MauledAgain

Among the tax practitioners I know are some who claim they ignore reports about pending legislation until the changes are signed into law. Their philosophy is that it makes no sense to invest time and effort learning about a proposal that might not make it into the statute. In many respects, I agree. There are hundreds, if not thousands, of tax law amendments introduced by members of Congress each year, almost all of which have as much chance of crossing the President's desk for signature as I do of being signed as a replacement kicker for the Philadelphia Eagles.

Sometimes, though, it is necessary to look up from the present and listen for the low, soft rumble of the approaching train. This is especially true for tax legislation that, once enacted, takes effect immediately, or as of an earlier date representing when the bill was approved by Committee, rather than at some future date. The Hurricane Katrina tax relief package, introduced as H.R. 3768, has moved through the House, and the Senate faster than it took Katrina to form and reach New Orleans. Late yesterday negotiators from the House and Senate met to reconcile the differences between the two versions, and approval by both houses of Congress is expected by sometime this evening, tomorrow at the latest.

So it's time to look at what this legislation, to be called the Hurricane Katrina Tax Relief Act of 2005, does. Here are the major provisions.

Transactions Involving Qualified Plans

* It will permit penalty-free distributions, up to $100,000, from tax-qualified retirement plans to individuals who have sustained a loss due to a federally-declared natural disaster if the distributions are made within one year after the disaster declaration, and will allow repayment of a disaster-related distribution to a tax-qualified retirement plan if made within three years after an initial distribution.

* It will permit individuals receiving a disaster-related distribution from a tax-qualified retirement plan to spread the distribution ratably in income over a three-year period, which keeps the income inclusion from being bunched in one year subject to a higher rate.

* It will permit individuals to recontribute as a rollover any withdrawals from qualified retirement plans that had received after February 28 and before August 29, 2005, to purchase or construct a principal residence in a Hurricane Katrina disaster area that was not purchased or constructed due to Hurricane Katrina.

* It will increases from $50,000 to $100,000 the amount which a tax-qualified employer retirement plan may loan to a plan participant affected by Hurricane Katrina, and it will extends the repayment period for such loans.

Charitable Contributions

* It will suspend limitations on individual and corporate tax deductions for cash charitable contributions to charitable organizations made between August 28 and December 31, 2005, for Hurricane Katrina relief efforts.

* It will increase the mileage rate for determining the tax deduction for the charitable use of an automobile to provide Hurricane Katrina disaster relief to 70% of the standard mileage rate in effect for business usage.

* It will extends to individual taxpayers and pass-through entities the deduction currently available only for C corporations for contributions of food inventories made anywhere in the country from August 28, 2005, through December 31, 2005.

* It will increase the allowable amount of the tax deduction for charitable contributions of book inventories made after August 28, 2005, and before January 1, 2006.

Personal Exemptions and Credits

* It will allow individuals who provide free housing to persons displaced by Hurricane Katrina for 60 consecutive days an additional personal exemption of $500 for each displaced individual, up to $2,000 annually, but family members do not qualify for this additional personal exemption, which means that they would need to satisfy the tests for being a qualifying relative that is in current law.

* It will allow taxpayers in Hurricane Katrina disaster areas to use earned income for the previous taxable year to compute the earned income and child tax credits for the taxable year which includes August 28, 2005.

* It will authorize the IRS, in taxable years beginning in 2005 or 2006, to apply the tax laws to ensure that taxpayers relocated due to Hurricane Katrina do not lose dependency exemptions or child tax credits or experience a change of filing status due to their relocation.

Employment Provisions

* It will designate employees hired in a Hurricane Katrina disaster area as members of a targeted group for purposes of the work opportunity tax credit, it will waive the termination date of the credit for these employees, and it will not require certification. The credit will be available for hiring someone who was unemployed before the hurricane struck. It will also permit the credit for a three-month period for hiring of employees outside the disaster area.

* It will make the employee retention credit available to employers in the disaster zone who have less than 200 employees, effective until December 31, 2005.

Other Provisions

* It will extend from two to five years the mandatory replacement period for property involuntarily converted due to Hurricane Katrina for purposes of provisions allowing nonrecognition of gain from property involuntarily converted

* It will exclude from gross income certain nonbusiness cancellations of indebtedness for victims of Hurricane Katrina.

* It will suspend the $100 floor and 10%-of-adjusted-gross-income limitations on personal casualty losses incurred by victims of Hurricane Katrina.

At the time of this writing, the full account can be determined by comparing the summary of the House bill with the summary of the Senate bill, reconciling the two using the reports that have made their way through the mainstream media or tax reporting services. If the links don't work, go to the Library of Congress legislation tracking site and enter HR 3768 in the search box, remembering to click the bill number radio button. From there, work your way to the summaries.

Because some of these provisions are short-lived, taxpayers and their advisors will need to make decisions very quickly once the bill is signed into law. If decisions are made expeditiously, then implementation can be arranged within what for many provisions is a short window of opportunity. To the extent that the language of these provisions encourages quick action, it is consistent with the notion that the relief needs to be speedy and soon.

Beware that by the time the final language is put together later today, there may be additional changes or there may be modifications that slightly alter some of the descriptions I've provided. I'm not attempting to analyze yet-to-be-enacted law but to give people a chance to think about the extent to which they or their clients might need to move quickly with respect to certain types of transactions.

Sadly, if the weather forecasters are right, we may see another edition of this legislation, or at least something that extends it to relief for the disaster zone Hurricane Rita seems intent on creating.

He's back at it. The TaxChartMaker, which is the nickname I've given Andrew Mitchel, he of the tax charts collection. It continues to grow.

This time, if I'm correctly keeping score, he has issued his fifth update. In four previous posts (here, here, here, and here), I tossed in my praise for his efforts. I do so again.

This time he has added charts for cases such as Chamberlin (Preferred Stock Bail-Out), Chisholm (Transfer to Partnership and Partnership Sale - Form Respected), and Old Colony Trust (Employer Payment of Employee Taxes), rulings such as Rev. Rul. 59-296 (Upstream Merger of Insolvent Subsidiary), Rev. Rul. 78-330 (Avoiding Sec. 357(c) in a D Reorganization), and Rev. Rul. 2001-46 (Multi-Step Tax Free Reorganization was Not a Qualified Stock Purchase), statutory provisions such as Triangular B Reorganization, Triangular C Reorganization, the 338(g) Election, the 338(h)(10) Election, and a regulatory provision, Reg. 1.302-2(c), Example 2 (Husband's Stock Redeemed - Basis Transfers).

According to Andrew, the site "now has a total of 104 charts (29 cases, 37 rev. ruls., 12 tax free reorgs, 21 indirect stock transfers, and 5 others)." They "welcome feedback on how to improve the clarity and/or accuracy of any of the charts."

Something doesn't add up, at least not when I try to do the math. As reported in numerous news stories, including this CNN article, when President Bush announced his proposals for a significant federal government role in the rebuilding of New Orleans and other devastated areas along the Gulf Coast, he did not put a price tag on his vision. Assorted consultants, experts, analysts, and others familiar with the details of construction and rehabilitation have floated a variety of estimates, with many being in the neighborhood of $200 billion. Some warn, however, that the price tag could be much higher. Although it is not clear, it seems that these estimates are for federal contributions, after taking into account amounts paid by private insurance companies and invested by the private sector. If indeed there are 250,000 homes that must be rebuilt, even at an average cost of $150,000 each, that's $37.5 billion. Toss in the cost of rebuilding and repairing commercial buildings and public structures. Add the price of reconstructing roads, bridges, dams, levees, utilities, railroad tracks and beds. Include the expense of replacing destroyed vehicles, equipment, and other items, both private and public. That's the quick list.

So I'm confident that the President's proposal carries a hefty price tag. I'm not alone in that conclusion. That's not the issue.

The issue simply is, "Where does the federal government get the money to pay for this work?" There are four possibilities, aside from various combinations of the four. The first is to raise taxes. The second is to cut other federal government spending. The third is to borrow, thus increasing the federal budget deficit. And the fourth is simply to print more money.

A person's political philosophy, economic beliefs, and fiscal perspective will influence the choice that the person makes. It is not unreasonable to expect a variety of opinions. All sorts of funding proposals can and probably will be floated. What is troubling is that the President's plan for coming up with the $200 billion, or more, is a generic campaign sound-bite carrying no specifics.

The President ruled out the first option. "We should not raise taxes," is about as clear an articulated position that one can take. Almost as clear as "Read my lips." You know the rest. To his credit, the President said taxes should not be raised, not that taxes will not be raised. Subtle difference. A nuance. Perhaps to the surprise of those who think nuance is a lost attribute in the current administration.

The President, saying nothing about the third and fourth options, hailed the second, "The nation will have to cut unnecessary spending." Nowhere, though, is "unncessary spending" defined. Instead, the President stated, I'm confident we can handle it and our other priorities."

Somehow that sounds to me as though he thinks 1 plus 1 plus 1 equals 2.

Although the current Administration prides itself on championing a legislative agenda designed to cut government spending, unncessary in its view and perhaps some of it necessary in the view of others, to admit that there is still $200 billion of unnecessary spending in the budget is too clever. Surely, the President would define appropriations for projects inserted into legislation in order to obtain votes, such as the bridge between Alaska and the island with several dozen inhabitants, as unnecessary. But I don't see legislators lining up to slice their pork barrel projects from the budget. A quick skim of the Energy Policy Tax Act, recently signed by the President, reveals more than a handful of questionable expenditures. Nonetheless, they don't add up to $200 billion. Not even close.

