MauledAgain

The tale of Philadelphia’s Board of Revision of Taxes continues. A little more than a week ago, in This Just Taxes My Brain, I commented on what was then the latest chapter in the BRT saga. Members of the BRT expressed outrage that anyone dare criticize the job that they and the Board’s employees were doing, and offered all sorts of excuses for why the BRT continues to fail in its charge to assess Philadelphia real property according to law. My previous commentary can be found in An Unconstitutional Tax Assessment System, Property Tax Assessments: Really That Difficult?, Real Property Tax Assessment System: Broken and Begging for Repair, Philadelphia Real Property Taxes: Pay Up or Lose It, How to Fix a Broken Tax System: Speed It Up? , Revising the Board of Revision of Taxes, and How Can Asking Questions Improve Tax and Spending Policies?.

In the latest installment of this long and far-from-over journey, according to City Takes First Steps to Abolish BRT, Philadelphia City Council voted 12-1 to move out of committee a bill that abolishes the BRT. Under the proposal, there would be an agency that did the property assessments and an agency that functioned as an appeals board. The former would report to the mayor, and the latter would be independent. Responsibility for most of the BRT’s work has been shifted, for the time being, to the mayor’s staff. Dozens of BRT employees are patronage employees, namely, people being rewarded for their services to city politicians. The funding for their salaries comes from the school district, which continues to face financial pressures and can ill afford to have tax revenues collected to fund education siphoned off for the benefit of these patronage employees. The salaries are paid by the school district to avoid the prohibition against political activity by city workers. It says a lot about what the politicians think of the citizenry and the significance of law when they flout the rules so openly and brazenly.

The first question that popped into my mind is whether the BRT employees, whose work for the most part is being done by others, will continue to be paid. The answer is yes. What a deal. It gets better.

The first question that popped into the minds of some other people was a related, though different, one. What happens to the BRT employees after the BRT is formally abolished? The Philadelphia Inquirer article cited above reports that one member of City Council warned, "I can't support any BRT legislation if we don't protect employees. If you don't commit to that, then I can't commit to you." According to the article, this particular member of City Council has at least one patronage employee placed at the BRT. The mayor’s finance director promised to produce a plan for dealing with the patronage employees, but won’t reveal what it is. I have a suggestion. Fire them, and let them find jobs on their own by relying on their skills. Let’s see what they would earn in an open market. Will that happen? I doubt it, because after the quoted warning from one member of the council was uttered, eight others jumped in with pleas to “preserve the patronage workers.” Don’t these politicians get it? Don’t they listen to the people? One member of council argued, “Those are 85 real people that pay for their groceries and heating bills with those jobs.” The problem with this argument is that these are jobs in name only, but in substance are hand-outs, because if there were jobs being done, and being done properly, the assessment system would not be the mess that it is. There’s nothing wrong with using tax revenue to hire people who need income to do jobs that need to be done, provided those who are hired perform the work, and provided the government stands ready to dismiss those who don’t do the work. Everybody has a need to pay for groceries and heating bills, but that doesn’t justify drawing a salary without doing the job for which the employee is being paid.

What needs to be done is a complete and accurate assessment of all city real property that conforms to state law. Whatever the BRT and its employees were doing for the past however many decades, they didn’t accomplish what they were paid to accomplish. According to the Philadelphia Inquirer article, it “could take years” to adopt a more accurate assessment system. Years? And then more years to do the actual assessing after the “system” is adopted? The nation put people on the moon in less time, and although Rome wasn’t built in a day, one can imagine that a good chunk of it was built in the amount of time that has been squandered by the BRT since forever. And now there are people who want to continue finding ways to compensate those who failed to deliver? This sort of mentality, and consequent behavior, is the very sort of thing that fuels the anti-tax crowd. Those interested in the maintenance of government providing services to its citizens and funded by tax revenues do not do their cause any justice when they tolerate the BRT approach to government tax assessment, tax collection, and spending of tax revenue.

Soon, City Council is scheduled to deal with the bill that abolishes the BRT. However, the BRT’s demise needs approval by the voters, who would have the opportunity to vote on the question in the May 2010 primary election. If it passes, the BRT would terminate on September 30, 2010. We’ll see what happens. It seems as though there will be a steady supply of discussion points for MauledAgain to consider.

The tax law is complicated. Attempts to simplify it encounter opposition from the special interest groups who gain an edge by reason of their particular special, but complicated, provision. This situation encourages others to seek their own special interest provision. Over the years, tax breaks have been put in place for real estate, the oil and gas industry, energy developers, the timber industry, homeowners, charities, those adopting children, professional sports franchises, banks, domestic corporations doing business abroad, recipients of dividends, investors making money through capital gains, and owners of race horses, to give but a few examples.

Now another group has taken a step to put yet another ill-advised tax break into the Internal Revenue Code. Representative Thaddeus McCotter of Michigan has trotted out introduced the “Humanity and Pets Partnered Through the Years (HAPPY) Act.” He did so on July 31, but I didn’t become aware of it until very recently. Before ripping into it, I will share the language of the bill:

To amend the Internal Revenue Code of 1986 to allow a deduction for pet care expenses.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

This Act may be cited as the `Humanity and Pets Partnered Through the Years (HAPPY) Act'.

SEC. 2. FINDINGS.

The Congress finds the following:

(1) According to the 2007-2008 National Pet Owners Survey, 63 percent of United States households own a pet.

(2) The Human-Animal Bond has been shown to have positive effects upon people's emotional and physical well-being.

SEC. 3. DEDUCTION FOR PET CARE EXPENSES.

(a) In General- Part VII of subchapter B of chapter 1 of the Internal Revenue Code of 1986 (relating to additional itemized deductions for individuals) is amended by redesignating section 224 as section 225 and by inserting after section 223 the following new section:

`SEC. 224. PET CARE EXPENSES.

`(a) Allowance of Deduction- In the case of an individual, there shall be allowed as a deduction for the taxable year an amount equal to the qualified pet care expenses of the taxpayer during the taxable year for any qualified pet of the taxpayer.

`(b) Maximum Deduction- The amount allowable as a deduction under subsection (a) to the taxpayer for any taxable year shall not exceed $3,500.

`(c) Qualified Pet Care Expenses- For purposes of this section, the term `qualified pet care expenses' means amounts paid in connection with providing care (including veterinary care) for a qualified pet other than any expense in connection with the acquisition of the qualified pet.

`(d) Qualified Pet- For purposes of this section—

`(1) QUALIFIED PET- The term `qualified pet' means a legally owned, domesticated, live animal.

`(2) EXCEPTIONS- Such term does not include any animal—

`(A) used for research or owned or utilized in conjunction with a trade or business, or

`(B) with respect to which the taxpayer has claimed a deduction under section 162 or 213 in any of the preceding 3 taxable years.'.

(b) Clerical Amendment- The table of sections for part VII of subchapter B of chapter 1 of such Code is amended by striking the last item and inserting the following new items:

`Sec. 224. Pet care expenses.

`Sec. 225. Cross reference.'.

(c) Effective Date- The amendments made by this section shall apply to taxable years beginning after December 31, 2009.

McCorter claims that the legislation would give pet owners tax relief while strengthening the human-animal bond. According to a Parade Magazine article, animal-rights activist Leo Grillo claims that “a tax break for the 60% of Americans who own pets will help keep pets in the home, where they contribute to the emotional well-being of families,” adding, “If Americans are happy and emotionally stable, they are going to be more productive, and that helps the economy.”

It is unlikely that someone who does not have a pet is going to run out and get one on account of this sort of tax break, for the same reason no one decides to adopt a child because there is a tax credit for doing so. People who do not own pets have reasons for not owning pets, and those reasons are not going to change because of a tax break. Some people are allergic to pets. Some people have schedules that don’t leave them time to care for pets. Some people live in places that don’t accommodate pets. Some people don’t have room for pets. Some people would make bad pet owners because they lack the skill, the commitment, the responsibility, or the maturity to handle the non-monetary burdens of pet ownership. If there is someone who doesn’t own a pet because he or she cannot afford to own a pet, the tax break isn’t going to solve that problem because it’s a deduction, making the tax savings insufficient to fund the cost of having a pet. All that is happening with this legislation is that a very well-organized group of people who are into owning pets have rallied to try obtaining for themselves a tax break that shifts some of the cost of their avocation onto other taxpayers.

Without a doubt, enterprising and clever people would turn this tax break into a tax shelter. If this proposal is enacted, it will encourage professional animal breeders to increase their output, advertising their wares with a “tax deductible” flag. How many people would be enticed into buying a pet only to turn it loose or turn it in to a shelter when they discover the “impositions” pets put on their otherwise carefree lives? People who want pets have pets, except for children whose parents are putting a veto on the idea, and if the proposal is designed to increase the number of people with pets, its success would mean a further incursion into limited global resources that should be used for assistance of humans who are barely, if at all, surviving.

