MauledAgain

Memorial Day is a day of commemoration that has evolved into a holiday marking the start of the summer vacation season. Though there remain some parades, the percentage of Americans visiting veterans’ gravesites or otherwise honoring those who have served to protect the freedom of the nation is diminishing. Ask 100 Americans at random what Memorial Day means, what it’s about, and what they are doing on that day. Some do, like the Honorable Patrick Dugan of the Philadelphia Veterans Court, who in Keep Alive Those Who Made the Sacrifice writes that “For most of my life, I was like most people: I knew what Memorial Day stood for, but I didn't really stop to think about what it truly meant. That changed after I went to Iraq in 2003 as a civil-affairs soldier with the Army Reserves. When you serve with people who don't come home, Memorial Day means something different.” It’s tough to understand, and even more challenging to explain, that freedom is not free.

Americans surely understand the word “free,” for it shows up frequently in the phrase “free market” and in the slogan “free to do what I want.” Yet when asked to pay for freedom, too many Americans balk, even when the cost facing them is far less than their time, their physical well-being, and their life. The notion that freedom is free is becoming ever more omnipresent in the culture.

Here’s a case in point that pulls together the concept of freedom and the beginning of the vacation season. In Beachgoers: If It’s Free, It’s for Me, the Associated Press reports that for the third time in four years, people voting in the New Jersey Sea Grant Consortium annual contest selected the Wildwoods – consisting of Wildwood, Wildwood Crest, and North Wildwood – as the joint winner. A major factor in the voting is the fact that, unlike many other New Jersey beaches, the Wildwoods does not charge for a beach tag. In the same issue of the Philadelphia Inquirer in which that Associated Press story appears is another report, the headline for which gives away the point in question: New Jersey Shore Communities Scrape to Keep Visitor Services. The mayor of the town of Wildwood, which is facing a $2 million budget deficit, is considering laying off 20 of its 36 police officers, and at least five firefighters. When? On June 1, the beginning of tourist season. Of course, everyone who has weighed in on the question claims that such a move would be disastrous, because, quoting the deputy city mayor of another shore town, “We have a certain level of service in the summer that people come to expect.” As another official put it, “The people who come here for vacation have to feel safe.” During the summer, 295,000 tourists take the town’s population from 5,000 to 300,000, and, according to that official, “aren’t interested” in the town’s budget problems because “[t]hey just want to have a good time.”

Perhaps if the town charged beach fees it would have the resources to cater to the 295,000 tourists who flood the resort. Town official after town official echoed the same theme, that visitors expect services at least as good as those that they experienced the preceding year, that they will not return if the services decline in quantity or quality, that they don’t care about the fiscal woes of the town they are visiting, and that their only interest is in having fun. The notion of “let’s have fun but let someone else pay for the things we get for free” is pernicious.

In order for a person to have something for free, someone else must pay. Most children receive their food, shelter, and clothing for free because their parents pay. But when tourists use a beach for free, requiring lifeguards, safety patrols, litter removal, public restrooms, parking, and other amenities, who pays? Should 5,000 pay for the freedom of 295,000?

The question of who pays the bills to use a free beach would be irrelevant but for the fact that this nation exists, has beaches, and has a citizenry that is free to go to the beach. In some countries, people aren’t free even to travel outside their home village, let alone jump in a car, train, or plane to head for some resort. There are people who paid for that freedom with something far more than suitcases full of cash, namely, with their lives, and they deserve recognition and thanks on this Memorial Day. Paying taxes or beach fees pales in comparison to paying the price that has been paid by the veterans whom we cannot thank in person. The best we can do is to honor their memory. And the best way to do that is to respect freedom and to acknowledge that freedom is not free.

It was rather startling to read the headline in this story: U.S. Allocates Record Amount for Beach Projects. A government saddled with trillion dollar deficits has found a way to increase the amount of money it spends on pumping sand onto beaches? Almost $150 million is slated for beach projects, which is the highest annual amount since “the nation’s most prominent coastal lobbyist” began in 1995 to record these sorts of expenditures. Most of the money is spent to put back onto the beach sand that storms, through natural processes, have washed out to sea, presumably so that nature can again take the sand out to sea and create more opportunities to spend tax dollars to put the sand back onto the beach.

So how is it that federal spending on beach replenishment can increase when other programs, such as those used to feed hungry people or provide medical care to impoverished children, are being cut? There may be some clues in another article, one that describes the efforts of those who own private beach property to restrict public access to beaches. What the beach replenishment money protects is, according to yet another article, to protect private investment in private homes, privately-held hotels and motels, and privately-owned businesses. In many instances, these structures are built in places guaranteed to be washed out by typical seashore storms. One coastal activist explained, "It's just a bailout for the rich who build homes in dumb places."

I wonder if anyone has done a survey to determine how many people who complain about taxes and advocate reduced government spending own properties whose beaches are being replenished at public expense. In the meantime, the lobbyists are attempting to get the federal government to double the amount of money it is pouring into beach sand that will be washed back out to sea. Even though the story is probably a legend or tall tale, even Canute had the good sense to understand the power of the ocean.

Across America, millions of people experience topsoil erosion, as rains wash dirt off their lawns and into streets, storm sewers, and creeks. How many of these people are getting topsoil replenishment at taxpayer expense? Next time someone heads to the store to purchase bags of topsoil, or pays for a delivery of several yards of dirt to restore the lawn, perhaps they should close their eyes and pretend they’re the owners of a home with a private beach whose sand is being replenished courtesy of taxpayers.

On Sunday, as reported in this story, Senate Republican leader Mitch McConnell stated that he and his party oppose higher tax rates. Most people consider tax rates changes to match tax revenue changes. That’s true for a simple tax that is computed simply by multiplying a rate by a standard measure. But it’s not true for a complicated tax, and there are plenty of complicated taxes, such as the federal income tax. Reduction or elimination of gross income exclusions, deductions, credits, or any combination of those items, can increase tax revenue despite the lack of changes in the tax rates. Enactment of additional exclusions, deductions, or credits can decrease tax revenue even though rates remain the same. Though Congress hasn’t reduced federal income tax rates for almost a decade, it has reduced taxes through a flood of new and expanded tax credits, deductions, and gross income exclusions.

What is significant about McConnell’s statement is that he did not articulate opposition to increased taxes, or increased revenue. When pressed about tax expenditures, McConnell not surprisingly sidestepped the issue. He is under pressure from the extreme right, which seeks reduced tax revenues, reduced spending, and presumably unavoidable consequences of reducing revenue and spending. Yet at least one other conservative Republican, and, yes, that is not an oxymoronic phrase, has suggested that overall tax reform that repeals loopholes and subsidies would be welcome even if it brings increased tax revenues while lowering tax rates.

A simple, or more pragmatically, a simpler, tax code can generate unchanged or increased tax revenues while lowering rates or leaving them alone. On account of all the special provisions and disguised spending buried in the tax law, rates are higher than they otherwise would be. Advocates of cutting federal spending need to look at, and some have started to look at, spending in the form of tax reductions for special interest groups. Imagine, for example, a federal income tax computed by subjecting all income to tax, with deductions allowed only for the direct cost of generating business and investment income, with basis and rates indexed for inflation and with no special rates or other provisions favoring special groups. The tax rates could be lowered to at least half of what they currently are, and perhaps even more. The price for rates that would no longer generate visceral negativity from most taxpayers would be a farewell to depreciation deductions for properties increasing in value, credits for all sorts of personal and business activity that ought to take place only if the market encourages it or citizens vote to require it through direct regulation, exclusions for fringe benefits that generally favor well-compensated employees, and deductions for things such as home mortgage interest that distort the housing market, to name but a few of the things that make the tax law a minefield for well-intentioned taxpayers and a playground for the greedy.

Of course, simplifying the tax law will bring howls of protest. Some might think that those who seemingly benefit from the mess, specifically tax return preparers and tax planners, would oppose the changes, but anyone who listens to tax practitioners, and I do, will learn very quickly that the complexity has made their jobs almost impossible to perform. They are sufficiently wise to know that even with the sort of changes that I, and others, advocate, they will continue to be busy. For example, timing issues will not go away until the earth stops rotating around the sun.

The howls of protest will come from the special interest groups that think they are entitled to special treatment. Like the drivers who go straight out of the left-turn lane as self-appointed VIPs, the special interest groups are quick with the excuses purporting to demonstrate that absent the special break the economy and nation will collapse, but short with the track record of demonstrating that the special break did anything for anybody other than its proponents who paid, excuse me, lobbied for its passage. The murkiness of federal politics makes it very difficult for people who understand the unfairness of the lane jumper to understand the similar inequities fostered by privileged access to the halls of power.

So, let’s stop focusing on tax rates, and put that distraction aside. Let’s turn the nation’s attention to the federal spending that, until recently, has gone unnoticed by the public because it is hidden in a labyrinth of badly drafted and deliberately obfuscated tax law.

In most basic federal income tax courses, students early on confront a question that has accompanied the income tax on its entire life journey. What is income? Section 61(a) defines gross income, the starting point in calculating taxable income on which tax liability is computed, as “all income from whatever source derived.” Thus, before a person can determine gross income, a person must determine income.