So what's to be cut? Military spending? Hardly, not with resources spread thin, existing cuts threatening the viability of the Navy and to some extent the Air Force and with additional funds required to induce enlistments and re-ups. Homeland security? After the current fiasco, no one valuing his or her political career would make such a proposal. Energy exploration? No, that won't be the target. The budgets of some small agencies? Perhaps, but cutting $100 million from a $150 million budget doesn't generate $200 billion even if there are 50 such agencies (and I doubt there are). Congress isn't going to vote to cut social security benefits. Note that I am trying to predict where the President and Congress will find $200 billion, not where I would find it. But I'm not a politician and I'm not out to make friends among the bureaucrats, hangers-on, lobbyists, and others who have misdirected the government's spending.

Let's face it. The history of the Congress, especially during the past several decades, suggests that when all is said and done, the federal deficit, now running slightly above $300 billion annually, will increase. Something on the order of $1 of spending plus $1 of spending plus $1 of spending somehow must equal $1 of revenue plus $1 of revenue.

I'm not going to regurgitate all the arguments of why the deficit poses a long-term threat. Most of those arguments are economic. I will emphasize a different one. The deficit threatens our national security. When the deficit is increased, the government must borrow money. From whom does it borrow? From people and institutions with dollars. Who has this sort of money? China. Yes, China. For a President trying to make his mark as a defender of national freedom and independence, it strikes me as short-sighted to let another nation, and one with visions of military glory at that, own this one.

Once the notion of letting China or other nations "own" this country is rejected, there are only two way of fixing $1 of spending plus $1 of spending plus $1 of spending somehow must equal $1 of revenue plus $1 of revenue, aside from combinations of the two. Cut spending. Increase revenue. The fourth option, printing more money, isn't going to happen on Alan Greenspan's watch and I doubt it would happen under the guidance of his successor.

Letting the deficit climb is as easy as cutting taxes, because the impact is in the future. Cutting spending, or refraining from enacting unwise expenditures, is a tougher choice, because the impact is immediate. Tomorrow's vote matters more to most of the Congress than do the votes that will be cast in 2012. In a world where long-term planning is essential, our government is hampered by a short-term poltical system. There's one for the Constitutional Law scholars to ponder.

Despite my general reluctance to let government make decisions unless there is no other viable choice, I also hold to a value of integrity that tells me to raise the appropriate revenue once that choice has been made. Where is the value in promising government assistance to those in need if those people or their descendants will be stuck with the bill? That sort of practice in the private sector can get attorneys general sniffing at the books of the business. It ought not be any more acceptable when government does it.

The defense of deficit spending, namely, that it is necessary when there is an emergency, is one that I can accept. Had there been no deficit spending during World War Two, when revenue was close to being maxed out, the outcome of that conflict could have been different or perhaps achieved at a greater cost in human life. The current difficulty, though, is that the existence of the Katrina emergency, which standing alone might justify deficit spending, comes at a time when the budget deficit already is out of control because of imbalances caused by non-emergency decisions. The huge capital-gains tax cut and the dividend tax rate reduction might be defensible in a time of peace and quiet on the military and weather fronts. But this is not such a time. Incidentally, the taxes that would have been paid by the investor community don't appear to have been channeled into projects such as energy independence, but appear instead to be chasing oil, gasoline and other energy futures. In other words, gambling. And we've seen how one great gamble, ignoring the improvement of the Louisiana levee system, brought the wrong sort of jackpot.

Sorry, Mr. President, but it's time to admit to another mistake, one that is more easily fixed. Bring back the revenue from capital gains and dividends. In the long run, that might be what makes your historical legacy something far better than what many people now think it's going to be.

For some reason, many people and businesses still live in a world of paper. According to a memo described here, a report of which I also received from another source, thirty thousand, yes, THIRTY THOUSAND, pieces of mail addressed to an IRS lockbox went into San Francisco Bay on Sunday, 11 September 2005, when an accident took place on the San Mateo Bridge in San Francisco, that involved a courier that was transporting the contents of the lockbox. Those contents consisted chiefly of 1040-ES estimated tax payments. The payments came from Alaska, California, Hawaii, Idaho, Montana, Nevada, Oregon, Utah, Virginia, Washington, and Wyoming.

What to do now (with thanks to Jim Counts of Hemet, California for the advice): Check with your bank (or have your client check with the bank) to see if the check cleared. If it has, fine. If it has not, call the IRS to see if the check has been posted to the taxpayer's account. If it has not, stop payment on the original check and send in a replacement. I add this cautionary note: include a statement that the check is being sent as a replacement for a timely mailed payment presumed lost on account of the 11 September 2005 San Mateo bridge accident. No one knows if the IRS will waive penalties. If it doesn't, that will surely generate an uproar.

What to do in the future: The IRS makes it possible to post estimated tax payments (and other payments) using the Internet. I haven't mailed a 1040-ES for several years. The same system can be used to make other tax payments. Many states have similar arrangements in place. I know that Pennsylvania does.

Decades ago, I mailed a monthly car loan payment but it never arrived. Fortunately, the lender was the credit union to which I belonged, back in the days when customers were known by face and reputation and financial institutions weren't gargantuan, so it was not a big deal to replace the check and avoid credit reporting issues. That experience surely contributed to my willingness to find other ways to communicate that are more reliable, easier to confirm, and less risky in terms of loss. I suppose now another 30,000 people will open themselves at least to trying a 21st century approach.

Although students usually react in disbelief when I tell them that one of the best ways to learn is to teach, eventually they come around to understanding the point that I am making. Frequently it takes months, sometimes years, before they acknowledge the validity of the statement. On rare occasions, I get the opportunity to show them an example while they are still enrolled in one of my courses.

That's what happened yesterday as we explored the section 117(a) exclusion from gross income of qualified scholarships. Many people, even those who are not tax practitioners, know that "scholarships are not taxed." Technically, what escapes taxation is "a qualified scholarship received by an individual who is a candidate for a degree at an educational organization described in section 170(b)(1)(A)(ii)." I include the tax treatment of scholarships in the basic tax course not only because it is something to which the students easily can relate (their responses to a "clicker" question revealing that an overwhelming majority had been scholarship recipients) but also because it provides an opportunity to explore cross-references and to understand how the definition of an educational organization for purposes of charitable contribution limitations becomes an ingredient in the analysis of the scholarship exclusion.

It's easy, when teaching the topic, to toss off the cross-reference as one that "picks up the typical college or university" and to turn to issues relating to the performance of services by scholarship recipients, the limitation of the exclusion to amounts expended on qualified tuition and related expenses, and to thrash out the treatment of athletic scholarships. But I pause for a moment with the "candidate for a degree at an educational organization described in section 170(b)(1)(A)(ii)" language because it's fun to ask the class what happens to the scholarship received by a student attending a private high school? It's fun because it shows the class yet another example of sloppy statutory drafting, and lets me see who has read the assigned regulations, where the IRS came to the rescue of Congress, once again, by defining primary and secondary school students as candidates for a degree. Don't believe me? Read Proposed Regulation section 1.117-6(c)(4)(A).

I then address the cross-reference to section 170(b)(1)(A)(ii). In addition to exploring how a statutory cross-reference works, it provides another opportunity to show students how something that they may have thought to be a simple concept before entering law school, in this instance, what is a college or university, becomes complicated. Section 170(b)(1)(A)(ii) describes "an educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on." After the bad jokes about irregular faculty and irregular curricula, I usually ask them to determine if a student who receives a scholarship to enroll at Concord University School of Law, which to the best of my knowledge does not have a campus for students, will end up being taxed because he or she is not a candidate for a degree at an educational organization that, among other things, has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on." This question is designed to get students to assert that "cyberspace" is the place where Concord carries on its educational activities. Sometimes students provide that response, sometimes not. Sometimes I have time to question whether Proposed Regulations section 1.117-6(c)(6) Example (4), which disqualifies scholarships received by students taking correspondence courses applies to an Internet school which operates in a cyberspace that extends throughout the world. Of course, I've never researched the question of whether students enrolled at Concord receive scholarships from anyone.

But yesterday, as I was engaging this question, the events of the past few weeks made something in my brain trigger one of those "think while talking" experiences. Because our law school, along with most others, have accepted law students from Tulane and Loyola (New Orleans), I had this "picture" of all the displace students from New Orleans area colleges and universities dispersed throughout the country. Knowing that those schools had collected tuition for the fall semester, and that the host colleges and universities were permitting the students from those schools to attend as non-matriculated visitors without charging tuition, I wondered what happens to the analysis when the law is applied to a scholarship received by a student at one of the New Orleans area schools. Those schools, for the semester, and perhaps for the entire academic year, do not have an operating campus. Those schools do not have a "place where its educational activities are regularly carried on." At least not for a while. Depending on how that phrase is interpreted in light of the current situation, the scholarship recipient may or may not be a candidate for a degree at an "educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on." The visiting student is definitely not a candidate for a degree at the school where he or she is visiting.

I suggested to the students in my class that the sensible interpretation is that "regularly" allows for temporary shut-downs beyond the now infrequent but once common summer and holiday break campus closures. Any other interpretation, no matter how reasonable and no matter how consistent with the statutory language, would generate an absurd result. The students agreed. No one raised a contrary argument. Gee, I'm persuasive.

After class, I did some research. I could not find anything addressing the question. Regulations section 1.170A-9(b), interpreting the phrase "educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried" says nothing about the issue. It's not as though it has never happened until now. There have been campuses closed because of flu or other quarantines, natural disasters, and similar emergencies, but I don't think the closures lasted for the semester or academic year, or longer, that threatens the New Orleans area schools. If there were long-term closures, they either occurred before the income tax was enacted or before the scholarship exclusion reached its present form (such as the "temporary" closing during the nineteenth century of what is now Pennsylvania State University Dickinson School of Law that plays a prominent part in the debate over the longevity rankings of American law schools). When schools close permanently, the issue does not arise because the student transfers to another school and thus is a candidate for a degree at a school meeting the definitional requirements.

