MauledAgain

For the past several years, I have reacted negatively to the policies and practices of the Delaware River Port Authority (DRPA) that funnel bridge tolls to a variety of projects that have nothing to do with maintaining or repairing the bridges or adjacent highways. I addressed this abuse of public trust in a series of posts, beginning with Soccer Franchise Socks It to Bridge Users, continuing through Bridge Motorists Easy Mark for Inflated User Fees, Restricting Bridge Tolls to Bridge Care, Don't They Ever Learn? They're At It Again, A Failed Case for Bridge Toll Diversions, DRPA Reform Bandwagon: Finally Gathering Momentum, and ending with When User Fee Diversion Smacks of Private Inurement.

What should be funded by tolls? In User Fees and Costs, I explained:

The toll should be based on the cost of building, expanding, improving, repairing, maintaining, policing, and monitoring the road. . . .

. . . The analysis I support is one that looks at the impact of the toll road and its use on surrounding residents, neighborhoods, and infrastructure. Traffic volume surrounding a toll road interchange is higher than it otherwise would be, and that generates additional costs for the local government. It makes sense to include in the toll an amount that offsets the cost of widening adjacent highways, installing traffic signals, increasing the size of the local police force, adding resources to local emergency service units, and similar expenses of having a toll road in one's backyard. I understand the argument that because the locality benefits economically from the existence of the toll road and its interchange that it ought not be subsidized by the toll road. It is unclear, though, whether the toll road is a net benefit or disadvantage. If it were such a wonderful thing, why are new roads so vehemently opposed by so many towns and civic organizations?

I reiterated this analysis, more succinctly, in Timing, Quantifying, and Allocating User Fees, by explaining, “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.”

There now is an opportunity to put this approach to the test. The opportunity consists of two components.

The first component was highlighted a little more than a week ago, in a Philadelphia Inquirer story that explained what the DRPA planned to do with the balance of the toll money it had set aside for projects unrelated to its mission. Of the roughly $30 million remaining in the account, the DRPA decided to set aside $10 million for “future capital projects” and voted to spend the other $20 million on “local food banks, a new cancer center in Camden, student housing for Rutgers-Camden, and Cooper River rowing facilities,” along with unallocated monies for the New Jersey Economic Development Authority and a pier. Two unappointed members of the Authority’s board, including Pennsylvania’s Auditor General, voted against the $20 million expenditure, failing to persuade the others that it should also be dedicated to transportation projects or reducing the DRPA’s $1.4 billion debt.

The second component was described several days ago in another Philadelphia Inquirer article. The City of Philadelphia plans to extend Delaware Avenue as part of the “master plan for the development of the Delaware River waterfront” in order to provide better access to the area. To extend Delaware Avenue, the city needs an easement from the DRPA because the Avenue would go under the Betsy Ross Bridge, one of the DRPA’s bridges. The DRPA has refused to issue the easement because it wants the city, in return, to take title to Hedley Street. The DRPA acquired Hedley Street when it bought the land on which the bridge supports rest. The city doesn’t want Hedley Street, in part because it is not paved and does not meet city street codes, and in part because it has no use for it. The city is willing to take ownership of the street if the DRPA returns it to its former compliant condition, a project that would cost $2 million. As one might expect, the city says that the DRPA is responsible for the cost, and the DRPA claims that the city should pay. If the DRPA continues to block the city’s plans, the city will lose $15 million of federal funds that had been granted some years ago to help defray the cost of the Delaware Avenue extension project.

The DRPA took the street, let it fall apart due to bridge construction and decades of neglect, now wants to pass it off to the city, along with the $2 million repair bill, and is using the threat of easement withholding in an attempt to bludgeon the city. The DRPA is the land owner and the DRPA is responsible for the condition of the street. It does not violate my view of responsible use of user fees for the DRPA to use some of the $20 million to fix the road that it owns, a road adjacent to one of its bridges. Instead, the DRPA is trying to get the city’s taxpayers to foot the bill while it diverts toll revenue to totally unrelated projects. The irony is how the DRPA defends itself. A spokesman said, "Our position is firm. We're not going to budge. . . . It would cost our toll payers $2 million, and they'd get nothing in return.” Why wasn’t that argument noted when the DRPA was forking over money, and as it continues to fork over money, for things that provide nothing in return to its toll payers?

Late last week, a TaxProf blog story explained that the Sentencing Law & Policy Blog had reported on a $2.3 million award to a wrongfully imprisoned man. The latter post contained a “follow-up question” which was in turn posed to Paul Caron at the TaxProf blog, specifically, “Does [the plaintiff] now get to enjoy this $2.3 million award free from all federal and local taxes?” Here’s an aside to the students in basic federal income tax law school courses: this is yet another example of why lawyers who have no intention of practicing tax law need to understand the basics of tax law, need to take the basic tax course, and thus learn, as was the case here, when to, as I put it, “ask for help.”

In his a TaxProf blog story, Paul explained, correctly, that the answer depends on whether the award was received on account of “personal physical injuries,” citing a half-dozen previous TaxProf posts on the issue. I had not taken a close look at the stories Paul had cited when he posted earlier this year and in 2010, principally because the black letter law was clear. That was a mistake. Had I done so, I would have noticed before now some interesting assertions about the taxation of false imprisonment damages.

As to the policy issue, namely should false imprisonment damages be subject to income taxation, there are good arguments on both sides. In some ways, those arguments reflect the ones advanced on both sides of the debate about the exclusion generally of damages for personal physical injuries and sickness. My focus today is not on those arguments but on the issue of who makes the decision.

Section 104(a)(2) of the Internal Revenue Code makes it clear that the exclusion of damages from gross income applies only to damages received on account of personal physical injuries and sickness. Section 104(a)(2) has been amended several times during the past several decades, which may explain why the IRS, in 2007, obsolete rulings from the 1950s in which it had concluded that gross income did not include damages received by survivors of Nazi concentration camps, Japanese-American internees, and American POWs.

Surely it is the language of section 104(a)(2) that constrained the Tax Court, in a case affirmed by the Sixth Circuit, from extending the exclusion to damages received for false arrest. The court opined that “[p]hysical restraint and physical detention are not ‘physical injuries’ . . . Nor is the deprivation of personal freedom a physical injury.” Robert Wood has provided a very good analysis of this case in Why the Stadnyk Case on False Imprisonment Is a Lemon, an article worth reading by anyone with a serious interest in the issue. In 2010, the IRS issued CCA 201045023, in which the IRS advised that a falsely imprisoned person who suffered physical injuries and sickness while incarcerated can exclude from gross income the damages for those injuries and sickness. Though many people tried to interpret the CCA as justifying exclusion of all damages for false imprisonment, the CCA does not go that far, as carefully explained, again by Robert Wood, in Wrongful Imprisonment Tax Ruling Stirs Controversy.

In Tax-Free Wrongful Imprisonment Recoveries, Robert Wood argues that the IRS takes too narrow a view of what “physical injuries and sickness” means and suggests that the IRS could issue administrative guidance excluding all false imprisonment damages from gross income, and in Why the Stadnyk Case on False Imprisonment Is a Lemon, he provides observations on why the IRS may be reluctant to do so but urges that the IRS or Treasury issue guidance specifying which false imprisonment damages are excludable. Similarly, in Tax On Wrongful Imprisonment Needs Reform, Wood argues that “It’s time for the IRS or Congress to fix this.” Wood is not alone in thinking that the IRS can resolve the problem by adopting definitions of “physical” that reach beyond what the word means. See Expanding Section 104(a)(2)'s Tax Exclusion. On the other hand, in Did the Sixth Circuit Get It Right in Stadnyk?: What to Do About the § 104(a)(2) Personal Injury Damages Exclusion, the author calls on the Congress to fix section 104(a)(2) to settle the question and provide certainty to plaintiffs. In fact, bills have been introduced in Congress to make false imprisonment damages excluded from gross income. On December 6, 2007, the Wrongful Convictions Tax Relief Act of 2007 was introduced, and on March 3, 2010, the Wrongful Convictions Tax Relief Act of 2010 was introduced. Neither bill was passed by the Congress.

