MauledAgain

During the past few years, I've commented from time to time on the disarray afflicting the Philadelphia real property tax assessment process (see An Unconstitutional Tax Assessment System; Property Tax Assessments: Really That Difficult?; Real Property Tax Assessment System: Broken and Begging for Repair; and Philadelphia Real Property Taxes: Pay Up or Lose It). In the most recent post, How to Fix a Broken Tax System: Speed It Up?, I noted that there had been four previous posts and that perhaps five was the magic number. It isn't.

In one of the earlier posts, Real Property Tax Assessment System: Broken and Begging for Repair, I commented on a Philadelphia Inquirer story that described the 4-3 decision by the Philadelphia Board of Revision of Taxes (BRT) to refrain from reassessing the 27-room mansion owned by state senator Vincent Fumo. The property, which Fumo put on the market with an asking price of $7,000,000, is assessed at a value of $250,000. The ensuing fallout from this news brought a promise from the BRT to explain how a multimillion dollar property is assessed for only $250,000.

According to this Philadelphia Inquirer story, released Monday, the BRT says that it cannot find the file for the Fumo property. A consultant claims that the BRT "moved heaven and earth to try to find it." Members of Hallwatch, a public interest group, have requested the file but have not been provided copies. The BRT consultant thinks the file disappeared when the BRT moved its offices. His explanation: ""They have thousands and thousands and thousands of files. They couldn't find it, and that was where it was left."

The BRT consultant did reveal that when the BRT proposed raising the assessment on the property from $200,000 to "more than $436,400," Fumo appealed and the BRT set the assessment at $250,000. Until and unless the file is located, there is no way of knowing what Fumo argued in his appeal. The head of the BRT in 2003 said there was a general policy at that time to cut proposed assessment increases when taxpayers appealed. The BRT consultant explained that the BRT encountered an obstacle when it focused on the valuation of Fumo's property, namely, a 1995 court order making Fumo's building and renovation permits secret. Fumo obtained the order after alleging that his pro-choice views threatened his safety. The Philadelphia Inquirer reports that no other property owner has obtained an order making a building permit or renovation permit secret. The BRT apparently ignored public records showing that the property was used to secure a second mortgage of $750,000 and a third mortgage of $1,100,000.

Fumo put the property on the market to raise funds for his defense in a corruption trial, which is scheduled to begin later this year. He recently dropped the asking price to $6,000,000. He claims he received no special treatment from the BRT, and the BRT claims it treated Fumo as it would any other taxpayer. One of the allegations in the corruption indictment is that one of his senate aides worked on the renovations of the property while drawing a public salary.

There are several troubling aspects to this story.

First, it is not reassuring to realize that government agencies lose important public documents. It makes one wonder about custodial control, file integrity, and competence.

Second, it is very puzzling why the information is not in digital form, with off-site backup. In that instance, moving offices ought not cause the loss of the information.

Third, it is disturbing to learn that the BRT automatically reduced assessments in 2003 when property owners appealed. I wonder how many people who did not have sufficient time or money to pursue an appeal would have found a way to do so had they known of the automatic reduction policy.

Fourth, it is bewildering that the BRT continues to undervalue Philadelphia properties for tax purposes. One analysis cited by the Philadelphia Inquirer concluded that assessments in the city average 60 percent of value. In Fumo's situation, the assessment is at roughly 4 percent of value.

Fifth, it is troubling to learn that the BRT does not cross-check property assessment records with public mortgage loan records.

When people complain about taxes, as they often do, it is helpful to ask whether the complaint is about the tax, the implementation and administration of the tax, or the use to which the tax revenues are put. In this instance, the implementation and administration of the real property tax in Philadelphia (and elsewhere in the commonwealth) leaves very much to be desired. If this is the best government can do, government's best isn't good enough.

Last week, in No One Drinks to This Tax, I questioned the wisdom of limiting such a tax to center city establishments rather than all establishments. I noted that such a distinction was inconsistent with the presumed justification for the tax, namely, the costs imposed on society by the drinking of alcohol.

A reader, who lives and works near Pittsburgh, wrote to tell me something I did not know, but probably should have known. I would have known it had I done some research. I would have discovered, for example, articles such as this one. The purpose of the drink tax in Allegheny County is to bail out the Port Authority Transit system, which is having financial difficulties. Now that I'm aware of this, I cannot resist criticizing the tax, regardless of whether it is imposed uniformly, as proposed, or without uniformity, as the Governor has suggested ought to be done.

As I pointed out not too long ago in User Fees and Costs, my view of user fees is that they should pay for the costs tied to the use on which they are imposed, including costs that arise from the impact of the use on related activities. Thus, as I pointed out, it makes sense to use tolls from use of a particular highway not only to maintain that highway, but also to alleviate the costs incurred by neighboring towns on account of the traffic using the toll highway. It does not make sense, I pointed out, to set the user fee high enough so that the revenue can also be used for some unrelated function in some distant place. As I explained in When User Fees Exceed Costs: What to Do?," user fees ought not be diverted to unrelated disconnected activities." Many people in Allegheny county aren't happy, and they're even singing about the drink tax. One restaurant owner wants to make the continuation of the tax contingent on the outcome of a boxing match he proposes between himself and the principal advocate of the tax. Who said tax isn't exciting?

So the question in the context of the drink tax is this: How do people buying alcoholic beverages in Allegheny County impose on the Port Authority Transit system costs that are more than those imposed on the system by people not buying drinks? And why should the financial relief of the Port Transit Authority be limited to people drinking alcoholic beverages? What about people imbibing soft drinks and fruit juices? What about people eating junk food? Or smoking? Or going to the movies? My guess is that it is easier to "target" drinkers of alcoholic beverages for a tax than it is to "target" movie-goers or people frequenting fast food outlets whose fare contributes to bad health.

The net take from the drink tax is less than its gross revenue, because the county must hire people to administer the tax, collect the tax, and provide legal guidance with respect to imposition of the tax. No tax exists that can be administered without cost. Proprietors of establishments that sell alcoholic drinks have been left with little time to reprogram their cash registers. But their attempt to obtain a stay of enforcement was denied.

If there is any logic, the tax should be levied on those using the system, and if their economic position precludes imposing enough user fee (in the form of fares), then it could be argued that a fee should be imposed on the system's competition, namely, the private vehicle. However, most users of private vehicles who are in town during the evening use their vehicles because they find public transit to be inconvenient, sometimes unsafe, and inefficient. It's not just drinkers who drive into town. So, too, do movie-goers, for example. A sufficiently high user fee on private vehicles would bring more riders, and thus more revenue, to public transit. However, would it bring enough of a ridership increase so that the public transit could add more trips to the schedule, shorten the length of trips, or take people from where they are to where they want to be?

Logic also suggests that it would make sense to encourage drinkers to use public transit rather than drive because it would keep them from driving while impaired. Would a decrease in the public transit fee increase ridership? Perhaps. Would it be enough to offset the revenue loss arising from the decreased fare? Only if a substantial number of new riders are added.

The drink tax may have the effect of discouraging people from going into town to have a drink. If, somehow, an exception is carved out for establishments not in center city, as the Governor prefers, even more people would remain closer to home. The drink tax would not bring in the anticipated revenue. What then? Increase the drink tax and discourage still more people to stay home?

Whether the drink tax, and its related car rental user fee, will solve the Port Transit Authority's financial woes is questionable. According to this analysis, the problems of efficiencies, or lack thereof, account for a significant portion of the annual operating deficit.

But who ends up paying? According to this story, the higher drink prices means less change when payment is made, causing reductions in tips. So bartenders and wait staff are paying for the transit system.

Ideally, public transit should be priced at actual, corruption-free, efficient cost. If the resulting fares are too high for people in lower income brackets, then the question of subsidizing them should be addressed directly. To then conclude that people drinking alcoholic beverages, or people drinking downtown, should foot the bill through a drink tax so that the fare increases can be avoided defies logic. But who ever promised that tax and user fee policy would be logical? And if it had been so promised, who would believe?