Perhaps I have missed something. I hope that if I have, it's an IRS announcement that the campus closures compelled by Katrina will not disadvantage scholarship recipients and will not require them to include their scholarships in gross income. Considering that Katrina is not the last catastrophe to befall us, and that a future disaster may cause years-long closures, the IRS (technically, the Department of the Treasury) ought to amend the regulations. In effect, either my interpretation is correct, and they should say so, or it is incorrect, and they should say so. Then at least one more unforeseen consequence of a horrible tragedy can be resolved.

When I wrote my essay in yesterday's post, "What's Scarier? The Problem, or the Proposed Solutions, I did not realize that there were worse proposals than the ones I had criticized. It's bad enough that people are demanding a decrease in the price of a less available product, or that politicians are taking up the cause for unwise reductions in gasoline taxes. The things that ought to get done are getting little, if any, attention, though I did give kudos where kudos were due, much to my surprise, to the angry Philadelphia mayor who did something constructive.

In today's Philadelphia Inquirer, a letter to the editor from Morris W. Feldstein of Philadelphia proposes a solution that startled me. He begins with a call for "some sacrifice for the common good." He then proposes that "the governors of various states call for four no-driving days on one Sunday during each season. (They could be called "family days.") They might result in very little driving except for emergencies and law-and-order situations." He adds that "I have no idea how many gallons of gasoline we would save, but it might at least create some discipline about our individual driving."

Did Mr. Feldstein think for a minute about his proposal? He is, in effect, proposing that on four Sundays of the year, every citizen who attends a religious service on Sundays and who must drive to their church would be prohibited from doing so. Did Mr. Feldstein think about this and dismiss it as unimportant? Did he fail to think of it, period? Is the First Amendment wandering around here, somewhere?

Did Mr. Feldstein think about the impact on a local economy of an empty stadium on a summer Sunday when the baseball team is in town, on the autumn Sunday when the football team is playing, or the spring Sunday when the hockey team is scheduled? Are these "emergencies?" Perhaps Mr. Feldstein sits at home on Sundays and figures everyone else ought to be doing the same.

Mr. Feldstein's approach is seemingly simple, but it's simplistic. If we are going to find ways to cut back driving, let's eliminate driving that can be eliminated without impinging on people's right to worship or on jobs in the local economy. Although I think I see some of this beginning to happen, it doesn't hurt to get widespread adoption of sensible approaches to saving gasoline. First, rearrange school bus schedules so that high school students do not need to drive to school. During the past two weeks, I have seen more students on the school bus, and fewer busses carrying only 25 or 30 percent of capacity. Second, carpool, not just to work but to other events. On Tuesday, I noticed that most of the vehicles arriving at the Phillies game (including the one I was in) held three, four, or more people. Excellent. Third, fix the timing and control of traffic lights so that people aren't wasting gasoline while the light remains green for a road on which there is no traffic. I have a list of these intersections, but if my attempt to undo a gasoline-wasting change in line painting on Lancaster Avenue is any indication of success, I hold out little hope for the upgrading of traffic flow control. Fourth, as I've mentioned in previous posts, let the price of gasoline reflect its value and scarcity, and let citizens make individual decisions with respect to the cost of their discretionary driving. Fifth, if that doesn't work, then ration gasoline, which will reward those who have already adapted their lifestyles to a resource-conserving approach, and send the message home to those who continue to think that there are thousands of oil tankers sitting off the coast holding supplies from the market until the price gougers are finished charging Americans for what should be one-dollar-a-gallon gasoline.

This morning as I was getting ready to head to the gym, I heard a KYW News Radio report in which John Street, the mayor of Philadelphia, was described as "angry" about gasoline price increases. He sounded angry. His reaction to the gasoline price increase is ”I don’t like it. I think it is terribly unfair.” Most people don't like it. Is it unfair? Is it unfair when the price of something in short supply goes up?

To his credit, the mayor explained that his personal protest against gas prices was to give up the city-provided custom Chevrolet van and to use a PT Cruiser. Street informed the reporter that the PT Cruiser gets double the mileage. He also predicted that "this exploitation" will convince many people to change their gasoline-use habits. He's right, and wrong. People already are beginning to change their habits. Far fewer vehicles are zooming down the highways at 20 miles per hour over the speed limit, though there must be some folks indifferent to high gasoline prices or in some huge hurry. But the term "exploitation" remains to be evaluated as truth or emotional exaggeration.

On the way home from the gym, I heard an interview of John Corzine, Senator from New Jersey and candidate for governor of that state. Asked "what are you going to do about the rising gasoline prices?" he responded with a two-fold approach. The first, which makes sense, was described as encouraging the Federal Trade Commission to investigate the price increases to determine if there is any gouging or illegal practices involved. The second was a call for a gasoline tax holiday. What made me wonder about the struggle between rational thought and playing to the crowd was Corzine's comment, and I'm paraphrasing the best that I can, "There are refineries here in the Northeast and they're not damaged. You'd think with the gasoline prices we've seen that the only refineries in the country are in Louisiana." In fairness to Corzine, he did remind listeners that not much has been done to secure the nation's chemical plants.

Here we go again. Two politicians playing with emotion. The contrast is interesting. Street is emotional, using some very strong terms, and yet does a rational thing in response. He changes vehicles and predicts, perhaps implicitly urges, changes in gasoline-use habits. Corzine, calm and at ease, proposes an irrational and countereffective response and makes a statement so inconsistent with a rational understanding of the markets that one wonders how he did manage to succeed in the business world before entering politics.

Here's the core of the problem: there is a finite amount of oil remaining to be extracted. Many commentators think that more than half of what was available before the "petroleum age" began has already been extracted and consumed. Some point out that much of what remains is the oil that is more expensive to find and extract, because it is in such places as deep water oceans, and that the cost of extracting what remains will begin to climb even more sharply. A few commentators claim that the Saudi oil fields are past their prime, explaining why the Saudis have been ordering off-shore drilling rigs (which, incidentally, appear to be in short supply). I recommend visiting the Oil Drum and reading up on the news and commentary. There's a lot there that does not see the light of the mainstream media day.

Corzine's comment begs the question. If, for example, Louisiana refineries processed all gasoline consumed in domestic uses, the sort of damage that was inflicted would have generated such a gasoline shortage that per-gallon prices would be in the double digits, and I'm not talking $12. I suppose once again the question would be, "What are you going to do about it?" There are folks, I think, who have the impression that the government can command an increase in the oil supply. These same folks think food is grown in supermarkets. Perhaps they're among the 90 percent of American adults who do not know what radiation is, the more than two-thirds who cannot identify DNA as a key to heredity, or the twenty percent of American adults who think the sun revolves around the earth. No, I don't make this up, for it comes from Dr. Jon D. Miller of Northwestern, who thinks that this ignorance "undermines" the ability of citizens to participate in democracy in a meaningful way, as explained in this New York Times story. And people wonder why I keep griping about the miserable overall condition of the K-12 and undergraduate education system in this country, especially after we set aside the schools catering to the elite.

Perhaps John Corzine knows it is pointless to try to teach his constituents the truth about supply and demand. I'm ruling out the possibility that he doesn't understand those economic rules, because I am almost certain he not only studied them in school but also used them in his pre-politician careers. Perhaps John Street understands that joining in the emotional reactions of the populace to rising gasoline prices is more beneficial for a mayor than cold, calm analysis.

Under the current circumstances, reducing the pump price of gasoline by suspending the gasoline tax is precisely what ought NOT to be done. It will give Americans the false impression that gasoline is more plentiful, because that's what reduced prices say to consumers. Under the circumstances, treating the gasoline tax as the user fee that it really is, and raising it to reflect inflation since the last time it was adjusted, would be the best thing to do. The increase in pump price would encourage even more of the adjustments that Mayor Street of Philadelphia thinks would occur. And perhaps the decline of net oil availability would be postponed for enough time to permit development of alternatives. The increase in pump price would also make existing alternatives cheaper in comparison and thus more likely to be moved from development to production. To cushion the poor against the impact of the increase, a tax credit would make sense.

There's another problem looming, and suspending the gasoline tax will have no impact. Natural gas supplies and the natural gas on-shore processing facilities were damaged or destroyed with greater adverse impact than crude oil supplies and gasoline refining capacity. Predictions of 70%, even 200%, increases in home heating costs when winter rolls around are making their way across the blogosphere, with only minimal attention in the mainstream media. As serious as is disruption in gasoline supplies and as annoying as is a gasoline price increase, home heating fuel shortages will be deadly, especially if there is unavailability at any price. As a practical matter, what will happen is that natural gas supply to heating will be given priority, thus cutting the supply to electrical generating plants. The ensuing brownouts and rolling blackouts won't be very good for folks who heat with electricity, or for those who use electric fans as part of a forced-air heating system.

Though I may sound like a disciple of Thomas Malthus, there is something bizarre about the way exploding populations and resulting increases in demand for all sorts of materials gets so little attention because perhaps it isn't quite up to the standards of the post-modern view of life. In a world filled with "pretend" and "say what they want to hear" the important news gets shoved into the corner. How many Americans, or for that matter, how many of the billions of people on the planet, understand supply and demand, or the impact of China's rapidly evolving economy on the price of cement, steel, and fertilizer? While the nation gobbles up PlayStations for the children to use during the next hour, few are thinking about life without PlayStations and all the other conveniences of a world so dependent on a few scarce natural resources that are destined to become even scarcer. I don't buy the "God will provide" message extracted from the lilies of the field parable. It's not that simple and it doesnt' work that way. (A theological aside: Though the parable is sometimes interpreted as "sit back, let God take care if it," has a different meaning for me, namely, stop fretting about the problem and try to do something about it, for only then will God put into your mind the inspiration to a solution.)