There is no question that section 104(a)(2) has flaws and needs to be revised. There is no question that the Congress needs to determine the scope of section 104(a)(2) and whether or not it applies to damages for false imprisonment and similar situations where physical injury or sickness is absent. Congress could, if it chose, to provide a definition of the word “physical” that extends beyond physical, but the better approach would be to provide more explicit parameters for the scope of the exclusion, assuming that the exclusion is maintained. To expect the IRS or the courts to step in and apply section 104(a)(2) as though it had been drafted in some other manner, even if it should be or have been drafted in a more helpful way, is to extend to the executive or judicial branch the responsibility for doing the work of the legislative branch. Congress needs to put aside the politics and get to work, on this and a long list of other matters that need its attention.

The real estate property tax rate in Montgomery County, Pennsylvania, is the same as it was ten years ago, although there was a miniscule increase that was reversed a few years later. A majority of the county commissioners have adhered to a policy of not increasing taxes.

According to a recent Philadelphia Inquirer article, the Commissioners have been told what the consequences will be of continuing to insist on not raising taxes. At least 500 people will lose their jobs, thus shifting an economic burden onto federal and state unemployment relief programs. The President Judge of the county court system explained that the cuts needed to accommodate the refusal to raise taxes “would bring the court system ‘to its knees.’” The county zoo would be closed. The county public library would be closed, a step inconsistent with the need to bolster adult public education. The coroner would try to institute a “don’t die on the weekend” law because it would need to close for the weekend. The county clerk of courts explained that she would be required to dismiss employees and would be unable “to run a functioning Clerk of Courts office,” which has been understaffed for four years and is facing a “significant, unacceptable backlog.”

Ironically, the tax increase required to avoid any more budget cuts than those imposed during the past decades would amount to a $1 per month increase for each of the 120 months that the county has been on what one of the commissioners called a “tax holiday.” For the sake of saving pennies per day, the long-term cost to the taxpaying public will end up being far more than small change.

A little more than a year ago, in Job Creation and Tax Reductions, I pointed out that the best way to stimulate the economy is to put money into the hands of consumers and not into the hands of the wealthy. I explained:

[R]educing tax rates or extending low taxes for the wealthy . . . does not create jobs. . . . 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. . . . 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 . . . [emphasis added]

I have repeated this argument, that jobs are created by demand, on other occasions.

Although the debate about the extension and expiration of the Bush tax cuts for the wealthy often is cast in terms of those who are wealthy and their supporters on the one side, and those who are not wealthy on the other, the reality is that the lines are not so clear-cut. There are wealthy people who oppose extension of the tax cuts for the wealthy and support the return to the pre-Bush-tax-cut days of a balanced federal budget. For example, in Taxing Capital to Help Capital, I explained:

A few readers have suggested to me that I dislike, or worse, hate the wealthy. That’s not true. I dislike what many, not all, wealthy do in terms of co-opting Congress and dictating tax policy that favors the wealthy and that has brought the nation’s economy to its knees. Indeed, there are wealthy individuals who advance economic arguments similar to the ones I make, but they quickly become the target of other wealthy individuals and those who are devotees of the agenda that has brought us so much economic misery.

This is what has happened to Nick Hanauer, an unquestionably wealthy individual, who, in a Bloomberg editorial, Raise Taxes on Rich to Reward True Job Creators, makes the same argument that I have been making, namely, that the wealthy do not create jobs because even if a wealthy person “can start a business based on a great idea, and initially hire dozens or hundreds of people, . . . if no one can afford to buy what [that person has] to sell, [the] business will soon fail and all of those jobs will evaporate.” Hanauer emphasizes that it is the middle class that creates jobs. As he puts it, “But it’s equally true that without consumers, you can’t have entrepreneurs and investors.” In other words, the growing income inequality that is making the middle class disappear is a threat to everyone, including the wealthy. Hanauer puts it nicely, “When the American middle class defends a tax system in which the lion’s share of benefits accrues to the richest, all in the name of job cretion, all that happens is the rich get richer.” As I’ve pointed out in numerous posts, the Bush tax cuts have not created jobs, and the promise of jobs is an empty ploy designed to put more wealth into the hands of those who already are wealthy.

Hanauer notes that “[s]ince 1980, the share of the nation’s income for fat cats like me in the top 0.1 percent has increased a shocking 400 percent, while the share for the bottom 50 percent of Americans has declined 33 percent. At the same time, effective tax rates on the superwealthy fell to 16.6 percent in 2007, from 42 percent at the peak of U.S. productivity in the early 1960s, and about 30 percent during the expansion of the 1990s.” He then raises an issue that has not been given sufficient attention: “The annual earnings of people like me are hundreds, if not thousands, of times greater than those of the average American, but we don’t buy hundreds or thousands of times more stuff. My family owns three cars, not 3,000. I buy a few pairs of pants and a few shirts a year, just like most American men. . . . I can’t buy enough of anything to make up for the fact that millions of unemployed and underemployed Americans can’t buy any new clothes or enjoy any meals out. Or to make up for the decreasing consumption of the tens of millions of middle-class families that are barely squeaking by, buried by spiraling costs and trapped by stagnant or declining wages.” Because of the decline in share of national income, the average American family has $13,000 less than it otherwise would have.

Hanauer notes that even with the expiration of the Bush tax cuts, the wealthy would be taxed at historically low rates, and their incomes would still be “astronomically high.” He understands that in the long run, undoing the foolish Bush tax cuts so that the middle class can be re-energized economically, will bring more dollars to the wealthy than would continuation of those tax cuts.

Understandably, Hanauer isn’t taking this position out of the goodness of his heart. He has a vested interest in the well-being of the middle class. Without an economically thriving middle class, he has no customers to sustain his business enterprises. Hanauer understands this because he comes from the segment of the wealthy who have acquired their wealth through their own efforts in the reality of the business world. But not all wealthy came to be that way in the same manner. Those who are wealthy through inheritance often lack the experience of someone like Hanauer. In Tax Rates or Tax Uncertainty?, in which I discussed Joseph N. DiStefano’s Isn’t It Rich? Capitalists Who Accept Higher Taxes, I shared DiStefano’s disclosures that the “working rich . . . aren’t necessarily discouraged to expand their businesses because of higher tax rates” and that “[i]t’s different among those whose money was mostly inherited” and that “As a group . . . those people are more likely to hate taxes, period” because “[h]aving lost the capacity to earn more, they fight harder for what’s left.” As I noted in my post, why can’t these people figure out how to earn more?

Hanauer has taken a lot of criticism for his position. That’s not surprising. If the anti-tax crowd stood by silently and let Hanauer’s common sense destroy the tax-cut myths, the entire anti-tax machine would fall apart. The supply-siders have had their at-bat. Why should the demand-siders not have their opportunity?

In more than a few posts, including The Value of Tax Education, The Consequences of Tax Education Deficiency, Tax Education is Not Just for Tax Professionals, and Why the Nation Needs Tax Education, I have decried the negative impact on tax policy debates of misleading and erroneous assertions with respect to taxation and tax law. This trend reaches back at least several decades, when banks opposed to a withholding requirement whipped up a frenzy of citizen opposition by deliberately mischaracterizing the withholding obligation as a new tax. Perhaps seen as clever, it was and is a dangerous approach that warps democracy.

Yet another example of how misleading tax commentary muddies tax policy discussions appeared in Gov. Corbett’s Stealth Tax Hike, a “reader feedback” in the Philadelphia Inquirer written by Kelly William Cobb. Cobb is described as “government affairs manager for Americans for Tax Reform and the executive director of StopETaxes.com and DigitalLiberty.net.”

According to Cobb, an attempt by the Pennsylvania Department of Revenue to enforce an existing tax constitutes a “tax increase that skirts the legislative process.” Responsibility for “this tax hike” rests on the state’s governor. Cobb goes so far as to claim that the governor and Department of Revenue are imposing “new and constitutionally questionable taxes” on Pennsylvanians.