In remarks at a press conference covered by BNA, Senator Charles Grassley described the provision in H.R. 2419 codifying an economic substance doctrine to be a "loophole-closer" and not a "tax-raiser." The issue arose because the President, in his State of the Union address, warned that he would veto any bill sent to him that "raises taxes." When describing the proposal, counsel to the Senate Finance Committee explained, "This isn't raising revenue." The Administration opposes the codification of the economic substance doctrine on the grounds it is unnecessary and should be left to the courts to refine.

The nation's addiction to sound bites, and dislike of thorough analysis, gives us this most recent bickering about the use of language. I would call it silly but for the fact it involves a serious issue.

When a provision has the effect of making people pay taxes that they should have been paying but were not paying, that provision raises revenue. It increases the amount of money flowing into the Treasury. If it didn't have that effect, why waste time enacting it? Clearly the provision is expected to raise revenue.

Similarly, a provision that has the effect of making people pay taxes that they should have been paying but were not paying does not increase the taxes paid by taxpayers who are complying with the tax law. In this respect, the provision could be described as "not raising tax rates" or "not a tax-rate-raiser." Does the Administration truly believe that the provision raises taxes and thus should be the object of a veto, as Senator Grassley seems to think the Administration believes?

Why is it so necessary to find and use two-word phrases that are inaccurate? Do politicians think Americans cannot handle a sentence that tells them that "this provision does not increase tax bills for taxpayers who comply, but collects taxes not being paid by people who owe them."? Has the typical human brain become incapable of concentrating for more than 2 seconds or unable to process 22-word sentences?

Fortunately, "loophole-closer" is an accurate label for the provision. Unfortunately, too few people understand what a genuine loophole is. So we're back to a longer description: "this provision closes a loophole, which means tax bills don't increase for taxpayers who comply, but taxes that should be collected but aren't being collected will be collected."

Considering how crucial tax policy is to the economic survival of the nation, is it asking too much for citizens to pay attention for more than two seconds, for politicians to wean themselves from sound-bite mentality, and for educators to insist that students learn how to handle the reading and writing of compound sentences?

Philadelphia has a by-the-drink tax on alcoholic beverages served in bars and restaurants. Allegheny County, which includes Pittsburgh, has just enacted a similar tax. According to Rendell Tweaks Remarks About City's Drink Tax, Pennsylvania's Governor Ed Rendell tried to comfort owners of small pubs and bars by pointing out the Philadelphia experience with the tax. Essentially, he explained that Philadelphia selectively enforces the tax, focusing on the larger establishments. His comments creates such a fuss that he had to clarify his remarks, claiming that enforcement is not selective but simply "concentrated" on the large establishments. A spokesperson for Philadelphia's mayor noted that “It makes sense that you would obviously go after those individuals, those entities that would have the highest return for the city” but that the city does not "go easier" on smaller venues.

The Governor also explained that he wished there was no uniformity clause in the Commonwealth's constitution because he would like to see the tax apply only to center city bars and restaurants. Goodness, I would enjoy a chance to debate this proposition with fellow Villanova Law grad Ed Rendell. It makes no sense to me, but perhaps he has some insight that would cause me to say, "Aha." As I see it, the justification for a tax on alcoholic drinks is the costs imposed on society by the drinking of alcohol in public establishments. On a per-drink basis, how does a person buying two drinks at a center city bar impose any greater cost on society than does a person buying two drinks at a neighborhood tavern? What justifies taxing one and not the other? To me, the notion of taxing the center city bars and not neighborhood bars is a matter of reaching for low-hanging tax fruit. Layered onto my analysis is a question about the large establishment in some other area of the city, for example, in the sports complex or in the greater Northeast, that generates as much, if not more, revenue than do many of the center city watering holes.

Unless someone can demonstrate that a person taking a drink in center city imposes a greater cost on society than by taking a drink elsewhere, I must conclude that a drink is a drink, a drink tax is a drink tax, and the drink tax, if it exists, ought to apply to all alcoholic drinks no matter where served. Otherwise, the very thing the uniformity clause is intended to protect would be destroyed. That would be unwise.

Several of the criticisms that I and others levelled against the original tax rebate component of the proposed economic stimulus plan, as noted in Who Should Get a Tax Rebate?, have been addressed in the deal that was struck late last week by members of Congress and the Bush administration. According to various reports, including this Philadelphia Inquirer story. Single taxpayers with adjusted gross incomes above $75,000 and married taxpayers with adjusted gross incomes above $150,000 would receive smaller rebates, with the amount of the rebate decreasing by $50 for every $1,000 the taxpayer's adjusted gross income exceeds the limit. Not only would the very wealthy be excluded, but also most taxpayers in what could be called the upper middle class. As I pointed out in Who Should Get a Tax Rebate?, "The wealthy aren't likely to rush to the store because a $400 or $800 check has arrived." People who do not pay income taxes because their incomes are too low, their deductions sufficient to offset income, or their credits sufficient to offset tax liability before credits will be eligible to receive rebates. As I also pointed out, "But for the working poor and the retired poor, an $800 check is far more than petty cash."

The proponents of the plan hope that it passes in time so that the Treasury can begin issuing rebate checks in May and that they will reach people by July. News flash: If the economy is spiraling into a recession as many claim and as appears to be the case, July is too late. Is there a faster way? Could the rebate be taken as a reduction in 2007 tax liability on 2008 returns? That would be a fine idea except that the forms have already been designed, printed, and distributed. Could the rebates be sent electronically through direct deposit? That also would be a fine idea except that the IRS doesn't have the direct deposit information that would be necessary.

The provision in the proposed deal that would permit businesses to deduct one-half of the cost of newly purchased depreciable property is misplaced. Businesses make investments if the investment is required. No well-managed business will purchase equipment merely because its after-tax cost is a bit less than it otherwise would be. Businesses that need equipment won't make the purchases if they are cash poor. By the time consumers spend the rebates, which they may or may not do, businesses in need of cash and getting it from rebate-fueled purchases would not be making purchases until late in the year. News flash: That's way too late. Businesses could borrow money, but isn't most of the current problem a consequence of excessive use of credit, and mis-use of credit, by individuals and businesses?

The more I consider the delay factor, the more I think that Len Burman's idea, discussed in Something Better Than a Tax Rebate? makes more sense. Not only would it be more effective, it also would be more timely. It would make its impact the day it is enacted, rather than months later.

In a Wednesday editorial, Make the Tax Cuts Work, Len Burman suggests that a good way to stimulate the economy and head off or shorten a recession is to accelerate the termination of the 2001 federal income tax cuts. His rationale is that investors, facing higher capital gains taxes in 2009, would rush to sell their capital assets in 2008 in order to reduce their taxes. In turn, the sale proceeds would presumably be used to purchase what I call high-end assets, such as the yachts and fast cars mentioned by Burman. Burman points out that in 1986, when facing a capital gains tax increase in 1987, stock sales doubled. Burman also argues that more tax cuts, including rebates, are temporary and at best postpone a recession. He also notes, as I did on Wednesday in Who Should Get a Tax Rebate?, that 37% of households would not get a rebate, and they are the people most likely to spend a tax rebate. Burman also takes the position that the deficit is "the single largest threat to the economy's long-term health."

Burman's proposal interests me. It's not that he agrees with my take on the rebate proposal as it presently exists, and it's not that we agree about the long-term dangers posed by the federal deficit. His proposal interests me because it addresses an issue that needs to be addressed if my never-ending call for the elimination of special low tax rates for capital gains were to be adopted. An increase in the capital gains rate, even if not enough to make it equal the rate on ordinary income, will encourage capital asset sales. Is that a good thing? Burman thinks so. I'm tempted to agree. However, if there is a rush to sell stock, would that not depress the stock market to the extent sellers purchase high-end consumer goods rather than other stock? Perhaps. But the "seller's market" impact might be offset by the purchases made by those adding to their holdings because they see long-term potential in the stock of companies poised to benefit from the increases in sales of high-end consumer goods.

