MauledAgain

If there's a bigger tax chart, I've not seen it. This one is huge. It's three and a half feet tall. It's almost six feet wide. It consumes more than twenty square feet of wall space. And it comes to us from the guru of tax charts, Andrew Mitchel.

Yes, I have seen bigger charts. But they've not been tax charts. I've seen floor-t0-ceiling enormities in museums and in library displays. But they've been about topics other than tax. Once upon a time, I made a chart that was a mere two feet high, but it was almost thirty feet wide. No, it wasn't a tax chart. It was a family history chart. I still have it, but it's no longer on display. It's very much out of date, so it sits rolled up, in a closet.

Everyone who reads MauledAgain, and hundreds of tax practitioners throughout the world, are familiar with Andrew's tax charts. They number in the hundreds, they touch on a wide range of tax topics, they are useful and creative, and they help people visualize the intricacies of the tax law. I've shared comments and references to these charts here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, and here. Yes, you really should click on each of those links. Or you can go directly to Andrew's topic or chronological listing.

This latest chart, though, is in a class by itself. It took three years to complete. It contains more than 325 color-coded boxes with questions and answers that help the user map out the consequences of transfers to and from foreign corporations. Each box contains a citation to the Code or other authority. So it covers a topic that simply isn't going to disappear, no matter what happens with or to the tax law, and it takes the tax practitioner on a guided journey through one of the tax law's most challenging thickets.

Generally, Andrew makes his charts available to one and to all. All it takes is a visit to the topic or chronological listing. But this chart is the chart of charts, a creation too big for a web page, beyond the capabilities of the desktop printer, and orders of magnitude beyond the utility of the outstanding topical charts Andrew has generated during the past few years. For this massive chart, visit Andrew's Tax-Charts.com site. It's not free, but it ought not be. It's the masterpiece.

Having seen this chart, I ask that same question that has been asked about cell phones, paper clips, and chocolate: How did we get along before they existed? How did tax practitioners manage to work through those complicated analyses of cross-border transactions without the quintessential map of cross-border transaction tax law?

Those practicing in this area will need to decide where to hang the chart. It needs to be a spot with a fairly large wall. The reception area? That might intimidate the clients. The senior partner's office? No, there will be too many interruptions as the tax lawyers pop in hour after hour to consult the chart. A conference room? Perhaps. One for each lawyer's office? Now there's an idea. Notice I didn't mention the library. Even if the firm has one, and many no longer do, the bookshelves own the walls. Wherever the chart Is hung, it indeed will be a conversation starter. Just tell your clients that it's a peek into a very small portion of a tax lawyer's brain. After all, that is what it is.

Last Thursday's news reaching the ears and eyes of those who advocate the imposition of tolls on I-80 to fund repairs and improvements to Pennsylvania's crumbling bridge and highway infrastructure was not good. As explained in U.S. Rejects Pa.'s Request for I-80 Tolls, a headline that almost says it all, the Federal Highway Administration refused to agree to the I-80 toll plan. The FHA explained that the flaw in the plan was the intended use of the toll revenues to fund highways and bridges other than those connected with I-80. According to the agency, use of the toll revenue must be limited to "legitimate and valid operating costs" of the road on which they are imposed. In other words, the state's plan violated federal law because the tolls "appear to have been predetermined by the Pennsylvania General Assembly based on considerations largely unrelated to the true costs" of operating and maintaining I-80.

This decision should come as no surprise to readers of MauledAgain. When commenting, in User Fees and Costs on the proposal in New Jersey to use highway tolls to reduce state debt incurred for unrelated purposes, I wrote:

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. (emphasis added)

And as I mentioned in
Are State Gasoline Taxes the Best Source of Highway Revenue? , "It makes no sense to require drivers using the turnpike or I-80 to subsidize repairs to Routes 1, 3, 320, 252, or 202, to name but a few highways in the southeastern part of the state where I live."

So where does this leave Pennsylvania's need for funds to deal with its transportation infrastructure problems? The Governor used the decision as a springboard to resume hawking his turnpike lease plan. Though some legislators predicted that proposal would not be approved, others appear ready to cave if the amount bid for the lease were increased. In other words, for a high bid, they would be willing to give up control of the turnpike.

Readers of MauledAgain know what I think of the turnpike lease proposal. Here it is in a nutshell, as summarized in Are State Gasoline Taxes the Best Source of Highway Revenue? :

When it comes to leasing the turnpike, all that needs to be said at this point is that it is a terrible idea, at best a short-term solution with a excessive long-term cost, as I explored in Selling Off Government Revenue Streams: Good Idea or Bad? and in Selling Government Revenue Streams: A Bad Idea That Won't Go Away.

It is completely foolish and irresponsible to sell the seed corn, no matter what temptations are dished up by the buyer. The buyer isn't trying to give money to the state and its people. The buyer is trying to extract profits, and if there are profits to be extracted, they should be extracted by the state, that is, the people of the state, who essentially are the owners of the turnpike. Listening to, or reading, the comments by members of the consortium holding the winning bid for the lease is not unlike watching a hungry person drool over food.

One legislator noted that there were "few other alternatives" to coming up with the money. He asked, rhetorically, if the alternative of raising the gasoline tax should be considered. Good question. The answer is the same answer I give to the turnpike lease proposal: no.

So what's to be done? The FHA graced its rejection of the I-80 toll proposal with these palliative words: ""We commend Pennsylvania for thinking creatively in trying to find a solution to its transportation needs. Although we are unable to move the application forward, the FHWA stands ready to assist the commonwealth in finding other creative ways to fill the gap." So, let's be creative.

The solution? I've proposed mileage-based road fees several times and I propose the idea again. I supported my support for this approach Are State Gasoline Taxes the Best Source of Highway Revenue? :

It's easy, of course, to pan all three proposals [the turnpike lease, the I-80 toll plan, gasoline tax increases]. It's more difficult to provide a constructive suggestion. Yet in this instance it is easy. As I discussed in Mileage-Based Road Fees, Yet Again, the answer is the mileage-based road fee. As I previously explained in Tax Meets Technology on the Road and in Mileage-Based Road Fees, Again, this fee is not restricted to limited-access highways, does not require the building of toll gates and toll booths, is not dependent on the level of liquid fuels use, can be adjusted for the degree of wear and tear inflicted by the vehicle on roads and bridges, and is easy to administer. It already is being used in other jurisdictions.

The Pennsylvania legislature needs to look beyond the present and consider implementing ideas that are ready to be put in place for the future. Gasoline taxes, tolls, and selling public goods to profit-hungry private enterprises are, or at least should be, strategies of the past. They are being eclipsed by newer, better ideas, and Pennsylvania needs to get on board. It doesn't help when a leading state legislator describes tolls as the "wave of the future," because in doing so, what he demonstrates is a surprising ignorance about the actual wave of the future that already is in the present, namely, mileage-based road fees. With a $1.7 billion annual shortfall in road and bridge maintenance requirements, the Pennsylvania legislature cannot afford to continue functioning in ways that account, at least in part, for the stagnation in the state's population and economic growth.

So here's my question for the Pennsylvania legislature: Are you folks listening? Are you thinking? Are you being creative? Are you seeking help with this problem by reading blogs, especially this one? Or are you stuck in the 20th century, unable to think past that with which you are familiar, hesitant to be daring, reluctant to lead, and too uninformed to understand what 21st century technology can do for the Commonwealth of Pennsylvania and its people? It would be such a delight to hear from you.

More specifically, when can someone collect a tax but refuse to turn some of the collected tax over to the taxing authority? Not surprisingly, the answer is that it depends. There exist statutes permitting someone to retain some very small fraction of a collected tax as compensation for engaging in the collection process. A revenue department that outsources collections can offer the contractor compensation in the form of a percentage of the taxes collected.

A case in Georgia, City of Atlanta v. hotels.com, 654 S.E.2d 166, (Ga. App. Ct. Oct. 26, 2007), puts the question in a different, and interesting, context. Earlier this week, the case was argued before the Georgia Supreme Court. It involves the collection of the Atlanta hotel occupancy tax by online travel companies. These companies collect tax from the people to whom they sell hotel rooms based on the sale price, but remit the tax to the city of Atlanta based on the lower amount that they pay to the hotels for the rooms. The city of Atlanta contends that the online travel companies ought to remit to it the entire occupancy tax collected from their customers, whereas the travel companies assert that they are responsible only for the tax computed on the price they pay for the rooms. They treat the excess of the tax amount collected from their customers over the amount of tax reflecting the price paid by the companies as a "nonitemized service fee."

The case in Georgia is not unique. A similar issue has been raised in Wake County v. hotels.com, and in jurisdictions throughout the country. The Wake County opinion provides cites to some of those other cases.