Understanding the confusion fueled by these assertions requires careful analysis to remove the impact of conflating two aspects of taxation, specifically, imposition and collection. The taxes in question are the existing sales tax and the existing use tax. The sales tax applies to sales of goods and services in Pennsylvania. Though technically imposed on the purchaser, it is collected by the retailer. The use tax, which is imposed at the same rate and on the same goods and services as the sales tax, applies to purchases made by Pennsylvanians from out-of-state retailers that they then bring back into the state. Collection responsibility technically rests on the Pennsylvanian, but compliance is woeful, just as it would be with the sales tax if retailers did not collect it at the point of sale.

A state can require an out-of-state retailer to collect the use tax on behalf of the purchaser and remit it to the state if the retailer has sufficient “nexus” with the state. In Quill Corp. v. North Dakota, 504 U.S. 298 (1992), the Supreme Court held that for use tax collection purposes, nexus required physical presence of the retailer in the state. Physical presence can exist not only if the retailer operates retail outlets in the state, but also if the retailer uses subsidiaries, representatives, employees, or independent contractors acting as agents, to act on its behalf in the state. These principles are set forth in existing Pennsylvania statutes, 72 P.S. sections 7201(p), 7202(a). On December 1, 2011, the Pennsylvania Department of Revenue issued Sales and Use Tax Bulletin 2011-01 (also available here), to address remote seller nexus. In the Bulletin, the Department of Revenue quoted the statutory provisions, and then provided a list of situations in which out-of-state retailers are considered to have physical presence in Pennsylvania. Each situation involves activity in Pennsylvania conducted by someone acting on behalf of the out-of-state retailer. The Department of Revenue simply is pointing out instances in which enforcement of an existing tax was lax and needs to be solidified. It could have done the same thing with respect to the thousands of Pennsylvanians who shop in Delaware and bring purchases back into the state without paying use tax, but for a variety of reasons has not (yet) done so.

Cobb raises a series of objections to the Department of Revenue’s plan to enforce an existing tax, trying desperately to tag it as a new tax, which clearly it is not. Each of these objections demonstrates how confusion is pumped into the discussion.

Cobb claims that the governor and Department of Revenue are trying to impose new and constitutionally questionable taxes. Yet he quotes from the Bulletin the Department’s own acknowledgment that it will require compliance to the extent that it is permissible “under the Constitution of the United States.” Cobb calls that provision “vague” and claims that it “may be unconstitutional.” To assert, as Cobb does, that announcing an intention to comply with the Constitution is unconstitutional is nonsense.

Cobb quotes the Bulletin, which refers to the statutory provision, “any contact within this Commonwealth which would allow the Commonwealth to require a person to collect and remit tax under the Constitution of the United States.” To this he reacts with, “Any contact? That gives the state extraordinarily broad powers.” No, not “any contact,” but “any contact” which falls within the scope of the limiting clause that follows the word “which.” There is a difference between “any house” and “any house which has shutters.” Technically precise reading is a valuable skill. When absent, it serves no one well.

Cobb argues that under the “newly announced policy, an out-of-state business that merely advertises online in the state – physical footprint or not – must now collect sales taxes from Pennsylvanians.” Aside from the erroneous reference to sales taxes, as it is the use tax that must be collected, Cobb also misreads the Department of Revenue’s restatement of existing law and policy because he omits to mention that every situation listed in the Bulletin is one that involves the out-of-state having a representative or other agent physically present in the state. If there is no physical footprint by or on behalf of the out-of-state retailer, the use tax collection obligation does not attach. The most diplomatic way of characterizing Cobb’s argument is to say it is a gross exaggeration.

Cobb claims that the Department of Revenue “circumvented the legislative process.” Excuse me, but the legislative process took place and generated the statutes quoted by the Department. Cobb notes that other states “passed similar measures, but they at least invited public discussion of the idea and subjected it to the scrutiny of elected representatives.” So where and how does Cobb think the Pennsylvania statute came into existence?

When Cobb claims that “Corbett and the Department of Revenue [have] opted to unilaterally impose higher taxes through administrative fiat and without transparency,” he is making an unsupportable and misleading allegation. The tax in question, the use tax, has been in existence for decades. The obligation of out-of-state retailers with physical presence in Pennsylvania, whether directly or through an agent, has been in existence for decades. The fact that enforcement was not as intense as it ought to have been, and the fact that compliance is weak, does not make attempts to increase compliance through more focused enforcement the enactment of higher taxes.

Perhaps a better understanding of the difference between the imposition of a tax and the collection of a tax would have spared the readers of Cobb’s editorial the need to sort out the facts from the misinformation, misleading assertions, and nonsense. With this post, I have tried to help people in their effort to do so.

Many students bring to their first basic federal income tax class a deep anxiety and sometimes overwhelming fear that they will be immersed in some sort of mathematical nightmare. I try to reassure them that to the extent numbers are involved, it’s a matter of arithmetic, probably the least complex field in mathematics. I explain that when they struggle with allegedly mathematical concepts such as ratios and proportions, the challenge often is with the concept and not the numbers. And I emphasize the significant role that language plays in learning and applying tax law. It’s not, as the unfounded claims suggest, all about numbers.

A few days ago, an interesting example of the importance of words in the tax world appeared in a Philadelphia Inquirer article about the New Jersey real estate property tax limitation available to farmers. The article examined several situations, involving well-known individuals including a member of Congress, who have taken advantage of the real estate property tax limitation even though their farming activities are minimal. Someone reading the article might think that the issue is one of defining “farmer” or “farming,” but that is not how the statute was drafted.

The provision in question states:

54:4-23.2. Value of land actively devoted to agricultural or horticultural use. For general property tax purposes, the value of land, not less than 5 acres in area, which is actively devoted to agricultural or horticultural use and which has been so devoted for at least the 2 successive years immediately preceding the tax year in issue, shall, on application of the owner, and approval thereof as hereinafter provided, be that value which such land has for agricultural or horticultural use.

In turn, the statute defines agricultural use in this manner:

Land shall be deemed to be in agricultural use when devoted to the production for sale of plants and animals useful to man, including but not limited to: forages and sod crops; grains and feed crops; dairy animals and dairy products; poultry and poultry products; livestock, including beef cattle, sheep, swine, horses, ponies, mules or goats, including the breeding, boarding, raising, rehabilitating, training or grazing of any or all of such animals , except that "livestock" shall not include dogs; bees and apiary products; fur animals; trees and forest products; or when devoted to and meeting the requirements and qualifications for payments or other compensation pursuant to a soil conservation program under an agreement with an agency of the federal government, except that land which is devoted exclusively to the production for sale of tree and forest products, other than Christmas trees, or devoted as sustainable forestland, and is not appurtenant woodland, shall not be deemed to be in agricultural use unless the landowner fulfills the following additional conditions: [with respect to establishing a forest stewardship or woodland management plan, attestation by professional foresters with respect to compliance, and proper submission of applications with respect to the plan].

The statute also provides that “ agricultural use shall also include biomass, solar, or wind energy generation, provided that the biomass, solar, or wind energy generation is consistent with the provisions of P.L.2009, c.213 (C.4:1C-32.4 et al.), as applicable, and the rules and regulations adopted therefor; and ‘biomass’ means an agricultural crop, crop residue, or agricultural byproduct that is cultivated, harvested, or produced on the farm, or directly obtained from a farm where it was cultivated, harvested, or produced, and which can be used to generate energy in a sustainable manner, except with respect to preserved farmland, ‘biomass’ means the same as that term is defined in section 1 of P.L.2009, c.213.” Another provision defines horticultural use as follows:

Land shall be deemed to be in horticultural use when devoted to the production for sale of fruits of all kinds, including grapes, nuts and berries; vegetables; nursery, floral, ornamental and greenhouse products; or when devoted to and meeting the requirements and qualifications for payments or other compensation pursuant to a soil conservation program under an agreement with an agency of the Federal Government.