My hesitation is that I'm not convinced there is a net long-term benefit from increases in the sales of high-end consumer goods, or perhaps even from increases in the sales of consumer goods generally. Increases in the sales of consumer goods translates into more energy use, more demand for increasingly scarce resources, and more dollars flowing out to the countries producing these consumer goods. Aren't these included among the things causing the lack of confidence that has triggered the recent stock market slide? In the long-term, can the planet handle a never-ending, sometimes slowed upward spiral in the consumption of its resources? At some point, the combination of the federal deficit, the trade deficit, the ensuing decline in the value of the dollar, the declining supply of oil, clean fresh water, copper, and similar resources, the growing world population, and the widening gap between haves and have-nots and the concomitant disappearance of the middle is going to cause something in the highly tensed global and national economic systems to snap. When something snaps, there's no easy prediction as to where the pieces land or what else gets broken. The scary question is whether something already has snapped and we're just now beginning to realize it.

The idea of boosting the economy through a tax rebate has once again surfaced as politicians in Washington seek to find the appropriate band-aid to deal with the financial distress that manifests itself ever more intensely as the Congress cannot bring itself to perform the required surgery. The surprise isn't that things are going badly, it's that it took as long as it did for people to notice.

Assuming that a tax rebate would work, and I'm not convinced it will, it makes sense to ask who should get the rebate. It's not my question. The issue has already sparked debate, somewhat along partisan lines, in a Congress that promises to act quickly. Until and unless this question is resolved in a manner that gathers sufficient votes along with no executive branch opposition, there won't be a tax rebate.

If the theory of the rebate is to give individuals and businesses money to spend, ought not the money go to those who are most likely to spend it? Restricting the rebate to those who have paid income taxes would preclude a substantial portion of the population, and an even larger proportion of everyday consumers, from having additional money to spend. Rebates received by the wealthy are unlikely to alter their spending habits. The wealthy aren't likely to rush to the store because a $400 or $800 check has arrived. But for the working poor and the retired poor, an $800 check is far more than petty cash. It's not as though the working poor don't pay taxes. They might not pay income taxes but they pay social security taxes. Those taxes take a higher percentage of their income than they take from the incomes of the wealthy, in part because of the earnings cap and in part because the income of the wealthy has a much higher proportion that comes from income not subject to social security taxes.

As for businesses, will tax breaks for the international giants make a difference in what they spend? The businesses most in need of help are the ones barely breaking even, or perhaps losing money, possibly because their customers aren't spending. Yet of what use is another income tax deduction or an increased deduction to a business not owing income taxes because its taxable income is zero or negative? The taxes that choke businesses are state and local levies, often imposed on businesses getting little benefit from the government assessing the tax. Perhaps turning the state and local income tax deduction into a credit would help these enterprises, but it might not make sense to provide such relief to larger businesses.

It's all in the details, of course, and fiddling with the details is inconsistent with the expressed intention of doing something quickly. One difficulty with this sort of government intervention is that it's much like chasing a child on a sled after the child and sled start going down the hill. How likely is the parent, guardian, or baby-sitter to reach the sled and child before the sled and child hit the tree? Hopefully that image is better than the one about barn doors and horses.

The issuance of tax rebates will enlarge the federal deficit. At some point, that deficit will haunt the economy in ways that no tax rebate, even an abolition of taxes, will cure. So long as consumption exceeds production, so long as more wealth, particularly dollars, flow out of the country than flow into the country, so long as certain items remain in short supply and project to remain that way, the nation's economic and financial health will worsen. Tax rebates will not increase the supply of clean water, oil, natural gas, or any of the other resources mismatched to the demands of the world population. In some ways, it makes the question about who should get a tax rebate seem trivial, almost like fighting over a deck chair on a sinking ship.

During the past week, the Pennsylvania legislature has been very active in the world of taxation. On Thursday, as reported in this Philadelphia Inquirer story, the state House passed a proposed constitutional amendment that would permit the state to restrict real property taxes to businesses and commercial enterprises while sparing homeowners any obligation to pay. Presently, the state constitution contains a provision permitting a 50 percent reduction in real property taxes imposed on homeowners.

The proposed constitution amendment cannot become law until it passes the Senate and is signed by the Governor. It then faces a second legislative enactment process and must be approved by the voters in a referendum. In other words, it would not take effect for at least a few years.

The House also enacted a bill that would reduce taxes for low-income workers and cut the state personal income tax. This provision cannot become law until it passes the Senate and is signed by the Governor, but a referendum is not required. The bill is what remains of a much larger proposal that would have cut a variety of other taxes. According to this earlier Philadelphia Inquirer story, at one point the legislation included reductions in, or elimination, of, the gross receipts tax on sales of cell phones, the inheritance tax, the corporate net income tax, and apparently an array of other taxes. Eventually, the realization that there would be little, if any, tax revenue left for states and localities to collect caused the legislature to disregard the proposed cuts other than the personal income tax reduction. My guess is that the parade of amendments served its purpose, namely, permitting sponsors to tell their constituents that they tried to eliminate taxation but were unable to overcome those who prefer to impose taxes.

So what would happen if somehow the legislature did repeal most, if not all, of the state's taxes? How would people react? Would there be dancing in the streets? Or would that stop once someone stepped into a pothole? When would the reality hit home?

The National Surface Transportation Policy and Revenue Study Commission (NSTPRSC) has recommended an increase in the federal gasoline tax. As reported by CNN, the proposal is for an increase that could be as much as 40 cents, phased in over a five-year period. The revenues from the tax would be dedicated to repairing highways and bridges, and to making improvements that would decrease traffic congestion. Thereafter, the tax would be adjusted for inflation. Some of the revenue would be used for reconstruction and expansion of railroads.

The members of the Commission, whose report has not yet been released, are divided on this question. Several plan to issue dissents, because they prefer raising revenue through tolls and selling public assets to private investors.

According to the CNN story, the recommendation of the NSTPRSC dovetails with those made by the U.S. Chamber of Commerce, the National Association of Manufacturers, some states, and some other business organizations. All of these groups see a need to fix the nation's transportation infrastructure. These aren't the only ones who advocate increasing the gasoline tax. Calls for hikes of up to $1 per gallon have been made, for example, by Business Week, and by Greg Mankiw, professor of economics at Harvard University.

It's not difficult to find people who oppose the idea of raising the federal gasoline tax. At Fred08 the position is that there already is sufficient money and the solution is to give decision making on the issue to the people who use the roads, rather than imposing federal taxes and federal mandates. How comfortable are we leaving specifications for bridge gusset plates to bridge users? Ron Paul has , to use his words, blasted the recommended increase. In his view, the cost of gasoline should be adjusted to fit what people are able to pay rather than the economic burdens gasoline use imposes on society and the economy. The folks at Tank the Gas Tax devote their efforts to repealing the tax, so it's safe to assume they oppose any increase. How they would fund highways isn't clear.

Nor is it difficult to learn where I stand on the issue. After the disaster in Minneapolis, I expressed surprise at the reaction by the President and the Transporation Secretary to proposals to increase the gasoline tax to fund infrastructure repair, in Funding the Infrastructure: When Free Isn't Free. I have repeatedly objected to the idea of reducing gasoline taxes to accommodate rising prices, as explained repeatedly in these posts: September 2005, March 2005, another one from March 2005, May 2004, and March 2004. The post, Raise, Don't Lower, Fuel Taxesalmost says it all.