Ultimately, the resolution depends on how a court parses the applicable statute. In the Georgia case, the appellate court held that the city had not yet exhausted its adminstrative process, and that the substantive question was not yet properly before the court. Whether the Georgia Supreme Court affirms that conclusion remains to be seen. The same outcome was reached in the Wake County case.

Fifteen years ago, there was no such thing as an internet-based hotel room resale industry. Its existence demands that state legislatures sit down and review their states' tax statutes to determine if they make sense in a transformed business environment. Local taxing authorities need to do the same with their ordinances and other enactments.

The procedural issue in City of Atlanta v. hotels.com rests on whether the online travel companies are subject to the taxing jurisdiction of the city. Unlike brick and mortar hotels that are subject to the occupancy tax, they are not physically within the city. The rooms that they sell are within the city, but those rooms are purchased by the companies from the hotels, which are paying the occupancy tax collected from the online travel companies, computed with reference to the amount the hotels charge those companies. So one core question is why the city of Atlanta thinks it is appropriate to impose yet another tax on the sale of the room by the online travel company to the actual consumer. The answer, I suppose, is that the city of Atlanta thinks that the statute entitles it to do so.

Unlike a sales tax, which applies to sales at retail and thus does not reach the wholesale transactions that occur between creation of the item and its retail sale, hotel occupancy taxes are imposed on the sale of occupancy rights to hotel rooms. No regard is given to whether those sales are to a wholesaler, which is what the online travel companies essentially are, or to the ultimate consumer. That is a flaw in the statute.

The state enabling legislation involved In the Wake County case imposes the obligation to collect and remit the tax on "[e]very operator of a taxable establishment," and defines a taxable establishment responsible to collect and pay the tax as " A hotel, motel, inn, tourist camp, or similar place that is subject to a room occupancy tax " The tax, however, is levied on "the gross receipts derived from the rental of any room, lodging, or accommodation furnished by a hotel, motel, inn, tourist camp, or similar place within the county that is subject to the State sales tax." The former language appears to contemplate brick and mortar establishments, whereas the latter language appears to focus on the transmission of the intangible occupancy right.

The resolution adopted by Wake County imposes the occupancy tax on "gross receipts derived by any person, firm, corporation, or association from the rental of any room, lodging or accommodation furnished by a hotel, motel, inn, tourist camp, or similar place within the County…" The resolutions of the other counties involved in the litigation have identical language.

All of this analysis focuses on the issue that the Georgia appellate court directed the parties to address first, namely, are the online travel companies subject to the tax? Only if the answer to that question is in the affirmative does one reach the next question, which is the computation of the occupancy tax. Should it reflect the amount for which the room is sold by the hotel to the wholesaler online travel company? Or should it reflect the amount for which the room is sold to the consumer? When the language imposes the tax on the "gross receipts derived … from the rental of any room …." the answer appears to be the latter formulation. The online travel company charges the consumer a certain number of dollars for the rental of the room. The fact that it pays a lesser amount to acquire that room does not reduce its "gross receipts derived … from the rental of any room."

In the Georgia case, there is imposed “a tax of seven percent of the rent for every occupancy of a guestroom in a hotel in the city.” The tax is imposed on both the consumer and the person or legal entity licensed by or required to pay a business or occupation tax to the governing authority imposing the tax for operating a hotel [or similar facility]. The obligation to remit the tax to the city is imposed on the entity operating the hotel. Though it appears as though the tax is imposed twice, it is imposed once. Are the online companies operating a hotel? Are they licensed to operate hotels? Are they required to pay business tax to Atlanta? The answers to these questions appear to be no, no, and no. The difference in language between the Atlanta ordinance and the resolutions adopted by the North Carolina counties could turn out to be the difference between a taxpayer victory and a taxpayer loss if, and when, the substantive questions ever are reached.

The lesson here is not so much, what is the answer to the question posed at the outset, as it is, what should legislatures be doing to bring tax statutes into the 21st century? Until and unless legislatures deal with these issues, taxpayers will face uncertainty and courts will need to unravel antiquated provisions. Of course, tax lawyers will earn fees, so perhaps they won't be so distressed.

Anyone who writes tax or other legal books, articles, or similar items is delighted when his or her works are cited by another author. I write from experience when I share this observation

For some authors, the delight is proportional in some way to the "status" of the citing authority. For example, the ultimate dream of many legal scholars is to have a book or article cited by the Supreme Court. Some critics give much less weight to the citation of an article by a blog or similar, "less scholarly" publication, though others are simply thrilled that someone is reading what they have written and deeming it worthy of the spotlight.

It's an entirely different experience, though, to have a non-legal item cited by legal authority. A few days ago, I discovered the first instance of which I am aware in which a legal article cites a genealogy web site. If there is another such instance, I'd very much like to know. It is possible that legal articles have cited genealogy texts, but I've not ever seen that.

What was cited? My genealogy website, the Maule Genealogy Homepage, has been cited in an article in a legal journal. The citation to the article that cited my genealogy website is
Kristine S. Knapland, The Evolution of Women's Rights in Inheritance, Pepperdine University School of Law Legal Studies Working Paper Series, Paper Number 2008/6 (January 2008).

On page 20, Ms Knapland writes: "One man, survived by his wife, asked that he be 'decently buried by the side of my dear sister Sarah;' " and she provides the reference in footnote number 134. That footnote reads:

Case 364 William Penn Evans. The testator was most likely a Quaker, as his will went on to direct that the stones at his grave be similar to those of his sister, “care being taken that the height and size are no greater, so that Friends may not be grieved.” His codicil executed in 1888 directed that he be buried where convenient if he did not die in Pennsylvania, but he died in Philadelphia. Evans, the valedictorian of the 1871 class at Haverford College, was considered one of the founders of Malvern, Pennsylvania, where he owned a flour mill. James Edward Maule, Some Prominent Members of the American Maule Family, http://www.maulefamily.com/maule50.htm (last visited Sept. 14, 2007).

I found this citation quite by accident, as I was searching for something else. Now I must return to the search engines and determine if anyone else has cited my genealogy website in a legal journal or similar item. I wonder if any tax treatises or articles have cited it.

Last week, someone pointed out the following sentence in the Republican National Platform:

In any fundamental restructuring of federal taxation, to guard against the possibility of hypertaxation of the American people, any value added tax or national sales tax must be tied to simultaneous repeal of the Sixteenth Amendment, which established the federal income tax.

This person noted that this was a new word for her and then asked what it meant. She had researched the question by looking at the Oxford English Dictionary and Merriam-Webster, but the word did not appear. When she googled the word, she found some references in extremely conservative blogs and a few web pages in French that used the word "l'hypertaxation." She asked if it simply meant "overtaxation."

Of course, I responded but then decided to do my own research. Yes, I know, I should have researched and then responded. It turns out that I was on the right track.

I tried my favorite on-line dictionary but it simply told me, "No results found for hypertaxaxtion." I turned to google, and it replied, "Results 1 - 61 of 61 for "hypertaxation" and so I dug in. I, too, found the word being used by some blogs and writers taking positions consistent with extremely conservative views, but I found that none of them defined the word. But one of the google hits took me to an on-line French dictionary, which provided this entry: HYPERTAXATION n.f. Taxation exagérée.

Aha, hypertaxation is exaggerated taxation. That tells us a lot, doesn't it?

So with that research tucked away in our brains, what did I write before I did the research? Here's what I said:

For me, the analysis benefits from an analogy to using hyper and over with the word speed. It is one thing to speed over the posted limit. It is another to move at hyperspeed, a rate of travel orders of magnitude beyond "normal" or "regular" speed (whatever that might be). One can speed over the limit without being in hyperspeed. And one can hyperspeed without being over the limit (if such things exist in the Delta Quadrant).

So I see overtaxation as a concept measuring taxation against some sort of limit (about which many argue). I see hypertaxation as a hyperbolic expression of a tax rate or revenue being orders of magnitude beyond what is "normal" or "regular" taxation (whatever that might be).

For more fun, compare the hyperactive child with the overactive child. :-)

Hypertaxation is a word that soundbite fans should enjoy. It doesn't, however, tell us much of anything.

Indeed, describing taxation as exaggerated is about as helpful as defining beauty. It's all in the eye of the beholder, or perhaps the outstretched hand of the tax collector or the checkbook of the taxpayer.

I suppose if one wanted to be technical, overtaxation could refer to a situation in which a tax collector or someone collecting a tax on behalf of a government, such as a merchant charging sales tax, overcharges the taxpayer. For example, if in a state that imposes a 6% sales tax on retail sales, overtaxation would exist if a retailer added $7 sales tax to a consumer's $100 purchase. If the state exempted food from the tax and a store added a $6 tax to a $100 grocery bill, the purchaser would be overtaxed. This approach means that overtaxation can exist regardless of the tax rate.