Why does this matter? Income is important not only in the computation of gross income, taxable income, and tax liability, but also in determining whether a person qualifies for assistance that is limited to individuals with incomes under specified levels. For example, in New York State, an individual in a one-person household is are eligible for food stamps if his or her annual income is less than $14,088. The cut-off increases as the household size increases, and is further increased if someone in the household is disabled or elderly. Eligibility actually is more complicated, but the essential point is that benefits are geared to individuals with low income.

So what happens if a person wins $2 million in a lottery? Does the person become ineligible for food stamps? According to the Michigan Department of Human Services, no. As reported in this story, a lottery winner who hauled in $2 million was permitted to continue receiving food stamps because lottery winnings are not considered income. Even though eligibility for food stamps “is based on gross income,” lottery winnings are considered liquid assets and not income. Hello? The last time I checked, gross income includes lottery winnings. There are a not insubstantial number of cases and rulings that make that conclusion unquestionable.

I do not understand why lottery winnings are not treated as income for purposes of food stamp eligibility. Food stamps are designed to assist low-income individuals. A person who takes in $2 million in one year is not a low-income person. Certainly not for that year, and certainly not for each succeeding year if the proceeds are invested wisely. After taxes, the $2 million becomes roughly $1.2 million, which should generate something in the neighborhood of $40,000 to $60,000 each year. There are many people in this country who survive without food stamps on annual incomes of $40,000 to $60,000.

The person in question, when interviewed, stated, “If you're going to try to make me feel bad, you're not going to do it.” Legally, the lottery winner is entitled to food stamps, and was told so by the Michigan Department of Human Services. One Michigan state senator commented that for the winner to continue using food stamps, funded by taxpayers, after winning the lottery, is “obscene.” That the winner lacks the moral fiber to waive his right to food stamps is a different question. The winner’s attorney correctly pointed out that he notified the state. He added, “The problem is with the state.”

Technically, the problem is with whoever designed a system that treats someone who wins $2 million as a low-income person, by considering what clearly is income as not income. As the Michigan state senator noted, “What a waste of taxpayer money.”

It’s this sort of bureaucratic nonsense, statutory defectiveness, and regulatory shortcomings that add inspiration for the anti-tax crowd. The effort to help needy people gets targeted because the system is badly implemented. Although Michigan has requested a waiver from the federal government that would permit it to count the lottery winnings as income, the more sensible outcome is for Congress to make it unquestionably clear that excluding lottery winnings from income is total absurdity.

Several months ago, in The Problem with Income Tax Vehicle Credits, I criticized the Congress for burdening the IRS with administration of all sorts of programs that ought to be handled by the federal agencies charged with oversight of those sorts of programs. I wrote:

During the past two decades, Congress has heaped credit upon credit onto the tax system, putting administration of environmental, energy, health, labor, child care, and all sorts of other matters into the hands of the IRS rather than the federal agencies charged with oversight of these areas. At the same time, the Congress has failed to provide the IRS with sufficient funding to administer these credits. It’s not surprise, then, that the IRS hasn’t developed a full and efficient set of procedures to manage each of the many dozens of credits that it must supervise.

This was not the first time I had emphasized the misguided approach that the Congress repeatedly follows. For example, slightly more than a year ago, in IRS Ought Not Be the Health Care Enforcement Administrator, I rejected the idea that the IRS should become the health care enforcement agency. Three years ago, in Not To Its Credit, I pointed out the foolishness of making the IRS responsible for administering energy incentive payments:

It's not that I object to the goals. I object to the Internal Revenue Service being turned into a institution that is focused more on the technical requirements of energy production activities than on administering revenue laws. I wonder why financial incentives to produce and conserve energy aren't administered by the Department of Energy. Well, I know the answer. The Congress, though every now and then publicly trashing the IRS and characterizing it as harmful, then turns to the same agency to administer its favorite incentives programs. Which should speak more loudly to America? What Congress says when it grandstands or what it does when it overburdens the tax law and the IRS because it apparently doesn't trust other agencies to administer laws relating to agriculture, energy, employment, or health?

I’m not the only one who notices the tax law complexity that is attributable to spending programs hidden in the Internal Revenue Code. In Tax Talk at the Gym, I explained my response to someone who had

stopped me and asked why the tax law was filled with so many provisions that weren't a matter of revenue collection but expenditures. The answer is an easy one, because it's asked every semester by students in the basic tax course. Why not have the Department of Energy write checks to companies and individuals who are doing things to develop or conserve energy instead of administering the grants through tax refunds? Why not have the Department of Labor reimburse employers who hire members of targeted groups? The answer rests in the Congress' confidence with those other agencies and with the supposed speed with which tax refunds can put money in the taxpayers' hands in contrast to check-writing programs.

I’ve been harping on this problem for decades, and the topic appeared in the early days of this blog. Six years ago, in the frighteningly titled Prof. Maule Goes to Washington, I challenged Congress’s practice of relying on the IRS to do the work of other agencies:

I understand that the Congress, which consistently criticizes the IRS, has a habit of demonstrating its true thoughts about that particular federal agency by putting into the tax law provisions that deal with matters that are within the purview of other federal agencies because the IRS appears to be more capable of administering these programs, but it's time for Congress to demand of the other agencies the same sort of competence that it attributes to the IRS when it turns to the IRS to handle its pet project of the week.

As has always been the case, I rejoice when others step up and corroborate my contentions. That happened last week.

In The IRS Oversight Board Annual Report to Congress 2010, released about a week ago, the IRS Oversight Board reported to the President, the Congress, and taxpayers on the state of the IRS, its accomplishments, its shortcomings, and its challenges. The Board pointed out two weaknesses, namely, the tax gap and archaic information technology systems. It then turned its attention to another concern. The Board’s comment seems familiar:

These two weaknesses are exacerbated by another concern: an under-appreciation of the importance of tax administration to the nation’s economic well-being as evidenced by a willingness to expand the complexity of the tax code with little regard for the impact on taxpayers or the resources needed by the IRS to administer the code. In recent years, the tax administration system has been used to deliver quickly and efficiently a variety of financial benefits to taxpayers during a period of economic turmoil. The IRS has responded well to these challenges, but the result has been to stretch the IRS’ resources thin. Every new tax provision added to the internal revenue code requires both service and enforcement resources for successful implementation.

The Board repeated its reference to “thin” IRS resources when it noted, in yet another familiar comment, the challenges of having the IRS function as the healthcare enforcer. The Board pointed out that failure to fund the IRS exacerbates the risks of turning IRS attention away from “responsible tax administration” and again referred to “IRS resources already stretched thin to administer an increasingly complex tax code.”

An excellent example of the dangers presented by how Congress uses or, more specifically, mis-uses or abuses, the tax law for purposes of gaining political advantage in the vote collection game can be found in its approach to dealing with the problems of economically distressed areas. I am in the early stages of revising a Tax Management portfolio that focuses on this aspect of the tax law. Although subject to change, at the moment I have identified at least forty different tax breaks available to persons, businesses, programs, or activities in any one of at least 14 different types of economically distressed areas. Some breaks are available to one area, some to many areas, and only a handful to all areas. Most of the tax breaks come with expiration dates, most of which are annually extended by a Congress that can hold the extension hostage to the vote collection process. There’s much more leverage available to a legislator when a tax break is on the verge of expiring than there is when a tax break is permanent. Combined with the inability to put relief for economically distressed areas in the hands of the appropriate agencies, the tax legislation game that has polluted the legislative process ever since the leverage twist was identified and put to work threatens the well being of the nation because it imperils the ability of the IRS to collect the revenue. While the IRS is playing multiple grant-making roles, tax returns that should be audited go unaudited. Sometimes I wonder if there aren’t members of Congress who secretly wish for this potential revenue collection failure to come to fruition so that they can impose their “tax only wages under the guise of a flat tax” scheme on America.

The fact that something can be done well and isn’t ought to be a message for all Americans. Perhaps the fact that I’ve been complaining about this for quite some time isn’t sufficiently persuasive. But perhaps the fact that the IRS Oversight Board has said the same thing – though perhaps more tactfully – might have some positive impact on the national tax policy culture. Perhaps. Just perhaps.

If the bad news about earthquakes, tsunamis, nuclear melt-downs, tornados, and floods aren’t enough, here are three recent articles about less eye-catching, but no less dangerous and alarming economic and tax-related developments:

1. When Changing Energy Suppliers, Check the Details: If you think deregulation of an industry is a wonderful thing for consumers, think again. The article features a woman who “embraced deregulation” of electricity suppliers, was promised a “big discount,” discovered that the quoted low rate turned out not to be so low, calculated her monthly savings at $1.25, and reported, “I’m unhappy.” No kidding. Perhaps that’s why most Pennsylvanians have chosen not to jump on the “deregulation of business is good for the consumer” bandwagon. Those who have been around long enough have seen those bandwagons crash and burn too many times.