It is human nature to want things for free, to seek preferential treatment, to get someone else to do one's work, to live on the backs of others. It takes intelligence, wisdom, and a sense of justice to understand that there is no such thing as a freeway, even if a select few find a way to make it free for themselves. Someone needs to pay. The mentality that brings the "I get to go straight out of the left turn lane because I am special" approach to driving surely dovetails with the "I get to use the highways without paying for them" mindset. The gasoline tax hasn't been increased for 15 years. The costs of repairing highways has increased during the same time period. That alone should close the door to the notion that the federal gasoline tax should be locked in forever at its current level.

Realists point out that increasing the federal gasoline tax is a politically difficult thing to do. For example, the Washington Post quotes Leon Panetta as explaining, "I don't think there's any question that as a matter of policy it makes a lot of sense to move in that direction, but politically it's a very high hurdle to get over." Of course it is. But if the nation doesn't clear that hurdle, the gasoline tax debate might become trivial in comparison to what awaits us if this situation isn't fixed, and fixed quickly.

Last week, in User Fees and Costs, I explained why I think user fees, such as tolls, should be used for construction, maintenance, and repair of the item for which the fee is charged, together with the expense of offsetting the impact of the item on adjacent areas and activities. I made these comments in connection with a proposal by New Jersey Governor Corzine to raise tolls on New Jersey toll roads rather steeply in order to pay not only for transportation throughout the state but also to pay down the debt incurred by the state on account of consistent budget deficits.

Now that there has been some time to study Corzine's proposal in more detail, plus the release of more information, two Philadelphia Inquirer writers have penned a story explaining that, if implemented, the toll hikes would generate revenues exceeding what is required to maintain and repair the state's highways and to pay off the general debt. It appears that by 2022, the proposed annual toll revenues would almost double what is needed to operate the state's highways and pay off the debt.

The governor's response? The extra revenue could be applied to reduction of the tolls. My inquiry? Then why raise the tolls by such a substantial amount? I'm wondering if the "reduction" would come in the form of an income tax rebate to state residents, leaving toll-paying nonresidents out in the cold. Why do I think this? Corzine stated, "If it [the increased tolls] does produce profit, the benefit will be for the citizens of New Jersey." I wonder if a plan with such an effect could withstand constitutional challenge.

The governor's second response? Spend the extra revenue on transportation. My inquiry? What transportation? Existing roads that are not toll roads and nowhere near the toll roads? Public transportation? Assistance to low-income families to purchase energy efficient vehicles? I wonder how well thought out this plan is. In other words, is the plan a plan or simply the expression of an idea that has not been thoroughly analyzed? I'm not the only one thinking this way. One member of the state Assembly commented, "The idea of raising more money than you actually need just tells me that this entire enterprise has not been thought out correctly."

It might be acceptable, in a truly free market, for private enterprise to cost its goods and services at what the market will bear. But when a government imposes a user fee, it ought to charge no more than is necessary to provide what the user fee purchases. Governments ought not be in the business of making profits. And, as I pointed out in last week's User Fees and Costs, user fees ought not be diverted to unrelated disconnected activities. Corzine's proposal appears to violate both of these principles, perhaps unwittingly, perhaps deliberately. Until yet more information is disclosed, and some is promised for release this week, it's too soon to decide if the excess is planned or unexpected.

A reader sent along a comment and two questions about my How Simple and Fair is Fair? posting on the FairTax, and asked me to explain. I welcome the opportunity to elaborate.

First, the reader commented:

Yes, we will all pay taxes whether it is withheld from our paychecks or paid at the register; but the big difference is that under the Fair Tax plan we have the CHOICE to NOT make the purchase or save our money and NOT pay taxes. Under our current tax system I do not have a choice.

In response, I analyzed the difference between theoretical choice and practical needs:

In theory, a person can choose not to spend their money and thus avoid the proposed federal sales/consumption tax. But that person must eat, needs a place to live, must have transportation of some sort, needs health care, requires clothing, and has other needs that preclude the option of not making purchases. The proposed prebate does not cover sufficient purchases for people living in most metropolitan areas. A similar argument can be made of the income tax. A person can avoid the income tax by not having income. That person wouldn't last long, either.

Second, the reader asked

Why do the critics keep saying the rich don't spend their money? Does the good fairy provide them expensive homes, cars and vacations?

In response, I provided an example of why critics of the FairTax think it lets the wealthy off the hook relative to other taxpayers:

The rich spend proportionately far less of their money than do the poor and middle-class. For example, a person earning $100,000 probably spends all of it. Perhaps they save a little and spend $80,000. For ease of computation I'll use 25% as the proposed federal sales tax rate. The person just described would pay $20,000 or $25,000 depending on if they saved $20,000 of the $100,000. Let's say the prebate gives the person $6,000 back. So the person incurs a tax of $19,000 or $14,000. That's an effective rate of 14% or 19%. Contrast the rich person who has $1,000,000 of income. That person spends, say, $400,000 (which buys a lot, quite a lot). The tax? $100,000, or $94,000 after prebate. Effective rate on their income? 9.4%. Now let's add in the ease with which the rich person can spend some of the $400,000 abroad, say on a vehicle or house they keep in Portugal. Good luck collecting the tax. Short answer: there are all sorts of studies showing that as incomes rise, the proportion that is spent decreases. The sales tax is a regressive tax. Add in the prebate and the tax gets the classic bubble, namely, highest effective marginal rate on the middle incomes.

The comment and questions focus attention on issues that don't get sufficient treatment in campaign soundbites. When people have a chance to think analytically about the FairTax, and look behind the slogans and superficial summaries, they can get a better picture of what the FairTax does, and base their decision to support or reject it on facts and analysis rather than platitudes.

New Jersey Governor Corzine has unveiled his budget plan, and among his proposals is a recommendation that tolls on New Jersey's toll roads be increased. Under the plan, tolls would be increased in 2010, 2014, 2018, and 2022, by as much as 50 percent. There also would be increases linked to inflation every four years until 2083. Some of the toll hikes would pay for improvements and repairs to New Jersey roads, and part of the toll revenue increase would be used to reduce the state's debt. The plan also includes the formation of a corporation that would borrow against the anticipated increases and pay New Jersey for the right to manage the toll roads and collect the revenue. The corporation's profits would be used to fund transportation projects. Officials consider toll increases to be realistic because many tolls are paid by nonresidents of the state who are passing through on their way to some other place. Supporters of the plan think that motorists using E-Z-Pass won't object as much as they otherwise would because the don't "see the actual fees" being paid.

According to this Courier News story, reaction has been very negative. Republicans call the proposed toll increases "an additional tax." Another claimed that the proposal was "a solution only my teenagers would have come up with." Yet another pointed out that people who rely on the toll roads for daily travel and commuting would bear an unfair portion of the burden.

As an advocate of user fees, I support the notion that toll roads should pay for themselves. The toll should be based on the cost of building, expanding, improving, repairing, maintaining, policing, and monitoring the road. It isn't difficult for a cost accountant to determine how much it costs to operate the New Jersey Turnpike, the Garden State Parkway, or any other toll road. Tolls should be increased as costs increase, and though it is preferable to recalculate the cost each year, it might be easier to use some sort of inflation index and do the cost recalculation every four or five years.

What many see as objectionable is the use of toll revenues from a toll road to fund other government projects and functions. I don't think there is a simple yes or no response to the question of whether this is fair, appropriate, or sensible. The analysis I support is one that looks at the impact of the toll road and its use on surrounding residents, neighborhoods, and infrastructure. Traffic volume surrounding a toll road interchange is higher than it otherwise would be, and that generates additional costs for the local government. It makes sense to include in the toll an amount that offsets the cost of widening adjacent highways, installing traffic signals, increasing the size of the local police force, adding resources to local emergency service units, and similar expenses of having a toll road in one's backyard. I understand the argument that because the locality benefits economically from the existence of the toll road and its interchange that it ought not be subsidized by the toll road. It is unclear, though, whether the toll road is a net benefit or disadvantage. If it were such a wonderful thing, why are new roads so vehemently opposed by so many towns and civic organizations?