Please don’t interpret my objection to this proposal as some sort of anti-pet or anti-animal position. I expect some people will start barking at me because of my criticism of this bill. I like animals. I’ve had pets and I’ve cared for others’ pets. Though I’ve not had the experience of tending snakes, horses, or alligators, I have learned how to see to the needs of cats, dogs, fish, birds, and turtles. Never did I, or any of the owners, dream that other taxpayers should foot the bill.

Because of my schedule and activities, I don’t currently own a pet. But I do have my own avocations. One of them, for example, is genealogy and family history research and publication. That activity makes me happy, contributes to my emotional well-being, and makes me more productive. It surely helps the economy, because dollars are flowing every time I subscribe to a research site, purchase a book, pay a researcher to help me, or invest in the publication of a book. Should there not be a deduction for the costs of maintaining this activity? What about the person whose “pet” is a motorcycle? Motorcycles require money, and time. They make their owners happy, contribute to their emotional well-being, and make their owners more productive. Motorcycle ownership helps the economy. How about a tax break for motorcycle enthusiasts? Or we could consider cosplay, another activity that makes people happy, contributes to their emotional well-being, and makes them more productive. The costs of costumes, travel to conventions, and other expenses help the economy. Is it time for a cosplay deduction? I could add dozens more to the list, but the point ought to have been made. Incidentally, I don’t own and have never owned a motorcycle. Nor do I participate in cosplay, unless showing up years ago at a law school Halloween Party in jeans and a flannel shirt claiming to be a lumberjack, and getting a ton of grief from everyone else for being lazy, counts as cosplay.

A Parade Magazine article quotes William Ahern, director of policy and communications at the Tax Foundation. He puts it nicely: “The tax code should not be used to make people ‘happy.’” He notes that the proposal is “just another snowflake in the blizzard of unjustifiable tax deductions, exemptions, and credits that congressmen propose to curry favor with a particular group of voters.” Amen.

It’s high time that members of Congress stopped using the tax law as a pawn in their trolling for votes. It’s tawdry. It’s offensive. It’s wrong. It endangers the republic. Congress needs to reject this latest attempt to monkey around with the Internal Revenue Code.

With my curiosity tweaked by a TaxProf Blog posting, I took a look at the OECD’s recently issued Revenue Statistics 1965-2008, 2009 Edition. That report contains, among other things, a comparison of the “total-tax-to-gross-domestic-product-percentage” for 26 countries. What sparked my curiosity was the relatively low percentage for the United States. With the anti-tax crowd and the “reduce taxes now” advocates painting a picture of overtaxed Americans, I thought it would be interesting to look more closely at the OECD information.

In Denmark, total taxes in 2008 equal 48.3% of gross domestic product. That figure tops the list. At the bottom is Mexico, where total taxes equal 21.1% of gross domestic product. In the United States, total taxes equal 26.9% of gross domestic product. The only countries with ratios less than that of the United States were Mexico, Korea, and Turkey. In 2007, only those three countries and the Slovak Republic had lower ratios, and Japan had the same ratio.

This information casts doubt on the argument that the United States needs to reduce its tax rates to remain competitive and to attract business activity. If entrepreneurs are avoiding the United States because its taxes equal 26.9% of its gross domestic product, surely they are not heading for nations where the ratio is 32.2%, 34.5%, 43.1%, or 47.1%, which are the ratios for Canada, New Zealand, France, and Sweden, respectively, let alone Denmark. Even Ireland, a nation which has attracted significant business development during the past several decades, comes in at 28.3%.

If those advocating reduction or elimination of taxes are correct in describing United States taxation as too high, what descriptor is available to describe taxes in almost all other industrialized nations? What does it mean when the United States has one of the lowest ratios? Does it mean that the United States is under-taxing itself? Does it mean that the United States has more in common with the tax havens of the world than it does with the countries with taxes set at amounts sufficient to pay for the nation’s endeavors?

But we know that statistics are boring. Sarcasm aside, when was the last time OECD studies were mentioned by the folks who want to reduce taxes but who scream whenever any program is nominated for the tax cut axe? Their bluster suggests that the ratio for the United States is way above 50%. The facts tell us something very different.

Last week, an article in the Philadelphia Inquirer, that in some versions was accompanied by a “Yankees Lose” tagline, suggested that professional athletes were getting a bad deal and that Philadelphia and Pennsylvania were getting good deals because the latter impose income taxes on the former when the former come to town to play games. The article noted that the New York Yankees probably paid more than $300,000 to the state and the city on account of playing World Series games in Philadelphia. The article also noted amounts paid by players for visiting teams in other sports.

The article explains that the players and the tax return preparers dislike what “they see as tax lunacy.” An attorney for player associations in at least three major sports says that “It’s a painful issue for athletes.” The article claims that “some tax experts” consider the athletes to be “victims” and then quotes the policy director of the Tax Foundation who calls the taxation of professional athletes “an inexcusable money grab.”

What nonsense. It doesn’t take much ignorance to stir up a lot of indignation.

The first thing that needs to be understood is that there are no legal barriers to imposing an income tax on a nonresident individual who performs services in the jurisdiction imposing the tax. All sorts of taxpayers throughout the country experience the consequences of this principle, even if some of them don’t quite understand it. People who live in New Jersey or Connecticut and work in New York City pay income taxes to New York State and New York City. So the claim by the policy director of the Tax Foundation that professional athletes are “targeted” is nonsense because 99.9% of the nonresidents paying income taxes to New York, for example, are not professional athletes. Let’s not think that there is some sort of tax imposed solely on professional athletes, and let’s resist this public relations campaign to stir up sympathy for a group of employees whose salaries are far higher than those of the typical person paying income taxes to the jurisdiction in which he or she performs services.

The second thing that needs to be understood is that with two exceptions, the imposition of an income tax on a nonresident does not increase the tax burden of the nonresident. The reason for this outcome is that the individual’s state of residence – and city of residence if it has an income tax -- allows a credit against the income tax that it imposes for the income taxes paid by the individual to the other jurisdiction. For example, assume X is a resident of New York who earns $10,000 in Pennsylvania. X pays an income tax of $307 to Pennsylvania, and then subtracts $307 from the New York income tax liability. One of the exceptions applies when the geography is flipped. If the individual lives in a state, or city, with a lower income tax rate, then there is an increased tax burden. That happens because the credit for taxes paid to another jurisdiction is limited to the amount of tax that the crediting jurisdiction would impose. For example, if Y, who lives in Pennsylvania, earns $10,000 in New York, Y’s Pennsylvania credit is limited to $307. If the tax paid by Y to New York exceeds $307, which it almost certainly will under most circumstances, Y ends up paying more tax than if Y had earned the $10,000 in New York. The second exception is an extension of the first. For individuals who live in the few states without an income tax, when they pay income tax to another state there is no state-of-residence income tax against which to claim a credit for the income tax paid to another state. So, for the most part, the winners and losers in this game are the states and cities, who, through the mechanisms of nonresident taxation and income tax credits, shift tax revenues from one jurisdiction to another.

The third thing that needs to be understood is that states and cities pursue enforcement against noncompliant nonresidents in a selective manner because of limited resources allocated to tax enforcement, a problem that mirrors the underfunding of the IRS with respect to federal income tax enforcement. Certainly states and cities will invest limited enforcement resources in ways that maximize collections, and accordingly will pay more attention to those earning higher amounts within their borders than those earning a few hundred dollars. Certainly athletes, along with celebrities and highly compensated corporate executives, will be targeted, but so, too, are individuals who aren’t in the national spotlight, at least until they become famous because they’re a party in a tax case arising from enforcement efforts. For example, consider the Tennessee resident who spent only 25% of his time in the New York offices of his employer, and the Connecticut resident who did not even have a physical presence in New York, but who were both pursued by New York City; it’s a long story recounted in a series of MauledAgain postings: State Taxation of Nonresidents, Another Setback for the Telecommuting Nonresident Taxpayer, New York Takes a Strike in the Tele-commuter Tax Game, Supreme Court Refuses to Resolve Interstate Tax Dispute, If the Supremes Won't Sing for the Taxed Telecommuters, Will the Congress Dance?

The fourth thing that needs to be understood is that the states and cities imposing income taxes on nonresidents aren’t simply grabbing money for nothing. They are providing services, though there is a good argument that nonresidents should be taxed at lower rates because they don’t consume as many state services as do the residents of the state. Philadelphia, for example, indeed has a lower rate of tax for nonresidents. Visiting athletes, as well as the other nonresidents who come into Pennsylvania or Philadelphia, benefit from roads maintained by the state and city, police protection provided by the city and, yes, the state, trash collection provided by the city, and so on.