2. The Ugly Truth About Infrastructure (and Taxes): Not all truth is pretty, and the status of the nation’s infrastructure qualifies for something worse than the word ugly. Scott Huler, whose On the Grid: A Plot of Land, An Average Neighborhood, and the Systems that Make Our World Work was published a year ago, focuses on the crumbling transportation, energy, utility, and other infrastructure of the nation. He fears that as the infrastructure crumbles, so, too, will crumble the nation, and he expresses concerns, not unlike those I consistently highlight, that Americans are simply unwilling to pay for replacement and upgrading of what their ancestors bequeathed to them, because they have sipped so much of the “no new taxes, no tax increase, goodness, no taxes at all” sound bites being used by politicians to curry favor with voters. The information he provides about infrastructure issues in Japan, Libya, South Korea, and Seattle ought to be taught in the nation’s schools and highlighted on every news channel. He equates the “War on Taxes” with the “War Against Infrastructure.” Consider that, as of 2009, the American Society of Civil Engineer figured the nation to be $2.2 TRILLION behind in maintenance. Serendipitously, late last week I happened upon a History Channel program about infrastructure. This particular episode focused on California. I can’t imagine anyone in San Francisco who watched the program sleeping soundly at night. I can’t imagine anyone living near the two million miles of natural gas pipeline feeling comfortable after learning what happened in the San Bruno catastrophe and understanding how corporate cost-cutting contributed to the death and destruction. Huler claims that he “no longer know[s] how to respond” to the arguments against raising taxes to pay for what we need and use. He said that when he wrote his book he “worked hard not to become a shrieking harpy.” No problem, Scott, I’m sure that in the eyes of the “infrastructure grows on the money tree” believers, I’ve earned the shrieking harpy designation.

3. Gen Xer’s Dim Retirement Prospects: Claiming a better title than “shrieking harpy,” Jack VanDerhai has earned the nickname of “Dr. Doom” because of his “decades-long career of studying the increasingly grim odds of whether Americans can make it through retirement without, to be blunt, going broke.” VanDerhai has concluded the people most at risk of not surviving retirement economically are not current retirees or baby boomers, but Generation X. People in this age group face reduced Social Security and Medicare benefits, the demise of fixed pensions, flat wages, ownership of homes purchased at the top of an artificial market, higher mortgage debt ratios, and horrific investment returns on what little they scraped to save for retirement. Consider these numbers. A person born in 1949 who started investing in a 401(k) equity plan at age 30 (1979), realized a 9.2 percent rate of return as of February 2010, which is post-crash. A person born in 1959 who started investing in a 401(k) equity plan at age 30 (1989), realized a 5.5 percent rate of return as of February 2010. A person born in 1969 who started investing in a 401(k) equity plan at age 30 (1999), realized a 0.3 percent rate of return as of February 2010. Wait? A 0.3 percent rate of return from 1999 through 2010? Hmm, I wonder what economic policies dominated that decade?

Alarming, indeed.

In an editorial last week in the Philadelphia Inquirer, John Sununu, writing in opposition to repealing oil company tax breaks, offered an interesting proposition. No matter where one comes out on the question of how oil companies should be taxed, Sununu’s proposition is one that deserves scrutiny. Defending deductions available to oil companies, Sununu wrote, “The precise point at which a tax deduction becomes a ‘loophole’ or a tax incentive becomes a ‘subsidy for special interests’ is one of the great mysteries of politics.”

The commonly accepted definition of a loophole is a tax law provision that is written in a manner that permits its benefits to reach those who are not within the intended scope of the provision. Flaws in the language of the statute make it possible for savvy taxpayers and tax practitioners to exploit the provision in ways that were not intended. For example, clever tax planners figured out how to structure compensation arrangements for hedge fund managers so that the use of partnership tax law provisions converts what should be ordinary compensation gross income into capital gains taxed at lower rates. Sometimes Congress closes loopholes, but too often it takes so long that it appears Congress is surreptitiously approving their use by delaying corrective action.

Distinguishing tax incentives from subsidies for special interests is very difficult, if not impossible, because in many instances they are the same thing. It can be argued that all subsidies for special interests embedded in the Internal Revenue Code are tax incentives, because these subsidies are in the form of incentives that reduce tax liability. However, there are tax incentives that are not subsidies for special interests because they are available generally and are not limited to a select group of taxpayers. For example, the credit for adopting a special needs child is a tax incentive. The credit is not a subsidy for special interests because the general population has an interest in providing for the care of special needs children and encouraging people to participate in that effort. Another example is the deduction for income or sales taxes, because that deduction is available to all taxpayers. Yet there are tax incentives in the form of subsidies for special interests. For example, section 181 permits taxpayers who produce films and television programs to deduct costs in a more favorable manner than taxpayers in other industries whose deduction is computed under less generous depreciation deductions.

Two deductions available to oil companies that need to be questioned are those for depletion and for intangible drilling costs. Both are among the tax breaks that would be repealed by the Close Big Oil Tax Loopholes Act.

Percentage depletion permits a taxpayer to deduct the cost of its oil by subtracting from gross income a percentage of the income generated by the sale of that oil. For example, if a taxpayer pays $100 for the right to extract the oil in a specific place, and sells that oil for $1,000, the taxpayer’s depletion deduction easily can exceed $100. Taxpayers acquiring other types of assets, such as buildings, equipment, and vehicles, are not permitted to deduct more than they pay for the item.

Permitting an intangible drilling costs deduction for the cost of labor, fuel, repairs, supplies, and other expenses of constructing a drilling platform bewilders the mind of anyone who thinks intangible refers to something that does not have material substance. Yet not only have the courts so held, for example, in Exxon Corp. v. U.S., 547 F.2d 548 (Ct. Cl. 1976), Standard Oil Co. v. Comr., 77 T.C. 349 (1981), Texaco, Inc. v. U.S., 598 F.Supp. 1165( S.D. Tex. 1984), and Gulf Oil Corp. v. Comr., 87 T.C. 324 (1986), the IRS revoked Rev. Rul. 70-596, in which it had ruled that none of the expenditures for onshore construction of offshore drilling platforms were intangible drilling costs, and issued Rev. Rul. 89-56, in which it ruled that it would consider the issue on a case by case basis depending on the degree to which the platform is customized for a specific drilling location.

The argument that tax breaks are necessary to encourage oil companies to explore for, develop properties with proven reserves, extract, and sell oil, gas, and other hydrocarbons flies in the face of the reality of profits. If there are profits to be made from an activity, businesses will engage in the activity.

“The precise point at which a tax deduction becomes a ‘loophole’ or a tax incentive becomes a ‘subsidy for special interests’” may be “one of the great mysteries of politics,” but they are not mysteries of tax. There is no mystery in tax. The mystery is in the hidden machinations underway in the brains of those who enact tax law. It is from those mysterious thought processes that emerge the silliness of some tax provisions and the inefficiencies of others.

It’s time for an exploration of statutory analysis. The statute in question is a state statute, from Pennsylvania to be specific, and involves a tax on daily gross table game revenue accrued by casinos.

Section 13A62(a) of title 4 of Pennsylvania’s Consolidated Statutes contains three paragraphs. The challenge arises from an inconsistency between the first two paragraphs.

Section 13A62(a)(1) states: “(1) Except as provided in paragraphs (2) and (3), each certificate holder shall report to the department and pay from its daily gross table game revenue, on a form and in the manner prescribed by the department, a tax of 12% of its daily gross table game revenue.”

Section 13A62(a)(2) states: “(2) In addition to the tax payable under paragraph (1), each certificate holder shall report to the department and pay from its daily gross table game revenue, on a form and in the manner prescribed by the department, a tax of 34% of its daily gross table game revenue from each table game played on a fully automated electronic gaming table.”

The first eight words of the first paragraph, namely, “Except as provided in paragraphs (2) and (3),” suggest that paragraph (1) does not apply if paragraph (2) or paragraph (3) applies. However, the first nine words of the second paragraph, namely, “In addition to the tax payable under paragraph (1),” suggest that paragraph (2) does not override or replace paragraph (1) but, rather, supplements it. The language of the first paragraph is inconsistent with the language of the second paragraph. Unfortunately for casino operators, the simple exercise of pointing out the inconsistency is insufficient. Someone in the tax department of the casino or from among the casino’s tax advisors must resolve the ambiguity because they need to determine the casino’s compliance position.

Greenwood Gaming and Entertainment, Inc., found itself in precisely that situation. It asked the Pennsylvania Department of Revenue to confirm the taxpayer’s conclusion that paragraph (2) was an exception to paragraph (1) that overrode paragraph (1). Not surprisingly, the Pennsylvania Department of Revenue disagreed, taking the position that paragraph (2) imposed a tax that supplemented the tax imposed by paragraph (1). Greenwood sought a declaratory judgment in its favor. And thus, some time later, the Commonwealth Court of Pennsylvania issued its opinion in Greenwood Gaming and Entertainment, Inc. v. Department of Revenue, No. 796 M.D. 2010 (March 9, 2011).