Long-term planning that should have been underway decades ago lies unattended, because long-term planning is so antithetical to an instant gratification culture that wants everyone to be happy and spared of inconvenience. Long-term planning is boring. It doesn't sell. It doesn't fit a tidy soundbite. It requires difficult, very difficult choices. It will not generate programs with which everyone will be happy. It will generate programs that easily could make everyone unhappy.

We have seen, at least on television and for some unfortunate victims and courageous relief workers, the impact of planning failures. It will happen again, because long-term planning cannot be accomplished in the few months or years before the next natural disaster, the next major terror attack, or the next disruption, for whatever reason, in the supply of something critical such as pharmaceuticals, zinc, or fresh water.

Suspending gasoline taxes is like putting a bandage on a hemorrhage. Saying "it will be ok" to the bleeding person doesn't quite get the job done. All those politicians quick to lament the lack of leadership, though speaking for understandable reasons, need to figure out how they will take the mantle of leadership voters have asked them to assume and to use it wisely. For the moment, John Street's allegedly anger-induced vehicle change is far more noteworthy than John Corzine's simplistic and countereffective "what they want to hear" gasoline tax suspension suggestion. Why? Because what John Street has done could become a long-term alteration in vehicle use. What John Corzine suggests does nothing to deal with the inevitable drying up of oil and natural gas supplies.

According to this Washington Post story, a tax relief proposal introduced in the Senate to assist in the recovery from Katrina includes "a tax credit to encourage employers to hire Katrina evacuees, and for companies in the disaster zone to temporarily retain evacuees on their payroll." About a week ago I predicted something quite similar:

I think the existing credits will be expanded. The temporary expansion for second-year wages will be extended beyond this year. I think a large area will be declared an empowerment zone, or perhaps be given a special category not unlike the New York Liberty Zone, generating special tax treatment for wages paid to individuals working in it, amounts paid to rebuild facilities located in it, money invested in enterprises formed to operate in it during or after reconstruction.

What I did not predict is interesting:

* A gross income exclusion on debt forgiveness related to the disaster.

* Waiver of penalties for early withdrawals from retirement plans to be used for recovery expenditures.

* A $500 personal exemption for each evacuee housed by a taxpayer who is not otherwise claimed as a dependent.

The last one is very interesting. Because it is late in the year, it is impossible to bring an unrelated evacuee within the definition of dependent. But $500? Why not a proportionate part of the current exemption amount, which would be on the order of $800?

It is estimated that the Senate package will cost between $3 billion and $7 billion. I wonder whether any attempt will be made to offset this cost, and the otherwise enlargement of the deficit.

There is no certainty that the House will pass the same provisions. The only certainty is that the House will pass additional provisions and leave out or modify one or more of the Senate provisions.

Stay tuned.

Prof. Ann Murphy of Gonzaga asked this question: "Does anyone know off the top of their head why the Hope Credit has a provision that bars the credit if the student has a felony drug conviction but the Lifetime Learning Credit does not?" It's one of those wonderful "why" questions that most law professors love, and law students dislike, because it goes beyond knowing black letter law and reaches to understanding the law.

Of course, the first thing I did was to check. Perhaps there was some complicated "deemed incorporation" provision, or a cross reference hidden in a maze of statutory spaghetti that made the rule applicable to both credits. No such luck in defusing the question. There is a difference. That energized my curiosity.

When Prof. Murphy asked her question, several other tax law professors responded. One speculated that the idea was to encourage high school students to "just say no." Another noted that she had read that the reason rested on the difference between the per-student character of the HOPE credit and the per-taxpayer character of the Lifetime Learning Credit.

These are valiant guesses. Nonetheless, if using the tax law to discourage drug abuse is something Congress thinks is effective and wise, there is no reason that both credits cannot be disallowed if the taxpayer whose expenses are generating the credit is convicted of a felony drug violation. Even though the Lifetime Learning Credit is per-taxpayer, there is no obstacle to prohibiting the taxpayer from taking into account expenses related to a convicted drug felon.

As one respondent noted, half seriously and admittedly with a cynical bent, was it to give tax professors another Code provision to ridicule in class? To that I add, was it to provide further proof that the tax law ought not be the vehicle for punishing violations of criminal law other than tax fraud? The warnings from those of us who have consistently objected to use of the tax law for social engineering or as a substitute for what should be done by government agencies other than revenue departments or the IRS are reinforced by this nonsense.

Though I may have missed something buried somewhere, there is nothing in the Committee Reports about the prohibition other than a paraphrase of the statute. No rationale for rule with respect to the HOPE credit is provided, though it ought to be obvious, I suppose. More importantly, no mention is made of the absence of the prohibition for the Lifetime Learning Credit appears, and so whether it was a conscious decision, with an undisclosed reason, an oversight, or a conscious decision whose reason was deliberately concealed is unclear. The last possibility is probably unlikely. As between the other two possibilities, I don't know. And, of course, there are no cases or rulings addressing the question. Unless a convicted drug felon challenges the prohibition on the HOPE credit because it doesn't apply to the Lifetime Learning Credit, a challenge surely to fail, I don't see how the issue would be one that a court would need to consider.

Finally, I have not seen any studies addressing the impact of the prohibition on illegal drug use. I wonder how many students think, "Wow, if I do this and get caught, a conviction jeopardizes my tax credit." So, being similarly cynical, I wonder if the prohibition is simply some sort of window dressing that lets politicians say, "See? We are doing things to reduce illegal drug use." But that still does not explain why a similar prohibition was not, and could not have been, inserted into the Lifetime Learning Credit provisions. For that matter, why not put it in all credit provisions. "Convicted of a drug felony? You don't get the adoption credit. After all, do we want to encourage drug felons to adopt children? Convicted of a drug felony? You don't get any other credits. THAT will make you think twice about using illegal drugs." Right. The illegal drug users are shivering with fear of losing tax credits.

Thanks to Prof. Gail Levin Richmond and Prof. Evelyn Brody for their comments. It always is nice to know I'm not the only tax professional who comes away from parts of the tax law muttering, "Huh?"

Here's an update to my post about the impact on annuity recipients if a charity goes under on account of Hurricane Katrina. I've been told that there is another type of annuity arrangement, which is not a CRUT, CRAT, or pooled income fund. A person essentially purchases an annuity from a charity, getting back less than would be received if the annuity had been issued by a commercial annuity company, with the remaining portion accruing to the benefit of the charity.

In these situations there is no trust. The charity's obligation to make the payments is secured by the charity's other assets. If the charity terminates, then the person who paid for the annuity stands in line with other unsecured creditors to get paid. And if something like a hurricane wipes out the charity, leaving it with uninsured losses, the annuitant loses. This is what happened to people expecting annuities from the Baptist Foundation of Arizona, a tax-exempt organization established to assist with advancing causes on behalf of Southern Baptists. Details of the Foundation's financial demise can be gleaned from this long list of articles. In another case, an organization was set up to sell these sorts of annuities, with the investors told that the excess would go to charity. At least one official of the organization embezzled the funds. Without getting into all the facts set forth in the SEC complaint, the would-be annuitants were left out in the cold. This situation, though, isn't one in which the charities themselves failed. Thanks to those who brought these cases to my attention.

Some states regulate these arrangements, subjecting them to rules that are the same or similar to those governing insurance companies selling annuities. Many states don't regulate them. A practitioner informed me that the charitable gift annuity "industry" of the sort just described is "quite large." It seems that many investor advisors push their use. Yet they are much riskier than CRUTs and CRATs, and don't have the protection, in many instances, afforded to commercial annuities. They also pose risk to the charity, because the annuitant can outlive life expectancy, and unless the charity is selling many of these contracts it lacks a sufficient base over which to spread the risk.

A good question is why charities are in the insurance business instead of in the business of doing charitable works. A better question is why charities are permitted to act as insurance companies but escape regulation. A tougher question is why people would go this route rather than set up a CRUT or CRAT. The practitioner who wrote me prefers the CRUT or CRAT, based on experience in the practice world, and I haven't heard or read any reason to ignore them. As students in my Decedents' Estates and Trusts course learn, "use a trust" becomes a good answer to very many of the "how could this problem have been avoided?" questions.

Once again, it is buyer beware. Even if the buyer is awash in noble purposes, such as assisting the charity.

A question from an anonymous reader was posted on a tax listserv to which I subscribe. It's a good question, and worth consideration. The person wrote:

What happens when a person sets-up a charitable gift annuity to a college or university, and the university no longer exists? Maybe Tulane will no longer exist due to Hurricane Katrina. Maybe at some future point, UCLA will no longer exist due to a catastrophic earthquake.

Through a charitable gift annuity, the university or college promises to pay an annual income for---life. Life, your life and my life, is a long time. Obviously, if the university (Tulane/UCLA/ University of Miami) no longer exists-- the check will not be in the mail.

Somewhere, there's an elderly couple who may not be receiving their annuity check from Tulane for a long time--a long, long, time.

I am going to provide a longer answer than I sent back to the listserv.