Using toll revenue to maintain and repair roads and infrastructure far from the toll road is more difficult to justify. Other than relying on arguments such as the maintenance of a high quality state-wide road network that would attract more tourists and business ventures, proponents of siphoning toll revenue to distant areas have a, sorry, tough road to hoe. A better approach would be to impose tolls on heavily used roads in those distant areas.

People do not like toll roads, and people do not like toll increases. Unfortunately, there is no such thing as a freeway or a costless highway. If the motorist does not pay, someone else is paying. The argument that it is unfair to use toll revenue to build schools, or to pay the debt incurred in building schools, in some other county can be turned very easily into one that points out the unfairness of using general tax revenue paid by many to support the cost of a road used by fewer than many.

My guess is that the tolls on New Jersey's toll roads need to be increased to offset increased costs of repair, maintenance, and expansion of those roads. To that extent, Corzine's plan is defensible. To figure out how to pay the debt saddling New Jersey, ought not the legislature figure out how that debt was incurred? What expenditures in previous years required the increase in debt? What needs to be increased are the taxes that should have been increased in the earlier years when those expenditures were made. Perhaps some of those expenditures were for underfunded or unfunded costs of the toll roads. That, however, is unlikely. It is difficult, therefore, to justify charging motorists on the toll roads for programs that have nothing to do with the toll roads. The fact that those motorists might include nonresidents with no voice in the matter, or that drivers somewhat clueless about what is being charged to their credit cards through E-Z-Pass are not sufficient reasons to hike the tolls beyond what the toll roads and the adjacent infrastructure requires.

Advocates of the Fair Tax are treating Mike Huckabee's victory in the Iowa Republican caucus as a triumph for the Fair Tax proposal. According to the Fair Tax web site, Huckabee's victory indicates that the Fair Tax proposal is getting ready to sweep into the next set of primaries as a prominent factor in the 2008 election. It is not unrealistic to suppose that during the next few months, the Fair Tax proposal will get even more attention, though it is competing with a variety of other hot-button issues. Keeping public attention on the details of a tax issue is challenging, but important.

What is the Fair Tax?

The Fair Tax website lays out the basics. Under the Fair Tax, all federal personal and corporate income taxes would be repealed. So, too, would be the gift tax, the estate tax, the alternative minimum tax, social security taxes, medicare taxes, and self-employment taxes. Surely that will get people's attention. These federal taxes are replaced with a federal retail sales tax administered by state sales tax officials in state revenue departments. Each household would receive a check covering the estimated tax on expenditures up to the household's annual consumption allowance. This so-called prebate is intended to eliminate the proposed sales tax on expenditures up to the poverty level.

Proponents of the Fair Tax claim that one of its advantages is the elimination of the IRS. They assert that it would be a very simple system. They also claim that it would enable workers to keep their entire paycheck, retirees to keep their entire pension, American products to compete fairly, Social Security and Medicare funds to be maintained, along with some other alleged benefits.

Criticism of the Fair Tax is easy to find. One can read analyses by Bruce Bartlett, Linda Beale, The New York Times, and others. There have been so many criticisms that the Fair Tax advocates have dedicated a portion of their web site for rebuttals of the criticisms.

For the moment, I am going to focus on five concerns. The Fair Tax is not as simple as alleged. The administration of the Fair Tax will not be uniform. People will not keep their entire paychecks and pensions. To provide the promised funding, the Fair Tax will raise overall federal tax revenues. The Fair Tax isn't necessarily fair.

Though advocates of the Fair Tax assert it is simple and transparent, consider the proposed definition of a household and who is considered to be a member:

The term “qualified family” means one or more family members sharing a common residence. A qualified family consists of all family members sharing the common residence. Family members include an individual and his or her spouse, children and grandchildren, parents, and grandparents. Children/students living away from home are considered family members if they are registered as a student for at least five months out of the year and receive at least 50 percent of their support from the family unit. Children of divorced parents are considered to be family members of the custodial parent. Incarcerated individuals are not eligible to be members of a qualified family.
In order for a person to be counted as a member of the family for purposes of determining the size of the qualified family, a person must have a valid Social Security number and be a lawful resident of the United States. Unlike the Earned Income Tax Credit, the application/registration form that families who choose to receive the prebate must file is simple and straightforward. Those choosing not to register will not receive a prebate. The registration form requires only the following information:
1. The name of each family member who shares the residence;
2. the Social Security number of each family member;
3. the family member to whom the monthly prebate check should be paid;
4. a sworn statement that all listed family members are lawful residents, that all family members sharing the common residence are listed, and that no listed family members are incarcerated;
5. the address of the shared residence; and
6. the signature of all family members 21 years of age and older.

Each of the terms in this description need to be defined. What is a common residence? Who is the spouse? Is a person a spouse if he or she abandons the residence during the year? Who qualifies as a student? How is support calculated? What constitutes incarceration? What happens if someone is not a member of the household for some portion of the year due to illness? How are kidnaped children counted? In other words, all of the complexities that afflict sections 151 and 152 of the current Internal Revenue Code would still be with us. There are special rules for hobby losses that resemble section 183, special rules for gaming activities, an exemption for intermediate sales, provisions affecting purchases by governments, rules for mixed-use property, not-for-profit organizations, and financial intermediation services. Each of these provisions includes all sorts of terms that need to be defined. For example, the need for complex definitions dealing with non-profit organizations will be no less under the Fair Tax than under the current income tax. Bottom line? The Fair Tax is nowhere near as simple as advertised. That it is presumably less complicated than the current income tax is not a noteworthy achievement. Everything is less complicated that the current income tax.

The proposed administration of the Fair Tax will be a nightmare. Advocates of the Fair Tax, intent on eliminating the IRS, propose that each state administer the program through their revenue departments. What about states without a sales tax? Will they be compelled to create special departments to handle their Fair Tax duties? Where do they find people to administer the tax? Hire them away from other states? Outsource the work to other nations? Have the advocates of the Fair Tax ever taken a close look at the administration of state sales (and use) taxes? Do they think this is an improvement over IRS administration? What if one state defines a non-profit organization differently than does another? What if one state deals with kidnaped children differently than another? A tax that is not administered uniformly is not fair.

The assertion that workers will keep their entire paychecks and retirees their entire pensions is a semantic tap dance. When workers and retirees pay the proposed federal sales tax, they will be using part of their paychecks and pensions. Whether tax is withheld, or paid out of pocket, when the dust settles, the person does not have in his or her hand all of the paycheck or pension. A tax is a tax. Trying to fool people into thinking that they will receive a paycheck and not pay any taxes because there is no withholding is the style of snake oil sales reps. Playing on people's misunderstandings is manipulative. And wrong.

Advocates of the Fair Tax claim that enough revenue will be raised to fund Social Security, Medicare, and other federal programs. If that's to be the case, then the Fair Tax must raise more revenue than do current federal taxes, because the current system is causing the nation to incur deficits. In other words, the Fair Tax would increase federal revenue. That means somebody's federal tax payments will increase. Or perhaps a bunch of somebodies will incur tax hikes. Why not advertise this fact? Why lure people into thinking that the Fair Tax will reduce everyone's taxes and yet somehow increase total tax revenue? Something is out of whack.

The Fair Tax isn't all that fair. The impact on the people with incomes at or below the poverty line would be minimal, because the prebate would offset the taxes they pay. In contrast, because the wealthy spend relatively little of their income, their tax burden would be far less than what it would be if it applied to their entire income. So who pays the bill? The middle class, which spends most of its income and which therefore would pay a higher percentage of its income in tax than would the poor or the rich. Somehow, it seems to me that the Fair Tax is a refined version of what has been done with the income tax, namely, absolve the wealthy, particularly through the special low capital gains and dividends rates, and the poor, through the earned income tax credit, and let the middle class pay. Of course, once the middle class is taxed out of existence, what will the wealthy do with the hordes of poor people, particularly when they are frustrated and feel hopeless?