The Department of Revenue argued that Section 13A62 “is clear and unambiguous, rendering consideration of other possible indicia of legislative intent unnecessary and improper.” It argued that the “except” clause in paragraph (1) is tantamount to “except as modified by” rather than “except as replaced by,” relying on the “in addition to the tax payable under paragraph (1)” language in paragraph (2). The casino argued that Section 13A62 creates a “two-tired tax scheme,” under which gross table revenue is taxed at 12% under paragraph (1) and fully automated gross table revenue is taxed at 34% under paragraph (2). The casino stressed that the meaning of the word “Except” in its capacity as a preposition excludes the subject matter of paragraph (2), fully automated gross table revenue, from paragraph (1). Alternatively, if that interpretation was not accepted as the literal meaning of the statute, Greenwood argued that the statute was ambiguous, justifying consideration of other indicia of legislative intent and interpretation that resolves all doubt in favor of the taxpayer under 1 Pa. C.S. sections 1921, 1928.

The court concluded that the statute is not ambiguous. It also concluded that paragraph (2) imposes a tax that is in addition to the tax imposed by paragraph (1). The court reasoned that to treat paragraph (2) as an alternative to paragraph (1) would render meaningless the words “in addition to” but did not explain how treating paragraph (2) as an addition to paragraph (1) does not render meaningless the word “Except.” Any attempt to do so would demonstrate that the statute indeed is ambiguous.

The statute is ambiguous because it is badly drafted. To determine how it should have been drafted, it is helpful to examine the legislative history that the court did not utilize. Section 1103(3) of title 4 of Pennsylvania’s Consolidated Statutes explains that the authorization of gaming, including automated table games, was intended to “provide a significant source of new revenue to the Commonwealth to support property tax relief, wage tax reduction, economic development opportunities and other similar initiatives.” During the debate on the bill, Representative Dante Santoni, described by Greenwood as the sponsor of the legislation that enacted section 13A62, explained the intent underlying the legislation. When asked if permitting casinos to install fully automated gaming tables would undercut the goal of generating jobs by legalizing gaming, Santoni answered, “Mr. Santoni: Mr. Speaker, just to be clear: Yes. [The casinos] are allowed to have the maximum amount of fully automated machines at 250, but the tax rate is different. The tax rate is 34 [%] if the casino chooses to use those types of machines; 16 [%] initially, 14[%] after July 1 if they do not and use the standard tables that will require a dealer or a person, an employee.” The Fiscal Note issued by the House Committee on Appropriations elaborated as follows: “In addition to the fees collected, a state tax of 14% is imposed upon the daily gross table games revenue. This rate would be applicable for the first two years of operation for each facility, after which time the rate will decrease to 12%. This tax and any accrued interest is payable weekly to the Department of Revenue. The tax rate on fully automatic electronic gaming tables is 34%.”

If the legislative history is any indication of what the legislature wanted, then the statute was not drafted properly. The first nine words of paragraph (2) should have been drafted to read, “In lieu of the tax payable under paragraph (1),”. On the other hand, if the legislature intended a 48% tax rate, which is a doubtful conclusion, then the opening language of paragraph (1) should have been drafted to read, “Except to the extent modified by paragraphs (2) and (3),”. Either approach would be unambiguous, though the latter approach would be wholly inconsistent with the legislative history, and yet controlling because unambiguous statutes trump legislative history.

Somewhere along the line, someone, or perhaps several people, goofed. Someone, or perhaps several people, did not pay close attention to detail. My guess is that the language was constantly being changed, that multiple authors put their hands to it, and that no one person took ownership of a final review and edit of the language. Add to that the possibility that the legislative process had sped up as deadlines approached, and the recipe for difficulties was complete.

It is likely that Greenwood will appeal. It is not implausible that the Supreme Court of Pennsylvania will disagree with the Commonwealth Court’s conclusion that the statute, as enacted, is unambiguous. The language of paragraph (1) is inconsistent with the language of paragraph (2). That makes for an ambiguous statute. Let’s hope the Pennsylvania legislature doesn’t give us any more statutes of that quality.

More than three years ago, in User Fees and Costs, I shared my perception of user fees in a posting that focused on tolls. Tolls should be used to pay for the costs of building, repairing, maintaining, and operating the toll road, and to defray the economic burden that the road imposes on the surrounding neighborhoods. Tolls should not be used for programs unrelated to the road.

A few days ago, a friend and law school classmate pointed me in the direction of an article in the Daily Journal Newswire. According to the article, a bill has been introduced in the California legislature to impose a $20,000 fee on each mortgage servicer for each foreclosure that the servicer processes. Supporters of the bill claim that it is necessary “to make mortgage lenders more accountable in dealing with at-risk borrowers.” The legislator who introduced the bill explained that its purpose is “to try to capture some of the hidden costs of foreclosure to our communities,” giving as examples “costs to law enforcement” and “the cost of blight that happens when property values go down.” Yet the bill provides that the funds raised by the $20,000 fee would not only offset foreclosure-related expenses but also for “K-12 and community college purposes, . . . public safety purposes, including, but not limited to, local police, county sheriffs, and local fire protection, . . . redevelopment activities, . . . including, but not limited to, the construction of affordable housing, . . . mitigating the effects of foreclosures on the community, including, but not limited to, reimbursement of the county recorder's costs in collecting the [fee], . . . [and] loans for small businesses.”

The California Bankers Association considers the fee to be a “tax on all properties in foreclosure” and contends that it will not help people who are falling behind on their mortgage payments. The legislator who introduced the bill responded that the fee was not intended to help people with their mortgage payments.

As constructed, the fee is much more than a fee designed to reimburse government for the direct and indirect consequences of foreclosure. It makes sense to charge for the cost of handling the paperwork or digital processing of the foreclosure documents and other filings. It makes sense to reimburse government for the increased cost of police and other activities generated by the existence of unoccupied properties going through foreclosure. It makes sense to reimburse the government for the cost of demolishing foreclosed properties that fall into serious ruin through neglect, vandalism, or uninsured casualty. But it is difficult to defend directing some of the proceeds from the fee to other public activities not connected with the foreclosures, just as it is difficult to defend using bridge tolls to fund soccer stadium construction, as I explained in Soccer Franchise Socks It to Bridge Users, and further explored in Bridge Motorists Easy Mark for Inflated User Fees.

A plausible argument can be made that it makes sense to use some of the funds to educate people so that they avoid foreclosure and its consequences, for example, by refraining from purchasing homes beyond their means, by establishing a program of regular savings, and by learning and following sensible household budgeting practices. Yet this sort of education ought to occur long before foreclosures occur. It needs to happen before people purchase homes. Education of that sort and at that point in time needs to be financed by a fee imposed on home purchases. In this respect, it is akin to insurance. Is it not better to charge a small fee at the time of mortgage application, to fund education that reduces the chances of the applicants ending up in foreclosure, than to charge a huge fee when disaster hits the small percentage who face foreclosure? Similarly, a fee imposed on mortgage brokers, loan processors, mortgage underwriters, and others involved in the making of mortgage loans would make much sense, provided its proceeds were used to regulate and educate the people whose bad decision-making triggered the housing market crisis. Unfortunately, it’s anyone’s guess as to which industry, currently unregulated or under-regulated and currently free of user fees and education requirements, is engaged in unwise decision-making that will trigger the next economic bubble and collapse. But if it can be identified, any proposed user fee should not be treated as a source of revenue to be used for unrelated purposes.

Governor Chris Christie of New Jersey has been making a reputation for himself as a “cut taxes, cut spending” activist. His position rests on the claim that because the state has limited revenue and ought not raise taxes, it must cut spending.

Christie’s decisions have been consistent with his approach. He has resisted tax increases. He has cut spending. His spending cuts, though, have imperiled the state’s citizens. For example, in Cut Taxes + Cut Spending = Reduced Education?, I criticized the decision by the Christie administration to cut school spending in order to protect New Jersey’s wealthy by not renewing the “millionaires’ tax.” The decision to eliminate vehicle safety inspections, as discussed in Cut Taxes, Cut Spending, Cut Safety?, surely make life on the state’s highways much more dangerous. As I explained in The Price of Insufficient Tax Revenue, Christie’s decision to cut back on state aid to Camden compelled that city to reduce its police and fire fighting forces to the point that residents’ safety was endangered. Yet when the state of New Jersey faced higher than budgeted snow removal costs, Christie lost no time in asking the federal government, that is, taxpayers elsewhere in the nation, to foot the bill, as described in When is No Tax Increase a Tax Increase?.

But now comes news that when it comes to spending that benefits people with substantial financial resources, Christie doesn’t hesitate to dish out benefits. According to this recent Philadelphia Inquirer article, Christie has agreed to hand over hundreds of millions in tax breaks to the developers of Xanadu, a planned shopping mall, amusement park, theater, indoor ski slope, and entertainment complex in northern New Jersey. The company behind the plan, Triple Five, is owned by the Ghermezian brothers, who, according to multiple sources, including, for example, this one, are far from poor. Tax breaks, of course, are nothing more than government spending equivalent to a direct grant to the taxpayer getting the tax break.