In contrast, hypertaxation suggests some sort of excess that violates some sort of norm. But because the users of the term hypertaxation haven't defined it, people can use the term without any precision. Is a 100% income tax rate hypertaxation? How about a 12% sales tax rate? Is the claim of hypretaxation more likely to be used if rates triple in one legislative act than if they creep up over time? Must there be something shocking or unconscionable about the rate before it qualifies as hypertaxation? Lawyers think they can define the term unconscionable but it ultimately comes down to the opinion of the trier of fact, usually a judge.

And what's the point of using the term? What does it add to the discourse that isn't provided by more specific descriptions such as "a tax rate of 43%" or "a doubling of the sales tax rate"? The latter phrases are informative. Hypertaxation isn't.

My suggestion that the term is fuel for the sound-bite mentality resurfaces. A word with no precise or useful meaning becomes a tool in debates that are more readily and sensibly resolved when the conversation is more specific and fact sensitive. Hypertaxation is an emotional word. There are places in human conversation for emotional words. Is it useful to insert emotional words into analyses of economic and tax issues? How instructive is a party platform plank when it makes use of word that can mean different things to different people? What does it tell us?

For quite some time, taxpayers who received incentive stock options and then exercised them have become aware that they can be subject to a significant AMT liability even though, in the long run, the option generated little or no income. Taxpayers who have litigated the issue have fared poorly, simply because the Internal Revenue Code says what it says, and no amount of creativity has persuaded any judge to disregard the statutory language. The Congress has been dragging its feet for years, expressing dislike for the outcome but saying little, if anything, about the fact that the Congress created the mess.

Now comes news that the IRS will suspend collection of these AMT liabilities at the request of several members of Congress, including the former chair of the Senate Finance Committee. These legislators wrote to the Commissioner of the Internal Revenue Service, asking for the suspension so that Congress has time to work out a legislative solution. The current version of the solution is the AMT Credit Fairness and Relief Act of 2007, which has been kicking around the Congress for more than a year, and the substance of which has been in proposed legislation for several years.

The lawmakers requesting the suspension, including both Democrats and Republicans, claim there now is "very broad bipartisan consensus" to fix the glitch. If that's the case, why hasn't the legislation been enacted? What's the holdup? It's not as though the problem came as a surprise to the present Congress. It's not as though the solution has been difficult to find, considering that legislative language to fix the problem was drafted long before the present Congress took office.

Instead, the IRS now suspends enforcement of a badly drafted law to give the Congress even more time to do something it should have done several years ago, and surely that the present Congress should have done last year. While the IRS decision is the best that can be done at the moment, it is not only disheartening to discover once again that the Congress cannot get its work done in a timely manner, it also is disturbing that a handful of federal legislators, through a letter, can have the same effect on the IRS as would properly enacted legislation. It is not healthy for the constitutional fabric of the nation to have laws administered in this manner. There are rules about how the Congress must specify to an administrative agency what it should and should not do, and administration by letter, even if generating a favorable and sensible result, does not comply with those rules.

I suppose the question can be put thusly: Is this any way to run a country or administer a tax system?

At the beginning of the year, in Another Sip of the Drink Tax, I criticized the Allegheny County drink tax, which is imposed to defray deficits in the operating budget of the Port Authority Transit system in the Pittsburgh area. My concern is that user fees ought not be imposed on one activity to support the cost of another activity, unless there is some evidence demonstrating that the former activity imposes a burden on the latter activity. As I noted in my earlier post:

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."

Not surprisingly, Pittsburgh area taxpayers, including restaurant owners and pub operators, tried to obtain a stay of enforcement but it was denied.

Now comes bad news for a group that is trying to reduce the tax from 10 percent to one-half of one percent. Friends Against Counterproductive Taxation attempted to put a referendum on the ballot that would require that outcome. However, according to this story, the Allegheny County solicitor has ruled that the referendum does not qualify for the ballot. Did the group obtain insufficient signatures? No. Did the group use invalid signatures? Apparently not. So what is the flaw in its attempt to resort to the democratic process to resolve an issue? It did not provide for another source of revenue to replace the portion of the drink tax it seeks to have repealed, something that the solicitor explains is required by the county's home rule charter. On the other hand, the solicitor approved a referendum offered by political insiders, namley, county council, that gives voters the option to jettison the drink tax if they support an increase in property taxes. Does it seem to anyone that this is a matter of a "once we start collecting a user fee we won't give up the revenue" approach? It is somewhat baffling that no one appears to have focused on user fees that relate to the funding deficit. The transportation system struggles to break even because it has insufficient revenue to fund its services to the point that it would encourage people driving into center city to leave their vehicles in outlying park-and-ride lots and to use public transit. The logical revenue source is a congestion charge such as the one used in London and other cities, or a mileage-based user fee that imposes a tax on miles driven within the affected area. I alluded to this approach in Another Sip of the Drink Tax:

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?

Friends Against Counterproductive Taxation plans to appeal if the elections panel accepts the solicitor's conclusions. Hopefully, somewhere along the line, the group finds a way to get this question in front of the citizenry. Perhaps it can propose a congestion charge or mileage-based fee. I wish the group success because something about its name appeals to me. Those who founded the group were thinking along the lines I was when, in Another Sip of the Drink Tax, I explained why the tax could be counterproductive:

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?

We can only hope that this one tax in one county in one state can trigger reformation of how legislators think about revenue, user fees, and taxation.

Back in March, I shared some thoughts on Barack Obama's proposal to "establish a new American Opportunity Tax Credit that is worth $4,000 a year in exchange for 100 hours of public service a year." In Does It Make Sense to Overload the IRS and the Tax Code? , I questioned whether volunteer service is genuinely volunteer service if the person who performs the service is compensated in some way. I also questioned the wisdom of using the tax code for something that is not a revenue issue.

Now that this proposal has elevated from being the idea of a primary candidate to being a proposal of a nominee for President, it makes sense to look at it again. Of the various tax proposals advanced by Obama, this was one of the few that was referenced, in a conceptual way, in his acceptance speech, so surely it will receive more attention and attract more effort if he is elected.

Two more issues floated through my brain when I heard the reference to the credit proposal. One is substantive. The other is administrative.

The credit is, in effect, a payment for performing services. It might be a good guess to predict that, as is generally the case, the recipient would not be required to report the credit as gross income for federal income tax purposes. But what happens with respect to state and local taxes? Though it is possible for states to mimic the credit, it is unlikely that they will do so. Is the credit within the definition of compensation for state and local tax purposes? For states that use federal taxable income as a starting point in the computation of state income tax liability, is the credit one of those items excluded from federal gross income that must be added back to state taxable income? In the several states, such as Pennsylvania, that do not use federal taxable income or a similar base as the starting point for the computation of state income tax liability, does the credit constitute wages? It would appear to fit the definition because it is an amount received in exchange for performing services. I wonder if state legislatures will consider and then react to this issue if the American Opportunity Tax Credit becomes law.

If the proposed credit becomes law, how will it be administered? Will the taxpayer simply check a box that says "Check here if you performed 100 hours of public service in 2009"? Yes, returns are signed under penalties of perjury, but consider what the earned income tax credit brought us. Will the taxpayer be required to list the organizations for which the service was performed? Will the taxpayer be permitted to write something along the lines of "picked up litter in neighborhood park every Saturday for 1 hour"? Will the taxpayer be required to obtain letters or other documents from a supervising agency? Will the taxpayer be required to attach those documents to the return? Will states and localities be compelled to organize entities to issue those documents, thus formalizing what now transpires as informal contributions of time to public service endeavors? Will those entities be required to register with the IRS as "credit worthy public service coordination organizations"? Will the credit be limited to people "of college age," whatever that means? Will it be limited to people enrolled in college? Will it also be available to people planning to attend college, considering that until they receive the credit they may not be ready, financially, to attend? Will checking a box "plan to attend college" be sufficient? Will the IRS shift some portion of its work force to auditing the taxpayer claims of performing public service? Will the IRS follow up to see if the person who checked the "planning to attend college" box actually attended? Will "college" include trade school, graduate school, adult community education, night school, and similar non-traditional academic pursuits? Surely there are more questions.

The proposal is a wonderful example of the divide between theory and practice. In theory, the proposal has much to offer. Let's find a way to help people get the education they need to better themselves, while impressing upon them the value of public service. In practice, administration of the proposal could be a nightmare. The devil is always in the details, and the arguments almost always turn on the nuances.

Is there a better way to attain the same objective? That is today's question.

I would not be surprised if someone takes this story and adds it to a collection of "stupid criminal" stories, such as the Country-Fried Bull Stupid Criminals Page But for me, it's an interesting insight into the impact of user fees on issues other than defraying costs.