In addition, another provision requires that the land be so devoted for at least two years preceding the taxable year in question and that it not be less than five acres. Finally, yet another provision requires the property to generate at least $500 during the year in receipts from the agricultural activity. Clearly, it’s not a simple matter of defining the word “farmer” or the word “farming.”

What brings this provision into the spotlight is a report, Subsidies of the Rich and Famous, issued by a conservative Republican senator. In the report, Tom Coburn criticizes not only federal subsidies for the wealthy, but also state subsidies, including the New Jersey farmland tax break. The spotlight was brightened because among the taxpayers taking advantage of this real property tax reduction provision are John Runyan, former NFL player turned Representative, Jon Bon Jovi, and Bruce Springsteen. It is important to separate the issues. One issue is whether these individuals are violating the law. They’re not, though Runyan had to add three donkeys to his land because the assessor had ruled that one donkey plus selling firewood was insufficient to meet the requirements, and to claim that Runyan is taking “advantage of New Jersey taxpayers by outrageously calling himself a farmer,” as does a spokesperson for the Democratic Congressional Campaign Committee, is to twist the language of a statute that does not require anyone to call himself or herself a farmer but requires a person to engage in agricultural or horticultural activities generating at least $500 of receipts. Put another way, the New Jersey real property tax limitation is not limited to full-time farmers. The other issue is whether it makes sense to let millionaires take advantage of a tax break supposedly established to “encourage individuals in agricultural pursuits, as Coburn puts it.

The policy issue can be separated into several questions. Should a tax break, which in Runyan’s case amounts to a 98 percent reduction in real estate taxes, be available to a person whose agricultural activities are minimal? Ought the tax break be limited to farmers whose activities are a meaningful part of their attempts to earn a livelihood? Ought the tax break be limited to individuals whose income is less than some particular amount? If the goal of the provision is to encourage preservation of farm land as a buffer against hopscotch development and urban sprawl, ought not the tax break be designed to mirror similar provisions in other states? Coburn answers one of the questions by stating, “Farmers that are millionaires no longer need [the] encouragement [to engage in agricultural pursuits].” He answers another by claiming “Further, a millionaire landowner should not be paid by the government to preserve their land.” Coburn’s first statement makes much sense. His second, however, appears to ignore what would happen without an incentive to sell land at its highest price to developers, namely, a diminution in the amount of open space in heavily populated areas. Conflating these two goals, , the encouragement of farming and the preservation of open space, muddies the discussion.

As a practical matter, when the goal is preservation of open space, the taxpayers who will directly benefit from the tax break are likely to be those with higher incomes. Poor people and working class individuals rarely own the quantities and types of land that are eligible for open space conservation attempts. So although the focus should be on the land and not the owner’s economic status, the overwhelming majority of tax breaks for open space preservation will flow to wealthier taxpayers. In contrast, when it comes to farming, most individuals who farm, at least in New Jersey, struggle. Often they must hold other jobs to make ends meet. When the goal is preservation of farming, perhaps there is justification to apply some sort of income test. Thus, though a Rutgers University professor explains that the farmland assessment is “blind to the person; it’s about the land,” when the tax break is broken into its separate goals, that characteristic ought to be limited to the open space goal and not the farming encouragement goal. Millionaires don’t need to be encouraged to farm or to be given financial assistance to farm. But if society wants a person to keep their land open and free of development, society should pay fair value, no matter who owns the land and no matter the income of the person who owns the land.

As the nation struggles with a deficit caused by a combination of unfunded war expenditures and unwise tax cuts, yet another goofy budget suggestion has emerged from the Congress. This time, it is House Minority Nancy Pelosi who suggests that the extension of the payroll tax reduction can be funded with dollars not spent on military operations in Iraq and Afghanistan. In her joint press availability with Democratic Whip Steny Hoyer, she said, “And we can pay for the payroll tax cut . . . by taking the funds from the overseas contingency operations account.”

Perhaps an example will illustrate the madness. Consider a family with a child who is ready to enter college. Until this point the family has been spending what it earns, perhaps accumulating a bit of a surplus. The child then enters college, creating for the family a new and significant expenditure. Though most families would not consider doing so, in order for the example to parallel the federal budget story, this particular family gives up one of its part-time jobs, on some goofball theory that by cutting revenue it will improve its financial condition. Facing a substantial excess of expenditures over income, the family incurs a deficit, borrowing money from creditors willing to do some lending. During the child’s senior year, the family takes a leave from yet another part-time job, the money from which had been flowing into the family’s retirement plan. As the child nears graduation, the family decides that its financial situation will benefit if it continues to stay on leave from the part-time job. When one spouse asks the other how the family will cope with the continued loss of revenue, the answer is startling. “Junior graduates soon, so we’ll use the dollars we are no longer spending on junior’s tuition.” Hello? Those dollars are fake dollars. Not spending money that wasn’t going to be spent is not a cut in spending nor an increase in revenue. The only way the family continues to have access to the amount of dollars spent annually on tuition is to BORROW MORE MONEY. That, of course, increases the family’s budget deficit. The solution to the family’s problem is to get back to work. Cutting tuition expenditures isn’t the answer because there are no more tuition expenditures to cut.

If this latest nonsense does not persuade Americans that members of Congress, charged with fiduciary care of the nation’s economy, don’t understand economics, nothing will. People would not take their injured children to an emergency room staffed by tax law professors, would refuse to schedule surgery for their grandchildren with oil well drillers, and would object to having their teeth cleaned by a carpenter. Yet they seem willing to entrust the future of this nation to an assembly of politicians who are so lacking in the skills required for leadership that they offer, and occasionally enact, legislation that not only is wacky, but also dangerous.

The anti-tax movement, at least some of which is an anti-government movement, objects to government having access to resources collected through the tax system. Rather than seeing taxes as a price paid for a civilized society, they see taxes as an obstacle to their so-called freedom to do whatever they want to do, as I pointed out in Free, Freedom, Fees, and Taxes and Taxes and the Funding of (De)Regulated Markets. A recent story from New Jersey demonstrates why taxes are a price that needs to be paid to permit society to function in a civilized manner.

Using tax dollars, state officials in New Jersey inspected 325 gasoline stations and discovered that 14 of them, almost 5 percent, were delivering gasoline with octane ratings less than what the pump indicated. In other words, entrepreneurs in the anti-tax movement’s beloved private sector were cheating their customers.

Government needs to regulate markets, and needs tax dollars to do so, because the private sector is incapable of policing itself. As I asked in Keeping Free Markets Free, “Who, I ask, protects the freedom of the free market?” The answer should be obvious. The answer also is disliked by some people. Who? People who lose when government regulates markets. For example, I wonder if the owners of the 14 gasoline stations in New Jersey that were selling lower quality gasoline than what the consumers were paying for are thrilled with the idea of paying fees or taxes to fund gasoline quality inspectors. I wonder. That is why I concluded, “The notion that a society without government, or a totally unregulated market, can provide for the welfare of society is a proposition that has never been successfully applied in life.” I also wonder how many people who resent taxes and wish for the disappearance or impairment of government were spared thousands of dollars in engine repair expenses because a tax-funded inspector identified gasoline stations selling a product inadequate for the customer’s needs. I wonder.

It’s not just the quality of gasoline that suffers when tax funding shrinks because of anti-government inspired opposition to taxation. I provided some examples in Life Without Tax Increases. According to this recent National Law Journal article, the list is growing, as a consequence of tax cuts that have reduced funding for state courts, in turn reducing citizen access to justice. I wonder whether it’s the owners of the 14 gasoline stations or their customers who benefit from the reduced availability of judicial system redress.

Disaster planning experts advise us to consider how we might function in the wake of a natural disaster. Perhaps it is time for people to consider how we will function in the wake of government disintegration.

The debate over extension of the payroll tax reduction involves a dispute over the funding of its cost. A proposal to impose a surtax on taxable incomes exceeding $1,000,000 has encountered resistance from Republican members of Congress. For example, as widely reported, including, for example, this posting, Speaker of the House John Boehner claims that “one-third of small business income would be hit by the surtax.” Senate Minority Leader Mitch McConnell, as reported here and elsewhere, claims the surtax would negatively affect small business. In contrast, the White House contends that the surtax would affect only one percent of small businesses, as explained in this commentary.