The sort of annuity in question is created when a certain type of charitable gift is made. It is essentially a creature of the tax law. Generally, charitable contributions of less than all of the taxpayer's interest in the property do not qualify for a deduction. There are several exceptions. The relevant one, in section 170(f)(2)(A), provides that if property is transferred in trust, no deduction is allowed for designating a charity as the taker of the remainder interest, unless the trust is a charitable remainder annuity trust (CRAT), a charitable remainder unitrust (CRUT), or a pooled income fund. Though the question did not specifically describe what sort of arrangement was made, it is likely that it was a CRAT or CRUT, and not a pooled income fund. The question highlights a challenge I tell my students they will encounter repeatedly in practice and for which they don't get as much preparation as they should, namely, clients who do not provide sufficient facts in the question. And it isn't just clients. Tax practitioners, and lawyers in general, are not necessarily more attentive to spelling out all the necessary information. For example, on another tax listserv to which I subscribe, a significant number of the questions come with a less than bare-bones outline of the facts, requiring a series of clarification requests to avoid the "if this then that, but if something else, then some other thing, else yet something else" answers that branch into all sorts of possibilities. Fortunately, the question I'm considering can be analyzed without knowing whether it is a CRAT or a CRUT. What matter is that it is a charitable trust.

What happens is that money or property is transferred into the trust, and a trustee is named. The trustee can be a bank, trust company, some other professional trust service. It can be the donor or a family member, and it could be the board or trustees of the charity, though there are reasons that using a bank or trust company generally is preferable. The taxpayer, in setting up the trust, determines how much of an annuity will be paid to the taxpayer (or the taxpayer and spouse). For a CRAT, it can be a fixed amount or iIt can be a percentage of the trust's initial value. For a CRUT, it is a variable amount that reflects the investment success (or lack thereof) of the trust. The annuity almost always is paid for the life of the taxpayer (or the joint life of the taxpayer and spouse), but in some instances for whatever reason it can be a set term of years. When the taxpayer dies (or the last of taxpayer and spouse dies), or the specified term of years ends, the trust terminates and its assets are distributed to the charity that owns the remainder interest.

So what happens if the charity ceases to exist? Though we tend to think of charities as perpetual entities that have been around forever and that will remain until the end of eternity, the reality is that thousands of charities are created each year, and hundreds, if not thousands, go out of existence each year. Charities cease to exist for many different reasons. Sometimes they use up all their money. Sometimes they accomplish their goal, perhaps using up all their money in doing so. When a charity is the beneficiary of a trust, and ceases to exist, unless the trust instrument specifies a successor (replacement) charitable beneficiary, the trustee must turn to the courts to obtain a determination of what to do. Courts have general supervisory jurisdiction over trusts.

Centuries ago the courts developed the doctrine of cy pres to deal with this sort of question. It was so long ago that Norman French was still the official language, and so the term "cy pres" emerged from the longer phrase describing the doctrine. The full phrase? "Cy pres comme possible" It means "as near as possible" The pronunciation is fun. In Norman French it would be close to "see pray" but lawyers say "sigh pray" (an interesting look at how language evolves). In modern French "as near as possible" translates closer to "aussi pres comme possible." Go ahead. Put "cy pres comme possible" into this translator and see what happens!

Originally, what the cy pres doctrine provided, and still provides, is that when the purposes of a charitable trust have been accomplished or are impractical to attempt, and money remains, the court will find another purpose, as close as possible to the original purposes. Technically, in some instances, centuries ago in England, the crown could dictate the substitution once the court determined that the original purpose could not be accomplished, but that's not of any relevance to the question. In the United States, the leading case (Jackson v. Phillips, 96 Mass. 539 (1867), for those moved to read it) involved a trust established to support abolition and support for fugitive slaves. The court crafted a substitute goal of assisting the education of emancipated slaves and the alleviation of poverty among former slaves in the city where the trust donor had lived. Over time, the doctrine expanded to include resolution of the problem suggested by the question, namely, what happens if the charitable institution benefitted by the trust ceases to exist?

If a charitable organization that is the beneficiary of a CRAT or CRUT (or any other charitable trust) ceases to exist, the court will select a substitute. How does it do this? As in every cy pres case, it is a question of fact and judgment. The court tries to find another institution which resembles the defunct organization. It considers whether its goals are the same or close to those of the defunct organization. It can examine if it reaches to the same sort of population or one close to it as targets of its charitable works. It notes if it operates in the same or nearly the same geographic areas. There is no set list of things to examine, because the facts of each particular case will set those parameters.

Now for the wrinkle. There's always a wrinkle. What I described is trust law as it developed in England and was absorbed and refined in those areas of the United States whose law has its origins in the English common law. Louisiana, however, because it was founded by the French and under French rule for many years, has a law originating in French civil law. Unlike common law, which developed principally from judicial application of legal doctrine to facts, civil law has its roots in extensive codes, or statutes, which are applied to the facts. Think of an Internal Revenue Code equivalent for every possible aspect of the law. In recent times the distinction has blurred, because statutes and administrative regulations have come to dominate a substantial portion of American (and English) law. So does Louisiana have a cy pres doctrine? Yes. See In re Succession of Milne, 230 La. 729 (1956) (reviewing the origins and application of the doctrine), and it has been codified at La. Rev.Stat. 9:2331.

If an educational organization goes out of existence, my guess is that the court would try to find another educational organization in the same area, with the same (or nearly the same) sort of student demographics, with the same (or nearly the same) programs of study, etc. I'm in no position to make guesses as to specific institutions. But what is clear is that if Tulane or some other school ceases to exist, the trust will continue to exist and the donors will continue to receive their annuities.

Hopefully, this was an interesting academic question. It would be sad, and indicative of far greater upset, if any practicing lawyer had to deal with this issue. All of these institutions, not just Tulane, need to be sustained and need to return to full operations after their properties have been restored. Anything less would compound what already is a horrific tragedy into something unthinkably worse.

My posting yesterday that summarized the discussion to that point between Stuart Levine and myself on the substitution of an income tax at death on unrealized net gains for the estate tax brought a response from Ben Bateman of Amarillo, Texas. He wrote:

Your argument in favor of taxing capital gains is correct, but for the wrong reason. The proper argument is that current law encourages people to hold appreciated assets until death, rather than shift their holdings to something that's more economically efficient. The proper argument is economic distortion, not some socialist cliché about rich vs. poor and the importance of progressivity.

You also missed the real problem about determining basis after death. What's the difference between figuring basis one hour before death and one hour after? Simple: One hour before death, the person most likely to know something about the basis is still alive to tell us. Dead men tell no tales, and they aren't very good at explaining basis records, either. I completely sympathize with the goal of taxing gains at death, because current law creates the sort of economic distortion that tax professionals should abhor. But taxing those gains would also mean that the children pay tax based on their ability to produce information that they had no legal right to obtain before death. Your father didn't keep good records? That means you pay extra.

Granted, this situation already occurs in cases of extended incapacity. If your father becomes disabled and you need to sell some of his property, then the amount of gain will in fact vary based on the quality of records that you had no right to maintain. But taxing gains at death would turn that relatively rare unfortunate situation into a commonplace injustice.

Here is the reply I sent to Ben:

Your point about the lock-in effect of not taxing gains at death is a good one. It should get mentioned, and I'll do that in a follow-up post.

In my experience figuring out basis for a client when doing a return, almost always they had to retrieve paper. None of them remembered anything other than "roughly something" and those were wild guesses. Now, finding the papers might be easier for the "organized" clutter-making client, but eventually it will turn up. The Code has rules for determining donor basis when gifts are made of property that were gifts to the donor by an earlier donor, who often is long gone. So I don't think it's as big an issue as you do. And as more and more recordkeeping goes digital it may get easier across the board. Many items of property, including stocks, bonds, land, commodity investments, vehicles, boats, etc. can have a basis determined fairly easily if date of acquisition is known (something that may be apparent from tax return and other records such as local government land title records, vehicle registrations, information from stock and other brokers, etc.). Many of the items for which records of cost and purchase date are not maintained aren't worth enough to worry about (or are loss items) such as clothes, housewares, etc. The general exception would be those special items on homeowners' insurance: guns, jewelry, antique furniture. How much, though, in the context of the entire picture, are those worth?

As for penalizing children for failure of parents to keep good records, that already happens, in tax and other areas (what if dad has no record of the $10,000 loan to A? the estate doesn't get to collect an asset). One way of dealing with this, going forward, is to have taxpayers report purchases on their income tax returns so that the record is established when the transaction is fresh. It won't be perfect but it would be much better.

Here's a little more about the lock-in effect. Knowing that gains would be taxed if property is sold during lifetime, and knowing that the gains forever escape taxation if the property is held until death, many taxpayers choose to take the latter course, thus "locking" themselves into a "hold the property until death" position. This is especially true if the estate tax would not apply and impose a tax cost to holding the property until death. Thus, increasing the estate tax exemption or repealing the estate tax exacerbates the lock-in effect.

The lock-in effect is one of the arguments raised by supporters of lowering or eliminating the tax rate on capital gains. After all, they argue, if capital gains are not taxed when there is a lifetime sale, there would be no lock-in effect. That's true. However, the lock-in effect can also be removed by taxing gains at death. Both approaches make lifetime sales and holding until death equivalent (aside from the time value of money that might favor holding until death, although the risk of higher income tax rates being enacted shortly before death has a offsetting impact on the decision making analysis). None of the other arguments for eliminating or reducing the tax on capital gains persuades me that it is a superior approach to taxing unrealized net gains at death.

Ben is correct. I should have made this point, but overlooked it.

Stuart Levine has posted a response to my summary of our on-going discussion concerning estate tax repeal/modification. It's not a disagreement with the summary, but a sharing of additional concerns about my proposal to impose income taxes on gains at death (which he calls the CGUD tax).

Because I'm paying attention to other, more immediate tax issues, such as gasoline tax suspension/reduction, I will be brief in my response even though I had contemplated letting the discussion sit until the issue resurfaces in the Congress.