These rejoinders to the tenor of the Philadelphia Inquirer article and the positions taken by the policy director of the Tax Foundation and counsel to several professional athlete player associations ought not be taken as an endorsement of unlimited state and city taxation of nonresidents. In that series of postings with respect to the Tennessee resident pursued by New York City, I noted the absurdity of New York City’s claim that because the Tennessee resident could have worked in New York City, he should be taxed as if he had done so. New York City tried to tax all of his income even though he was present in New York City for only 25% of the time. Determining how much of an individual’s income is treated as earned in a city or state in which the individual is not resident is an arithmetic endeavor, but not terribly difficult. For any employee, including professional athletes, it’s a matter of determining how many days the person performed services anywhere and how many days the person performed services in the state or city imposing the income tax.

These rejoinders also should not be taken as a dismissal of the compliance complexity faced by taxpayers who work in multiple jurisdictions, most of whom end up paying professional tax return preparers to deal with the various filing requirements. Is it complicated? Yes. Is it aggravating? Yes. Could it be simplified? Yes. I wrote about this issue in Curtailing Multistate Tax Filing Burdens, in which I examined the Mobile Workforce State Income Tax Fairness and Simplification Act, H.R. 2110, a noble but flawed attempt to deal with the complexity. That bill, incidentally, has not been enacted into law.

Though there is room for improvement in how nonresidents are taxed, those are principally matters of procedure and refinement. The notion that taxation of nonresident professional athletes is “an inexcusable money grab” and the notion that these players are “victims” is utter nonsense. Perhaps these wealthy employees have decided that they, too, deserve some sort of special treatment in addition to and along the lines of the tax breaks afforded to wealthy individuals generally. The only barrier to this nonsense and this play for special treatment is education of the citizenry. Hopefully this posting has contributed in a positive way to that effort.

I don’t understand it. After I read about it in this news item, I thought about it and concluded that it made no sense when viewed rationally and reasonably. How can something so simple become so convoluted?

I’m talking about the reaction of Philadelphia’s Board of Revision of Taxes to the criticisms leveled at the way it operates, its failure to generate property valuations that comply with applicable law, its use of patronage employees, and all of the other shortcomings that afflict it and that have led to proposals to put it out of existence. I’ve commented on the BRT’s issues in a series of posts: An Unconstitutional Tax Assessment System, Property Tax Assessments: Really That Difficult?, Real Property Tax Assessment System: Broken and Begging for Repair, Philadelphia Real Property Taxes: Pay Up or Lose It, How to Fix a Broken Tax System: Speed It Up? , Revising the Board of Revision of Taxes, and How Can Asking Questions Improve Tax and Spending Policies?. There is no question that the BRT is seriously flawed, has not accomplished its assigned task, has produced indefensible assessments when it has generated work product, and has had all sorts of other administrative and ethical difficulties.

So when the a hearing was held to explore the prospect of eliminating the BRT, six of its members showed up and not only defended their track record, but also expressed outrage at the accusations and criticisms that had been directed at them and the BRT. The BRT chair claimed, “I want you to know that I take umbrage and offense.” According to the news report, she claimed she was “’insulted,’ angered by the ‘public flogging’ she had taken, and disturbed by the ‘vicious and wrong’ attacks to which she said BRT employees had been subjected.” Another board member commented, “It is my honor that is at stake here. I will not let it be tarnished." A third board member defended the patronage hiring system, claiming, “That’s the way things work. It doesn’t make it wrong.” To accusations that City Council is responsible for BRT’s failures, a council member replied, "To blame Council for the inaccurate assessments is utterly ridiculous. We don't work at the BRT. We aren't the ones who have spent millions of taxpayer dollars on a system that for four years they have been telling us is six months away from being finished. How do we get blamed for something that they control?" Members of the BRT also claimed that the mayor and his administration caused the problem because they cut funding for the BRT.

They just don’t get it. If anyone should be offended, it’s each taxpayer whose property is assessed at an inappropriate amount, and it’s each taxpayer who endures curtailed city services because property taxes are less than they would be if assessments were done properly. It’s classic “blame the victim” mentality to show up and try to upstage the proceedings by acting as though those who complain of inefficiency, ethical breaches, and failed efforts are the problem. If honor matters that much, then perhaps doing the job the way it needs to be done would be more helpful and gather the accolades that would ensue if things were done the way they should be done. The notion that because things are done a certain way, it’s appropriate is total nonsense. When things are being done a certain way, even if for a long time, and they don’t cause things to be accomplished that should be accomplished, and don’t cause things to be done in the manner they should be done, those things need to be abandoned. To blame recent budget cuts, which were applied to all city agencies and not just the BRT, for problems that reach back for decades is more nonsense. Apparently the BRT subscribes to the philosophy that it’s always someone else’s fault.

The BRT would have earned points had its members showed up and apologized for the mess that afflicts the Philadelphia real property tax system. The BRT would defuse the situation if it were to admit to the rampant mismanagement that has been uncovered by a series of articles written by Philadelphia Inquirer investigative reporters and by others, such as the watchdog agency, the Committee of Seventy. The BRT would have helped the public’s perception of its operations had it admitted to its failures and offered to do whatever City Council chose to do, which at the moment appears to be the recently introduced plan to dismantle or totally revamp the BRT. The news report suggests that the BRT may be backing away from its initial decision to cooperate with the efforts to eliminate or redefine it, and suggests that the anger expressed by the six board members may be fueling that retreat.

It’s this sort of attitude by government civil servants that contributes in part to the resentment many taxpayers direct toward the tax system. But it’s important to separate the tax from those administering it. In this instance, resentment with respect to the property tax isn’t justified, but resentment with respect to its administrators surely is. That resentment surely is bolstered by the BRT reaction to reasonable expressions of dismay at the job it has and hasn’t done. I doubt I’m the only one whose brain is taxed trying to figure out how the BRT acts as though it’s the good guy in this mess.

David Obey, a representative from Wisconsin, has renewed his call for a war tax to fund any increase in expenditures to finance the war in Afghanistan. According to various reports, including this one, though he considers the war, as being presently fought, to be futile, he argues that his tax proposal would “create a sense of shared sacrifice that has been missing in the last eight years.” According to this report, almost all of the proposed tax would be raised from upper income taxpayers.

Obey is not the first member of Congress to call for a war tax. Several years ago, Senator Joe Lieberman suggested that a special tax be enacted to pay for the war against terrorism, an idea on which I commented in War Taxes: Even A Discussion Can Teach Lessons. Four years ago, I took the same position, though I doubt my MauledAgain post had any influence on Lieberman or Obey. What I said in Taxes and Sustaining a Civilized Society, still holds true:

Whether or not one supports none, one, or all of the various military actions undertaken in connection with this war, it is inconceivable to me how one can disagree with the notion that if there is a war the war must be funded because wars cost money.

Nine months later, in A Memorial Day Essay on War and Taxation, I made the same point and noted the risks that the nation would face if it continued to cut taxes while fighting a war:

War cannot be done on the cheap. War is not free. War ought not be purchased on a credit card. War is a national commitment. Hiding the true cost of war in order to influence a nation's willingness to engage in war is wrong. Ultimately, the price to be paid will be dangerously high.

I have come back to this point repeatedly, quoting myself, for example, in War Taxes: Even A Discussion Can Teach Lessons, in Peacetime Tax Policy While Waging War = Economic Mess, in Does It Matter Who or What is to Blame?, and in Leaders as Teachers: Fixing the Financial Fiasco.

For the most part, my focus has been on the economic disequilibrium generated by the incompatibility of cutting taxes and refusing to raise taxes while increasing expenditures, whether for war or pretty much any other purpose. But there’s another aspect to the war tax idea, and it is the notion mentioned by Obey and repeated in commentary such as this one, that “the notion of shared sacrifice has somehow gotten lost in the shuffle.” As Joe Klein points out in that editorial, “In a war, every citizen should have to contribute something to the effort.” If I differ with Klein, it’s that I would replace the word “something” with the word “enough” because every taxpayer is already paying something. The question is whether taxpayers are paying enough. What exacerbates the problem is that the sacrifice falls disproportionately on the poor, and to a lesser extent, on the middle class. The children of the wealthy and of the elite are far less likely to be found on the battlefield. Perhaps if some of the speculators, day traders, mortgage gamblers, toxic debt bundlers, Ponzi scheme operators, security fraud perpetrators, and other negative contributors to the economy were experiencing the risk of death and injury at every turn, the pursuit of money that so motivates them would be tempered with an appreciation for the intangibles, such as freedom, self-sacrifice, and responsibility, that money cannot purchase, and without which, in the long run, money loses its ultimate value.