Finding the actual language of the proposal on the web site isn't easy. In fact, one must go to the Library of Congress Thomas website and search for the bill language. How many people can do that? Why not put the text of the bill on the Fair Tax web site? Perhaps because once people see it, they will question some of the assertions.

A quote from the current standard bearer for the Fair Tax, presidential candidate Mike Huckabee, reveals quite a lot about his own understanding of the Fair Tax: "Instead, we will have the Fair Tax, a simple tax based on wealth.” Excuse me, Mr. Huckabee, a tax based on wealth would not be computed by reference to consumption.

Chances of the Fair Tax becoming law are between nil and none. If those who seek the unquestionably necessary change in the federal tax system could direct their energies to support of a plan that did not require complex transition, did not shift more tax burden onto the middle class, eliminated computations based on joint and household concepts, and tied ability to pay with incidence of taxation reflecting benefits provided by society, federal tax reform's chances might slip beyond none into the realm of slim and possible. I am confident that if Americans avoid the sound bites and think carefully about the Fair Tax plan, they will see whose ox is going to be gored.

Almost four years ago, in A Tax Trifecta: Gas, Enforcement, and Special Interests, I commented on a Philadelphia City Council plan to reduce the local tax burden of an insurance company. The tax relief followed the company's announcement that without the tax reduction it would take itself and its 1,000 jobs to some other place. I asked:

So what happens if this [plan is] approved? Are new jobs created? No. Do city tax revenues increase? No. Do city tax revenues decrease? Yes. How does the city make up for the decrease? It could reduce services, increase taxes on other taxpayers, or borrow money. The first choice drives more individual taxpayers (and small businesses) out of the city or out of business. The second choice does the same thing. The third choice requires further cuts to finance the interest payments, and poses a long-term threat to the city's financial stability. It wasn't that long ago that New York City almost defaulted on its debt.

It turns out that the first alternative, reducing services, does more than drive individual taxpayers and small businesses out of the city or out of business. It can kill people.

According to Philadelphia's City Controller, the city's ambulances are so slow in responding to emergency calls that there is only a 60 percent chance that they will arrive in time to save a person's life. In this Philadelphia Daily News report, Alan Butkovitz, the City Controller, explained that at least 40 percent of ambulance runs do not arrive within the nine minute period recommended by EMS experts as the standard, that the city has insufficient ambulances, insufficient paramedics, increasing calls for assistance, and a deteriorating communications and dispatch system. The chief of the Fire Department, which runs emergency services, admits that it is a struggle to keep up with public demand for help. The problems were anticipated by union members and by journalists, but little has been done to repair the system. Why?

The reason simply is lack of resources. The City Controller suggests that scheduled business tax cuts should be delayed. The incoming Mayor ran in part on a pledge to accelerate those cuts. What will happen? Will tax cuts be maintained? Accelerated? Postponed? Will people begin to die?

A few days after Butkovitz issued his statement, a woman died after waiting for more than an hour after calling 911 for an ambulance. According to this Philadelphia Daily News story, the ambulance that eventually showed up then broke down. It was based in south Philadelphia, and was responding to a call from Northeast Philadelphia. Not what one would call a neighborhood service. Forty minutes later another ambulance arrived but it was too late. I'm sure the City Controller is far from pleased that his prediction has come true. People are dying for want of sufficient emergency services.

In my earlier commentary on the disadvantages of tax breaks targeted for specific, usually large, business entities, I wrote "The city is in a spiral. A revenue death spiral." Little did I know that my figurative use of language would turn out to be literal. People are dying. The politicians should be more than embarrassed, and should do more than express their apologies. As I wrote almost four years ago,

How can it get out of [the revenue death spiral]? What is needed is clear: it needs a tax base. It needs jobs. It needs businesses willing to set up shop in the city and it needs people willing to live in the city. It needs a reversal of the trends of the past 30 years.

Why do people not live in the city? Most say it is the high taxes and the low quantity and quality of services. I think it is more than that. I think it is a matter of people not wanting to live or work in a place that suffers from the inefficiencies and political games that afflict Philadelphia government. People don't "see" Philadelphia as a great place to live and work. Philadelphia needs to examine WHY people are reluctant to live and work within its boundaries. It needs to ask questions and it needs to be prepared for answers that it won't like and that will cause much angst. It needs to admit that the policies of the last 30 years, even if suspended for a mayoral term here or there, don't work and should be rejected. THAT will require a huge shift in the way things are done in Philadelphia.

I concluded that "My guess is that it will not happen." I wonder if the unfortunate death of a citizen left without timely assistance will change things. Or, will my initial prediction, that "It won't happen because people are walking away rather than staying to fight for change," turn out to be correct?

I wonder how many people are aware that the government, through the National Telecommunications and Information Administration, is giving away $40 coupons to help people purchase converter boxes for analog televisions that are incapable of picking up the over-the-air digital television signals that will take over broadcast television as of February 18. According to the CNN story, Government offers TV coupons, the coupon give-away began on Tuesday. Happy New Year?

According to the story, the NTIA will accept requests for two $40 coupons per household. Congress budgeted $1.5 billion to fund the coupons. After allowing for the cost of administering the program, there's enough money for 33.5 million coupons. Who gets them?

CNN reports that "The giveaway basically works under the honor system." Does that make you feel as wonderfully confident as I do that the people who need the converter boxes and who lack the resources to acquire one are the people who will get the coupons? Surely the con artists, the identity thieves, the credit card imposters, the greedy, and the troublemakers will sit this one out. What controls are in place to prevent the well-intentioned, confused, and yet affluent citizen who notices the giveaway from requesting, and getting, two coupons? Apparently, none.

The only distribution arrangement that appears to be in place is a reservation of 22 million coupons to anyone who asks for one or two. In theory, those who enacted and administer the program expect the requests to come from people who, despite having televisions connected to cable or satellite systems, also own analog televisions not connected to those systems, or who own only analog televisions without any cable or satellite connection. In practice, I predict that some coupons will be requested by people who understand that when the cable or satellite system goes down, over-the-air broadcast might be the only communication connection to the outside world, and that for analog televisions, the converter box will be necessary. Of the 33.5 coupons, 11.5 are set aside for people who do not have cable or satellite television. Even if people requesting coupons are asked about their television situation, what's to prevent them from saying what they need to say to get the coupons? And even if the honor system works perfectly, industry information suggests that there are 2.8 million more households without cable or satellite system connections than there are coupons reserved for those households.

The Government Accountability Office has criticized the NTIA, claiming that there is no comprehensive plan in place for the transition to digital television. Of the $1.5 billion set aside by Congress to finance the transition, only $5 million was earmarked for programs that explain to the public what is involved in the changeover. One survey indicates that slightly more than half of Americans do not know that the shift from analog to digital is underway. Now the government, through the FCC, is considering a regulation that will require broadcasters to donate air time to educate the public about the new technology.

It also is the government that mandated the shift from analog to digital. The change permits television stations to send a signal using much less of the broadcast spectrum than currently is used. Some of the space that is freed by the changeover will be allocated to emergency services and the rest will be auctioned off to wireless providers. That auction process also is stirring up controversy, the description of which I will leave to others.

When all is said and done, some of the taxes paid by taxpayers will be given to people regardless of genuine need, so that technological changes benefitting wireless providers can be implemented through government planning that is far from comprehensive or sensible. The government is implementing a system financed by taxpayers and designed to help not-so-poor wireless providers, with no controls to prevent $40 coupons from enriching those not in need, with no guarantees that the planned auctions will reimburse the taxpayers.

The only good news is that the coupon distribution is not tied to the tax system, was not enacted in the form of a tax credit, is not implemented by the IRS, and is not reflected on federal income tax returns. I wonder how that happened.