Stuart's first point is that "it is truly revolutionary to throw out a tax regime with a system of rules and decisional interpretations that has been built up over many years in favor of a wholly new design." Indeed, it is. And though Stuart is correct that this ought not to be done blithely, there are times when wholesale revision is necessary. Just because something exists or has existed for a long time is not enough, in and of itself, to perpetuate its existence. Akin to zero-based budgeting, a tax system ought to prove its worth year after year, rather than rest on past glories. The estate tax has created far more problems than it is worth.

Stuart notes that "One aspect of the current tax regime that contributed to the force of the political drive to abolish the estate tax in its entirety was the failure to automatically adjust the unified credit to take account of inflation." He is correct. The same can be said of the income tax personal and dependency exemption, which went from the $600 on which a person could live 60 years ago to a minuscule $3,100 on which no one can live today. As Stuart notes, this problem energized the "force of the political drive" but isn't the only flaw. Fixing it before the political storm erupted might have kept the issue off the radar of the folks who want estate tax repeal without any substitution, but now that the cat is out of the bag, I'm not certain that the die-hard repeal advocates would relent if the unified credit were adjusted as Stuart proposes.

Stuart suggests that "many of the abuses in the present system can be easily abolished" and gives insurance trusts and family limited partnerships as examples. He also notes, realistically, the political pressure that insurance companies would bring to bear against abuse correction with respect to insurance trusts. It's not as though I'm against fixing abuses. What concerns me is that after Stuart fixes these, those folks with nothing better to do in their lives than to dream up ways to reduce their clients' share of tax revenue payments will conjure up some other crafty device that won't hit the IRS radar for a while and then will require several years of legislative activity. What do we get? A parade of increasingly complicated and voluminous estate tax provisions. For an example of how that can happen, see the income tax. Look, for example, at the mess subchapter K has become as the battle for abuse prevention has been fought at the fringe of almost every Code subsection.

Stuart then points out that "the manner in which qualified plans are taxed has to be changed, since they are frequently subject to both income tax and estate tax at roughly the same time." I agree. Here's an area of tax law that affects a huge portion of taxpayers, and it has to be one of the most complicated areas of taxation. When people tell me Partnership Taxation is the toughest area of the Graduate Tax Program, I tell them that I think the deferred compensation/employee benefit area takes first prize. Maybe I'm wrong. No matter. Stuart is right. Whether it's the worst, or second to worst, messy part of the tax law, it needs to be fixed.

Stuart then turns to "what [he] perceive[s] to be some negative aspects of the CGUD Tax."

He doesn't think that the CGUD tax could be sufficiently progressive. That is true, as the report he quotes points out, if we use the same tax rates in place today. However, as a staunch advocate of taxing capital gains at the same rates as other income, the income tax revenue of the CGUD tax would be far more than what was computed for purposes of the comparison made in the study. And I would not be adverse to higher income tax rates on incomes (including CGUD) above, say, $10 million, with perhaps progressive rates within that "above $10 million" range.

How do I square that with my overall tax philosophy? I see those high rates (or perhaps a substitute) as a "user fee." Most people who are wallowing in tens of millions, hundreds of millions, and billions of wealth, are in that position because the market for their products has doubled, tripled, etc., on account of population increase. The user fee is a way of getting these folks to repay society for society having bred a large consumer base. It's also a user fee for society having globalized into a wider market that contributed to this wealth. After all, could a professional athlete make $20 million a year to play ball if the population of the U.S. was still 40 million and the population of the world, say, 800 million? Could the maker of the consumer products whose sales enriched the families Stuart mentions have been sufficiently voluminous to generate that wealth had there not been a world population explosion? I know these thoughts will cause some to brand me a "socialist" (as already has happened) even though Stuart thinks I'm "somewhat conservative" in my outlook. That's why I introduce the user fee concept, which is what someone with my outlook uses as the core revenue generating justification.

Stuart thinks that the CGUD Tax "would be both extraordinarily complex and subject to a whole new set of rules." I think not, though I can contemplate the lobbyists having a field day turning a simple concept into a special interest morass. My proposal, rather than setting up a separate and new user fee (or excise tax), rides on the income tax system which already is in place. A final income tax return already is filed for almost all decedents. My proposal eliminates the filing of transfer tax (estate, gift, GST) returns without creating new returns to be filed. If the rules are drafted properly, there ought not be the "years of controversy and litigation" that Stuart thinks "would likely result." After all, the principal reasons for controversy and litigation in the tax world are (1) bad drafting that is incomplete, ambiguous, inconsistent, and not thought through, and (2) taxpayers who use the complexities and bad drafting of tax law to find an unjustified personal tax benefit. Stuart's concern about complexity justifies my demand that anything that is enacted be drafted properly and free of special interest interference.

Stuart notes that "the current estate tax carries with it a strong incentive to make charitable contributions." The existing income tax charitable contribution deduction (which does need a LOT of fixing) would be available to offset the gains taxed at death. Perhaps the limitations based on AGI should be made inapplicable to "at death" charitable contributions. Stuart raised a good point, and though it take us deeper into the drafting of my proposal, it illustrates the benefit of discussion. Time, perhaps, to let our readers chime in.

All around the country, in reaction to the gasoline price increases triggered by the adverse impact of Hurricane Katrina on domestic refinery capacity, taxpayers and politicians are clamoring for a reduction or suspension of gasoline taxes. As described in this report, legislators in Maine, Tennessee, Wisconsin, and Michigan have called for such action. In Pennsylvania, the governor is considering a suspension. In Michigan, legislation to this effect has made it through the state House. Although surely legislators and governors in other states not highlighted in the report have joined in this tax-cutting chorus, a complete list is not critical to the analysis.

Now there is pressure growing for the Congress to suspend the federal excise tax on gasoline. According to the L.A. Times, at least one bill has been introduced in the Congress to this end.

It will not surprise anyone that I am opposed to cutting gasoline taxes. Doing so would be adding fuel to the fire, pun intended. Why?

1. Higher prices cut demand, and anything that lowers price, including proposed freezes as well as the suggested tax reductions, will hold demand steady rather than cutting it. Considering that the world's oil supply is being consumed faster than it can be replaced, consumers should not be enabled in the gasoline and oil-consumption frenzy. Yes, I know how dependent we and our economy are on oil, but the one of the blessings from an otherwise horrific disaster is that people may be compelled to think rather than emote about gasoline prices, supply and demand, exploration, environment, alternatives, and the need to think about something more than the next day or the next election. Those who want to dig into the issue with perspectives not found in the mainstream media may find the news and commentary at The Oil Drum to be informative, alarming, and even frightening.

2. Cutting or suspending taxes generates a revenue loss. Almost every gasoline tax, state and federal, is "dedicated" to specific expenditures. If the revenue is cut, the expenditures cannot be made. "So what?" may ask the opponents of "big" government. The "so what" is answered by a list of the things funded by gasoline taxes. In most states, the tax generates funding for road and bridge repair. Imagine what happens if the tax is suspended, bridges are not repaired, and there is a catastrophic bridge collapse. Who will be the first in line crying about "the failure of government to plan for and fund disaster prevention"? To their credit, Massachusetts legislative leaders rejected the gasoline tax reduction proposal for this very reason. There is hope. One person commented that the reduced revenues ought to be made up by freezing work on repairs and projects in the home districts or states of the members of Congress who vote for a gasoline tax reduction or suspension. I'd like to hear them explain how the resulting loss of jobs was so good for the citizens who they are supposedly trying to help.

3. Even in states where monies can be moved from other funds to make up for the lost gasoline tax revenue, there are problems. In Wisconsin, the proposal is to make up the gasoline tax revenue loss by cutting money that would have been used in the public school system. If that isn't unwise, it's simply stupid. Cutting education funding at a time when education isn't doing exactly a top-notch job getting people ready to live in the modern world (do they teach survival techniques, rescue skills, and CPR in our high schools?) is pretty much close to eating the seed corn. Fortunately, the governor and some legislators in Wisconsin have raised their eyebrows at the proposal.

4. Cutting gasoline taxes has so little impact on an individual that it can be seen as nothing more than window dressing, soundbite generation, and posturing for votes. In Pennsylvania, a suspension of the state's 30-cent-per-gallon gasoline tax would save the average driver $66 over four months, but it would cost the state $660 million in highway maintenance money.

5. There is no guarantee that the reduction in the gasoline tax would cause a concomitant reduction in the price at the pump. The bureaucracy required to make pump price reductions occur would be enormous and expensive. And there's no guarantee it would be effective. Surely we would hear claims that a further increase "wasn't as high as it otherwise would be" as though something like that could be proven. The governor of Pennsylvania, acknowledging this problem, noted that the state is investigating the use of paying rebates to motorists when they renew vehicle registrations. Yep, more bureaucracy.

Yes, there is a problem. Gasoline prices have increased, dramatically, as a result of a catastrophe. This is not a surprise. Experts have predicted that any sort of natural disaster, accident, terrorist or criminal act, or other cause of a disruption would cause price spikes. Was anyone listening? Perhaps they listened as closely as they listened to the weather forecasts. Prices still are not at an inflation-adjusted equivalent to gasoline prices in the late 1970s, when a supply disruption caused by OPEC's political decision spiked the prices. People adjusted.