According to Work-release Fugitive Gets Tagged for Being Cheap, a story with a headline that takes a pun award, a fellow who had escaped from a work-release program was caught when he failed to purchase a beach tag in Se Isle City, New Jersey. People who live at or near the Jersey shore, or who travel to those beaches, are not only aware of the beach tag fees but have had far more to say about them than I could fit into thousands of blog posts. The argument that "beaches should be free" runs up against the truth, namely, beaches are not free if the people using them want them to be clean, appreciate the presence of lifeguards, and pine for replenishment when storms wash out the sands. Most beach fees are fairly inexpensive, a bit higher than most bridge tolls, but usually less than what it costs to buy the gasoline used to drive to the shore from the Philadelphia or New York metropolitan areas. Most of the few people who are approached by "tag checkers" for not wearing the proof of having paid the fee are either individuals who somehow miss all the signs or who absent-mindedly leave their tags at their beach house before heading across the dunes. Though it wouldn't surprise me if an occasional protester went onto the beach without a tag in support of a "Beaches without Taxation" philosophy, I haven't seen or read any stories about such activities.

So what is surprising is the refusal of the escapee to pay for a beach tag when he decided to make use of the Sea Isle City beach. According to police, when he was apprehended, he had cash in his pockets, so his failure to pay the user fee wasn't a matter of economic impossibility. An investigation revealed that when he walked away from his dish washing job he went directly to the beach.

When the tag checker invited the fugitive to purchase a tag, an approach that almost always precedes any attempt to evict or apprehend the tagless visitor, he refused. The tag checker let it go, and did not even call police. But when officers arrived while searching for the prisoner, the tag checker remembered the incident, and the authorities quickly took custody of the escapee.

Had the fellow decided to visit the beach in the town where he was employed under the work-release program, he would not have had to buy a tag, because the town of Strathmere does not require tags. So perhaps the combination of heading for a tagged beach and the refusal to purchase the tag suggests that the escapee wasn't thinking clearly. Or perhaps he went to the Sea Isle City beach because he planned to meet someone there. The fact that he had previously been convicted of robbery, drug distribution, and parole violations makes it easy to conjure up all sorts of possibilities.

There's an interesting lesson in this story. Sometimes the consequences of not paying a user fee aren't quite what one would expect.

There's a new movie hitting the theaters. It's not a romance, it's not a shoot-em-up, it's not a western (do they make those anymore?), it's not a comedy, it's not a goofball comedy. It could be called a tragedy, and it could be called a horror story. Technically, it's a documentary.

The name of the movie? IOUSA. A dual-acronym play-on-words merger that gives just a glimpse into the skills of the folks who put this together. The gist of the movie is this: The country is going broke. The government is over-extended financially. The amount of money spent on war, on defense, on entitlements, and on the day-to-day running of government far exceeds what political leaders are willing to collect in taxes. If this doom-and-gloom scenario seems familiar to readers of MauledAgain, it's because I've been saying pretty much the same thing for several years.

Because most Americans do not understand economics, another problem on which I've previously commented, IOUSA takes its viewers through an explanation of how public sector finance works, how government fiscal policies affect marketplaces and individuals' financial condition, and why persisting on the current path guarantees economic disaster. To their credit, the producers don't restrict themselves to negative commentary, but step up with suggestions to fix the problem before it is too late.

Reviewers are calling this movie a must-see. One recommended that it be shown in all high schools. Others have called it the Inconvenient Truth of Economics. Words like "frightening" and "alarming" pepper the reviews, corroborating my suggestion that it is more a tragedy and horror flick than a boring documentary. Boring it is not. The film makers even manage to insert some humor, which is good, because if one doesn't laugh one might cry.

Here's the problem. It's a cerebral movie. Americans aren't cerebral. News about what outfit some celebrity is wearing, or who's doing what to whom in Hollywood get far more attention than the serious stuff of real life. Movies, we are told, exist to help people escape. The catch is that eventually there will be no escape. And no movies. Or at least anyone who can afford to go to one or view one. Perhaps it is because Americans prefer silly to serious that IOUSA has been booked in only one or two theaters in the Philadelphia area, and it appears it's getting similar exposure elsewhere. Unlike so-called blockbusters that show up in every multiplex, sometimes grabbing two or three screens, IOUSA is playing the role of the small child knocking on the door of the house where a wild party is underway, being ignored as she tries to explain there are flames coming out of the attic.

For more information, visit the website for IOUSA.

The "property tax standard deduction" added to the Internal Revenue Code by the Congress in July, and initially discussed by me in Why This New Tax Provision?, has received more attention. I shared comments from Andrew Oh-Willeke and Robert D. Flack in Is This How Tax Laws Are Created, and from Mary O'Keefe in Unintended Beneficiaries of New Tax Provision?. Now the politicians are spinning the legislation to their advantage.

On Wednesday, New Jersey governor Corzine, senator Menendez, and representative Holt conducted a presentation to tout the new provision. According to this Philadelphia Inquirer story, they hailed the "little-known provision" as one "that could put $500 or $1,000 in property taxpayers' pockets." Really? Folks, the provision allows a $500 or $1,000 deduction, depending on the taxpayer's filing status, which means taxpayers who otherwise have tax liability are looking at federal income tax liability reductions ranging from $50 or $75 to perhaps $75 to $150. These New Jersey politicians are thrilled with the provision, because they represent and govern a state with very high local property taxes. Menendez claims that there are 600,000 taxpayers in New Jersey who pay real property taxes but do not itemize deductions. Real property taxes in New Jersey average $6,800, which is enough to put single taxpayers into the "should itemize" mode and puts married taxpayers filing joint returns in a position of needing only a few thousand more dollars of itemized deductions to find itemizing more beneficial than taking the standard deduction. Considering that New Jersey also has a high state income tax, even those homeowners who do not pay mortgage interest should be itemizing. The article explains that the deduction "starts with tax returns for 2008" but should have clarified that it also ends with tax returns for 2008. It's a one-year provision that brings even less cash to a taxpayer than the so called economic stimulus payment. The word popping into my head is band-aid.

On Thursday, Mary O'Keefe sent along a link to Barack Obama's mortgage credit proposal, which would replace the mortgage interest deduction. Obama asserts that ten million taxpayers who do not itemize deductions, most of whom "earn less than $50,000" annually, would benefit. Presumably, these ten million taxpayers are going to benefit from the new real property standard deduction provision. In another link sent by Mary, Obama tried to explain his mortgage credit proposal , but he slipped up describing current law. When he claimed that homeowners who itemize "get a mortgage deduction, up to $1 million," he made a mistake so classic that I usually find a way to work it into the exam or a semester exercise in the basic tax course. The $1 million limitation is on the amount of the acquisition mortgage, the interest on which is deductible. So if the interest rate on the mortage is 6%, the deduction is limited to $60,000.

The fact that politicians are having a tough time giving accurate descriptions of the tax law should teach everyone, including them, a lesson. The tax law is too complicated. All four of the politicians who goofed are in, or have served in, the Congress. If they don't understand the law for which they have voted, how can they expect everyone else to understand it? Rather than layering on more complexity each time a group arrives hat in hand, or check in hand, seeking special relief, Congress needs to overhaul the system before it collapses. Otherwise the tax law is going to become a conglomeration that amounts to a separate tax law for each person in the country. The difference between leadership and pandering can be measured by what a legislature does with revenue provisions. A patchwork quilt eventually rips apart.

In my last post, in which I explored the scope of "sin" in the phrase "sin tax," I expressed disagreement with the classification of chocolate in the same product bundle as tobacco and liquor. But someday that outcome might make more sense. About two months ago, I noticed a CNN story, which I set aside until my blogging thoughts turned to chocolate. And, yes, there is a tax angle.

According to the story, government scientists are going to dissect the cocoa bean genome. They are doing so to safeguard the world's chocolate supply. Though it is difficult to think of a higher priority for the expenditure of tax dollars than the safeguarding of chocolate, tax dollars are not funding the project. Funding is being provided by Mars, which will make the results public. Mars does not care that its competitor will have access to the information it generates, because it thinks there will be far more data than any one chocolate processor could use.

The project also is expected to benefit cocoa farmers, most of whom are in Africa. The scientists anticipate identifying the "breeds of cacao trees … most appropriate for a specific locale and most able to fend off disease and drought." The goal is to increase crop yields, not by increasing total output, but by reducing the amount of land required for the trees so that land can be freed for the growing of other, cash generating crops.

The research will explore why cocoa tastes as it does. Will the phrase "flavor gene" become a trendy element of food advertising?

The story educated me. I had not known that the cocoa genome had more than 400 million parts. Nor did I know that fungal diseases kill off enough cocoa to set its growers back $700 million each year. And I did not know that there were cacao pests that posed threats to the flow of chocolate from farm to table.

The possibilities are endless. Cauliflower that tastes like chocolate, anyone? Perhaps someone will invent green or purple chocolate. Who says chocolate should be limited to brown and white? What I would like is the tree I can plant in my backyard and from which I can pick ready-to-eat chocolate candy. How long would it take before someone tries to subject these chocolate candy trees to some sort of sin tax? And how long would it take for me to explain that chocolate is a medicine, not a luxury? Not long. Certainly not as long as I had this story parked in my email inbox.