A few of the comments posted to Klein’s commentary are interesting for a variety of reasons. One respondent suggested that it would be better to have conscription than new taxes, though it isn’t clear to me how conscription eliminates the need for funding. Even conscripted soldiers are paid. But it is an interesting insight into the disadvantages of hiring people to fight one’s wars, whether those hired are volunteer citizens – some, perhaps, motivated by an economic mess that makes other employment almost impossible to find – or foreign mercenaries. Very few nations have done well, or even survived, trying to rely on mercenaries and volunteers to do the work of a citizenry. Another respondent took the opportunity to trumpet the seeming eternal proposal to “pass legislation that downsizes the IRS and put on a flat tax for ALL citizens to pay,” without explaining how a flat tax simplifies the rules for exclusions, deductions, credits, timing, assignment of income, or any of the many tax issues that have nothing to do with the tax rate. Another respondent explained, “I would love to see taxation tied directly to spending and programs. Fund the war with a war tax. Fund education with an education tax. Fund healthcare with a healthcare tax.” This idea has some merit but would make the tax law absurdly complicated. The advantage is that it puts into the spotlight the cost of a program and the tax impact it would cause. The disadvantage is that it would require as many tax computations as there are programs, and even a government operating under libertarian principles would involve dozens, if not hundreds, of programs. A better alternative is to provide each taxpayer with a “receipt” when a tax return is filed, showing how much of the taxpayer’s tax liability is channeled to each program, and also showing how much money the taxpayer, as a citizen of a deficit-spending government, has “borrowed” to pay for unfunded programs.

The repeal of the ill-advised tax cuts is long overdue. The alternative, keeping them in place, promises nothing but continued economic turmoil, steadily increasing debt, escalated infrastructure failures, deteriorated national security, increasing numbers of people living in poverty, eroding educational achievement, and eventual national decline. Defenders of those tax cuts, and of the irresponsible waging of war while piling on more tax cuts, ought to ask themselves who really benefits from those unwise actions. Why do they put so much effort into defending the greed of the greedy? Why are they investing so much energy into shielding from taxation people whose incomes are multiples of their own, and whose stewardship of the nation and its economy has been worse than abysmal? Is it a futile hope that they will join their economic masters? Is it a matter of surviving by being paid to push their agenda? Do they, like the flat tax advocates, simply not understand taxation and economic principles?

We’re told, in this report, that Senator Carl Levin, who initially supported Obey’s proposal, has retreated somewhat, saying, "Well in the middle of a recession we're probably not going to be able to increase taxes, [something that] should have happened some time ago." Indeed. Better late than never, and as for the recession, repealing those tax cuts from a decade ago will do more to help the economy than to hurt it.

In New Jersey to Follow in California's Tax Footsteps?, I noted that "Now New Jersey gets a chance to see what happens when tax revenues are reduced but demand for government spending continues unabated" and asked "how much spending will be cut from each New Jersey program on account of the governor-elect’s planned spending cuts?" The folks who run the Quinnipiac University polls were thinking the same thing, and last week released the results of a series of questions they posed to New Jersey residents.

According to the poll, 68% of the respondents favor cutting programs and services, whereas only 23% advocate increased taxes. Of those answering the poll questions, 75% support a wage freeze for state workers, and 61% advocate laying off state workers. Not one of several state programs nominated for reduced state funding gathered the support of a majority of the poll's respondents. Only 41% wanted to cut economic development spending, 30% would vote for reduced social services funding, a mere 11% favored cuts in education spending, and a scant 7% stood up for reduced health care expenditures.

This lack of unified focus shows up in how New Jersey residents dealt with specific questions. With respect to state spending for local government and schools, 60% want it to remain the same, 20% want an increase, and only 16% favor a reduction. Though 54% oppose school vouchers and 55% do not want to expand charter schools, 51% want increases in state spending on early childhood education.

When compelled to suggest a tax that should be raised if tax increases were to be part of the solution to the state's fiscal mess, 30% went for tolls, 28% chose the sales tax, 15% opted for gasoline taxes, and 13% selected the income tax. Asked specifically about state tax rebates, 45% want to keep them and 29% want to increase them, but only 21% favor cutting them. When asked if the gasoline tax should be increased to pay for highway and mass transit improvements, 62% said no.

About the only thing on which the respondents overwhelmingly reached agreement was the condition of the state's budget problems. A whopping 97% agreed that those problems are very serious or somewhat serious. Yet voters in the poll seem somewhat optimistic that the situation can be resolved, as 49% agree that the governor-elect and the legislature will be able to cooperate in solving the problems.

The poll reinforces my contention that the underlying problem is the continued demand for government spending on programs that benefit state residents coupled with a continued resistance to the idea of paying taxes in order to fund those programs. The results of the poll suggest the extent to which various programs benefit residents. That explains the support for maintaining or increasing tax rebates even though it requires higher taxes on someone in order to do that. It also explains why so few favor cuts in health care, education, and social services funding, why gasoline tax increases aren't preferred, and why so many were quick to target state employees for pay freezes and furloughs.

This sort of entitlement mentality, a vision that grows out of the "I want, I got, I will continue to get" experience of too many people, suggests that finding a common ground to resolve the tax and spend debate in New Jersey, and elsewhere, will be difficult if not impossible. It's amusing to see that almost everyone understands there is a problem, almost half think it will get fixed, but fewer than half can rally around any specific solution to the fiscal mess. It may be a simple matter of what the residents of New Jersey want being something that collectively is more than what the residents of New Jersey have. I repeat my inquiry shared in New Jersey to Follow in California's Tax Footsteps?: "Is no one taught the skills required to balance budgets? Are fiscal discipline and common sense lost abilities? Are there any political leaders still standing who have the courage to explain the true cost, tax-wise and otherwise, of the things that the people demand? Is the nation paying the price for too many years of too many people refusing to say 'no' to the demands of those who are unable to comprehend that money does not grow on trees?"

As enlightening as it was to read the poll and its results, it's going to be far more interesting to observe the proceedings when the governor-elect is sworn in, and he and the legislature sit down to work on the problem. As proposals are floated, leaked, and debated, the controversy and tension between "spend on this" and "don't raise taxes" is going to become heated and nasty. About the only advantage New Jersey holds in this crisis is the ability to look at California and learn some lessons about what not to do. It remains to be seen if this happens.

Section 30B of the Internal Revenue Code provides a credit for alternative motor vehicles. Section 30B(h)(3) provides that, “The terms ‘automobile’, ‘passenger automobile’, ‘medium duty passenger vehicle’, ‘light truck’, and ‘manufacturer’ have the meanings given such terms in regulations prescribed by the Administrator of the Environmental Protection Agency for purposes of the administration of title II of the Clean Air Act (42 U.S.C. 7521 et seq.).” With one exception, each of these terms is used elsewhere in section 30B, and it makes perfectly good sense for these terms to be given definitions, and it is efficient and logical to provide those definitions through a cross-reference to definitions in another federal law.

The puzzle, though, is why “medium duty passenger vehicle” is given a definition, because that term does not appear anywhere else in section 30B. In fact, a search of the entire Internal Revenue Code reveals that the term “medium duty passenger vehicle” does not appear in any Code section. Thinking that perhaps the term is used in some bifurcated manner, I searched for “medium duty” in the Internal Revenue Code. It turned up once, in section 30B(h)(3), as part of “medium duty passenger vehicle.”

The next task was to examine the legislative history of the provision. As introduced in the House of Representatives, section 1316 of H.R. 6, the Energy Policy Tax Act of 2005, provided for a new section 30B, which would allow an “advanced lean burn technology motor vehicle credit. Section 30B(d)(6) of the proposed new Code section provided that, “The terms ‘passenger vehicle’, ‘light truck’, and ‘manufacturer’ shall have the meanings given such terms in regulations prescribed by the Administrator of the Environmental Protection Agency for purposes of the administration of title II of the Clean Air Act (42 U.S.C. 7521 et seq.).” The term “medium duty passenger vehicle” wasn’t there. As passed by the House, and as placed on the calendar in the Senate, the language of proposed section 30B remained the same.