Once again, as they did 26 years ago, people will adjust and reset priorities. The argument that it is a "food or gasoline" choice is true for the very poor, who also face "food or medicine" choices. For most other families, the answer may be in cutting gasoline use, consolidating car trips, postponing the unnecessary frill purchase. The solution is to assist the poor rather than cut gasoline prices for everyone, including those who are wealthy enough to use gasoline unwisely. For example, do driveways really need to be cleared with gasoline-powered leaf blowers rather than brooms? Youngsters, rather than complaining about their parents' decision to forego purchase of a new video game cartridge so that gasoline can be purchased, can earn some money and get in shape by hiring themselves out to sweep driveways and shovel snow by hand. It's good exercise, too. How necessary is the consumption of gasoline for recreational use of all-terrain vehicles? What I'm saying, without digressing into another topic, is that the gasoline price spiking may end up as a catalyst (another pun intended) for a change in the overly materialistic, luxuriated culture that has overtaken almost all of America save the very poor.

After all, the nation has itself to blame for this problem. Prices have increased because there is a lack of excess refinery capacity. No one wants a refinery built in or near their town. Yet almost everyone wants what refineries produce. This sort of "have it all" scenario, symbolic of the platforms on which most politicians run for office and on which many people look at life, simply doesn't work. And now, thanks to nature, we are finding out what some have known for decades. It's also a nation which, by not doing good planning and giving developers free reign, has ended up with most people living so far from their places of employment and shopping that gasoline consumption has had to increase. I'm not advocating additional government regulation of what is an almost-too-late-to-fix-it problem. I'm simply asking where was the common sense when decisions were being made? The current crisis certainly provides an excellent reason and a fine opportunity for some deep, long-term, well-pondered consideration of where this nation is, how it got to be where it is, and, most importantly, where it is going. Yes, and how it is going to get there, literally and figuratively.

Yes, to the extent higher prices reflect price gouging, and a small portion of the increase does, then what politicians can do is to support those officials who have the responsibility to enforce existing laws against price gouging. A few highly publicized arrests and prosecutions should get the message across to most of the opportunists who use national crises to line their own pockets. Suspension of gasoline excise taxes does absolutely nothing to end price gouging. It might even encourage it by making people less concerned about it and thus less likely to file complaints.

If anything, gasoline prices should be increased. After all, their inflation-adjusted equivalent has been dropping for years. As a practical matter, it would be politically impossible to increase gasoline prices (at least until the next hurricane or other natural disaster takes out half of the remaining refinery capacity). But surely it makes no sense to cut taxes that are too low as it is. After all, a gasoline tax is a user fee imposed for the maintenance of the highways and bridges used by the consumers of gasoline. And user fees ought to reflect the true cost of what is being used.

I can't imagine what we will hear from the politicians when home heating bills start arriving in late November and early December. More of the same, I'm afraid.

Last week, in a post that examined my initial reaction to the impact of Hurricane Katrina on the tax system and my suggestion that the decision on making estate tax repeal permanent be delayed, which then happened, I commented:

I'm more than willing to make estate tax repeal permanent, in exchange for taxing capital gains at death subject to a sensible exemption.

In his generally favorable reaction to my post, which he kindly labelled as a "must read regardless of one's location on the political spectrum," Stuart noted:

(However, he is willing to consider a full estate tax repeal in exchange for taxing capital gains at death subject to what he terms a "sensible" exemption. Here, we part company.)

Our subsequent email correspondence has helped us identify the issues raised by the trade-off I suggest that go beyond the basic arguments for and against estate tax repeal. Though the postponement of the decision may be, as Stuart points out in another post, a death warrant (I know, I know, ...) for the estate tax repeal plan, it is helpful, while the matter is still fresh in our minds, to outline the parameters of the trade-off issues so that when/if the estate tax issue returns to the spotlight there will be a foundation on which to build further, more extensive discussion. Of course, it would not surprise me to see the advocates of estate tax repeal push their proposals back on to center stage a few months from now. All of us know how it works in horror movies, as we think or yell, "He's not dead yet, don't celebrate too soon."

The suggestion that the estate tax be replaced with an income tax on net gain inherent in the decedent's assets at death reflects a wish to correct a fundamental flaw in the income tax system. Permitting these gains to escape income tax forever gives an advantage to those who can afford to hold on to their assets until death, specifically, those who are relatively more wealthy. Factored into a computation of effective income tax rates, this tax escape pretty much contributes to a regressivity in the tax system. Considering that one of the "defenses" for the failure to tax built-in net gain at death is the estate tax that is imposed on the value of the assets holding the gain, any repeal, or even significant minimization of the estate tax, removes that "defense" and requires re-examination of the question.

Taxation of net built-in gain at death is simple. Determining the values of the assets is fairly easy, because it is done not only for federal estate tax purposes, but for state inheritance and estate tax purposes and for state probate purposes. Those estates that as a practical matter don't value assets are almost surely to be within the scope of an exemption structured to let the net built-in gains of poor decedents and those with modest amounts of gains to escape taxation. The adjusted basis of the assets in question can be determined. After all, if the decedent in fact sold such an asset before dying, the need to determine the basis would exist and would be satisfied using the various rules in place to determine adjusted basis. I always scoffed at the argument, raised decades ago as one justification for repealing the short-lived and effectively eliminated taxation of built-in gains at death, that such a provision was "unadministrable" because "no one knew how to figure out, factually, the decedent's adjusted basis in the assets." Hogwash. If the decedent sold the assets, there is no way the courts, the IRS, or even the advocates of letting built-in gains at death go untaxed would accept an argument from the decedent, "Hey, I can't report gain because there's no way of figuring out the adjusted basis because, after all, if I died moments before the sale, there would be no way of figuring out the adjusted basis according to the advocates of not taxing built-in gains at death."

The amount of the exemption needs to be determined after doing some revenue estimation computations that I cannot do because I don't have the information available to the revenue estimators. That is, we need to know how much of an exemption would cause taxation of non-exempt gains to generate revenue equivalent to what the estate tax generates. To do that, we need an income tax rate. The amount of the exemption also needs to be set sufficiently high so that poor and low-income taxpayers do not get taxed. Whether the exemption should be $300,000 or $1,000,000 can be debated, but it ought not be $10,000,000.

There are several approaches to determining the income tax rate. One is to use the rates applicable to taxable income generally. But because this might put a decedent's gains into a higher bracket than would apply if the decedent sold the property uniformly over lifetime, there is a case to be made for using a lower, flat rate. However, because the highest income tax rate is less than the highest estate tax rate, the potential application of higher rates doesn't necessarily require that it be avoided.

The problem of liquidity, that is, finding cash with which to pay what would be the decedent's final income tax liability, can be solved by using the same sort of payment deferral arrangement that exists in the present estate tax for postponement of estate tax payment with respect to certain types of assets. There would be no need to reinvent the wheel.

In our email correspondence, Stuart raised some good questions about the impact of the proposed trade-off of estate tax repeal for taxation of built-in gains at death. I've merged our emails into a dialogue of sorts.

Stuart: I believe that such a tax would, unless modified by some degree of progressivity, shift the tax burden represented by the current estate tax downward, from the more wealthy to the less wealthy and even the middle class. (By way of example, the wealthy have a greater ability to do tax planning that would allow matching of recognized losses and gains, etc.

Jim: If the exemption is set at the appropriate level, and existing income tax rates are used, the burden would be progressive and would not shift the revenue sourcing downward. In fact, properly designed, it would shift it upward, because there would be far less opportunity to escape taxation. The current estate tax is riddled with loopholes that let enormous amounts of wealth go untaxed. The income tax that applies to gains provides far fewer opportunities. Providing the current income tax system is repaired to prevent the use of artificial losses that some taxpayers seem to "discover" in time to offset gains, the income tax is less fragile than the estate tax. There are far more estate tax planning games than gain avoidance games, and with some cleaning up of the grantor trust provisions, the concept of "actual or deemed" ownership can be retained.

Stuart: Perhaps more significantly, intuitively, I suspect that a tax on untaxed capital gains would more than likely burden "new" wealth. That is, a family that has built a significant business with a fairly low basis would be taxed more than, say, a Bush in (at least) the fourth generation of wealth accretion.

Jim: To the contrary, I think taxing capital gains at death favors the new wealth. A taxpayer who starts a business and dies within a short period of time has a high basis to value ratio (unless the thing took off, in which case taxation would not be as burdensome). If the taxpayer started the business 40 years before death, there would be more tax, but the business formed by the taxpayer's grandfather and passed down through gifts, where the basis would be much lower relative to value, would bear a higher burden. So it's "old" wealth that would be carrying the higher burden. That's all transitional, for once in place, basis would step up at death, and thus the business
held for the longer period of time (say, 40 years) would be taxed more than the one held for, say, 10 years. Which may not be that bad of an idea.

Stuart: Finally, how would the system work if, say, Dad gave stock to Sonny. Would the tax be deferred upon Dad's death? In that case, there would be significant gifting and property would likely never get taxed.

Jim: The gift question is interesting. After all, the gift tax "backs up" the estate tax. Because there's no chance, really, of section 102 being repealed, one approach is to tax the donees on the built-in gain when the donor dies (when there would be a higher likelihood of liquidity because the donee is likely to be an heir of the donor). Another possibility is to require donors to include in gross income the net gain built into gifted property. Alternatively, gifted property could be added back and treated as belonging to the donor, with something equivalent to an unlimited section 2035 mechanism. Or, as an alternative to that, gifted property gifted (rather than consumed) by the donee could be added to the capital gains tax applicable when the donee dies.

I expect Stuart will reply on his blog. When he does I'll post a link. Then, because the issue has retreated to the back burner, he and I will wait until it resurfaces before continuing with an extensive continuation of our dialogue.