No tax practitioner worth his or her professional license is unaware of the concept of sin taxes. For years, governments have found it morally and politically easy, at least compared to other alternatives, to impose taxes or fees on products and activities associated with "sin." Thus, it is not uncommon to find states and localities imposing taxes on items such as tobacco, beer, wine, liquor, and gambling. Whether the true intent of legislatures is to use the tax to discourage the activity or the use of the product or to ride a profitable revenue stream has been debated for decades. In our post-modern world, some have taken to using the term health promotion revenues rather than sin taxes.

According to a recent Philadelphia Inquirer story, the chances of a decline in revenue from these sources on account of the economic downturn are slim to none. In Cash-Strapped? Not for Necessary Treats, the manufacturers of alcohol, cigarettes, and yes, candy, are reporting "healthy sales." The use of the adjective "healthy" by the writer is most clever, because although red wine and chocolate are sufficiently medicinal to warrant that description, the same cannot be said of cigarettes, most candy, and most liquor. According to the article, although the value of so-called sin stocks have fallen, most of the companies producing these products are reporting strong sales. Anheuser-Busch reported a profit even though it has faced increases in the price it pays for ingredients, for manufacturing, and for shipping. Cadbury has reported a 7.3 percent first-half sales increase. Diageo P.L.C., which manufactures such brands as Johnnie Walker whiskey, Smirnoff vodka, Captain Morgan rum and Guinness stout "expects its Scotch whiskey business to continue to grow at least 8 percent to 9 percent annually." Philip Morris has reported a 23 percent increase in earnings for the second quarter.

How is this possible? Economists call consumer demand for these items "inelastic," meaning that higher prices don't deter purchases. For that reason, as reported in Cash-Strapped? Not for Necessary Treats, Anheuser-Busch plans to increase the price it charges for its popular brands. According to this report, Hershey is raising prices by an average of 11 percent, the second increase of 2008, even though it still expects sales to grow, and even though, according to Cash-Strapped? Not for Necessary Treats, it "reported dramatically higher second-quarter sales and profit."

Because I don't smoke and because I'm not much of a beer drinker, I suppose my zero demand for those items is totally inelastic, or perhaps infinitely inelastic. On the other hand, if the price of chocolate keeps rising, perhaps it ought to be covered by health insurance drug plans, because, as we know, chocolate is medicinal. Seriously, there is something strange about lumping stocks in candy companies with stocks in tobacco and liquor companies. Unlike smoking or chewing tobacco, eating chocolate and drinking red wine in moderation, though not necessarily simultaneously, is good for one's health. So-called sin taxes have been imposed on cigarettes, cigars, chewing and pipe tobacco, beer, wine, and other spirits for decades if not longer. In contrast, chocolate and candy have not been included in the products generally tagged as "sin" products. If the list is to grow beyond tobacco, liquour, and gambling, I can think of a some other things that fit in with that crowd far more readily than medicinal chocolate. Think about junk food, soda, and coffee, to name but a few.

If the notion of sin taxes gives way to the idea of taxing activities that do not promote health (so called "health promotion revenues"), should we expect a couch potato tax? How about a tax on elevator use by those who could use the stairs? Imagine a tax on television sets and video games because they encourage children to give up outdoor activities, which presumably are healthy. Perhaps a tax on plastic bags makes sense because it is a sin, some say, to waste resources making something that ends up clogging landfills.

Theoretically, there is no limit to the number of products or activities that can be swept within the reach of a sin tax. As the Pet Shop Boys explained:

Everything I've ever done
Everything I ever do
Every place I've ever been
Everywhere I'm going to
It's a sin

Indeed, one person's vice is another person's virtue. For all the damage they do, smoking and excessive drinking supposedly calm the nerves, which in the current economic and political climate, is something more and more people are seeking to attain. My advice: put out the cigarette, put down the fifth drink, jump on the treadmill, the bike, or the stepper, and when done, luxuriate with some dark chocolate. All while reading the Internal Revenue Code, of course.

In Why This New Tax Provision?, I questioned the necessity for the new, one-year-only additional standard deduction reflecting $500 or $1,000 of real property taxes, wondered whether its benefits are worth the extra complexity it causes for the tax law and tax administration, and asked who was the driving force behind its appearance in the Internal Revenue Code. Shortly thereafter, in Is This How Tax Laws Are Created, I shared the views of Andrew Oh-Willeke and Robert D. Flach, the former pointing out that the AARP likely provied the lobbying effort behind the provision, and the latter pointing out that a few retired senior clients would benefit.

Last week, I received a comment from Prof. Mary O'Keefe of Union College. Among other responsibilities, Mary is the faculty sponsor of its Volunteer Income Tax Assistance (VITA) program. That puts her in an ideal dual-role position, a teacher who is deeply connected with the practice world. What she shared is informative, extensive, and enlightening. With her permission, here is her take on the new provision:

Hi Professor Maule,

I found your article about the new property tax deduction for non-itemizers thought-provoking. I agree that tacking on yet another provision compounds the confusion and tax administration difficulties and I can think of many higher priorities for tax reform.

However, as the faculty sponsor of Union College's VITA site in Schenectady in upstate NY, I can immediately think of a number of taxpayers who will benefit from the new provision. And I'm not just talking about the senior citizens already mentioned by your other correspondents.

Our VITA clients are mostly working families with household incomes under $40K. Most are renters, but a signficant minority are homeowners, especially those with incomes in the $30K to $40K range. A typical homeowner might have paid about $3K in property tax and $5K in mortgage interest. (Housing prices are relatively low in upstate NY, but property taxes are relatively high.) A few had significant charitable donations but most did not have much in the way of other itemized deductions, other than a bit of sales tax or state income tax. My student preparers always run the numbers both ways (standard deductions vs. itemized deductions.) The majority of our homeowner clients did not have enough in itemized deductions to justify itemizing. Even among the small number of our clients who have found it worthwhile to itemize under the prior tax law, many received only very marginal tax benefits from doing so because their itemized deductions generally totaled only a few hundred dollars more than their standard deduction.

Here are the kinds of our site's clients who immediately come to my mind as likely beneficiaries of the new property tax deduction for non-itemizers.

1) First-time homeowners who bought a house late in any given tax year. In the past, new homeowners have come in to our site all excited and expecting a higher refund because they'd heard all the hoopla about the tax benefits of home-ownership. However, when my student volunteers added up their itemized deductions, they were disappointed to discover that they still didn't have enough deductions from the partial year of homeownership to make it worth itemizing in their first year. The new tax deduction will give them an immediate tangible tax benefit even in their first year of home-ownership.

2) Low-income clients who financed their home through a zero-interest mortgage obtained from a local nonprofit agency. They pay property taxes but zero interest and never have enough deductions to make it worth itemizing, so they will fully benefit from the new deduction not just in their first year of ownership but for many years to come as well.

3) As mentioned above, even the small portion of our clients who benefited from itemizing under prior law, got very little incremental advantage from doing so, as their itemized deduction total was generally only marginally higher than their standard deduction.

So I would say that most of our clients who itemized last year will do better this year if they take the new deduction.

As you point out in your post, the new provision won't make much difference to most middle-class or affluent homeowners, who already benefit from extraordinarily generous tax benefits for owner-occupied housing, but the amounts of money involved are enough to ease life at least a little bit for the families we serve. Even the small "telephone tax credit" two years ago put smiles on the faces of many clients--I think the new property tax deduction will make some of our clients smile as well.

Every year, our low-income clients who are homeowners come in hopefully with files full of receipts they dutifully saved because the receipt said "Save this for tax purposes," and my students go through the exercise of examining each receipt and entering deductible items in the schedule A worksheets. Many clients bring in as many as 8 property tax receipts (since the city and the school district each issue quarterly bills) as well as bank statements, charitable donation letters, and medical copay receipts. The clients hold their breath as they watch our student volunteers painstakingly enter all the numbers from these receipts into their computers. We all hope for the best. But in the majority of cases, in the end, our student preparer has had to inform the client that they are better off taking the standard deduction.

You wrote: "It is inconceivable that anyone will find a tax provision worth $50 to $75 for one year will make the difference between keeping and losing his or her home."

There is a highly debatable but much-vaunted tradition of promoting "the American dream" of home ownership through tax breaks, but up until now, low-income homeowners have seen little if any benefit of those tax breaks on their tax returns. I agree that $50 or $75 (or even double or triple that number, given the indirect benefits I mentioned above) will not make the difference between keeping and losing one's home for many taxpayers. However, as long as our country feels the need to make a big symbolic statement about home ownership via the massive home ownership tax expenditures built into the tax code, there is something to be said for ensuring that the symbolic statement includes low-income taxpayers as well as the middle class.