The difficulty with this particular aspect of the debate is that no one agrees on what constitutes a small business. Even the Internal Revenue Code has at least four different definitions of “small business.” One is found in section 1361(b), which deals with small business corporations eligible to make the S election. Another is found in section 1244, which allows an ordinary loss deduction for certain small business stock losses. Yet another is found in section 1202, which provides an exclusion for capital gain from the sale of certain small business stock. Even another is found in section 44, which allows a disabled access credit to small business. Not surprisingly, the Small Business Administration has its own definition of small business. Section 1361 focuses primarily on the number of shareholders, though the amendments increasing the limitation to 100 hardly bespeak “small” in that respect. Section 1244 defines a small business as a corporation that has received no more than $1,000,000 for its stock. Section 1202 defines a qualified small business as a corporation with aggregate gross assets of no more than $50,000,000. Section 44 defines a small business as a business with either gross receipts not exceeding $1,000,000 or no more than 30 full-time employees. With this sort of inconsistency in the Code, is it any wonder that all sorts of claims are being tossed about with respect to the impact of the proposed surtax on small business?

Most people, perhaps almost all people, when asked about a small business, would refer to the solely-owned or family-owned business that has few employees, generates a modest amount of taxable income, and owns a modest amount of assets. Most people would not consider a business with $49,000,000 of gross assets to be “small,” yet under one definition that business is a “small business.” An corporation, so long as it has no more than 100 unrelated shareholders and meets some other tests, can qualify as a “small business” for S election purposes, even if it has billions of dollars of assets and hundreds of millions of dollars of taxable income.

Any sensible definition of small business, such as gross receipts not exceeding $1,000,000, or fewer than 31 employees, or no more than a handful of unrelated owners, necessarily escapes the surtax on taxable incomes exceeding $1,000,000. Put another way, 99 percent of America’s small businesses do not generate $1,000,000 or more of taxable income for their owners. Though, as explained in this Treasury Department report, two-thirds of millionaires are “small business” owners (using $10,000,000 as the threshold), only 3.31 percent of small business owners are millionaires, which leaves 96.69 percent of small business owners unaffected by the proposed surtax. Thus, the claims that the proposed surtax would kill small businesses is false. Why is this false claim being circulated? Because it sounds plausible to enough people that political mileage can be gained from touting it. In contrast, if opponents of the surtax on taxable incomes of $1,000,000 or more claimed that it would wipe out widows and orphans, the lunacy of such an assertion would be so obvious that the goals of the objectors would be more readily observed. The bottom line is that many, perhaps most, but probably not all, people with taxable incomes of $1,000,000 or more do not want to pay more taxes, and in fact are trying to obtain more tax reductions. Though some admit to this viewpoint, others prefer to have legislators make the proposed surtax look like something it is not, namely, the destroyer of small business. This sort of political discourse, with false claims and disguised agendas, is dangerous, but it won’t stop until enough people call out the politicians for using this sort of twisted rhetoric.

In two recent posts, Tax Policy, Elections, and Money and If the Government Collects It, Is It Necessarily a Tax?, I have explored the unwarranted and excessive influence that the unelected Grover Norquist holds over federal, state, and local tax policy and decision making. Based on Norquist’s own words, I concluded that his anti-tax stance is simply part of his strategy to destroy government.

The adverse effect of Norquist’s efforts on the American people and the nation’s economy is beginning to get attention from people other than myself. For example, a well-written letter to the editor by Sarah H. Widman of Trappe, Pennsylvania asks:

Who's Norquist?
I don't remember ever voting for Grover Norquist for any public office, so it is difficult for me to understand why and how so many members of Congress have allowed their integrity and independence to be hijacked by him and his tactics.
In fact, it should be illegal for an elected official to pledge allegiance to any private, partisan interest group that places the interests of that group above the needs and interests of the representative's constituents and prevents that representative from doing a proper job of legislating.
The fact that we do not know who finances Norquist's Americans for Tax Reform organization makes the strength of his influence even more suspect. But how can we hope for reform from Norquist's brand of campaign-finance extortion, when a majority of those with the power to reform are in his thrall? The only answer is for voters to head to the polls in the next election and vote out all who have placed their loyalty to Grover over their loyalty to country.

This groundswell of opposition to disproportionate influence wielded by an unelected person disturbs Charles Krauthammer. In Debunking the Norquist Myth, he attempts to discount the claim that “Republicans are in the thrall of one Grover Norquist” by offering several examples of Republican legislators who agreed to proposals that would increase tax revenue. Aside from failing to mention that only a few Republican signers of the anti-tax pledge have defected, Krauthammer overlooks Norquist’s bullying reaction to anyone who stands up to his strategy. Politicians who signed the Norquist anti-government, excuse me, anti-tax pledge and who, realizing how dangerous it is, decide to make a more sensible decision, go through twisted and tortured maneuvers to prove they are not violating the pledge. Whether it is Pennsylvania’s governor explaining that impact fees are not taxes, as discussed in If the Government Collects It, Is It Necessarily a Tax?, or a legislator claiming that a package with more spending cuts than tax increases is not a tax increase, Norquist’s influence and unelected power cannot be denied, and Krauthammer short-changes some of his other analysis by rushing to the defense of one of the nation’s most dangerous people.

Krauthammer claims that the “myth of the Norquist-controlled antitax monolith” persists because “Democrats can’t tell the difference between tax revenues and tax rates.” He correctly points out that the nation’s creditors care only about total revenue and not the particulars of rates, deductions, exclusions, and credits. Though I suppose sophisticated creditors do pay attention to those things as they try to evaluate the creditworthiness of the United States, as a practical matter, it’s the total revenue that counts. Krauthammer claims that Democrats are so intent on raising rates that they overlook proposals to eliminate deductions and loopholes. But in making that claim, he distorts the analysis. People who have read or listened to my tax policy position know that I’m in favor of eliminating most exclusions, deductions, and credits. That’s not the issue. The issue is identifying the loopholes to be eliminated. Republican proposals target exclusions, deductions, and credits that benefit the working class and the middle class, while providing additional tax reductions for the wealthy, as discussed in What Sort of Tax Increase?. That is why the Democrats object to the loophole elimination ploy. If the Republicans stepped up to support elimination of things such as the capital gains loophole, the tax-exempt bond interest exclusion, the stash-your-money-overseas-to-avoid-tax schemes, and the turn-your-compensation-into-low-taxed-capital-gains-because-you-are-rich-enough-to-do-that partnership gimmick, they would find allies among Democratic legislators in a heartbeat. So although Krauthammer is on the right road with this argument, he’s driving in the wrong lane.

Krauthammer further weakens his credibility by claiming that “the real drivers of debt, as Obama himself has acknowledged, are entitlements.” The real driver of debt is the reduction of tax revenues while incurring huge amounts of debt to finance war. I’ve pounded on this issue for years, and fortunately increasing numbers of commentators and taxpayers are beginning to wake up and realize the magnitude of this wealth-shifting tactic. Entitlement spending needs to be reformed, but the only way to reform it without raising tax revenues is to eliminate all entitlements. That, of course, is one of Grover Norquist’s goals, because it is a necessary consequence of his desired destruction of government.