In yesterday's post I predicted that tax incentives for the rebuilding of New Orleans and the rest of the devastated Gulf Coast would come in the form of empowerment or other zones similar to those already in existence, such as the New York Liberty Zone:

I think a large area will be declared an empowerment zone, or perhaps be given a special category not unlike the New York Liberty Zone, generating special tax treatment for wages paid to individuals working in it, amounts paid to rebuild facilities located in it, money invested in enterprises formed to operate in it during or after reconstruction.

This evening an (look at 4:14 P.M.) AP report picked up by New Orleans' WWL-TV (operating out of Baton Rouge) explained that Representatives Peter King and Charles Rangel are working on legislation that does exactly that, create empowerment zones for the damaged areas. Considering that King is a Republican and Rangel a Democrat, it is safe to predict a high likelihood that this legislation will be enacted in some form. King and Rangel expect the tax relief to exceed the $8 billion enacted after September 11, 2001, for the New York Liberty Zone.

An aside: The same AP report asserts that not all $8 billion of the New York Liberty Zone tax incentives were claimed.

Yesterday, I commented in a post about the impact of Katrina on taxation:

I really do hope the members don't waste time on things that can be postponed, such as permanent estate tax repeal or additional lowering of rates on capital gains.

In Friday's post, Taxes and Sustaining a Civilized Society, I argued:

And it surely is not time to make estate tax repeal permanent. Yes, I know that certainty is good for planning, but there are a lot of things that are and must remain uncertain when it comes to planning. I'm more than willing to make estate tax repeal permanent, in exchange for taxing capital gains at death subject to a sensible exemption. But the nation needs time to contemplate such a plan, and September 2005 is too soon.

Some, it appears, are listening. And agreeing.

One of those someones is Senate Finance Committee ranking minority member Max Baucus, who declared, "I am supportive of working on repealing the estate tax, but now is not the appropriate time…" At the moment, his position on the estate tax permanent repeal proposal isn't the focus. It's the willingness to postpone that debate so that other, far more urgent matters can be given attention. According to this report, the scheduled vote on the estate tax debate has been postponed indefinitely.

So perhaps my pessimism, which surely oozed through those two posts from which I quote myself, will turn out to have been a bit too intense. Is it any wonder? It's becoming easier and easier to be pessimistic about too many things.

What a way to celebrate Labor Day. A day set aside for Americans to think about and express appreciation for the contribution made to the nation, its people, and its economy by those who labor at their chosen or assigned tasks has not only evolved into a "last gasp of summer" vacation jaunt for many, it has also, this year, become a day of sobering estimation of what Hurricane Katrina has done to the livelihoods of many Americans. Estimates vary. According to this site, referencing this article, as many as 750,000 people have been left jobless by the storm and its aftermath. A higher estimate of one million jobs is offered by an economic forecasting expert in this report.

Whether 750,000, a million, or some other number of jobs have been lost, there are a lot of people who are going to face tough times in the near future. Some may have easily relocated skills. Others, though, are totally dependent on the devastated area for their livelihood. Shrimpers can't pick up and do their job in central Kentucky. River boat pilots can't parlay their skills into navigating the plains of Kansas. Oil field workers and refinery technicians won't find work in the farmlands of Missouri.

It matters very much to American that some way be found to help these displaced workers get back to doing what they do best. Those shrimpers, and the other fisherfolk, bring in one-third of America's seafood harvest. The river boat pilots help bring America's grain to market. By now, anyone who can read or understand cable news talk knows why those oil field workers and refinery technicians need to get put back to work expeditiously. These are but a few examples, because surely there are all sorts of other jobs that suddenly disappeared but that are needed by Americans.

How will that happen?

More than a few commentators have tossed around a variety of ideas for rebuilding the facilities, the buildings, the institutions, the towns, yes, the life, damaged or destroyed by the hurricane and the subsequent flood wall breaches. Many of those ideas involve taxes. That is not a surprise.

The connection between jobs and taxes is close, intricate, and ancient. It's not just the inclusion of wages in gross income. That part is straight-forward. It's the use of the tax law to encourage the creation of jobs that is complicated, frequently changed, and surely ready for another entrance onto the tax stage.

There is an income tax credit for a portion of first-year wages paid to individuals in targeted groups. Targeted groups are, for the most part, those who traditionally have difficulty finding jobs, such as members of family receiving certain public assistance, certain veterans, individuals between age 18 and 25 who reside in an economically distressed area, and another half dozen specific and carefully defined groups. The credit was temporarily expanded, until the end of this year, to include second-year wages in the case of individuals who are long-term family assistance recipients. There is a separate credit for a portion of wages paid to certain members of Indian tribes.

There are deductions for compensation, subject to certain limitations. There are deductions for contributions made to retirement plans, also subject to certain limitations. The cost of many fringe benefits, even those not subject to taxation when received by the employee, are deductible by the employer.

There are indirect incentives. To the extent the tax law encourages investment in certain activities, or purchase of particular types of items, the industries making those items and the entrepreneurs operating those activities will face increased demand and hire more workers to meet that demand. So the theory goes, and sometimes it works that way in practical application. After all, every once in a while a bad-armed pitcher can hit the side of a barn.

Will the tax law be used to encourage, fund, and motivate the recovery? I would be shocked if it weren't. That's not to say there won't be non-tax laws enacted or amended, for surely a long list of things need attention, and some aren't even financial in nature. But the tax law is going to be the beneficiary of many changes, enacted as early as this fall.

What do I predict? I think the existing credits will be expanded. The temporary expansion for second-year wages will be extended beyond this year. I think a large area will be declared an empowerment zone, or perhaps be given a special category not unlike the New York Liberty Zone, generating special tax treatment for wages paid to individuals working in it, amounts paid to rebuild facilities located in it, money invested in enterprises formed to operate in it during or after reconstruction. I've read suggestions that the low-income housing credit be adjusted so that it attracts investment into rebuilding the some of the hundreds of thousands of destroyed or damaged homes. It would not surprise me to see hundreds of activities, investments, purchases, and other enterprises nominated for special tax treatment.

Should the tax law be used in this manner? It depends, in part, on one's outlook and in part on one's conclusions on the effectiveness of using the tax law to encourage economic behavior. Is there not sufficient incentive in the private sector, absent tax provisions, to undertake what needs to be done? Yes, there is, but there are insufficient resources. How does an uninsured homeowner rebuild? Part of the problem, of course, is that the existing tax law has flaws that put many taxpayers in a worse financial position than they would be if the tax law were more equitable, sensible, and efficient. But even a zero tax rate on a displaced homeowner won't pay for rehabilitation of a home. But would it not make sense to distribute grants rather than fooling with the tax law? Yes, and I think that we will see a variety of new and expanded grant programs. In fact, most of the tax incentives that I think will be enacted do not reach directly to the worker, the homeowner, or the individual. They reach businesses, trying to encourage them to hire and invest in ways that ameliorate distressed economic conditions in a specific area. Why not direct grants to businesses instead of indirect payouts through the tax code? Yes, why not? Would that not be easier to administer?

One of the causes of tax law complexity is the relocation of social welfare and similar programs from other laws and federal agencies into the Internal Revenue Code and the IRS. Many of the newest credits and other incentives, such as those applicable to empowerment zones, renewal communities, and the like, require the IRS to issue regulations that are reminiscent of regulations issued by those other agencies. Some go so far as to incorporate regulations issued by other agencies. Why can't those other agencies do this work and administer these sorts of programs? Could it be that the IRS, despite being perpetually maligned in the press, holds a secret place of respect in the heart of Congress? That speaks volumes about the federal bureaucracy, but I doubt much needs to be said after the past 9 days to make this point. It's been made. Unfortunately, at huge cost.

There are serious questions that need analysis and that will be the subject of intense debate before the specifics of these anticipated tax law incentive enactments are worked out. Some reach far beyond the details of the upcoming reconstruction. Some will be framed as a referendum on whether tax dollars should be used to rebuild New Orleans. Others will focus on whether tax dollars, through direct grants or tax incentives, should be used to encourage rebuilding of homes on barrier islands and other at risk areas. There will be a parade of soundbites advocating the construction of affordable housing for the poor and lower middle class, and how the tax law should be fine-tuned to accomplish such a result. That's assuming the tax law can produce the desired consequences.

It's unclear whether the various tax law provisions that now substitute for other agency programs are effective. Despite a credit for hiring native Americans, the economic conditions on Indian reservations, aside from casino enterprises, remain difficult. Poverty among tribal members remains high, and an embarrassment for the nation. Many of the enterprise zones and renewal communities continue to stagnate economically. Even an alleged success story such as the New York Liberty Zone is difficult to assess because New York probably would have recovered without such incentives.

These sorts of provisions are complicated. And I'm no fan of complex tax law. In all fairness, if the alternative is a complex law for some agency other than the IRS, is that any real improvement? But there is some good news on the complication front. If Congress piggybacks the Hurricane Katrina tax incentives onto existing provisions, and can manage to avoid fiddling with the definitions, the increase in complexity can be minimized. However, if Congress chooses to enact totally new incentives rather than working with existing credits and empowerment and similar zone definitions, it will make the complexity problem much worse.

Congress needs to move quickly. Yes, time is needed to debate the serious questions I mentioned, along with the others that did not get articulated. But taking time to craft new provisions rather than using existing ones would extend the suffering of those displaced workers who need jobs, preferably the ones they had. Worse, trying to do the technical drafting at the last minute, in the wee hours of the morning when most brains are at the low ebb of their biological cycles, guarantees the combination of complexity and technical error. It will be interesting to see how Congress, whose members understandably have been critical of the sluggishness with which government responded to the crisis, reacts when time is of the essence. I really do hope the members don't waste time on things that can be postponed, such as permanent estate tax repeal or additional lowering of rates on capital gains.

The nation's workers, and the nation, deserve no less.