Any taxpayer who pays another person to do work should consider very carefully the payee's tax status. Is the person an employee? Or is the person an independent contractor? The determination carries significant consequences. Generally, if the payee is an employee, the payor is subject to tax withholding obligations, liability for the employer's portion of social security, possible qualified plan coverage and other fringe benefits, and other consequences. If the payee is an independent contractor, the payor might have an information reporting obligation and, in rare instances, a backup withholding responsibility, but generally far less onerous burdens than does an employee.

Although many situations are easy to diagnose, others are more challenging. That's not to say that the easily diagnosed situations are properly treated, but those instances usually sort themselves out once the IRS gets wind of the matter. On the other hand, when the relationship between the payor and the payee resembles both an employment situation and an independent contractor transaction, the chances of getting it wrong increase significantly.

The most recent situation to take center tax stage is the decision by FedEx Corporation to classify as independent contractors a group of drivers who own and maintain their own trucks while making deliveries for the company. According to this Business Week story, FedEx has reported on an SEC filing that the IRS "has tentatively concluded" that the drivers are employees. The IRS has focused on 2002, but reportedly is examining 2004 through 2006. It's a safe guess that other years also are, or will be, under the IRS microscope. A few days ago, the Massachusetts Attorney General revealed that FedEx had been fined for intentionally misclassifying 13 drivers as independent contractors who should have been classified as employees.

There's more at stake than simply income tax withholding and employer social security tax liability. The drivers in question, having been treated by FedEx as independent contractors, are not entitled to fringe benefits provided to employees. The dispute is not limited to tax issues. Some of the drivers have sued FedEx, raising employment law issues, and contending that they are employees who should receive expense reimbursements, lost wage coverage, and other fringe benefits. Because of litigation in California, FedEx is trying to restructure its arrangements with the drivers.

FedEx has announced it plans to challenge the IRS reclassification. It pins its hopes on the fact that in 1994, the IRS examined similar arrangements and agreed that the drivers were independent contractors. Because the details of that decision and the current one are not available, it is impossible to examine the many factors that enter into the employee classification determination to identify any possible differences between what was done in 1994 and what has been done more recently.

The announcement by the Massachusetts Attorney General sheds some light on the situation, though it is unclear if the same factors exist in all of the FedEx arrangements. Apparently, even though the drivers own and maintain their trucks, they are not permitted to deliver for other companies, must keep to schedules set by FedEx, and are performing the "core business" of FedEx. The work done by the drivers is not work "customarily" performed in an independent contractor manner. According to the Massachusetts Attorney General,

The Massachusetts Independent Contractor Law provides that an individual performing any service shall be considered to be an employee unless: (1) the individual is free from control and direction in connection with the performance of the service, both under his or her contract for the performance of service and in fact; and (2) the service is performed outside the usual course of the business of the employer; and, (3) the individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.

Relying on this statute, the Attorney General concluded that FedEx had "intentionally violated all three prongs of the Independent Contractor Law."

The issue of whether a person is an employee or independent contractor has always been on the front burner. From time to time, the heat gets turned up. Considering all that is at stake, it is not unrealistic to expect even more federal and state examinations of worker classifications. Unless a payor takes pains to structure the arrangement so that the majority of the independent contractor factors are satisfied, the safer course of action is to treat the person as an employee, making appropriate salary adjustments in order to generate the funds necessary to provide social security tax and other benefits.

I cannot avoid commenting that no sort of flat tax, fair tax, curved tax, or magic tax will make this issue go away. It might morph into a different set of responsibilities and standards, but so long as there are income and similar taxes, there always will be a need to identify the relationship between a payor and a payee transacting in the market place. Perhaps abandonment of the income tax in favor of a "transaction tax" would apply to all transactions regardless of the relationship, but that's not likely to happen and ought not be something on which the hope of solving the worker classification issue should be pinned.

Last Wednesday, the Tax Court issued its opinion in Weiss v. Comr., 129 T.C. No. 18 (2007). The case highlights the dangers of using sound bites, as Congress often does, to describe a tax law change or tax break.

People who know something about taxation, and even some who don't, are familiar with the provision that taxes qualified dividends at 15 percent. It's quite a simple concept, even if it is objectionable. Would it not make sense, if asked for the tax on $100 of qualified dividends, to respond, "$15"? Would it not make sense to conclude that if a person shifted investments from tax-exempt bonds to stocks generating qualified dividends of $24,376, that their federal income tax liability would increase by $3,656?

Well, surprise. Adding $24,376 of qualified dividends to gross income can increase a taxpayer's federal income tax liability by much more than $3,656. Much to the taxpayer's chagrin, this point was made clear to Tobias and Gertrude Weiss by the IRS and the Tax Court. What the Weisses did was to leave the qualified dividends out of gross income, and to add $3,656 to the tax otherwise computed. That omission, however, caused their alternative minimum taxable income, and their alternative minimum tax, to be understated. It also caused their regular taxable income to be understated, because adding the qualified dividends to gross income increases adjusted gross income, and thus increases the limitations that apply to various itemized deductions. It also increases the amount of social security benefits included in gross income, an issue in the Weiss case.

This phenomenon, that the net increase in federal income tax on account of an additional dollar of qualified dividends can exceed fifteen cents, is a characteristic of the famous "bubble." A similar outcome is generated when someone in the 15-percent marginal bracket who also receives social security benefits earns an additional dollar of gross income. The tax increase can be as much as 22.5 cents.

I wrote about this problem 16 years ago, in Getting Hamr'd: Highest Applicable Marginal Rates That Nail Unsuspecting Taxpayers, 53 Tax Notes 1423 (1991). It has been cited and quoted almost a dozen times. I doubt, though, that anyone in Congress has read it. That's too bad, because repairs could be made if members of Congress understood the wool that was pulled over their eyes and the eyes of the citizenry by the folks who shoved phaseouts into the tax law as a way of raising taxes without raising rates. The alternative minimum tax, patched yet again, is so flawed that it, too, needs adjustment. Either it should be repealed and the regular tax fixed, or the regular tax should be repealed and the alternative minimum tax, in some modified form, should take center stage. Having both a regular and alternative minimum tax is nothing more than a blood-soaked band-aid masking the need for deeper surgery.

Part of me sympathizes with the Weisses. They thought that they'd be paying tax at a rate of 15 percent on their qualified dividends. That's what the politicians told them, as they toured the country crowing about the wonderful thing they had done. Unfortunately, the Weisses incurred tax on their qualified dividends at an effective rate exceeding 15 percent.

Of course, part of me doesn't sympathize with the way the Weisses filled out their tax return. They ignored the instructions, notwithstanding a feeble argument that the form and the instructions were ambiguous. On that point, the answer simply is that qualified dividends are a subset of taxable dividends. So had they filled out the form properly, they would not have invested time and money pursuing their case.

On balance, though, all of us benefit from the approach taken by the Weisses. Though they lost, they brought this embarrassing problem with the tax law into the spotlight. Nothing I write today can change the result in the Weiss case. But perhaps it will contribute to tax law reform that will spare others the same rude shock.

The challenges faced by people on fixed incomes when local property taxes increase has been widely reported. For example, I explained one facet of the problem in Independence, Taxes, and Homeownership.

A variety of plans to alleviate the difficulties have been proposed, including one that I reviewed in Tax Relief Based on Age and Income? and a cluster of others I dissected in New Pennsylvania Tax "Reform" Doesn't Add Up.

Now another arrangement has begun to catch on with public officials in a few communities. There's quite a message in the headline for this story: New York Town Lets Senior Pay Off Property Tax Bill With Cheap Labor, which was reported on Christmas Day.

At first glance, the deal appears to be a no-brainer, win-win, great solution invention. People on fixed incomes in the town of Greenburgh, New York, trying to find ways to pay higher and higher real property taxes, can be hired by the town at $7 an hour. Their wages are used to pay a portion of their real property taxes. The town prefers that these people not sell their homes and leave, and these people want to stay. A town official suggests that it could use the services of retired physicians and accountants, lawyers, and people who can thins such as the work of receptionists. Greenburgh and its officials, however, are not the pioneers. Similar arrangements have been crafted in Concord, Massachusetts, Boulder County, Colorado, and in other locales.