Not long ago, in What Sort of Tax Increase?, I mapped out the foundations of a plan to deal with the federal budget crisis:

Put the tax rates back where they were before they were foolishly reduced at the same time the nation went to war (as discussed in When Tax Cuts Are Part of the Problem, They Ought Not Be Part of the Solution, and the posts cited therein). Impose a user fee on entities that receive or received federal bailout or other funds and fail to increase the number of employees hired and working in the United States. Enact a mileage-based road fee to fund transportation infrastructure repair (as discussed in Toll One Road, Overburden Others? and the posts cited therein). Remove from the Internal Revenue Code all spending programs, and then put each one up for a vote in Congress as a spending outlay, thus putting an end to the spending increases that have been enacted disguised as tax credits, to bring front and center a serious budget problem discussed in More Criticism of Non-Tax Tax Credits and the posts cited therein. Provide corporations a deduction for dividends paid, and impose a tax on corporate accumulated earnings that exceed five percent of the fair market value of assets reported for financial accounting purposes, thus reinvigorating a rarely enforced existing tax (as discussed in Taxing Capital to Help Capital). Repeal the depreciation deduction for buildings and building components (as discussed in Abolish Real Estate Depreciation Deduction? An Idea Gathers Attention, and the posts cited therein). Repeal section 168(k) and section 179 (as discussed in If At First It Doesn’t Work, Try, Try, Try Again, and the posts cited therein). Repeal the special low rates for capital gains and dividends, and index the adjusted basis of assets (as discussed in, among other posts, Special Low Capital Gains Tax Rates = More Tax Revenue? Hardly.). Remove the limitation on the deduction of capital losses. Subject Social Security benefits to means testing, making relevant the “I” in FICA (as discussed in FICA, Medicare, and Payroll Taxes). Clean up the Medicare and Medicaid programs. Eliminate subsidies to any individual or entity that has positive taxable income or reports income for financial accounting purposes.

I know Grover Norquist would reject my suggestions out of hand, because they necessarily require the continuation of government. But I wonder if Charles Krauthammer would be so single-minded. The answer to that question would tell us a good bit about Krauthammer’s defense of Norquist.

Sometimes an article about tax can hit the surely-you-jest trifecta. That was my reaction after reading a Philadelphia Inquirer article about Grover Norquist’s self-injection into the Pennsylvania legislature’s consideration of an impact fee on Marcellus shale drillers. My recent post on the issue, Revenue: It’s Not Just the Name, It’s Also the Place describes how I have been arguing for a user fee to defray the costs generated by natural gas developers 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?” and answered “Perhaps.” Five months ago, in Revenue: Is It All in The Name? I described an impact fee proposal offered by the President of the Pennsylvania Senate who defended the revenue raiser by noting that it was a fee and not a tax.

The first hit in the trifecta is the headline of the Philadelphia Inquirer article: Tax Guru Norquist inserts himself in Pa. Shale Debate. Are you kidding me? Grover Norquist is not a tax guru. He does not practice tax law, nor tax accounting. He is not a commercial tax return preparer. He would struggle to earn points on any well-designed tax law exam.

The second hit in the trifecta is Norquist’s absurd challenge is his contention that Pennsylvania Governor Tom Corbett, who has signed Norquist’s infamous and dangerous anti-tax pledge, was violating the pledge by supporting an impact fee because, in Norquist’s bizarre perspective on government operations, a flat-dollar-amount fee is a tax because it requires the driller to pay a portion of revenue from the gas wells into the commonwealth’s general fund. Norquist, who claims he does not exert “any direct influence” over legislatures, including the Congress, because he merely “applauds from the sidelines” made himself quite visible in the Pennsylvania legislature’s debate on the issue. He peppered the legislature of a state in which he does not reside with letters in which he warned Pennsylvania legislators who had signed his pledge that they would be violating it by voting for the governor’s proposal because the governor’s proposal was a tax. The governor responded, explaining that the proposal involved a fee because the money that would be collected would be transferred to agencies dealing with the matters affected by the drilling, such as environmental protection and transportation infrastructure. The governor told Norquist that a vote for the proposal would not violate the anti-tax pledge. Could it be that the governor is beginning to understand the shallowness of whatever intellectual analysis Norquist purports to bring to tax policy discussion? Or might Corbett also be increasingly aware of the negative impact Norquist’s meddling has on the ability of governments to serve their people? There is no question that what the governor has proposed, and what passed the legislature though in different versions, is a fee and not a tax. I explained this in Tax? User Fee? Does the Name Make a Difference? and again in Revenue: Is It All in The Name?. I doubt Norquist has ever read these, or any other explanation of the difference between a tax and a user fee. I doubt that he cares, for as I explained in Tax Policy, Elections, and Money, Norquist is not so much anti-tax as anti-government, and his diatribes against government revenue, warped by his inability to distinguish fees from taxes, is nothing more than his own version of hate speech directed against government.

The third hit in the trifecta was the foolishness of the only pro-Norquist-position comment in the collection of opinions attached to the Philadelphia Inquirer article. Asked one reader, “If you dig a hole in your yard and you find you have gold there, then you sell the gold and make a fortune, should you be taxed over and above the 3.07%. If so why?” The 3.07% to which the reader refers is the Pennsylvania state income tax rate. The answer is the classic, “It depends.” More facts are required. Does the person digging the hole cause thousands of heavy vehicles to traverse and damage local roads? Does the person digging the hole, by doing so, pollute groundwater and inject harmful materials into watersheds that adversely affect people living many miles downstream? Does the person digging the hole rip out trees in otherwise pristine forests? If the answer to one or more of these questions is yes, then the answer to the reader’s question is yes, because the person digging the hole is imposing costs for which compensation is required. The reason I characterized the reader’s comment as pro-Norquist-position and not pro-Norquist is that the reader wrote nothing to contradict the other comments. Those other comments included a variety of negative opinions of Norquist, including questions such as “What does this leech actually do? Who pays him?” and warnings that “If you research Grover Norquist’s background and his affiliations you will quickly realize neither Party should be affiliated with him” and “This guy needs to go, he’s a cancer on this nation.” One reader noted, “Grover Norquist is not an elected official and should not be shaping tax policy. . . . Funny, I don’t see Grover Norquist living up here in Bradford County dealing with the negatives of gas drilling. Grover a true America[n], let the other guy feel the pain but don’t do it in my back yard.” That Norquist hasn’t fooled everyone is corroborated by a comment describing him as “Just a greedy POS slug using his power and money to get more power and money – and easily convincing the average amerikan idiot that he’s a ‘hero.’ The morons who give this guy credence are intellectually unable to understand they are being reamed a big one.” They will eventually figure it out if his dangerous campaign is permitted to continue and heed is not given to a wonderful suggestion provided by another of the article’s readers: “Time for politicians to sign a pledge to not pay attention to this dork.” I, however, will continue to pay attention to Norquist just as I would continue to pay attention to the suspicious character wandering the neighborhood testing house and car doors to see if they are locked.

Many taxpayers, tax commentators, and tax practitioners think that the IRS, or any other revenue agency, doesn’t focus on “small change” tax deficiencies because it isn’t worth their while to pursue an amount that most likely is less than what it costs to track down the taxpayer, determine the deficiency, and set out to collect what is due. A recent City of Philadelphia press release, however, calls that common belief into question.

According to the City of Philadelphia press release, the city plans to pursue unpaid back taxes, and other city bills, from retirees and beneficiaries receiving pension benefits from the city. According to the city, roughly 2,500 of its 33,000 pensioners and beneficiaries owe $12.9 million in delinquent taxes. Simple division tells us that on average, each of the 2,500 pension benefit recipients owes $5,160. According to this report, the average pension in 2010 was $18,363. Again using simple division, the average unpaid tax is roughly 28% of the average pension. No city tax or even bundle of taxes comes close to that sort of percentage in one year, so the situation must be one of unpaid taxes accumulated over multiple years. A sensible guess is that a good chunk of the unpaid taxes are real property taxes.

The city threatens to withhold up to 25% of pension payments to satisfy the unpaid taxes. It also has the option of publishing the names of the delinquent taxpayers on its web site. The latter approach should prove to be far less effective than the former.

