into effect, to $23.4 million in 2018. The store is just blocks from the city limits, and it would be no surprise to learn that when people go to a store outside the city to avoid the soda tax they also purchase everything else on their grocery shopping list. The Shoprite’s owner concluded that the store has become unprofitable, losing more than $1 million each year since the tax went into effect. This Shoprite is not the owner’s only city grocery store, as he owns six other stores in the city. Those stores also have suffered revenue decreases but not to the extent of the store within blocks of the city limits.

The impact of the closure is unhealthy. The owner had opened this store and the others in what are called “food deserts,” places in cities where access to fresh groceries is limited or non-existent. Customers who shopped at this store despite the soda tax because they lack transportation to stores six, ten, or fifteen blocks away now face serious challenges in finding places to shop for food, even though the owner of the store has suggested he will offer ride shares. Employees of the closed store will be transferred to the owner’s other stores, but as employees of those stores leave, they will not be replaced, adding to the 200 positions already left unfilled because of slumping sales at those other stores. These are rather high prices to pay for a program that is generating less revenue than projected, and that has seen its projected revenue revised downward several times.

A spokesperson for the mayor, the chief cheerleader for the tax, responded by claiming that there was no “evidence that the tax has had any impact on sales.” The evidence I see is rather clear, so it would be helpful to know what sort of evidence the mayor seeks. The spokesperson pointed to several of those studies summarized above, but those did not focus on any particular store or area of the city, but rather looked at overall trends. The mayor continues to insist that because the tax is imposed on beverage distributors, they could absorb it rather than pass it on to customers, but the practical reality of the tax is that it gets passed on to customers.

Imagine if the tax was imposed on all items containing substances harmful to health, and not just beverages that contain sugar. Imagine if the tax did not apply, as it does, to items that are not harmful to health. The impact of the tax would be much less significant, because it would be spread over a much larger array of unhealthy food items, such as doughnuts, pastries, cakes, bacon, cheese curls, candy, and other items that contribute as much, if not more, to the poor health of America as does soda. Imagine if the revenue generated from the tax was used to improve health habits, dietary decisions, and medical care. Imagine if there was a connection between the impact of the tax and the purposes to which its revenues were dedicated. Imagine.

Friday, January 04, 2019

Tax News: Good or Bad? 

Three days ago, reader Morris directed my attention to a four-and-a-half-year-old BBC Report that explored why bad news dominates the headlines and television news. All of us are familiar with the teasers that promote the 11:00 evening news on local television stations that almost always highlights a car crash, a shooting, a fire, or some other catastrophic event. When was the last time “Man Finds His Long Lost Sister” the lead story?

Morris asked me a series of questions. He asked:
Do you blog more bad tax news stories than good tax news stories?

How do you define bad vs good tax stories?

Is it possible that the same story or the same tax circumstances could be good news for one or more persons and bad news for one or more persons?

Are you drawn to bad news stories {headlines} when writing your blog? If so, why?
After realizing I had never thought about this perspective on my blog writing, I did a bit of thinking. Here is what I concluded. Stories with bad tax results for someone do get my attention, perhaps because the “Maxine filed her taxes and didn’t get audited” story doesn’t ever appear. And to the extent I am drawn to stories with bad tax results, it’s because the lesson to be learned from what someone did wrong can make a stronger impression on readers than the highlighting of someone’s routine and correct reaction to a tax issue.

Yet it is the third question posed by Morris that is most important. Yes, the same tax story can be good news for one or more persons and bad news for others. Why? To the extent the story is about someone who failed to do something correctly when filing taxes and who was audited, there is bad news for that person but good news for everyone else who has filed correctly. So in some sense, it is not possible to tag a tax story as “good” or “bad” because the adjective depends on the viewpoint of the reader. Thus, perhaps I should conclude that I don’t blog more bad tax stories or good tax stories because all tax stories are both good and bad from a universal perspective. From my own personal perspective, at least some of the tax stories I report and analyze are good or bad, but many of them are both. Consider the story of someone who does something bad with respect to taxes, from my viewpoint and the viewpoint perhaps of most others, but in which I find something good because there is the opportunity to help others avoid the same mistake.

Perhaps a good example of the difficulty in tagging a tax story as good or bad are the commentaries I have shared with respect to the 2017 tax legislation. From the short-term perspective of those who hauled in huge tax cuts, that was a good story. From the perspective of those who did not get any tax cuts, or perhaps a crumb or two, or who even were afflicted with a tax increase, that was a bad story. The long-term perspective might cause some of those who considered the legislation to be good news to change their minds, although there surely will be some who would consider the news to be good no matter what happens.