In the Senate, the credit was renamed the “alternative motor vehicle credit,” several other types of vehicles were added to the list of those qualifying for the credit, and there was a provision in proposed section 30B(c)(2)(A) that set forth different credit amounts, specifically, “In the case of a new qualified hybrid motor vehicle which is a passenger automobile, medium duty passenger vehicle, or light truck.” In section 30B(c)(4)(A), the definition of “new qualified hybrid motor vehicle” was separated into different types, and section 30B(c)(4)(A) set forth the conditions that needed to be met by a “passenger automobile, medium duty passenger vehicle, or light truck.” Because the term “maximum available power” was used in the definition of “new qualified hybrid motor vehicle,” it, too, needed to be defined, and again, was defined separately, in section 30B(c)(4)(C)(i) for any passenger automobile, medium duty passenger vehicle, or light truck. One of the types of new qualified hybrid motor vehicles was a “heavy duty hybrid motor vehicle,” and its definition excluded any “medium duty hybrid motor vehicle.” Understandably, the definition provision, then in section 30B(f)(3), was changed to include medium duty passenger vehicle.

In the House-Senate Conference, subsection (c) became subsection (d), and paragraph (2)(A) was rewritten to provide different credit amounts “In the case of a new qualified hybrid motor vehicle which is a passenger automobile of light truck and which has a gross vehicle weight rating of not more than 8,500 pounds.” That removed the need for the other definitions that referred to “medium duty passenger vehicle” and so those definitions were removed. However, nothing was done to the definition provision, which by this point had become section 30B(h)(3), and the definition of “medium duty passenger vehicle” remained, even though the phrase had been taken out of the various places it had appeared in what became subsection (d).

Oops.

There are lessons to be learned. It’s good to be thoroughly familiar with the document on which one is working, but that doesn’t happen when tax legislation passes from committee to committee, with all sorts of people hovering over people’s shoulders, figuratively, at least. It’s good to let a document sit, and to go through it again, but that doesn’t happen with tax legislation, and lots of other drafting tasks, because not enough time is budgeted for the process. It’s good to have a reviewer who can look at the document with fresh eyes, an advantage I have for some, but not all, of my writing, and the difference can be significant.

Fortunately, this drafting error does not appear to have any adverse consequences other than making the Internal Revenue Code four words longer than it needs to be. I’m confident that fixing the error will not raise any revenue.

A question that probably has wandered into the brains of at least some readers is, “How, or perhaps why, did you find this?” I found this as I worked my way through section 30B while preparing soon-to-be-published Tax Management, Inc. portfolio 512, Tax Incentives for Production and Conservation of Energy and Natural Resources. As I make certain I’ve dealt with every provision in an applicable Code section, and decide where to position my “translation” of the language, I necessarily ask myself how the term fits in with the overall “outline” of the section. It was during that process that I encountered a defined term that was not being used.

The question that now occurs to me is whether these four words are “deadwood.” Perhaps, but perhaps not. After all, can wood be dead if it’s never been alive? This isn’t a provision that was effective at some point and then rendered meaningless. It was never effective. But it’s there, living in its own little world.

What happens next? Someone on Capitol Hill reads this, and arranges for the deletion of the phrase. Yes, I can dream. What’s more likely is that someone will read this, and then mention it to someone who will make a remark about it to someone else, and eventually it gets to someone on Capitol Hill who remembers it at some point and puts an amendment to section 30B(h)(3) into some pending tax legislation. Likely, but not guaranteed. So all of us now have something to which we can look forward, namely, the “medium duty passenger vehicle” death watch.

And if I'm wrong about this being an orphan provision, please let me, and the rest of us, know. It will be an interesting explanation.

“Tomorrow is Thanksgiving. I don't plan to post tomorrow, and I have a feeling many regular readers won't be checking in. So though it's a day early, here's my annual Thanksgiving litany.”

That’s how I began my 2007 Thanksgiving offering, Actio Gratiarum. I spoke too soon, because my reference to an annual Thanksgiving litany became an inaccuracy one year later, for none of my posts in late November of 2008 dealt with Thanksgiving. What happened? All sorts of tax stories distracted me, though if I wanted to be flip I’d suggest that I intended to give readers of MauledAgain a reason to give thanks, namely, no more Thanksgiving litanies with Latin titles and Latin text. But this post’s title does away with that possibility, doesn’t it?

In 2007, using lawyering terms, I “incorporated by reference” my Thanksgiving posts from 2004, Giving Thanks, 2005, A Tax Thanksgiving, and 2006, Giving Thanks, Again. To that list can be add the fourth Thanksgiving post, the one in 2007, Actio Gratiarum.

Everything mentioned in those previous Thanksgiving posts continues to be something for which I am thankful. The list has been getting longer, as it should, but it’s time to add a few more:

I am thankful for taxes. Taxes bring balance to what would otherwise be an unbalanced economic system. Without taxes, much of what gets taken for granted would not exist, or would command a higher price. It might be trite to claim that taxes represent what must be paid for a civilized society, but it’s true.

I am thankful that as bad as our federal, state, and local tax systems are, that I don’t live in a place that would subject me to the sort of tax systems found elsewhere in the world. Not that the existence of worse systems should give our tax systems a free pass, but it’s time to acknowledge that at some of the tax law writers get some of the provisions right some of the time.

I am thankful that I live in a country where a mistake on a tax return or tax assessment doesn’t bring an immediate transportation to prison, or worse.

I am thankful that I don’t live in the past, in societies that had no tax systems because they relied on serfdom, plunder, and confiscation by royals, nobles, and ecclesiastics, none of whom were selected by ballot or referendum.

I am thankful that I continue to be subjected to user fees that are imposed and collected with little or no inconvenience to me. I appreciate that I have the ability to drive through a toll booth without completing a 10-page form, and often can do so without stopping and fishing for coins or paper currency.

I am thankful that I can criticize the various tax systems in this nation without having my passport revoked, my goods seized, my property invaded, or my liberty constrained.

I am thankful that I can criticize Congress, state legislatures, and local government officials for their woeful record on tax policy and tax legislation. If they were doing the top-notch job that I prefer that they do, I’d have much less about which to write. There are only so many things one can say about chocolate.

I repeat what I wrote three years ago, in Giving Thanks, Again:

Have a Happy Thanksgiving. Set aside the hustle and bustle of life. Meet up with people who matter to you. Share your stories. Enjoy a good meal. Tell jokes. Sing. Laugh. Watch a parade or a football game, or both, or many. Pitch in. Carve the turkey. Wash some dishes. Help a little kid cut a piece of pie. Go outside and take a deep breath. Stare at the sky for a minute. Listen for the birds. Count the stars. Then go back inside and have seconds or thirds. Record the day in memory, so that you can retrieve it in several months when you need some strength.

As I was going through my Thanksgiving posts from earlier years, I saw that and thought to myself, “Every once in a while I do manage to crank out something that’s worth repeating. This is one of them. I’m thankful I’m still around to have the opportunity to repeat it.” And I’m glad all of you are around to read it, whether for the first time, or yet again.

My short essay on The Math of Tax and Spend brought a very perceptive response from Daniel Hoebeke, J.D., a reader who is Gift Planning Officer for the Jewish Home in San Francisco:

As usual, I have found this column most thought-provoking. I wonder, though, if we aren't missing something here. On a personal level, I have no problem with getting less than I have contributed. The proper function of government is, as you note, to rely on some in order to benefit others. However, the missing element in this discussion of the budgetary process is accountability. We are keenly aware in the non-profit world that simply expressing a need is not enough. Even the most consistent donors are demanding that effective stewardship of their gifts is shown. In those cases where non-profits appear to be heavily invested in administrative versus program expenses, we must re-evaluate in order to provide an optimum ROI. Should we expect less from those whom we are supporting with our tax dollars?

This comment did its job, in causing me to think more about this question. Here’s my reply:

You make a good point. Perhaps it's not the budget that needs the close examination. Perhaps it's the "financial statement" or whatever it could be called, prepared after the fact to show what use actually was made of taxpayer dollars, much the same, as you describe, as non-profits set forth their expenditures. I'm fairly certain governments at all levels prepare such reports, but I wonder how public they are. I wonder if they get much attention, considering that budgets tend to get much more focus from the media.

The timing of the comment was almost serendipitous, or should I say that the timing of a major transportation snarl last Thursday was the event that should be tagged as serendipitous, at least with respect to this question of what happens with tax dollars.

As almost everyone knows, last Thursday air traffic was brought to a near halt because of a glitch in the system that is used to control airline flights. The system is responsible for keeping track of airplanes, flight plans, and all the other details that must be monitored so that there isn’t total chaos in the sky. According to this Philadelphia Inquirer story, the problem was caused by a circuit board in a computer system. According to the story, tens of millions of dollars have been invested by the FAA in a “nationwide communications system” intended to “modernize air-traffic control.” However, the project is “over budget” and “plagued by outages.” What is required, whether computers are being used to regulate air traffic or heart-lung machines, is a set of adequate backup equipment and systems. It’s called redundancy, and it’s no surprise that the aviation experts quoted in the story used that word.