There are several lessons to be learned from this development. First, although a particular item of noncompliance might generate a rather small amount of tax underpayment, when accumulated over multiple years, even aside from interest and penalties, the instances can add up to something far more worth the revenue agency’s efforts than one year’s instance standing alone. Second, governments are caught between continued demand for services from most of their populations and a decline in revenue caused by tax cuts, economic malaise, and noncompliance, and are looking for revenue in places formerly considered not worth exploring. Third, advances in digital technology and communication make it easier, and a bit less expensive, for revenue agencies to pursue smaller amounts of unpaid tax. Fourth, tax noncompliance is increasing, in part because of the economic challenges facing specific taxpayers, but also as a way in which lower and middle income taxpayers can compensate for the tax cut attention provided to the wealthy. Fifth, though counter-productive in the short term, these sorts of silent taxpayer revolts might wake the nation up to the reality of the concern, not that citizens seeking government services and protection despise taxes, but that a privileged few are doing well at the expense of everyone else by manipulating the tax system and those who write the tax laws. Sixth, when a revenue agency pursues a lower income individual for $500 or $1,000 in unpaid taxes, that individual often lacks the resources to hire an attorney or other representative to work out a favorable deal, whether in terms of settlement or enactment of a tax break that legitimizes what the taxpayer did, but when a revenue agency pursues a high income individual for $20,000 or $100,000 in unpaid taxpayers, that individual almost always can afford to retain someone to work out a favorable deal and someone to push a special tax break through the legislature.

Like turkey, cranberry, and football, sharing a moment of thanks on the fourth Thursday of November has become a tradition on the MauledAgain blog. With the exception of 2008, an omission for which I don’t have or remember an explanation, I have consistently addressed the underlying purpose of Thanksgiving since 2004: In that year there was Giving Thanks, in 2005, A Tax Thanksgiving, in 2006, Giving Thanks, Again, in 2007, Actio Gratiarum, in 2009, Gratias Vectigalibus, and in 2010,
Being Thankful for User Fees and Taxes. The cumulative list is long, and though I won’t repeat it in this post, I’ll again do the lawyerly thing, and incorporate it by reference. The interesting thing about the list is that unlike my assorted “to do” lists, there’s nothing for me to cross off the list.

Despite the attention given at Thanksgiving to expressions of gratitude, this holiday does not have, and ought not have, a monopoly on saying “thank you.” Those words are, and should be, uttered millions of times each hour across the planet, in a variety of languages. Almost always, they are reactionary. Someone does or says something, and it inspires in another person, or several or more people, the delivery of two words taught to most children at a very young age. For the most part, people do not speak or act in an effort to bring these words out of the mouths of others. They speak or act for other reasons, and the “thank you” might appear in some ways to be gratuitous and extraneous to the conversation or encounter. Rarely does someone, for example, hold open a door for another simply to elicit a “thank you” from the other person. The door is held open because it is the right thing to do, and the expression of appreciation is vocalized because it, too, is the right thing to do. I wonder sometimes, though, if the world would be a better place if we thought about our words and deeds by considering if those affected by what we are about to say or do would be motivated to say “thank you.” Though that might not work with some people – consider the “you will thank me for this later” voiced to defiant teenagers and occasionally to resistant students – it might help open people’s minds to the contemplation of an interaction with another person from that other person’s perspective.

Today I will add that I can think of some things for which I will be thankful when and if they occur. Perhaps those who are in a position to bring these things about will think about the effect of their decisions on the willingness of people to say “thank you.” At what point will the people of this nation collectively turn to the Congress, consider what it does to repair the nation, and say, “Thank you”? At what point will the consumers of this nation collectively turn to those who have sold products and services to them, consider what effect those things have had on their lives, and say, “Thank you”? At what point will the temptation to say “Thanks for nothing” subside?

Today I am thankful to live in a nation where it is possible that these things might come to pass. I am thankful that I can offer these thoughts freely. I am thankful that I have had thousands of reasons over the past year to say “Thank you” to friends, colleagues, acquaintances, and strangers. I am thankful that I have heard friends, colleagues, acquaintances, and strangers say “Thank you” to other people. I am thankful that there have been reasons for people to say those two words and that they have been said.

One of the benefits of my regular attendance at the gym, aside from the obvious health advantages, is that I have an opportunity to address tax-related questions in an environment outside the law school and law practice worlds. I’ve shared some earlier experiences of this sort in Flat is Not Simple, At Least Not with Taxes, Tax Talk at the Gym, A Zero Tax, A Zero Congress, and Being Thankful for User Fees and Taxes.

The latest episode opened when one of the regulars at the gym said to me, “So have you ever heard of Grover Norquist?” I kept my reply simple. “Yes.” “Did you see 60 Minutes last night?” This required another simple answer. “No.” That brought an interesting question. “So what is it with this Norquist guy and his anti-tax pledge?” My response this time wasn’t so simple. “He doesn’t like taxes and he likes to get politicians to sign onto his anti-tax pledge.” I was not surprised when I heard in turn an unambiguous criticism of Norquist and his anti-tax campaign. Among the reactions was one that stood out. “It’s dangerous.” Of course it is.

As I drove home from the gym, I wondered, “So who is Grover Norquist? Why does he have so much influence? How does he manage to turn so many politicians against taxation even when anti-tax policies threaten the nation’s survival?” It is no secret that in 1985 Grover Norquist founded Americans for Tax Reform. Though the name of the organization suggests one thing, the actual goal is not reform in the sense of making the tax system more efficient, but elimination taxation by opposing tax increases while advocating tax cuts. Norquist was a principal player in the design of the Bush tax cuts.

Norquist, though, does not oppose tax increases simply because he advocates maintenance of the tax status quo. He opposes not only tax increases, but taxes. He has not cloaked his goal behind smoke and mirrors. As Norquist explained, "I do not want to abolish government. I simply want to reduce it to the size where I can drag it into the bathroom and drown it in the bathtub.” So the leader of the anti-tax movement is not only anti-tax, but anti-government. So much for the claims that my likening of the tax-cut movement to a bring-back-the-Wild-West movement is off base.

Yet Norquist, though active behind the scenes, has not been elected to public office. Americans have not been given any choice when it comes to his influence over tax policy. So how did he maneuver himself into this position? It’s another simple answer. Money. Norquist’s father was a vice-president of Polaroid Corporation. According to Americans for Tax Reform’s Form 990, Norquist was paid $222,419 for a 24-hour-per-week job. Norquist was not and is not poor, has not experienced deprivation, and has not suffered through the trauma of being laid off hunting for work. He comes from, and lives in, the ranks of the privileged few. Roughly $4 million in contributions are collected by his organization, and it is doubtful that the money is coming from people with little or no income, or even from people trying to get by on middle-class salaries. The people paying for anti-tax advocacy are people who benefit from that advocacy. According to this article from eight years ago, the tobacco, gambling, and liquor industries lead the way in funding Americans for Tax Reform.

What makes Norquist so zealously anti-government? Considering his claim that “nobody learned anything about politics after the age of 21,” it is likely that something happened when he was young. Something, some event, some person’s experience turned him into a zealot for abolition of the IRS, the FDA, and every other piece of government, a champion for dismantling of public pensions and public schools, and a diehard for privatization of social security. Perhaps the answer lies in a story such as this one, in which Norquist explains how his father would deprive him of some of his ice cream cone. One must wonder whether Norquist's anti-authoritarianism and his rejection of partisanship and support of bitter partisanship has its roots in the psychological abuse suffered at the hands of a cruel parent.

Norquist has acquired sufficient power that, as I described in Food for Tax Thought, he can host a “Tax Policy Dinner” at his home, so that people like Jack Abramoff and Karl Rove can arrange how they are going to direct the representatives of the American people to make tax policy decisions. In 2006, released Senate documents “shed light on how [Abramoff] secretly routed his clients' funds through tax-exempt organizations with the acquiescence of those in charge, including prominent conservative activist Grover Norquist.”

When unelected power brokers control the nation, especially when they use tactics and strategies that border on, if not cross, the line of what is appropriate, it makes a mockery of the ballot box. As I predicted in Food for Tax Thought, “To me, a ‘Tax Policy Dinner’ packed with lobbyists is certain to generate more of what we've seen during the past two decades, things that grill the average citizen, slice and dice paychecks, and sweeten the tax rates for the wealthy. If the trend continues, the tax system will be toast.”