For me, the primary good news is that there are tax stories on which I can comment. Perhaps for those who disagree with my analyses or dislike my tax philosophy, the bad news is that there are tax stories on which I can comment. The fact that the world will not run out of tax stories is good news or bad news, depending on how a person views that prospect.

Wednesday, January 02, 2019

Tax Ignorance or Bad Writing? 

A few days ago, reader Morris directed me to a web site and asked me, “tax ignorance or bad writing.” Curious, I took a look, and spotted several statements at least some of which had inspired reader Morris to send the note to me. Perhaps he saw other questionable statements that I overlooked. Here they are:
* * * For instance, if you receive money from life insurance proceeds, a gift or an inheritance, rather than work-related wages, calculating your taxable income can become more complex. * * *

* * *

The list of what type of revenue is taxable, according to the IRS, is long, but a good way to understand what you should report and what you don't need to is to think about earned income versus unearned income. If you earned it, report it as taxable income. If you didn't earn the income, you probably don't have to report it.

* * *

If you receive long-term disability benefits before you're retired, that's also considered taxable income. Union strike benefits are also taxable, as are jury duty fees. Unemployment benefits are also considered taxable income. So are royalties and license payments, interest or dividends from investments and severance pay from a previous place of employment. Even money you win from a game show is considered taxable income.

* * *

Here are some of the types of income categories that you must pay taxes on:
* * *
Capital gains and losses.
* * *
Rental income and expenses.
* * *
401(k) plans.

* * *

What is nontaxable income?
As a general rule, among what you don't have to report includes gifts and money you inherit, child support payments, welfare benefits, damage awards for physical injury or illness, cash rebates from a dealer or manufacturer for an item you purchase and reimbursements for qualified adoption expenses. Still, there are some exceptions. For instance, while you won't have to pay an inheritance tax on the federal level, six states – Iowa, Kentucky, Maryland, New Jersey, Nebraska and Pennsylvania – currently collect an inheritance tax. Inheriting property versus money can also sometimes involve paying taxes.

* * *

Here are some of the types of income categories that are not taxed:

* * *
Life insurance reimbursements for medical expenses not previously deducted.

* * *
My conclusion is that we’re looking at some bad writing. The primary problem is the insistence on trying to define taxable income by listing items that are or are not included in GROSS income, which is not the same as taxable income. Deductions can offset some or all of a person’s gross income. So it is wrong to state that any particular amount of income is included in taxable income because it is premature to determine the impact of that income until deductions are taken into account.

A related problem is the attempt to bunch losses and deductions with gains and income when trying to define income. A person does not “pay taxes on” capital gains and losses. A person must include capital gains in gross income. Capital losses can offset those gains in the process of computing taxable income. Taxes are not paid on capital losses. The same is true of rental expenses.

Nor is it correct to state that if a person receives a gift or inheritance, “calculating your taxable income can become more complex.” Gifts and inheritances are not included in gross income, and thus are not included in taxable income. They are left out of the process, so there is no way they can make the process of computing taxable income more complex. On a related note, the sudden shift into state inheritance taxes is confusing because inheritance taxes have nothing to do with the computation of federal taxable income.

The idea that a 401(k) plan is a type of income is bewildering. Distributions from 401(k) plans are what get considered in determing gross income. Do reimbursements for medical expenses come from life insurance, or do they come from health insurance?

The notion that “a good way to understand what you should report and what you don't need to is to think about earned income versus unearned income. If you earned it, report it as taxable income. If you didn't earn the income, you probably don't have to report it” is completely wrong. Earned income, in the federal income tax world, is income derived from performing services. Some earned income is included in gross income, and some earned income Is excluded from gross income. Unearned income refers to income from investments, and again, some unearned income is included in gross income and some unearned income is excluded from gross income.

I think what leads to the bad writing is the ever-increasing demand for sound bites and tweets, as Americans, and others, seem to be losing the ability to process multi-step analyses, to hear or read comprehensive descriptions, or to understand complete sets of instructions. This tendency to reduce things to overly simplistic sound bites and tweets nourishes the tendency of too many people to look at things as binary possibilities rather than as realities on a spectrum. The article to which reader Morris directed my attention can easily be fixed, but it would require the addition of at least several sentences, or perhaps two or three paragraphs. When the reaction becomes, “Oh, but readers won’t last that long,” I fear that the same could be said of everything else that depends on having attention spans of more than 15 seconds. The willingness to humor and enable those short attention spans leads to bad writing, which in turn increases ignorance, which in turn leads to more bad and erroneous writing, which in turn spirals us down, down, down, eventually into oblivion.

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