Fifty to one-hundred-fifty dollars is still a non-trivial amount of money for our VITA clients. Our clients have household incomes below $40K, and those clients who are homeowners tend to be married couples in which both husband and wife work at several modestly paid jobs. They face pretty high marginal tax-rates (due to phaseout of Federal & NYS EITC and other credits as well as FICA and Federal & State taxes). Taking into account daycare and commuting costs as well as their marginal tax rate, it might easily take a full-day's work for one of them to earn fifty dollars.

Mary O'Keeffe
Union College Volunteer Income Tax Assistance site faculty sponsor

Mary definitely has drawn attention to a group of taxpayers, albeit small, who benefit from this provision but who were not on my list of beneficiaries. Certainly the "late in the year" purchasers and the "zero interest mortgage" homeowners defy the notion that homeownership by folks without paid-off mortgages means that itemized deductions will exceed the standard deduction. The irony is that I doubt Congress was thinking about "late in the year" purchasers or "zero interest mortgage" homeowners when it enacted the provision, and I cannot imagine either of these two groups has lobbyists working on their behalf in Washington. It's a rather interesting aspect of the legislative process, namely, benefits of tax legislation accruing to people who weren't under consideration by legislators who were aiming to benefit some other group. I wonder whether the estimates of revenue loss attributable to the provision took into account the people Mary identified. Revenue estimating being the mystery that it is, shrouded behind all sorts of secrecy, we'll probably never know.

Nonetheless, from the broader perspective of designing an efficient tax system, the idea of having a standard deduction in lieu of itemized deductions but then grafting special provisions so that those claiming the standard deduction also claim some itemized deductions defies logic and common sense. Years ago, Congress enacted a provision allowing taxpayers claiming the standard deduction to deduct a portion of charitable contributions as above-the-line deduction. The justification was that people who did not itemize deductions donated less to charities than they would if they were itemizing, and that the provision would increase charitable contributions. Certain charities lobbied intensely for the provision, but the empirical research demonstrated that the provision had little or no effect on charitable giving, and eventually the provision was repealed. The new provision, as additional standard deduction rather than above-the-line deduction, has a slightly different effect because it does not change limitations based on AGI, but it opens the door to a potential "standard deduction plus part of real property tax deduction plus charitable deduction plus plus plus" arrangement that defeats the purpose of the standard deduction, which is to spare taxpayers the burden of keeping records of expenses when they know that they're not paying much, if anything, in state and local taxes, etc. Ought not the solution be a larger deduction for personal and dependency exemptions and the repeal of deductions for personal expenditures? Better yet, ought there not be a "credit for personal and dependency exemptions" in lieu of the current deduction and the deductions for personal expenditures? On this point, Mary agreed with me that increasing the exemption and using tax credits "makes a lot more sense." However, like me, she is " fairly pessimistic about the potential for permanently getting rid of tax deductions in any rational orderly way." That may happen, she points out, if the number of taxpayers subject to the AMT, and its effective denial of these deductions, continues to grow. But no one thinks that's the ideal way of fixing the income tax.

Two more comments have arrived in response to Why This New Tax Provision. The first is from Wayne Brasch. The second will be shared in next Monday's posting. Wayne shares my distaste for the complexity generated by converting a small portion of what would be an itemized deduction into an above-the-line deduction. More on that issue will appear in next Monday's posting.

Wayne directed my attention to another provision in the Housing and Economic Recovery Act of 2008, P.L. 110-289. In section 3011 of this legislation, Congress provides a tax credit for individuals who are first-time homebuyers of a principal residence in the United States between April 9, 2008, and June 30, 2009. The credit equals 10 percent of the purcahse price, but is limited to $7,500 ($3,750 for taxpayers who are married filing separate returns), allocated among joint purchasers who are not married. The credit is reduced if the taxpayer's modified adjusted gross income exceeds $75,000 ($150,000 on a joint return), at a rate that eliminates it for taxpayers with modified adjusted gross incomes of $95,000 or more ($170,000 or more on a joint return). In the interest of brevity, I omit the definition of modified adjusted gross income, first-time homebuyer, principal residence, purchase, purchase price, and the treatment of constructed residences and purchases from related taxpayers. I also omit discussion of the exceptions.

What irks Wayne is the recapture provision. Section 36(f) provides, with several exceptions, that during the 15-year recapture period the taxpayer who claims the credit must increase tax liability by 1/15 of the credit. In other words, the credit isn't a once-and-done deal but the equivalent of a loan. For example, a taxpayer who claims the full $7,500 credit in the year of purchase must add $500 to his or her tax liability for each of 15 years, beginning with the second taxable year following the year in which the purchase was made. If the taxpayer sells the residence, the remaining unrecaptured credit must be added to tax liability. The only limitation on this accelerated recapture is that it cannot exceed the taxpayer's gain on the sale of the residence. Exceptions exist for death, involuntary conversion, and transfers between spouses or incident to divorce.

Here is what Wayne noted with respect to this credit: "These people are going to have to be concerned with paying for their house and keeping up with when it's time to begin to repay the "interest-free governmental loan". What will IRS to do recover this money from those who don't or can't repay it timely? Will they actually take back the house the government helped them purchase? This is really going to complicate the lifes of IRS and tax preparers in general." Indeed. If the taxpayer is unable or unwilling to pay the recapture tax, does the IRS jump in ahead of the first mortgagee, or is the IRS relegated to a secondary position? Does the IRS have a lien on the property from the time the credit is claimed, or only after it files in response to nonpayment of taxes in a subsequent year? Does the Congress really want the IRS to be in the business of foreclosing on homes, or forcing their sale, in order to collect taxes that would not have existed but for the credit? If the taxpayer would not have purchased the house but for the credit, isn't the Congress putting the United States Treasury into the same position as many sub-prime lenders put themselves when they made it possible for someone to acquire a home who wasn't financially ready to do so? If the banks making the bad loans are bailed out by the United States, who bails out the United States?

Another thought crossed my mind. To the extent the government decides to assist people in purchasing homes, is that not within the bailiwick of the FHA, to be administered through loans made or guaranteed by FNMA and FHMC? Why now get the Treasury Department into this business? Unlike the credit for first-time home purchases in the District of Columbia, a provision designed to entice people to purchase homes in Capitol Hill's backyard that would otherwise continue to spiral into the consequences of local government mismangement, this new provision does not target economically depressed areas or neighborhoods with higher than average foreclosure rates.

The temporary nature of this credit also raises questions. It suggests that Congress expects the "problem" to be fading away by the middle of 2009. The problem, it seems, is that housing sales have dropped. Housing sales have dropped because the veil has been removed from the mortgage lending market, and those not financially ready to own homes cannot get loans. Is the solution to have the government lend them money in the form of a must-be-paid-back tax credit because the private sector has finally come to its senses and put an end to irresponsible lending practices?

Yet another concern pops up. This credit is refundable, and there is a reason for that. Many taxpayers with adjusted gross incomes making them eligible for the credit will have tax liabilities that are less than the credit. A useless credit isn't much of an incentive whether or not one agrees with the incentive. This nation has had an educational experience with refundable credits targeted toward low-income taxpayers. The earned income tax credit has spawned so many schemes, many fraudulent, and has caused such havoc among taxpayers and tax return preparers, that the Congress should beware of imitating it without taking steps to minimize the temptations it presents to the schemers who would manipulate it to their advantage. Will the IRS end up directing even more of its resources toward audits of low-income home purchasers as it has had to direct a disproportionate amount of its resources toward auditing the earned income tax credit?

This seems to be another in the long line of tax provisions tossed into the Internal Revenue Code during the past decade that reflect the "Wouldn't it be cool if…?" approach to decision making that permeates post-modern America. Where are the studies that carefully consider the full implications of enacting this credit? When were the hearings that put the spotlight on this provision? Does anyone know if this credit will have any meaningful impact on the economy or the housing sector? Is this simply a matter of tossing another provision into the Code and seeing if it works, figuring that if it does, fine, and if it doesn't, oh well, no one reduces the lobbyists' salaries or votes the incumbents out of office for the gaffe?

Wayne's closing comments are a fitting end to this peek at new section 36: "I just think this whole law was a very ill-conceived thing that got through Congress somehow. I've been in the tax preparation profession since 1963 and have never seen such a crazy concept as contained in this law. I realize the economy needs a kick in the pants, but this is not going to do it."

I'm certain everyone knows who I think needs a kick in the pants, and it isn't the economy and it isn't Wayne.

Last week, in Why This New Tax Provision?, I asked why Congress had complicated the Internal Revenue Code, tax return filing, tax forms, instructions, and the tax law by adding a new above-the-line deduction for a small portion of real estate taxes, and invited the member of Congress who inserted the provision into the legislation to educate me on what transpired during the legislative process with respect to this provision. Though I haven't (yet) heard from anyone on Capitol Hill, I have been the beneficiary of two explanations, one from Andrew Oh-Willeke and the other by Robert D. Flach.