So why does a company owned by billionaires need tax breaks from a state that refuses to raise taxes and has been cutting essential services? The answer is simple. It doesn’t. But the important question isn’t why the company needs tax breaks.

The important question is why does a company owned by billionaires get tax breaks? The answer is simple. Because it can. The even more important question is why can a company owned by billionaires get tax breaks? The answer is simple. Because it is owned by billionaires.

Christie defends his decision to extend tax breaks, in other words, to spend money on grants, to Triple Five by claiming that the development will create jobs. If New Jersey did not dish out hundreds of millions to Triple Five, how many fewer jobs would be created? More important, if the development cannot be sustained without the infusion of hundreds of millions of taxpayer dollars into a company owned by billionaires, why should the government not listen to the message thus being sent by the private sector and its free markets? Is not opposition to government “interference” in the private sector and in free markets one of the cornerstones of the platform brought to us by the “cut taxes, cut spending” crowd? If there’s no money when the people of Camden need police, or when vehicles need to be checked for safety violations, or when children need to be educated, why is there money when a company owned by billionaires asks for hundreds of millions of dollars? Could it be that this company and its owners are more important to some people than are the residents of Camden, the drivers on New Jersey roads, and the children of the state’s residents?

I daresay that the investment of hundreds of millions of dollars in the education of New Jersey’s children will pay off more in the long-run than the investment of hundreds of dollars in the enrichment of a company owned by billionaires. Education of children creates a long-term asset that will pay dividends in the future as America competes with the highly educated children of India, Brazil, Japan, China, and other nations. Education is a life-long asset that keeps on giving. A glorified shopping mall entertainment complex is a wasting asset that will keep asking. For money. From taxpayers. From taxpayers who are told there’s no money to help educate their children.

So who is getting richer? And who is getting poorer?

Richard: “Hey, Monica, did you hear the good news?”

Monica: “No, what?”

Richard: “Legislators in New York have introduced a bill to suspend the gasoline and other fuel taxes for Memorial Day weekend, Independence Day weekend, and Labor Day weekend.”

Monica: “That’s great. I’ve been paying a lot for gasoline. Maybe they'll do that in every state.”

Grady: “Can’t help but overhear. I think it’s a bad idea.”

Richard: “Why? How can something that reduces what we pay for gasoline be a bad idea?”

Grady: “Whatever the state doesn’t collect in fuel taxes means that much less it has to spend on fixing roads and bridges.”

Monica: “So what? The state has lots of money.”

Richard: “Well, THAT’S not true. The state is in financial difficulty.”

Grady: “Exactly. Less fuels tax revenue, less road repair.”

Monica: “We don’t need new roads. That just encourages people to drive.”

Grady: “I’m not talking about new roads. I’m talking about all those potholes.”

Richard: “Yeah, they’re all over the place. Why are they so slow in fixing them?”
Grady: “It costs money to fix potholes. There’s not enough fuels tax revenue as it is, and a so-called tax holiday means that there’s less money.”

Monica: “So what’s the big deal about potholes?”

Richard: “Well, if you hit one, it can be bad.”

Grady: “Exactly. Worse case, you lose control of the car, perhaps die, kill someone, injure somebody. But even without that sort of tragedy, it knocks the front end out of alignment.”

Monica: “The what?”

Richard: “The way the tires are set matters, and a jolt can make the various parts holding them in the correct angles go awry.”

Monica: “So?”

Grady: “It wears out the tires faster, and causes the car to burn more fuel per mile.”

Monica: “Can it be fixed?”

Grady: “Sure, but it will cost way more than the few pennies you saved from the gas tax holiday.”

Richard: “So you’re saying that saving a few pennies on gasoline in the short-term is a long-run bad idea?”

Grady: “Absolutely. The gas holiday takes people’s attention away from the clash between growing demand for fossil fuel and diminishing supply.”

Monica: “But I HAVE TO HAVE my gasoline!”

Richard: “So what do we do?”

Grady: “Perhaps it would help if people drove in a manner that reflected their awareness of how precious and expensive gasoline really is.”

Monica: “What do you mean?”

Grady: “Here’s an example. Last week I was driving on a road with a 55 mile-per-hour speed limit. I was speeding, doing about 62. EVERY CAR on that road passed me. I passed no one except an old truck.”

Monica: “So? You’re holding up traffic.”

Grady: “They passed me like rocket ships. Imagine if they slowed down, if not to 55, perhaps to 60 or 65, instead of the 75, 80, 85, 90 that many of them are driving. They’d reduced their gasoline consumption by 10, 20, 30 percent. They could drive the same distance on 10, 20, 30 percent less gasoline. That’s the equivalent of cutting 40 cents, 80 cents, even $1.20 off the cost of a gallon of gasoline. Much more than three weekends of knocking 20 or 30 cents off the cost of a gallon of gasoline.”

Monica: “Oh.”

Richard: “So if people really cared about the cost of gasoline they wouldn’t waste it?”

Grady: “Exactly. Actions speak louder than words. When I see fewer people driving at 80 on roads posted for 55 miles-per-hour, when I see fewer people driving children to school while school buses are half empty, when I see people bundling their errands into fewer trips, when I see people keeping their tires inflated to the proper level, then I’ll believe that these high gasoline prices really matter.”

Richard: “You should explain this to everyone.”

Grady: “Someone already has. Five years ago, the guy that writes MauledAgain, in A Tax Trifecta: Gas, Enforcement, and Special Interests, explained why it makes no sense to reduce gasoline taxes. A year later, in Raise, Don’t Lower, Gasoline Taxes, he explained again why gasoline tax reductions and holidays make no sense in the long term. Three years after that, he wrote, in Tax Holidays, “Going on a tax holiday is one of the worst things that this nation could do. That would be the equivalent of spending hours in a tanning booth before going out into the sun without sunscreen.”

Monica: “Never heard of the guy. Never read his stuff.”

Grady: “You and most other people.”

Richard: “And if they did, they wouldn’t like what they read.”

Grady: “No kidding. I guess he’s not running for office or looking for votes.”

Monica: “If he did, he’d lose.”

Generally, governments raise revenue either by imposing taxes or collecting user fees. There is a third source of revenue, one that has received little, if any, attention on MauledAgain. Revenue flows to governments in the form of fines imposed for behavior that violates a civil or criminal statute.

A recent Philadelphia Inquirer story about the use of fines collected from motorists caught by red-light cameras running through red lights has opened the question of how those revenues should be used. The Pennsylvania experience is both instructive and troubling.

According to the story, Philadelphia is the only locality in Pennsylvania that is permitted to use red-light cameras. From 2005 through the current fiscal year, the city collected $32.1 million in fines. Of that amount, $15.4 million was used to reimburse the city’s parking authority for maintaining and operating the cameras. The $16.7 million balance was divided evenly between Philadelphia and the state, which allocates its share among localities throughout the state. The even split is the same ratio used to divide the proceeds of fines collected from motorists who are issued tickets for running red lights when the ticket is issued by a police officer and not by a camera. Thus, of the fines collected by Philadelphia for traffic violations in Philadelphia, $300,000 went to McKeesport for a new traffic-control system, $12,800 went to Aliquippa for a school-zone flashing light, $218,000 went to Highspire for traffic-control upgrades, and $75,000 went to Scranton for left-turn signals.

A member of the state House has decided to introduce legislation that would eliminate the split of red-light traffic camera fines. It is unclear whether the legislation would apply to the split of fines from tickets issued by police officers. What also is unclear is the disposition of fines paid by motorists who receive tickets from police officers in places other than Philadelphia for running red lights.

If the fines collected by cities and towns throughout Pennsylvania from motorists who violate red-light, or any other traffic, regulation are kept by those cities and towns, why should Philadelphia relinquish half of the fines that it collects? That makes little sense in terms of equity and symmetry. It makes even less sense if one considers the relative fiscal poverty of Philadelphia when compared with many, though not all, of the other localities in the state. If Philadelphia chooses to enforce traffic laws to the point that it generates net revenue, why should it share that net revenue with other cities and towns that may or may not be enforcing traffic laws with similar rigor?

True, in an ideal world, there would be no net revenue from traffic fines, because the goal of the red-light camera program, and the goal of having police officers observe traffic, is to discourage behavior that poses safety risk to the offending motorist and to innocent passers-by and drivers of other vehicles. The surge in revenue is frightening, because it reveals the absurdly high number of motorists running red lights. That, of course, is no surprise, as anyone who lives or works or visits in or near Philadelphia knows that red-light running is close to a sport.

Until the day arrives when motorist compliance with traffic rules is much improved, there needs to be a sensible way to make use of the fines that are collected. There seems to be a consensus that the cost of collecting the fines should be reimbursed. Any excess, it seems to me, should remain with the jurisdiction that enforced the traffic regulation and collected the fines. To be fair, all cities and towns in Pennsylvania ought to be permitted to use not only red-light cameras but also speed cameras, should be encouraged to enforce traffic laws, and should be permitted to use the fines to reimbursed themselves for their expenses and for making improvements that improve traffic safety. From what I observe, though Philadelphia deserves its reputation as a city of red-light runners and traffic law violators, the same can be said of most other places in the state. What are the other localities doing with the fines they are collecting for traffic violations? Is compliance so much better in other places that there is no net revenue and thus a need to seek funds from Philadelphia’s net revenue?