According to another Philadelphia Inquirer story, Senator Charles Schumer or New York declared the “country's aviation system [to be] ‘in shambles’” and explained that more money is needed to prevent a repeat of the failure: "If we don't deliver the resources, manpower, and technology the FAA it needs to upgrade the system, these technical glitches that cause cascading delays and chaos across the country are going to become a very regular occurrence." The question that Daniel Hoebeke’s comment suggests is this: “Why, considering the tens of millions already spent, is the system not working?” Was the project underfunded? Is the quality of the equipment below par? Is the software as reliable as much of what most of us use every day when glitches of every sort slow down or crash computers? Or is it simply a matter of a complicated project having its original funding amount cut in order to offset tax reductions, or to satisfy those who oppose government spending?

A preliminary issue that must be addressed is whether government should be in the business of regulating air traffic. There are several alternatives. One is to ban air traffic so that there is no need for regulation. That is, of course, silly. Another is to permit air traffic but dismiss regulation of it. That, too, is foolish. Yet another is to permit the “private” sector to regulate air traffic. As a practical matter, this would require the creation of a monopoly. The cost to air travelers would increase because the cost of running the system would include not only the cost of the equipment, software, personnel, etc., but also the cost of generating the profits that the private sector would seek. Proponents of “privatizing” air traffic regulation claim that there are “efficiencies” in having the private sector take over the task, but what guarantee is there that the private sector would avoid failed circuit boards when the private sector approach is to “purchase on the cheap”? The pitfall of privatization of any monopolistic activity is the lack of accountability and responsiveness on the part of the monopoly. There’s no way for the public to “vote out” the monopoly or the private individuals running it and profiting from it. There’s no competition to keep it in line. That’s a serious weakness in the so-called free market, though a market consisting of a monopoly isn’t a market because there’s no arena in which to dicker over terms and conditions. Those, instead, are imposed by the monopoly.

Turning to the question of taxing and spending, how does one ensure, or at least ensure a high probability of, fiscal efficiency? Whether the funds come from general taxes such as the income tax, or from user fees imposed on airlines and air travelers, concluding that the federal government should operate the air traffic control system does not, in and of itself, tell us anything about the path to tax and expenditure levels for that operation. If the public, through the government, owns a less capable and less reliable system than is required because insufficient funds were expended, how is that remedied? What mistakes were made, and what lessons can be learned from those errors? If the public, through the government, owns a less capable and less reliable system than is required because it took delivery of defective materials or because it overspent by entering into contracts that overcompensated the contractors, how is that remedied? What mistakes were made, and what lessons can be learned from those errors? But none of these questions can be answered until the information is acquired. What happened? How does the public find out? Will the public find out? If the system is underfunded, is it a matter of trying to get by on too few dollars? Was it a bad design, one lacking, for example, redundancy? Was it a good design that fell victim to bad implementation? Were funds diverted to other projects that were no less necessary, in more critical need of funding, and overlooked by Congress? So should government spending on the FAA be reduced to accommodate tax cuts? Or should it be increased as Senator Schumer suggests? The answer depends on information not (yet) available.

Some sort of independent, transparent, information-intense audit of government is required, something far wider in scope and much deeper in review than what currently exists. Ought not governments be subjected to at least the same level of audit and review that it requires non-profit organizations to undergo? The twist is that such an audit might not generate, as some think, nothing more than identification of areas in which government spending can be reduced without adversely affecting programs that the government needs to fund and operate. Such an audit might also discover instances in which insufficient government spending is generating long-term economic costs far exceeding the reductions in government expenditures, and accompanying tax reductions or rejected tax increases. One good example is deferred maintenance on infrastructure. This latest air traffic control fiasco is another good example, although using the word “good” in a sentence describing what happened last Thursday is painful. But imagine how painful it could have been, and how other situations may turn out to be, if the goals of the tax cutters are accomplished.

On Wednesday, in The Math of Tax and Spend, I noted that “The world continues to wait for an answer to the question, ‘So if state taxes are cut, what spending programs should be reduced or eliminated?’ I had asked that question in New Jersey to Follow in California’s Tax Footsteps?.

It seems I’m not the only one with this question. It was posed to one of the candidates in the Republican primary campaign for U.S. Senator from Florida. Mario Rubio is challenging Charlie Crist, currently governor of the state, and an intense argument has developed between each of them, and their supporters, on, among other things, economic issues. The debate pits Rubio’s classic attack on taxes and spending – cut both, he says – against Crist’s decision, as governor, to accept federal stimulus monies to balance the Florida budget. The segment of the Republican party backing Rubio holds firm to the “cut taxes, cut spending” ideology, and Rubio claims that he would have refused the federal stimulus funds. According to this report, Rubio claims he would have cut $6 billion from the $65 billion Florida budget. According to this essay, “When asked by the press to specify how he would have pulled the state out of the economic emergency, Rubio reportedly replied, ‘I don't have the budget in front of me.’” Brilliant. Just brilliant.

Permit me to translate. “I don’t know. I haven’t studied the budget even though I’m quick to denounce the spending authorized by it. All I know is that I should stand up here and preach tax cuts and spending cuts. I’m certainly not going to identify any spending cuts because that would either cost me votes or make me look like an unsympathetic fool who has no understanding of what spending cuts would to do people.” According to the essay, a governor who takes steps to deal with his state’s economic collapse, who knows the budget must be balanced, who knows there’s little if any revenue available from the few fees and taxes that the legislature agreed to increase, who knows that spending cuts would hamper public schools, impair public health, require the dismissal of state workers, reduce jobless benefits, and curtail state services, was “caught in a classic dilemma.” It’s easy, the essay notes, to sing the praises of cutting taxes while campaigning, but it’s not easy to act responsibly when dealing with reality. Didn’t Marie Antoinette have a similar problem in understanding life as it was for the tens of millions not wallowing in untaxed luxury?

The classic “cut taxes” philosophy strikes me as just that. It reminds me of so many other instances in postmodern culture where theory holds sway, but provides little, if anything, of practical value. Think of those folks who are quick to criticize something, but when asked what they would do instead, mumble, “I don’t know.” To those folks, I respond, "Then figure it out, and couple the criticism with at least one constructive suggestion." In other words, don’t simply criticize government spending. Go through the budget, identify the items that should be cut, and then stand up to make an argument for those spending reductions. Maybe it’s possible for one hook and ladder company to cover the entire city. Demonstrate how that could be accomplished. Perhaps it makes sense to eliminate all spending that assists the impoverished. The alternative, sick, dying, and criminally behaving individuals, might appear to be a better alternative for those voters hung up on taxation levels. Perhaps taxes could be reduced if all prisons were closed and prisoners released. Stand up and make that argument. And if the fall-back of “cut waste and mismanagement” becomes the tax cut advocates’ only hope, step up with specific identification of the waste and mismanagement, identifying those who are mismanaging, explaining what should be done differently, and sharing the computation of savings that would permit the sorts of tax cuts that are being advocated. At least the late Senator William Proxmire blessed the nation with his Golden Fleece Award, though the amounts involved were less than a drop in the ocean of federal spending. Though he had to recant on some of them, at least he tried. That's far more than what Rubio and his colleagues in the cut-taxes-and-spending camp are offering us.

There is a difference between demagoguery and leadership. Demagogues rely on sound bites that encapsulate fear, prejudice, and gross oversimplification. Good leadership offers solutions that work, shares specificity that allows evaluation of the proposed solutions, sets an example by engaging in careful study of problems and possible solutions, and understands the needs and concerns of those who are asked to follow. Attachment to abstract ideas for which no practical implementation plans or analysis of consequences are set forth is not political leadership. Resolving the tax and spending problem in this country, at every level of government, requires something more than platitudes and ideological slogans.

The world continues to wait for an answer to the question, “So if state taxes are cut, what spending programs should be reduced or eliminated?” This is a question I asked a few weeks ago in New Jersey to Follow in California’s Tax Footsteps?. At the federal level, there are two additional choices not available to the states, namely, deficit spending and printing money. States, though, need to cut spending if they cut taxes.

The latest show in the “cut taxes” parade took place in Harrisburg last weekend. According to this report, several thousand protesters swarmed the state capital to condemn tax increases and proposals for tax increases. Though sponsored by the Pennsylvania Tea Party Patriots, an organization with an agenda focused on tax reduction and elimination, the protesters who showed up carried signs dealing with all sorts of other issues. It must have been noisy, because one politician tried to influence interpretation of the event by noting, “Although you hear hooting and hollering, these are not radicals. The silent majority is waking up.” I might buy into that perception had tens of millions of people attended the event. Several thousand isn’t a majority in any state. It’s not even close.