Andrew suggests that the lobby for this new deduction is the AARP and that the beneficiaries of the deduction are "elderly homeowners with low incomes who want to keep living in their homes." These homeowners are asset-rich and income-deficient, and even though the provision "doesn't make much sense from a tax complexity or economic necessity perspective," it is difficult for legislators to deny some sort of relief to these homeowners. What the AARP and Congress understand is that older voters are "the most reliable voting block in existence, and are capable of mounting massive letter writing campaigns." Older voters who don't own homes, or who itemize deductions, see the provision as an indication that "a member of Congress who votes for it cares about elderly homeowners generally." Andrew notes that to this extent it resembles the additional standard deduction for elderly taxpayers.

After doing some research, for which I am deeply appreciative, Andrew determined that the AARP did lobby the bill but, as reported by the New York Times and other media outlets, with its primary focus on reverse mortgages and FHA administration. It is possible that the provision had been sitting on the shelf, waiting for an appropriate piece of legislation to come along to which it could be attached. Considering that the AARP lobbies at the state level for senior citizen property tax relief, it makes sense to conclude that the AARP was the moving lobbying force behind the provision. Interestingly, an earlier Senate version of the provision, which would have limited its benefits to taxpayers living in localities that did not raise property taxes, met objections from a large coalition including the National Conference of State Legislatures, the United States Conference of Mayors, the Council of State Governments, the National League of Cities, the International City-County Management Association, the National Association of Counties, and the National Education Association. Their point was that the Senate version would discourage localities from raising tax rates to make up for revenues lost to falling home values, and could force localities to cut funding for schools, police, and other public services.

According to AARP research, 63 percent of Americans aged 65 or older filed tax returns in 1998, but only 50.6 percent of them had positive tax liability. The other 49.4 percent would not benefit from increased deductions, increased exemptions, reduced rates, or increases in nonrefundable credits. They are not the beneficiaries of the new provision. The AARP also determined that only 27 percent of older filers itemize deduction and thus benefit from the existing deduction for real estate taxes. What is unclear from these two disconnected bits of statistical information is how many of the the 50.6 percent with positive tax liability itemize deductions. A good guess is that all, or almost all, of the itemizers are among that group. That suggests that only one-fourth of senior citizens file tax returns with positive tax liability but do not itemize deductions. In other words, the new provision benefits, at best, one-fourth of senior citizens.

Robert D. Flach, the Wandering Tax Pro, shares this comment: "In response to who will claim the deduction, as I have mentioned here before I do see several of my retired senior clients receiving the very small benefit of this deduction – taxpayers who have paid off their mortgage and have an inflated standard deduction which is more than their deductions due to 2 additions for age 65 or over." In other words, the conclusion that I reached, that the benefits of the new provision are rather limited, is corroborated by the observations of yet another tax practitioner.

If the notion that the other three-fourths are more willing to vote for incumbents because their support of the new provision indicates some sort of caring about older citizens is correct, it strikes me as rather sad that the nation's tax laws must be complicated and tax administration increasingly burdened in order to make some people feel good about Congress. That people would consider something of no value to them to have value is baffling. It is inconceivable that anyone will find a tax provision worth $50 to $75 for one year will make the difference between keeping and losing his or her home.

If Congress truly cared about the impact of rising property taxes on elderly low-income homeowners, it would do something other than enact a provision that benefits a fairly small proportion of them. It would examine the reasons for those property tax increases, and if it did so properly, it would discover that it, yes, the Congress, is responsible for a substantial portion of the increase. The Congress consistently enacts mandates that it imposes on state and local school systems, but fails to provide funding. These unfunded mandates then become a fiscal obligation of the states and localities, which then must raise taxes in order to pay for what the Congress has ordered them to do. I suppose, though, that by enacting these unfunded mandates, members of Congress obtain yet another block of votes in their perpetual campaigns to remain in office and hold power. Somewhere, somehow, the goal of retaining power has usurped the task of doing what is right for the country, and somehow politicians and their consultants have figured out how to distract taxpayers from focusing on long-term questions of national interest by blinding them with misleading promises of short-term individual benefits that aren't, after close examination, benefits after all.

The Comparative Effectiveness Research Act of 2008, introduced last week in the Senate as S. 3408 (which can be found through a search at the Thomas legislation site), is a proposal worth examining because, although it would impose a tax on health insurance in order to fund "comparative effectiveness research," it seems to be slipping under the radar because so many other issues are getting attention in the press. As I interpret the legislation, people would be funding research designed to compare the effectiveness of differing approaches to dealing with a disease, illness, or medical condition. The few Senators who have commented on the legislation claim that the funding is a tax rather than a fee, but for me, regardless of what the charge is called, the initial question should focus on what people are acquiring in exchange for what they would be paying.

The fee, or tax, or whatever it is called, would be imposed by new Internal Revenue Code sections 4375 and 4376. Section 4375 would impose a $1 fee on each person covered under any accident or health insurance policy, including group health policies, issued with respect to individuals residing in the United States. The $1 would be reduced to 50 cents during 2012. The issuer of the policy would be required to pay the fee, but it would be a good guess to conclude that this cost would be passed along to insureds. The fee would not be imposed on an insurance policy if substantially all of its coverage is limited to accident insurance, disability income insurance, supplemental liability insurance, workers' compensation, automobile medical payment insurance, credit-only insurance, coverage for on-site medical clinics, and coverage described in regulations as being secondary or incidental to insurance benefits other than medical care. Starting with policy years ending in any fiscal year beginning after September 30, 2013, the $1 amount is increased to reflect the percentage increase in the projected per capita amount of national health expenditures. An identical fee is imposed on self-insured health plans, defined by the legislation as plans providing accident or health insurance through a means other than an insurance policy, if established or maintained by one or more employers for their employees, by one or more employee organizations for their members, and by several other specified associations or organizations. Under section 4377(c), the fee would be treated as a tax for purposes of the procedural and administrative provisions of the Code.

The fee, or tax, collected under sections 4375 and 4376 would be transferred to the Comparative Effectiveness Research Trust Fund, known as the CERTF. In addition to the fee or tax imposed by sections 4375 and 4376, there would also be transferred to CERTF fixed dollar amounts, ranging from $5 million in fiscal 2009 to $75 million in fiscal 2012 through 2018, to be taken from the Treasury general fund. Amounts in the fund are to be made available to the Health Care Comparative Effectiveness Research Institute, which I am going to call the HCCERI even though the statute does give it an acronym as it does for the CERTF.

The HCCERI is established as a D.C. nonprofit organization, though the statute provides that it is "neither an agency nor establishment of the United States Government." According to the proposed legislation, "The purpose of the [HCCERI] is to improve health care delivered to individuals in the United States by advancing the quality and thoroughness of evidence concerning the manner in which diseases, disorders, and other health conditions can effectively and appropriately be prevented, diagnosed, treated, and managed clinically through research and evidence synthesis, and the dissemination of research findings with respect to the relative outcomes, effectiveness, and appropriateness of the medical treatments, services, and items described in subsection (a)(2)(B)." Those items are " health care interventions, protocols for treatment, procedures, medical devices, diagnostic tools, pharmaceuticals (including drugs and biologicals), and any other processes or items being used in the treatment and diagnosis of, or prevention of illness or injury in, patients."

The HCCERI is charged with eleven duties. First, it must identify national priorities for comparative clinical effectiveness research, taking into account factors such as disease incidence, prevalence, and burden in the United States, evidence gaps in terms of clinical outcomes, practice variations, including variations in delivery and outcomes by geography, treatment site, provider type, and patient subgroup, the potential for new evidence concerning certain categories of health care services or treatments to improve patient health and well-being, and the quality of care, and the effect or potential for an effect on health expenditures associated with a health condition or the use of a particular medical treatment, service, or item. Second, it must establish and update a research project agenda to address the priorities identified under the first duty, Third, it must conduct a study on the feasibility of conducting research in-house and issue a report within five years. Fourth, it must collect data from specified federal agencies and "Federal, State, or private entities." Fifth, it may appoint advisory penels. Sixth, it must establish a methodology committee. Seventh, it must ensure that there is a peer-review process in place for its research. Eighth, it must share its findings with clinicians, patients, and the general public. Ninth, it must adopt the national priorities described with respect to the first duty, the methodological standards described with respect to the sixth duty, the peer-review process described with respect to the seventh duty, and the dissemination protocols and strategies developed with respect to the eighth duty. Tenth, it must take steps to avoid duplicating research conducted by other public and private agencies and organizations. Eleventh, it must submit annual reports to the Congress and the President, making it available to the public.