But until the day arrives when noncompliance with traffic rules disappears, the question of how to use the revenue generated by fines for noncompliance will persist. The fine has some trappings of a user fee, though user fees generally aren’t intended as deterrents and fines are, and so there is a good argument to use the revenue as one uses the money generated by user fees. It should be used to defray the costs to society of traffic law violations and to minimize the danger to society of those violations, such as improvements that increase protection for pedestrians on sidewalks who are vulnerable to reckless drivers ignoring red lights and other traffic control devices.

Last year, in Tax? User Fee? Does the Name Make a Difference?, I asked whether the name given to a revenue-raising system mattered, and concluded that it did.

Readers of this blog know that I prefer that governments enact user fees when that is possible, as I explained seven years ago in Equitable Taxation. In Yet More Reasons to Prefer User Fees, I elaborated on the advantages that user fees provide when compared to certain business receipts taxes. The connection between costs incurred by governments when providing services and the user fee imposed on those receiving the benefit of those services was discussed in User Fees and Costs.

I have advocated user fees in several situations. My support for the mileage-based road fee, or vehicle-miles traveled user fee, was first explained in Tax Meets Technology on the Road, and subsequently in Mileage-Based Road Fees, Again, Mileage-Based Road Fees, Yet Again, Change, Tax, Mileage-Based Road Fees, and Secrecy, Pennsylvania State Gasoline Tax Increase: The Last Hurrah?, Making Progress with Mileage-Based Road Fees, Mileage-Based Road Fees Gain More Traction, Looking More Closely at Mileage-Based Road Fees, and The Mileage-Based Road Fee Lives On. I suggested user fees rather than taxes as a way for local governments to seek reimbursement for services to tax-exempt institutions, in Funding City Services to Tax-Exempt Schools: Impose User Fees, not Taxes.

One of the situations that I argue calls for a user fee is the need for the Commonwealth of Pennsylvania, as representative of its citizens, to recover from the Marcellus Shale natural gas developers the costs that otherwise would be borne by the state government and thus, indirectly, by its taxpayers. I first made that suggestion in Tax? User Fee? Does the Name Make a Difference?. I followed up in Giving Up on Taxes = Surrendering Taxpayer Rights?. A month later, in Life for My Proposed Marcellus Shale User Fee?, I asked, “Have these people been reading my MauledAgain posts?” As I noted then, the answer is, “Perhaps.”

According to this story appearing last Friday, the President of the Pennsylvania Senate, Joe Scarnati, has revealed the details of a “local impact fee” that he plans to propose. Whether Scarnati, a Republican, will obtain the blessing of the state’s Republican governor, who opposes all tax increases and all new taxes as a matter of principle, remains to be seen. The governor, who has said he would consider a fee, also explained, through a spokesperson, that he was willing to “look at” a fee but had not promised to “endorse” a fee. Similarly, House Republicans were similarly noncommittal. The proposal would require developers to pay a base fee of $10,000 per well, with additional amounts based on production and the price of natural gas. The bulk of the revenue would go to counties and municipalities where the drilling occurs, with the rest going to conservation districts, statewide environmental projects, and statewide infrastructure projects.

The chances of the fee being enacted are not only questionable because of the governor’s noncommittal attitude, but also because Democrats, and at least one Republican senator, prefer a severance tax. One reason for that preference is the availability of the revenue to fund expenditures throughout the state, whether or not directly or indirectly connected to the drilling. They consider the tax “the best way to get drillers to pay their fair share,” and point to how all the other states imposing severance or extraction taxes use the revenue.

Interestingly, Friday’s story begins, “It is a fee, not a tax,” as though that might make a difference. It is doubtful that the changing of a word will matter much to those who oppose new taxes and increases in existing taxes. To them, a fee represents a government taking just as does a tax. The notion of compensation for what drillers and producers are taking from the state’s residents doesn’t seem to enter the picture for many of them. That approach prevents the discussion from reaching the more important aspect of the issue. To what purpose should the revenues from a user fee be put? In When User Fees Exceed Costs: What to Do?, I argued, “But when a government imposes a user fee, it ought to charge no more than is necessary to provide what the user fee purchases.” The costs imposed by Marcellus Shale drilling and production on the state’s residents can be computed. Those costs ought not be limited to direct costs, such as the monies required to repair roads and bridges damaged by heavy vehicle use, but also indirect costs, such as increases in water bills on account of water companies incurring increases in the expenses of testing and cleansing water affected by the drilling. The notion that user fees ought not be used for completely unrelated purposes was further explored in User Fee Philosophy Vindicated.

Unfortunately, the more time that is wasted by politicians trying to milk this issue for electoral advantage the more revenue goes down the drain. It’s time for the state’s elected leaders to act like leaders rather than supplicants for votes. It makes no sense to fiddle while things are burning.

The recent news, reported by dozens of sources, including this CNN report, that a hacker managed to infiltrate Sony’s Playstation servers and obtain “users’ names, home addresses, e-mail addresses, birth dates, passwords, and possibly credit card information with respect to almost 100 million users poses, for me, not only cybersecurity questions but tax issues. Coming on the heels of the Amazon “cloud computing” crash, the most recent security breach suggests that serious attention needs to be given not only to prevention of these intrusions but also to the consequences. The consequences might generate some sort of deterrent effect that would contribute to the prevention effort.

But putting cybersecurity issues aside, what popped into my brain when I heard the news were two tax questions. One is substantive and the other is a matter of procedure and policy.

Considering that a bundle of customer information has value, and for decades the market place has put a value on customer lists and similar information bundles, does the hacker who obtained a bundle of information with respect to almost 100 million Sony Playstation customers have gross income? I think this is an easy question to answer. The hacker becomes a wealthier person by obtaining the data, and is in no different of a situation than is an embezzler. Embezzlement proceeds constitute gross income. So held the Supreme Count in James v. U.S., 366 U.S. 213 (1961). That answer sets up the more difficult second question.

Considering that tax law violations have often been the downfall of criminals charged with other crimes – one think only of the oft-repeated Al Capone story – should we expect the Justice Department to indict the hacker, once identified, for failure to report the gross income from hacking into Sony’s Playstation servers and obtaining valuable information? It is unlikely that the hacker will report “miscellaneous income” of hundreds of millions of dollars. It is possible that the hacker is not a citizen or resident of the United States, which would raise jurisdiction problems. It’s unclear where the Sony Playstation servers are located, but it is likely that the hack could not have taken place without use of internet facilities within the United States, and the fact that United States citizens and residents are among those whose information was stolen opens up another avenue to obtaining jurisdiction. Implementing that jurisdiction, however, could be challenging. Suppose the hacker turns out to be someone in, and perhaps working for the government of, North Korea, the People’s Republic of China, Iran, Bulgaria, Russia, Israel, Libya, or some other nation? The jurisprudential questions raised by the Internet’s virtual destruction of national borders are pushing their way deeper into the spotlight, and it would not be surprising to see a tax matter, civil or criminal, in the vanguard.

Monday’s Philadelphia Inquirer brought a small item that described the results of research exploring the connection between childhood music lessons and long-term brain health. The headline caught my eye because I could relate to it. When I saw “Those clarinet lessons helped you tune up for your later years,” I had no practical choice but to keep reading. Why? When I was a child, my father taught me to play the clarinet. Or perhaps I should say that he tried to teach me. I made progress, but certainly not to the level that would open the doors to any concert hall. Part of my failure to progress competently was my resistance to what I perceived as an irrelevant instrument in the days when playing guitar – especially electric guitar – seemed to be the gateway to success in a variety of venues. My father would have nothing of rock music. He, and I later discovered, more than a few others of his generation, considered rock music to be some sort of communist plot to weaken the youth of America. Apparently he abandoned that outlook in his later years, something I discovered when I arrived home for a visit and he was playing compositions penned by the Beatles and a few other artists of that era. He never did quite get to Pink Floyd. Perhaps had he lived a few years longer, he would have made friends with The Wall. My father, who played several instruments professionally, and even a few more for fun, had previously decided to teach my brother how to play the saxophone. Now that was an instrument with rock band potential, as my brother demonstrated and as Clarence Clemons – and others – proved. And now, one of my brother’s granddaughters is making a name for herself playing, yes, the saxophone. I, however, long ago abandoned the clarinet, though I still own several. I did not abandon my love of music, and dabble with keyboards, though quite inadequately.

So this Philadelphia Inquirer story suggested that I might owe my father an apology. According to the report, researchers examined 70 adults with similar levels of education and fitness, and who had no symptoms of Alzheimer’s disease. The adults were give a battery of cognitive tests. Who scored the best? Those with ten or more years of musical training. Who scored the lowest? Those with no musical training. Those running the study want to do more research, to determine if the cognitive performance enhancement is caused by the music lessons or by some other factor.