Five years ago, in Maybe There is A Dependency Exemption Problem After All , I re-examined a dependency exemption hypothetical that was one of several raised in a National Association of Enrolled Agents (NAEA) letter to the Commissioner, asking for clarification of what then were new provisions affecting dependency exemptions, and that I had examined in Defining Dependents: Is it Any Easier?. Now, an alert reader has pointed out to me that the issue raised in the hypothetical was addressed by the Tax Court in a Summary Opinion in July of this year, Abdi v. Comr., T.C. Summary Op. 2011-89 (July 13, 2011).

It is worth repeating enough of the discussion to put the analysis in context:

Recall the hypothetical:

Mom, dad, Alice (14), and Joe (22) live in the family house. Mom and dad file a joint return with an AGI of $400,000. Since Alice is a qualifying child of mom and dad, they could claim her as a dependent but would receive no tax benefit as their personal exemptions are phased out and the child tax credit would not be available to them. Joe is not a full-time student and his only income is a W-2 with $15,000 in wages. Under §152, Alice is a qualifying child of Joe, so he claims her as a dependent and thus gets the child tax credit and yes, even the earned income tax credit. Assuming Joe had no tax withheld, he goes from a balance due of $683 to a refund of $3,158.

I had analyzed the facts in this manner:

I agree that Alice is the qualifying child of Mom and Dad. She is their child. She has the same principal place of abode as they do. She is under 19. She does not provide more than half of her own support. Alice also appears to be the qualifying child of Joe. She is his sibling. She has the same principal place of abode as he does. She is under 19. She does not provide more than half of her own support. But in this instance the Code provides a rule to break the impasse. Under section 152(c)(4)(A), an individual who may be claimed as a qualifying child by two or more taxpayers is treated as the qualifying child of the individual's parent if one of the taxpayers claiming the individual as a qualifying child is the individual's parent. The fact that the amount of the exemption for the parents is zero because their AGI is high enough to trigger total phase-out of the exemption amount does not change the definition of qualifying child.

Frank Degen [who had signed the NAEA letter] explains that the NAEA considers phrase "and is claimed" in section 152(c)(4)(A) as precluding the parents from entering the tie-breaking competition. Literally, this would make sense. The parents, not needing a dependency exemption the amount for which has been phased down to zero, do not enter Alice on their return. Thus, as Frank concludes, the son is the only person claiming Alice and there is no tie to break under the tie-breaking rules.

What happens if the statute is interpreted in this manner? First, taxpayers in the situation that Alice's parents and brother find themselves are left to work out a suitable tax-favorable arrangement. Only one "claims" the child in question and the others fail to "claim" the child. Perhaps Congress intended this flexibility. Under this interpretation, the only time that the tie-breaker would be triggered is when two or more taxpayers both claim the dependency exemption, prompting the IRS, which most likely would notice the double dipping, to apply the tie-breaker. Is the tie-breaker intended only as a remedial tool for the IRS to use when multiple taxpayers with "claims" to the child fail to settle on one claimant? Although figuring out what Congress intends is more a guessing skill than an analytical one, it's safe to suggest that Congress intended for the tie-breaking rule to apply as soon as multiple taxpayers became eligible to claim the child.

Interpreting the "and is claimed" language so that it gives the taxpayers a planning option is inconsistent with how Congress treats failure to claim the dependency exemption when doing so opens up a personal exemption for the dependent. Persons for whom another taxpayer can claim a dependency exemption are not permitted to claim their own personal exemption. Technically, they have a personal exemption but its amount is zero. Taxpayers whose adjusted gross income is sufficiently high to trigger a phase-down of the dependency exemption amount to zero have nothing to lose by omitting the dependent from their tax return. The statute, however, eliminates the dependent's personal exemption even if the eligible taxpayer neglects the dependency exemption.

But it's not so simple. In several other provisions, Congress bases eligibility on whether a dependency exemption has in fact been taken rather than looking to see if one could have been taken. For example, the Hope and Lifetime Learning credits are disallowed to a person if a dependency deduction with respect to that person "is allowed to" another taxpayer. Thus, the other taxpayer can forego the dependency exemption and leave open the credit door for the person in question, which is something that the taxpayer would want to do if the dependency exemption was phased down to zero or close to zero.

Why the difference? No one has any idea. In fact, some have argued that the credit should be disallowed to the person if the other taxpayer is eligible to take the dependency deduction even if the other taxpayer fails to do so. But the language of the credit provision undercuts that argument.

Thus, although it makes no sense in terms of policy or practical application, there is something to be said for the NAEA's interpretation of the "and is claimed" language. After all, to reach the sensible policy and practical application result, Congress should, and could, have used the phrase "and could otherwise be claimed" in lieu of "and is claimed." Congress did not do so. Thus, to the extent the NAEA is asking for clarification, it is a problem that should be mentioned, even though I'd be reluctant to advise Alice's brother to take the dependency exemption deduction and would insist he make his decision after listening to, or reading, a full explanation of the issue and the risks involved in making a yes or no decision.

In the Abdi case, the taxpayer in 2008 was a 21-year-old who lived with his mother and three siblings, including his 11-year-old sister. The taxpayer’s mother did not claim him as a dependent, and though she claimed exemptions for the two youngest siblings, she did not claim one for the taxpayer’s sister. The taxpayer had three jobs and used most of his earnings to contribute to the support the family. The taxpayer claimed a dependency exemption for his sister in 2008, and the IRS disallowed it. The Tax Court concluded that the sister was the taxpayer’s qualifying child and also the qualifying child of the mother. The sister was the daughter of the mother and the sister of the taxpayer, satisfying the relationship test. The principal place of abode test was satisfied because all three resided in the same house. The sister satisfied the age test because she was eleven years old. The sister also satisfied the support test because she did not provide more than half of her own support.

The Tax Court examined section 152(c)(4)(A) as in effect for 2008. The applicable language provided, “. . . if (but for this subparagraph) an individual may be and is claimed as a qualifying child by 2 or more taxpayers for a taxable year beginning in the same calendar year, such individual shall be treated as the qualifying child of the taxpayer who is – (i) a parent of the individual . . .” The court simply concluded, “However, as herein pertinent, this rule comes into play only if petitioner’s mother had claimed [the sister] as her qualifying child. The record shows that petitioner and his mother carefully arranged their tax affairs; petitioner’s mother claimed her other two sons as her qualifying children and petitioner claimed [his sister]. . . Because [the sister] is petitioner’s qualifying child for 2008, petitioner is entitled to the claimed dependency exemption deduction for [his sister] for 2008.” The Court did not examine the inconsistency between the provision in question and other provisions dealing with the dependency exemption, most likely because neither party raised the question. The Court applied the statute as written.

Long before the case reached the court, Congress had amended the provision, effective for taxable years beginning after 2008. Section 152(c)(4)(A) now provides, “. . . if (but for this subparagraph) an individual may be claimed as a qualifying child by 2 or more taxpayers for a taxable year beginning in the same calendar year, such individual shall be treated as the qualifying child of the taxpayer who is – (i) a parent of the individual . . .” The words “and is” were removed. In addition, Congress added, also effective for taxable years beginning after 2008, the following new provision in section 152(a)(4)(C): “If the parents of an individual may claim such individual as a qualifying child but no parent so claims the individual, such individual may be claimed as the qualifying child of another taxpayer but only if the adjusted gross income of such taxpayer is higher than the highest adjusted gross income of any parent of the individual.” If the Abdi case had arisen in 2009 or thereafter, the taxpayer would not have prevailed unless his adjusted gross income was higher than the adjusted gross income of his sister’s mother or father, whichever was higher. There are insufficient facts in the opinion to resolve the question.

Because of the 2008 legislative amendment in Public Law 110-351, the issue raised in the hypothetical has disappeared. Congress decided to eliminate the tax planning opportunity available before 2009. I close with the same words I used to close Maybe There is A Dependency Exemption Problem After All : “It is, though, a wonderful lesson in how the Internal Revenue Code, and tax law generally, becomes more complicated as each year passes. And this is with respect to a fairly simple concept and rule, as tax law concepts and rules go. Imagine what it's like parsing the subchapter K partnership regulations.”