The HCCERI would be directed by a Board of Governors, and the statute elaborates on how its 21 members would be selected, not only in terms of constituencies but also in terms of "diverse representation of perspectives" and considerations, though not elimination, of conflicts of interest. Members of the Board would be compensated. The Board would be authorized to hire a director and other employees, to retain experts, to enter into contracts, to provide expense reimbursements, and to issue rules and regulations for operation of the HCCERI. There would be financial oversight by a private sector auditor and the Comptroller General, who would be required to review a variety of information with respect to research priorities and funding. Procedures would be established to ensure transparency, credibility and access, through public comment opportunities, forums for public feedback such as the media and web sites, and disclosure of the process and methods for conducting its research and other information.

So we will be paying for the establishment of another bureaucracy, a rather elaborate one that will conduct research into the efficacy of various medical treatments, but only if it does not duplicate what the private sector and other federal and state government agencies are researching. I suppose there are medical diseases and conditions with respect to which no one is researching the effectiveness and cost efficiency of available treatments. Surely there are private sector organizations, and existing government agenices, looking at the best ways to treat heart disease, various types of cancer, diabetes, tennis elbow, migraine headaches, drug and alcohol addiction, depression, athlete's foot, broken bones, concussions, insect bites, and just about every other medical problem other than, perhaps, the diseases for which the so-called orphan drug credit was designed to alleviate. The proposed legislation does not mention any specific medical illness or condition, so it's rather difficult to figure out what this legislation really is designed to accomplish. It's not as though it is designed to reduce or eliminate Medicare fraud or medical profession malpractice, in which case it would be contributing to the preservation of the free aspect of a free market. It's not as though it is designed to evaluate new pharmaceuticals, because an agency already exists that does that.

Before deciding if it makes sense to impose a tax, or fee, the nation must understand what that tax or fee would be funding and why whatever would be funded needs to be funded. Whether the imposition is called a tax or fee doesn't answer those primary questions. Again I invite the Congress to explain what truly is going on with respect to this proposed legislation.

Last week, in Selling One's Place in a Class: Part I: The Tax Issues, I suggested that the amount received by a student for selling a spot in an over-enrolled course should be treated as amount realized from the disposition of property and gain or loss realized should be computed by taking into account the student's adjusted basis in the right to enroll in the course. I specifically suggested that the adjusted basis in that right should be some fraction of the tuition paid by the student.

A former J.D. and LL.M. student, Ryan Bornstein, practicing in Berwyn and also a colleague teaching as an adjunct in the Graduate Tax Program, though agreeing with me that the transaction is a disposition of property, challenged my suggestion that a portion of tuition be allocated to adjusted basis in the right. The gist of Ryan's argument rests on the fact that the student almost certainly will enroll in another course in order to maintain the number of credits that the student needs to meet academic requirements. Under my approach, the student would need to do yet another allocation so that the right to enroll in the "new" course has adjusted basis, but perhaps instead it would have a zero basis? I think my friend Ryan raises a very good point, and he has persuaded me to reconsider my approach. After all, he teaches the Tax Consequences of the Disposition of Property course, so he is immersed in this are of the tax law.

Perhaps the better view is that this is a situation in which allocation of basis is impractical. The student who pays tuition acquires a variety of rights, including not only the right to enroll in courses, but the right to enter the building, an email account, use of the library, use of school computers and equipment, access to financial aid and career decision advice, and other benefits. Are these rights some sort of inseparable whole, despite the ability of the student to transfer the right to enroll in a particular course?

Ryan raised another point. Suppose the selling student did not need to enroll, and did not enroll, in another course. Would it then make sense to allocate a portion of tuition to the right that has been sold? There is logic in reaching this conclusion, but logic doesn't always find a home in the tax law.

What makes this situation, as Ryan put it, "a very interesting issue for sure," is that other analogies generate different conclusions. These conclusions surely would find even less favor with those critical of my original suggestion. As I thought about Ryan's questions, I considered several other analytical paths. Could the disposition be similar to the grant of an easement? In other words, the student retains the ability to make full use of whatever the school provides in exchange for the tuition. The problem is that the student has transferred the right to enroll in that particular course and no longer can make use of it, whereas when an easement is granted the owner usually has the ability to continue making use of the land. The easement is a sort of "sharing" whereas the sale of the right to enroll in a class is the antithesis of sharing. Nor is the payment akin to the receipt of severance damages, because the place in the course under consideration has not been damaged or destroyed. Interestingly, the consequences of treating the transaction as an easement or as the receipt of severance damages is recovery of basis in the underlying land. The inapplicability of this outcome is apparent from the requirement in one case that the basis recovery be allocated to the portion of the land affected by the easement. What the selling student retains is unaffected by the transfer, and what is affected by the transfer is a right to enroll in a course that the student no longer has. The treatment of basis under like-kind exchanges would be helpful, but I tossed that aside because the student is not carrying on a trade or business or otherwise qualified to bring the transaction within section 1031.

If the student's adjusted basis in the right that is sold turns out to be zero, how does that change the outcome? There would be gain realized. How would it be characterized? Is the right a capital asset? If so, the gain would be short-term capital gain, and unless the student had capital losses to offset it, it would be taxed at ordinary income rates. That's not quite the same result as treating the transaction as compensation for services, as many of my tax colleagues across the country who weighed in on the issue suggested, because this compensation would be subject to self-employment tax (assuming the student was above the threshhold), but It would be close. If the right is not a capital asset, then the gain would not be offset by any available capital losses. It's for these reasons I doubt we will ever see an IRS ruling or a judicial opinion on the question. It will remain a wonderful discussion piece for tax professors, an object of curiosity for tax practitioners, and a looming nightmare of an examination question for tax students.

On July 30, the president signed into law the Housing and Economic Recovery Act of 2008, P.L. 110-289. In section 3012 of this legislation, Congress provides that up to $500 of otherwise deductible state and local property taxes ($1,000 on a joint return) may be deducted by taxpayers who do not itemize deductions. The provision is effective only for taxable years beginning in 2008.

Here's my question: What's the point of this provision? Considering that it adds yet more complexity to the tax law, what urgent national interest does it serve? What significant public economic benefit is generated by a provision that adds not only to the size of the Internal Revenue Code, but also will require attention from the Internal Revenue Service in terms of revised and more complicated forms, additional instructions, alterations to its computer programs, and issuances of notices and announcements if not rulings and regulations. What essential economic repair is accomplished by a change that is certain to confuse many taxpayers and annoy many tax return preparers?

The provision is useless for taxpayers who itemize deductions, because the new legislation adds the $500 (or $1,000) real estate tax deduction to the standard deduction. Most taxpayers who deduct real estate taxes also deduct mortgage interest, and those two deductions alone put the taxpayer in the position of having itemized deductions that exceed the available standard deduction. That leaves, as taxpayers possibly benefitting from this provision, those taxpayers who pay real estate taxes in amounts less than the standard deduction and who have insufficient other itemized deductions to bring their total itemized deductions above the standard deduction. This means we are looking for taxpayers who own homes, pay real estate taxes that are not exorbitant, do not have significant medical expenses, pay little or no state and local income (or sales) taxes, and do not make more than trivial charitable contributions.

How many people own homes on which they are paying little or no mortgage interest? Almost everyone in such a situation either is well-to-do or past retirement age. Most people in those situations make sizeable charitable contribution deductions, incur significant medical expenses, and pay state and local income (or sales) taxes. I have been unable to find any statistical information that identifies the number of people who pay little or no mortgage interest, and have few other itemized deductions aside from low to moderate real estate property taxes.

To make the situation even more bizarre, consider the tax savings generated by what amounts to a $500 or $1,000 increase in the standard deduction. It could be as much as $175 (or $350). It could be as little as zero, if the taxpayer has otherwise unusable credits. Again considering that most taxpayers in the 35% marginal tax bracket, and even in the intermediate brackets, itemizes deductions, the few taxpayers who benefit from this new provision are likely in the 10 percent or 15 percent marginal tax brackets. That means they are looking at a $50 or $75 per-person tax savings. Even if all of these taxpayers rush out and spend that money, it isn't going to stimulate the economy.

An even more perplexing question is the identification of the lobby that pushed for this provision. I doubt it was the American Petroleum Institute, the health care institute, multinational corporations, professional athletes, or charities. Was it the product of a theoretical analysis? What propelled its passage? Surely it found its way into the bill for political reasons. It's in a bill designed to alleviate the housing crisis and the foreclosure chaos, but $50 or $75 of tax savings definitely isn't going to save a person's home from foreclosure or encourage someone to purchase a home.

Would the member of Congress who put this provision into the legislation kindly email me and explain what really has transpired? Even if it's a matter of educating me on the votes that this provision will procure in 2008, I'm looking forward to enriching my understanding of civics and the legislative process. I'm certain others are similarly eager to be enlightened.