The article mentions a woman who expressed concerns about “government spending and the future of her five grandchildren.” She ought to be concerned. She ought to think how tax cuts would affect her children’s future. She should be asked, “If taxes are cut, which programs should be curtailed? Do you want the state to reduce or eliminate funding for education? What would that do for your grandchildren’s future? How about the health department? Or the state police? Or highway and infrastructure expenditures? Do you think your grandchildren have a great future in a place that doesn’t tend to public health, provides reduced or non-existent crime prevention, detection, and solving, or that lets its citizens drive over crumbling highways and failing bridges and overpasses?” After the usual theoretical platitudes and emotional screeds are heard, she, and her colleagues in the anti-tax business, ought to be asked to describe how the country and the state would function in their utopia of no or low taxes.

I wonder if this woman would be happy to have her Social Security cut. There’s a way to reduce spending. I’m sure she would scream that she “paid for it” and that she would have difficulty understanding, or accepting, that what she is getting far exceeds the sum of what she put in plus the earnings on that investment. I wonder if she can see that most citizens are taking more from government than they are contributing to it, and that most of those screaming about high taxes would scream even more loudly when their time at the public trough ends. The challenge is getting people to understand that when they drive on allegedly free highways they are consuming government expenditure dollars, that when they do business or converse with an educated person they are benefitting from the government dollars invested in that person’s education, when they walk their relatively safe suburban and rural streets they are benefitting from taxpayer-financed police protection, and when they purchase gasoline from a pump that claims to dispense the stated number of gallons they are benefitting from tax-funded government inspection of fueling stations. Hidden benefits are rampant. The proof lies in the deficits and budget shortfalls afflicting every level of government throughout the nation.

Many of those drawn to these various anti-tax rallies have convinced themselves that they are getting the short end of the deal, that much of what they are paying in tax dollars isn’t being returned to them. That’s because they cannot or refuse to see the tangible and intangible benefits they accrue from government spending. It is possible, of course, that some individuals could demonstrate that they don’t get as much back as they pay in, though the huge scale of government spending deficits and budget shortfalls suggests that very few would fall into this category. Even in an ideal world, there are individuals who take more than they give, particularly when they are afflicted with needs surpassing their resources. Society, through government, has an obligation to step in, and fulfilling that obligation costs money. Some anti-tax advocates claim that the private sector can and should deal with these situations, but history tells us that the private sector, though sometimes performing admirably, consistently comes up short.

What it comes down to might be a matter of allocation. Many of the haves, on whom most tax burdens rest, want taxes to benefit the haves, and not the have-nots. Is it coincidence that the anti-tax groups have become enlivened during the past year? Is it a reaction to the election results of a year ago? Is it an outlet for the emotional distress of discovering how eight years of tax cutting contributed to an economic disaster the effects of which will continue to threaten the country long after experts declare the recession to be over? Whatever it is, many of us continue to await their proposals. I know I’d like to see a list along the lines of “Cut $x from program y” so that discussion could take place with respect to these ideas. But the only thing I hear, see, or read is a “cut taxes” chant that has become the mantra of a group seemingly incapable of contributing to both sides of the tax-and-spend equation.

Last week, in Partnership Taxation, I alerted students to the trap that exists in section 751 and the need for them to be very careful when dealing with the identification of partnership assets subject to section 751. There is a wrinkle that seems to serve no purpose other than to confuse taxpayers, tax practitioners, and tax students. Some background is helpful.

When a partner “sells” a partnership interest for tax purposes, the tax law (section 751(a), to be specific) treats the gain or loss recognized on the sale as capital gain or loss, except to the extent it is attributable to the partner’s share of section 751 assets in the partnership. The purpose of this provision is to prevent the partner from “converting” ordinary income into capital gain. Accordingly, even though the partner is treated as having sold a thing called a partnership interest, which reflects an “entity” approach similar to a shareholder selling stock in a corporation, an “aggregate approach” is used with respect to section 751 assets. In effect, the analysis “looks through” the partnership interest to the underlying asset.

A similar provision (section 751(b), to be specific) applies to distributions to a partner that changes the partner’s interest in section 751 assets. The purpose of the provision is the same, to prevent the partner from obtaining capital gain treatment with respect to assets that would generate ordinary income.

So what’s the catch?

The catch is that the definition of section 751 assets differs for purposes of section 751(a) and section 751(b). The definitions are identical except with respect to inventory items. For purposes of section 751(a), which applies to sales of partnership interests, all inventory items are treated as section 751 assets. But for purposes of section 751(b), which applies to distributions, inventory items are treated as section 751 assets only if they are “substantially appreciated.” To be substantially appreciated, the inventory items must have a fair market value that exceeds 120 percent of their adjusted basis, with a rule disregarding inventory items acquired to manipulate these numbers.

Why the difference? The short answer is that I don’t know. Once upon a time, the definition of section 751 assets was the same for purposes of both section 751(a) and section 751(b). Inventory items were included only if they were substantially appreciated. Why not include all inventory items? I cannot think of a legitimate, reasonable, worthwhile, defensible reason. If the goal is to prevent the conversion of ordinary income into capital gain, it ought not matter whether the inventory is 104% appreciated or 123% appreciated. It’s not a de minimis rule, because inventory can flunk the substantial appreciation test while having tens or hundreds of millions of dollars of ordinary income inherent in the inventory. Putting aside the fact that this entire discussion would be irrelevant if capital gains and ordinary income were not treated differently, it makes no sense to treat some ordinary income as ordinary income and other ordinary not as ordinary income, but that is how things stood until Congress amended section 751.

When news broke that section 751 was going to be amended, I rejoiced. Well, I didn’t really rejoice, but I was glad, because it meant I could free up some class time because the definition and computation of substantial appreciation would be tossed out of the course. Unfortunately, when the amending legislation worked its way through Congress on its route to enactment, the amendment was tweaked so that we ended up with the “dual definition” of section 751 assets. Why? Again, I don’t know. Why should the ordinary income in inventory that is 104% appreciated be ordinary income when dealing with a selling partner but not ordinary income when dealing with a distributee partner? It’s tough to visualize the special interest group behind this one, because partners rarely know ahead of time whether they’ll end up as a selling partner or distributee partner.

The effect of this difference is to confuse people. True, it creates exam material for tax law professors. That provides the opportunity to identify students who are careful and precise and those who are not, but I prefer to do that using Code provisions that require care and precision for explicable reasons. Nonetheless, I’ve been known to include section 751 asset definition questions on exams and in semester exercises.

Not only is there confusion in terms of the dual definition, there’s also a variety of circumstances where the substantial appreciation rule generates surprise results. For example, assume a partnership has actual inventory with an adjusted basis of 100 and a fair market value of 110, and assume it also has unrealized receivables of 30. Standing alone, the inventory is not substantially appreciated, but when the inventory items, which include the receivables, are aggregated, the inventory items are substantially appreciated. Considering that section 751 assets are often referred to as “hot assets,” (don’t ask), one can refer to this situation as “receivables heating up the inventory.” Consider a partnership that owns inventory with an adjusted basis of 100 and a fair market value of 130. Standing alone, the inventory is substantially appreciated. But assume the partnership also has realized receivables of 60. When aggregated, the inventory items (adjusted basis 160, fair market value 190) are not substantially appreciated. The receivables have “cooled down the hot inventory.” Why should the ordinary income treatment, or not, of a distributee partner turn on theses sorts of “computational games”?

Something else I do not know is how much revenue would be raised if all inventory were treated as section 751 assets for purposes of both sales of partnership interests and distributions to partners. Surely it is some positive number, but whether it is in the tens of millions, hundreds of millions, or even low billions is a question I cannot answer. Perhaps someone else, perhaps a revenue estimator, could crank out the numbers. What I do know is that the tax law would be simplified, by a smidgen, if the definition of section 751 assets for the purposes of sales of partnership interests were extended to distributions. So I return to the question, why not do so? Whatever may have been the reason for not doing so when section 751 was amended, assuming there was a reason, it surely wasn’t and isn’t one that justifies this sort of complexity.

So here’s a proposal that brings simplification and revenue increases, and that can be justified on the grounds that the income in inventory that is not substantially appreciated ought not be taxed at capital gains rates even if one accepts the idea of special low tax rates for capital gains. This sounds like a “shelf project” for Calvin Johnson. Yes, when this is posted, I’m passing on to him the URL for the post. I wouldn’t be surprised to learn he’s “already on it.” Even if it’s a small revenue increase, he keeps telling us we’re going to need every dollar to deal with a looming budget deficit crisis that will severely threaten the nation. He’s right. So I guess I’m going to become a lobbyist, arguing for this change to section 751. But I’d like to think that I’m lobbying for the nation’s economic and budgetary welfare. Of course, I’d rather be lobbying for repeal of the special low tax rates, but it’s worth having a backup plan in the unfortunately likely event Congress cannot be persuaded to ditch a disproven rate giveaway.