The lead research tossed out an idea that I found quite plausible. “Since studying an instrument requires years of practice and learning, it may create alternate connections in the brain that could compensate for cognitive declines as we get older.” If that indeed is the case, then would not the same cognitive achievement be attained by other endeavors requiring years of practice and learning? Certainly more research is in order.

So where does tax fit in? Two questions pop into my brain. Do years of practice and learning involving tax have the same effect as years of practice and learning involving music? Do years of practice and learning involving music make a person more proficient in learning tax? When I was a student in the basic federal income tax course, the professor often referred to “music majors” as a stereotype of students he expected to struggle in the course. Yet, my years of teaching have taught me that music majors do well in tax law. Though I’ve not conducted any empirical or laboratory research, I have convinced myself that the reason rests on the number of shared characteristics between music and tax law. Both require attention to detail. Both require careful reading. Both emphasize the need to recognize and apply patterns and sequences. Both are highly structured. Both are, to some extent, mathematical. Both involve interpretation. Both require precision. Both require the learning of a new language. The only difference between music and tax law that I could find has nothing to do with the learning process. Music makes almost everyone happy. That cannot be said about tax law.

This isn’t my first foray into the connections between tax and cerebral characteristics. Not long ago, in The Tax Brain, I asked:

Is there such a thing as a tax brain? Is there something to be said for the fact that most tax practitioners are proficient in semantic language processing and arithmetic calculation? Are there areas of a tax person’s brain that are larger or smaller than the typical brain, or that show higher or lower levels of activity? Are the brains of tax professionals awash with dopamine or with noradrenaline?

Now, to that list of questions, I add, “Do musicians and tax professionals find themselves in the same part of the intellectual family tree?” Perhaps a more important question is this: “Do tax professionals face a lower risk of cognitive decline as they get older?” There are plenty of anecdotes that I could share. What I prefer to see is an appropriately conducted study.

Seventeen years ago, I co-authored an article that focused on inadvertent consequences of changes to the section 751 regulations. The title, “IRS Hot Asset Reg Re-tuning Falls Flat, Causing Sharp Pain for Partner Estates,” 94 Tax Notes 751 (2002), probably doesn’t say it all, and only a few of the borrowed musical terms show up in the table of contents:

Overture ................................................ 751
1st Movement: Sonata of the Basis Discrepancies ......... 752
2d Movement: Rondo of the Resolutions ................... 753
3d Movement: Scherzo of the Fractured Minuet ............ 755
4th Movement: Variations on Fractured Syncopation ....... 757
Finale: A Crescendo of Improvisations ................... 757
Coda: The Denouement of Repetition ...................... 760
The Final Gong .......................................... 760

The full scope of this musically influenced tax article can be understood only by reading it. And I’ll leave to another post, and another area of science, the significance of the page number on which the article appeared.

About a year and a half ago, in Poll on Tax and Spending Illustrates Voter Inconsistency, I reacted to the results of a Quinnipiac University poll that indicated New Jersey residents, although favoring spending cuts over tax increases, failed to achieve a majority when it came to cutting the outlays for any particular program. I explained that, “The poll reinforces my contention that the underlying problem is the continued demand for government spending on programs that benefit state residents coupled with a continued resistance to the idea of paying taxes in order to fund those programs.”

In my post back near the end of 2009, I hypothesized that the problem rested in the “I want, I got, I will continue to get” experience that leads so many people to an entitlement mentality that objects to cutting any program other than one that, at the moment, does not directly benefit the person suggesting which programs get cut. I noted that the problem “may be a simple matter of what the residents of New Jersey want being something that collectively is more than what the residents of New Jersey have.”

According to a new Quinnipiac poll released last week, as reported in this story, attitudes haven’t changed. Sixty percent of those polled support increased state spending on public schools, and 57 percent supported increases limited to the state’s poorest areas. Nonetheless, 67 percent take the position that spending is not the best way to improve public schools. Of those polled, 59 percent oppose tax increases, even though 52 percent support restoring the higher tax rate on incomes exceeding roughly a million dollars, and 55 percent oppose tax cuts for corporations.

Though roughly 40 percent of those polled appear to be taking a consistent position, roughly 60 percent, or more, do not want to pay more taxes, do not think spending is the best way to improve public schools, but support increased spending on public schools. That sort of reasoning makes no sense. Is it any wonder that governmental budgetary processes are a mess throughout the country?

With the inconsistency seemingly flavored by irrationality, I’m beginning to think that there is more to the disconnect than simply the entitlement mentality. The inability of so many people to frame the analysis in a logical manner is disturbing. Another instance of that bewildering approach manifested itself last week in the various comments that blamed the President for the increase in gasoline prices and claimed that by preventing his re-election, gas prices would be reduced. Hello! How is the President, or any president, responsible for the finite nature of hydrocarbon resources and their decline? How is the President responsible for the huge increase in the number of the people living on the planet? How is the President responsible for the huge growth in the number of people no longer content to walk, ride donkeys, or ride bicycles because they have experienced and now want self-propelled vehicles? How is the President responsible for the effect of speculators’ gambling on oil and gasoline prices? How is the President responsible for the cost of switching gasoline refining to the summer-blend process? Careful reasoning tells us that gasoline prices are doing what was predicted, namely, increasing, at the time that was predicted, namely, as the global economy began to rebound from the recession. Of course prices are increasing, and it’s something that would have happened no matter who was in the White House.

In Poll on Tax and Spending Illustrates Voter Inconsistency, I repeated the questions I asked in New Jersey to Follow in California's Tax Footsteps?: "Is no one taught the skills required to balance budgets? Are fiscal discipline and common sense lost abilities? Are there any political leaders still standing who have the courage to explain the true cost, tax-wise and otherwise, of the things that the people demand? Is the nation paying the price for too many years of too many people refusing to say 'no' to the demands of those who are unable to comprehend that money does not grow on trees?"

It’s not possible, in the long run, to run a government by cutting or maintaining taxes, increasing spending, and reducing deficits and debt. Yet that is what the nation, and the residents of specific states and localities, want. It’s not possible, in the long run, to make gasoline available to everyone at $1 or $2 per gallon. Those who tell people that these things are possible know that when people discover that they are not, the disappointed people will lash out. Those who tell these myths to people then conveniently direct the anger and frustration arising from the disappointment so that it lands on the political enemies of those who sell the false promise of a no-tax government and $2 gasoline in every vehicle. Politicians seem to think that people do not want to hear the truth, yet it seems from various polls and commentaries that most people do want to hear the truth. Unfortunately, people tend to react by voting out the elected official who brings bad news. For that reason, present-day politicians hesitate to elevate truth over re-election opportunities. The truth needs to be told, and the politicians who do best at telling the truthful bad news are those who also bring a simultaneous delivery of realistic, feasible plans to deal with the bad news and the ability to deliver both messages in a manner that helps people understand what needs to be done, rather than riling them up. The bad news is that very few, if any, now remain in politics who have that trio of abilities. Hopefully, that won’t be an enduring truth.

It’s likely that even people who are not tax professionals can answer the following question: “If taxpayer T writes a $100 check to Charity A, and delivers it to the Charity, and Charity A cashes the check, is T permitted to claim two $100 charitable contribution deductions on T’s income tax return?” I expect similar results if they tried to answer this question: “If taxpayer B purchases kitchen equipment for B’s restaurant, paying $1.5 million, is B permitted to deduct depreciation on the equipment totaling $1.5 million, and then start over, deducting another $1.5 million of depreciation?” And I expect roughly the same results if they tried to answer this question: “If taxpayer Z drives for business purposes from Z’s office to client G, whose office is 10 miles from Z’s office, and then drives, for business purposes, 8 miles from G’s office to Client H’s office, and then drives 14 miles from H’s office back to Z’s office, is Z permitted to deduct transportation expenses based on 48 miles (2 x 10 plus 2 x 14)?

Anyone with even a rudimentary understanding of tax, or some sort of basic common sense, would quickly determine that the answer to each question is “No.” It’s obvious, isn’t it, that paying $100 ought not generate a $200 deduction, spending $1.5 million on depreciable equipment ought not generate $3 million of depreciation, and driving 32 miles ought not generate 48 miles’ worth of deductions?

In a recent case, however, a taxpayer tried, unsuccessfully, to achieve a double-dip with respect to home office expenses. In Bosque v. Comr., T.C. Memo. 2011-79, the Tax Court addressed the proper treatment of home office expenses when a taxpayer conducts multiple businesses from that office.