At second glance, there are some disadvantages. In Boulder County, not every person who wants a job under the plan can get one. Unions worry that when the local government hires people on fixed incomes at low wage rates, the number of jobs available for union members decreases. Unless state legislatures make changes to their income tax laws, the wages earned by the people in the program are subject to state income tax, and thus the real property tax bill is not reduced by as much as the full amount of the wages. Unless the person has unused standard deduction or personal exemption deduction amounts, his or her federal income taxes also would increase.

At third glance, the arrangement appears to be a u-turn in the history of public fiscal policy. For centuries, people rendered unto their overlords and governments chiefly by providing unpaid labor. Yes, there have always been fees, customs, duties, and excises, but for most of those with little economic wealth, their "contributions" to whatever form of society existed were made in their capacity as serfs. As economies changed, and people were "untied" from the lands that they worked, a variety of taxes replaced the practice of providing services to the government through laboring on the fields or in the entourage of a nobleman. Feudal tenure, though leaving remnants of its practices and customs in modern law, faded away.

But now serfdom may be making a comeback. Imagine a society in which citizens do not pay taxes but answer government phones, teach in government schools, work in government hospitals, file papers in government offices, and perform other tasks in exchange for whatever the government provides its citizens. At what point would towns and counties try to restrain their serfs from going to another location? At what point would the serfs be prohibited from switching careers? Proponents of the arrangements, which admittedly have some positive values, probably would argue that things would never reach such a point. Without a doubt, they would claim that safeguards would remain in place. I wonder, though, what advice we would get if we could bring forward in time someone who benefitted from the practice of feudal tenure and who was told that guarantees were in place to ensure there would always be sufficient numbers of people to work the land owner's lands.

Despite the benefits of these arrangements, there is something unsettling when people on low or fixed incomes, many of them retired, must go out to the fields and offices, earning very low wages, in order to retain ownership of their homes. Will the future bring more "Will Work for Real Property Tax Relief" signs than "Will Work for Food" signs?

I suggest that those designing these arrangements, and those who inevitably will craft the second generation of such plans, go slowly and very carefully. Sometimes society doesn't realize it's riding a trend toward an undesired result until the journey is already underway.

According to this Daily Express political commentary, people in England face a 225 pound "stealth tax bill" for this Christmas. That's roughly US $450. The claim is that when a household adds up what it pays in value added tax on gifts, excise duties on alcohol, and fuel tax on petrol used in traveling to visit friends and relatives, it will discover that it has contributed roughly 225 pounds to a 5.65 billion tax haul by the government.

I'm in no position to dispute the calculations reported in the story. I have no basis to think that the VAT on a personal music player isn't 30 pounds, or that the excise on a bottle of champagne isn't 6 pounds. From what little I know, those figures seem to be correct. Of course, I have no idea how many bottles of champagne are purchased in England because of Christmas, let alone the number of personal music players purchased as gifts.

What bothers me is the notion that these are "stealth" taxes, in other words, taxes that are collected without anyone knowing that they are being collected. Perhaps there are people in England who do not realize a VAT is imposed on their purchases. When I've been in England, I've seen notices and packaging legends disclosing the fact that a particular percentage of the price is for VAT. The petrol pumps set forth the fuel tax. I don't know if the alcohol excise duty is prominently displayed, but I wasn't looking for it and wasn't focused on alcohol acquisition.

For me, a stealth tax exists if the seller of a product does not disclose that a portion of the price is being used to reimburse the seller for a tax paid by the seller, or if some component of an income tax computation is altered in a manner that changes effective rates without changing stated rates. The latter is a feature of the several phase-outs that infect the American Internal Revenue Code.

The terminology is not the invention of the political commentator. The Shadow Treasury Chief Secretary used the term in a criticism of the Labour government. The criticism implies in some sense that there were no VAT, fuel, or excise taxes until Gordon Brown stepped up to be prime minister. Can that really be the case?

The row over taxation, not unlike the soundbite battles to which we are treated here in the States, does generate some interesting assertions. Mike Denham, a former Treasury economist, is reported to have said: “While Santa Claus is coming down the chimney, Gordon Brown is sneaking through the back door and taking the presents from under the tree.” It definitely makes for a fine visual, and probably will inspire someone to make a cartoon for YouTube.

The same reasoning could be used to conclude that there is a stealth tax on Easter, on Valentine's Day, on every holiday, and even on people's birthdays and wedding anniversaries. I wonder how many people see it for what it is. Perhaps next year folks will ask Santa to bring a gift card entitling the bearer to some free tax law, economics, and public policy courses at one of England's many fine institutions of higher learning.

Two years ago, in Legislatures Take a Holiday From Taxes, I carped about the unwillingness and inability of legislators to schedule their tasks so that they do what they are elected to do, or to do what they are elected to do in a timely manner. I pointed out that the "ran out of time" excuse is unacceptable.

The first example that I presented in 2005 will trigger deja vu. I wrote:

First, the United States Congress whiffs on reform of the alternative minimum tax that would prevent 15 million more taxpayers, mostly from the middle class, coming within its reach for the first time in 2006, even though the tax was designed to prevent the wealthy and ultrawealthy from using deductions to lower their tax liabilities below a specified minimum. According to Senate Majority Leader Bill Frist, as reported by a number of sources, including this Los Angeles Times story, earlier this week asserted that Congress "had run out of time" to finish work on the proposed legislation fixing the problem.

Change the number of affected taxpayers, change a few names, and we're ready for the reruns.

This year, Congress managed to enact a "patch" to the AMT. I remember when I was a child, fixing my own bicycle tires and tubes, that one would reach a point where yet another patch on the tube was a guarantee of a flat tire, or worse, shortly thereafter. There are only so many patches that can be slapped onto something. If in doubt, check out patched software. But at least there is a patch, so it could have been worse.

The timing of the "patch" is awful. Congress enacted the patch and sent it to the President for his signature on December 19. Shortly thereafter, its members went home. They leave behind a cadre of IRS employees who are faced with the unenviable task of updating forms and computer software to reflect the enacted patch in time for the upcoming filing season. In When Congress Can't Do Things On Time, I explained how the legislative delay would cause all sorts of problems for taxpayers and the IRS. To its credit, the IRS, along with the Treasury Department and the President, has promised, to quote the TaxProf blog, "to minimize the disruption and delays in the tax filing season caused by the late passage of the bill." As a practical matter, the effort falls on IRS employees. Trust me, the President isn't going to be giving up his holiday break to get IRS software updated or to change tax forms. Nor is the Secretary of the Treasury.

So while the Congress and others get to enjoy this holiday period with family and friends, some IRS employees will be putting in extra hours, perhaps to the point of missing family get-togethers, to do work that they were scheduled to do one or two months ago, simply because the Congress cannot manage itself. The public has a negative view of the IRS, but can it not come to understand that the IRS is a creation of the Congress and that in this instance IRS employees are going above and beyond the call of duty to fix yet another mess created by the Congress? The idea of Congress walking out to enjoy a holiday while others must labor on isn't all that different from factory bosses and other economically powerful magnates living the high life while their employees put in long hours without holiday breaks. If Dickens were alive, he'd have material for another novel.

So this year, while enjoying the food, the gifts, the gatherings, and the fun, stop for a moment and think of the people at the IRS, and at some commercial software firms, who are racing the clock, trying to minimize or eliminate the filing season delay that can postpone your receipt of a refund that will pay for those gifts and the food. If you're one of those people caught between the Congress and the calendar, grinding away in your office so that the rest of us can begin filing tax returns on or near the usual starting time, the rest of us thank you. I have tried to make the voters aware not only of why their refunds may be delayed, but of the effort you are making to compensate for the shortcomings of a Congress afflicted by time management deficit disorder.