The taxpayer was a self-employed attorney, and also preformed services for a corporation that he formed in 2005. The corporation was in the business of recruiting individuals to become real estate agents. The taxpayer and his wife had added a room to their house which the taxpayer used as an office for his law practice and for the corporation he had formed. On the Schedule C for the law practice, the taxpayer deducted $7,551, representing the allocation of the residence expenses to the room. On the Schedule C for the services rendered to the corporation, the taxpayer deducted $7,729, representing the allocation of the residence expenses to the room. As the Tax Court put it, “Instead of apportioning the business use of their home between [the corporation] and the law practice, petitioners claimed as a deduction the full amount of the business of their home twice.” The Tax Court’s opinion does not explain how the apportionment of the residence expenses to the room generated $7,729 and $7,551, respectively, but made it clear that these were duplicate amounts. The court stated, “Petitioners claimed on both their 2006 ACI Schedule C and their 2006 law practice Schedule C deductions for the business use of their home. Although Mr. Bosque used the same room for both businesses, petitioners claimed the full amount of the deduction on each business’ Schedule C.” Technically, there was no duplication with respect to the $178 claimed on the Schedule C for the services rendered to the corporation but not on the Schedule C for the law practice.

The IRS, not surprisingly, argued that “because Mr. Bosque used the same room in the house for both businesses, petitioners are entitled to only one deduction for the business use of their home,” and also argued that “since petitioners were allowed to deduct the expense for the business use of their home on their 2006 law practice Schedule C, they are not entitled to the deduction claimed on their 2006 ACI Schedule C.”

The taxpayer “admitted that he used the same home office for both his law practice and [the services rendered to the corporation]. The Court agreed with the IRS, noting that “to allow petitioners two deductions would be to double the amount of the allowed deduction under section 280A(c).”

The opinion does not indicate whether the return was prepared manually or through the use of software. The software with which I am familiar is designed so that home office expenses are shared among multiple businesses. Though I don’t know for sure, it’s a safe guess that other tax preparation software also prevents double dipping with respect to the same expenses.

One wonders how the taxpayer would have reacted if the IRS attempted to require the taxpayer to report the law practice and corporate services income on both Schedule C and on some other schedule. One can also wonder how taxpayers would react if the IRS required gross income from rendering services to be reported on a Form W-2 and then again on a Form 1099.

Last August, in Tax Politics and Economic Uncertainty, I agreed with the comment of Martin Regalia, chief economist of the U.S. Chamber of Commerce, who noted that “Uncertainty is the probably the biggest factor retarding economic growth.” It is my position that the constant tinkering with the tax law, such as the on-again, off-again bonus depreciation deduction, makes it even more challenging, if not impossible, for businesses, particularly small businesses, to do the long-term planning necessary for a viable business plan. I am convinced that, as I argued, “The bottom line, no pun intended, is that it is easier for businesses to make decisions if they know what lies ahead, regardless of what lies ahead, than if they don’t know what lies ahead. Businesses can react to higher tax rates and to lower tax rates, if they know what the tax rates will be, but their decision modeling suffers when virtually everything in the tax law remains open to change, perhaps retroactively, sometimes at a moment’s notice.” I explained that although the Congress is able to provide a sufficiently certain tax law, it does not do so because its members can play the uncertainty into bargaining chips in their unchanging pursuit of campaign contributions, a point on which I had elaborated in A Zero Tax, A Zero Congress with respect to the consequences of Congress’ refusal to come to grips with a permanent solution to the estate tax mess. Just last week, in What Sort of War is the “Real Budget War”?, I argued that “the uncertainty raised by the dilly-dallying and political posturing infecting the process is one of the most significant reasons American businesses are hesitant to expand, hire, borrow, lend, produce, or commit to much of anything other than what is imminently necessary.”

In more than a few posts, I have repeatedly argued that the tax cuts and tax breaks touted as “job creators” have failed to generated the promised jobs. For example, in If At First It Doesn’t Work, Try, Try, Try Again, I asked this of the bonus depreciation and section 179 expensing deduction expansions:

The previous incarnation of section 168(k) “bonus depreciation” as well as continual expansion of section 179 expensing have been consistently hailed as solutions to the nation’s economic woes of the moment. Yet no evidence exists that these tax giveaways have had the claimed effect. Why is it, for example, that during 2008 and 2009, while businesses basked in the benefit of 50-percent bonus depreciation, the economy got worse, not better? Where are all the jobs whose creation was promised when the proposal for the 2008 and 2009 tax break was being trumpeted as the answer? Where is the economic recovery that supposedly was an inescapable consequence of enacting those tax breaks? Similar questions can be asked about the long parade of tax breaks for business investments during the past 50 years.

I elaborated on this point in Job Creation and Tax Reductions:

Fourth, reducing tax rates or extending low taxes for the wealthy, which is what Boehner advocates, does not create jobs. Extending tax cuts for individuals with incomes exceeding $250,000 (for purposes of simplicity, without getting into the slightly different numbers for individuals in different filing status categories) in addition to extending tax cuts for individuals with incomes under that amount would have no effect on small business owners who do not generate that much income from their business. And that's most truly small business. What about individuals with incomes exceeding $250,000? Will they create jobs if their taxes are reduced or if their tax cuts are extended? Not necessarily. A person does not “create a job,” that is, hire a person for a position that previously did not exist, simply because the person’s tax cuts are extended. People do not hire other people for the sake of doing so. They hire other people if they have work that needs to be done. Extending tax cuts does not cause an increase in the amount of work that needs to be done. Even if it did, would the extension of a tax cut that means roughly $35,000 to someone with income of $1,000,000 generate a new job of any significance? Considering that it costs roughly $1.40 to pay $1 in salary, even if the person with $1,000,000 of income needed work to be done, at best they could “create” a job that pays roughly $25,000. One job. One job paying very little. On the other hand, if the person really needed to hire someone, the tax law provides a zero tax rate on the income used to pay a new employee. Thus, no matter the tax rate, if the person with $1,000,000 of income needed to hire someone to do work for $25,000, by doing so at a rough cost of $35,000, the person’s taxes would be reduced under current law by roughly $12,000, and under a tax-cut-expiration situation, by roughly $14,000. In other words, the “we aren’t creating jobs because our taxes might go up” is utter nonsense. If the person has work that needs to be done, $2,000 isn’t going to make or break the decision. Better yet, the wealthy person can hire enough people so that their taxable income sinks below $250,000 and they won't need to bother themselves with what the tax rates for the wealthy are, and in the process they can learn what it's like to live like most people do. What will create jobs is an increase in demand, 90 percent of which comes from the 99 percent who are not in the economic top one percent, and the best way to stimulate demand among the 99 percent is to extend their tax cuts. Ironically, where work needs to be done, such as highway and bridge repair and maintenance, refurbishment of public infrastructure such as storm sewer systems, firehouses, schools, sanitary sewage systems and plants, dams, national cybersecurity, and similar public improvements, the advocates of tax cuts for the wealthy hold a position that guarantees the lack of funding for most, if not all, of what needs to be done to keep the nation vibrant in a changing world economy.

Now comes news that reinforces my position that tax certainty has far more value than ever-changing, sometimes expired, sometimes re-enacted, sometimes retroactively modified tax breaks and tax rate cuts.

Last week, in his column Philly Deals nicely headlined Isn't It Rich? Capitalists Who Accept Higher Taxes, Joseph N. DiStefano asked an important question, “So how are the rich - and the larger group of Americans who think they're rich, want to be rich, support the rich, or at least trust rich Republicans more than rich Democrats - going to react to Obama's warning that he won't back down next time [when it comes to opposing extending the Bush tax cuts for the wealthy]?” The answer was one that works for many questions. “It depends.” Specifically, according to DiStefano, it depends “on which rich you mean.” DiStefano reminded his readers that last fall he had commented on the arguments made by well-known billionaires and millionaires in favor of “higher taxes on wealthy Americans as a matter of national fairness and fiscal sobriety.” He then reported that his discussions with financial professionals disclosed that “their working-rich clients aren't necessarily discouraged to expand their businesses because of higher tax rates.” Instead, “A bigger burden is the unpredictability of tax rates and tax breaks; subsidies and penalties; and liability, labor, and trade, and pollution laws and regulations as Democrats and Republicans keep rewriting the rules or threatening to.” In a conclusion reminiscent of my own proposition, he wrote, “This politically manufactured instability makes it tough for capitalists to plan.”

Di Stefano then shared something that many people intuitively suspect. The same financial professionals told him that, “It's different among those whose money was mostly inherited. As a group, say the pros, those people are more likely to hate taxes, period, and to support politicians who promise to cut them, no matter what. Having lost the capacity to earn more, they fight harder for what's left. Even if that means a fat national deficit.” Interesting, isn’t it? I’m particularly puzzled by the notion that people who inherit money have “lost the capacity to earn more.” Maybe someone can start a new business, teaching those born into money how to earn money, just as people born into specific athletic skills end up needing to learn how to develop their other natural talents when time runs out on their physical superiority.

Who can disagree with DiStefano’s proposed solution? He suggests, “Maybe the solution is to simplify the tax code, set income-tax rates at some world-competitive level, keep them there for the next 20 or 30 years, and boost inheritance taxes.” The productive wealthy, those who seemingly are attempting to develop business plans to which they can commit, have indicated their ability to deal with such an environment. Having tried the approach of continual re-enactment of short-term tax changes, and having seen it fail, it is time for Congress to try something else. The folks who brought us the last several decades had their chance. It’s someone else’s turn now. Didn’t they learn that rule in kindergarten? You know, the one about taking turns and not hogging things?