Hopefully, someone will appreciate this effort. Perhaps even substantially.

Pittsburgh’s having tax problems again. In No One Drinks to This Tax, I explained how the governor of Pennsylvania tried to soothe the owners of small pubs and bars facing implementation of a newly-enacted drink tax in Pittsburgh by suggesting that Pittsburgh would follow the same selective enforcement approach used in Philadelphia. I followed that post with Another Sip of the Drink Tax, I explored information shared with me by a Pittsburgh-area reader, who alerted me to the purpose of the tax, namely, to fund the financially-troubled Port Authority Transit system. In what should not be a surprise to those who are familiar with my perspective on user fees and taxes, I objected to the shifting of transportation funding from transit users to bartenders and wait staff, which is what studies indicated happens in these situations.

Apparently Pittsburgh officials haven’t learned anything, though surely they don’t read this blog, because they’re now proposing another foolish tax idea, namely, a tax imposed on college tuition. According to this story in the Philadelphia Inquirer from the Pittsburgh Post-Gazette, the mayor and his staff are asking Pittsburgh City Council to approve a budget that includes a one percent tax on tuition received by Pittsburgh colleges and universities. According to the mayor, because institutions of higher education have raised tuition by more than one percent, the city’s proposal “falls right in line with orientation fees, with transportation and security fees, with lab fees,” and he suggests the schools could reconsider other charges.

According to the Pittsburgh Post-Gazette story, the tax would not be a tax on the students. It would not be a tax on the schools. It would be a tax “on the privilege of getting a higher education in Pittsburgh.” Can someone tell me how the city of Pittsburgh can take credit for the education provided by the schools that located themselves in the city? Perhaps the schools should be charging Pittsburgh a fee for bringing jobs and business activity to Pittsburgh. What would happen to Pittsburgh if all of the institutions of higher learning in that city moved elsewhere? Surely Johnstown, Erie, Altoona, and other places would welcome the jobs and economic activity that the schools would bring.

Now, as an advocate of user fees, I can understand the City of Pittsburgh charging schools, and other organizations, within its borders for the services it renders. Even though the schools, and some of the other institutions are tax-exempt, it makes sense to require them to pay for water provided by city water works, for trash pickups made by city refuse collection crews, for police services rendered on the campus, and so on. In the past, the schools in Pittsburgh, acting collectively through an organization called the Pittsburg Public Service Fund, contributed millions of dollars to the city. But last year the city refused to accept the donation, presumably because $5.5 million was insufficient.

Why is the mayor proposing this tax? First, there’s a deficit in the city budget. Second, he thinks that adding another one percent hike to college tuition is “just a nibble compared with the bite that college fees and tuition hikes take out of student and parent wallets.” It would be helpful to his position if he set forth a cost accounting analysis of the services provided to the colleges and their students. Whether that turns out to be one percent of tuition, ten percent of tuition, or one-tenth of one percent of tuition remains to be seen. Picking a number out of thin air, specifically one percent, suggests that not much thought has gone into the proposal. Certainly not persuasive, rational, analytical, specific thinking. The mayor suggested that if it’s acceptable for colleges and universities to charge fees, they ought to charge a fee for the city. How’s that? If a college charges a fee for providing meals to students, it’s providing something for something. Why should the schools charge a fee “for the city”? If the city wants to charge for services, it ought to do so by charging a fee that reflects the cost of providing the services. Do I detect a lack of logic? I surely do.

Where would the tax revenue raised by the tuition tax go? Almost all of it would provided funding for the city’s pension fund and for capital improvements. Hello? Why would it not be used to pay for services provided to the schools?

The mayor claims that he is prepared for “a fight, or a battle, if you will” to deal with the budget deficit. That was his reaction when the institutions of higher learning in Pittsburgh “blasted” the proposal. To the assertion that the tax would reduce the institutions’ competitiveness, and it would, the mayor responded that “if there was a competitiveness issue, it was the schools' fault.” Brilliant. Absolutely brilliant. In the meantime, the mayor has set aside proposals to impose taxes on hospital bills, parking fee surcharges, and water rate increases.

The schools in Pittsburgh claim that the proposed tuition tax is illegal. It is likely that if Pittsburgh’s City Council enacts the tuition tax, litigation will follow. One of the issues is whether the state legislature needs to endorse the tax, because cities and other localities are limited to enacting taxes within the scope of state legislation giving them power to do so. Arguably, there is no state law allowing the imposition of a tuition tax. The controversy over the proposed tuition tax won’t be the first brouhaha of the 29-year-old mayor’s short political career. Far from it, if even half the reports summarized and cited in his Wikipedia biography are true. Reportedly, it’s not his first foray into a tax controversy, though the previous one involved allegations of tax benefits for certain non-profit entities in exchange for sponsorship of participation in a golf tournament.

Some schools, however, claim that any sort of tax is “an attack” on nonprofit status. However, the issue is clouded by use of the term tax, and would be clarified by the use of the term “user fee.” The schools in Providence claimed that they were dealing with their own budget deficits, but it seems to me that schools ought to be paying fair value for what they receive from state and local governments. If they need to cut back on water use, on police services, on trash collection, then they ought to do so. The argument “we’re tax exempt so we get these services for free” is just as silly as the explanations advanced by the mayor of Pittsburgh.

The mayor of Pittsburgh probably got his idea from the mayor of Providence, Rhode Island. But he should have finished reading the story. The attempt by Providence’s mayor to impose a fixed-dollar fee was rejected, an attempted negotiation for voluntary payments fell through, and when he tried to get the legislature to enact a reduced-rate property tax on non-profit organizations, the state legislature balked. When the Pittsburgh mayor said, “I have an idea,” someone should have saved him by saying, “It’s not a good one.”

Here’s a suggestion for the city of Pittsburgh. Enact user fees set at the value of the services provided by the city. Here’s a suggestion for the non-profit organizations, including institutions of higher learning, operating in Pittsburgh. Don’t treat tax exemption as though it means everything is free. Support the city if it attempts to enact user fees set at fair value, and pay them. It’s an arrangement that has been adopted elsewhere, and it works. Had some research been done before the “good idea” was publicized, a lot of embarrassment, bad publicity, and bad tax policy could have been avoided. It’s not too late to prevent tax-dollar-consuming litigation from impeding progress. That’s my idea, and it is a good one.

Earlier today, Mary O'Keefe reacted to my Tax-Free Beverages: Let Them Drink Chocolate? post with a question. Had I read the article, Nutrition: Chocolate Milk May Reduce Inflammation, in the New York Times? I had not. I am grateful for the tip from Mary.

So there's further proof, assuming the studies aren't fabricated products of dairy industry influenced-focused funding, that chocolate is medicinal. Taxing medicine is a horrific idea, and most, perhaps all, state and local governments choose to refrain from imposing sales taxes on prescription medications. Almost all similarly exempt over-the-counter medicines. So, if white milk isn't taxed, and chocolate gets the medicine exemption, chocolate milk should survive the taxation attempt, just as strawberry-flavored milk would escape because of the fruit exception.

Here's the catch. Red wine does a better job of reducing inflammation. Most children who drink chocolate milk probably graduate to soda, coffee, and beer. Perhaps the health care bill should be amended to include a tax credit for people who engage in healthy dietary habits, such as eating fruit, say, strawberries, chocolate, say, covering the strawberries, and drinking red wine. Maybe any chocolate-covered fruit would qualify. Now I'm off to think up a fancy name for this credit, one that is catchy and also generates a fun acronym.

Amidst the furor over children’s access to sugar, particularly sugar-laden beverages, in schools, and proposals to impose a tax on sugary drinks, another front has opened up in the battle for children’s taste buds and dietary intake. For my earlier thoughts on this tax idea, see What Sort of Tax? and The Return of the Sugar Tax Proposal. According to an article with an informative title, Industry Pushes Chocolate Milk in Schools, the dairy industry is starting a campaign to encourage more children to drink milk while at school by touting the allure of chocolate milk. People are quickly taking sides.

It appears that the dairy industry thinks that adding chocolate to milk will encourage students who wouldn’t otherwise drink milk to reach for it at mealtime. Some educators and health-care professionals, particularly those concerned about childhood obesity, prefer to keep chocolate milk out of the schools, and claim that if the only available milk is the usual white milk, students will drink it. These folks see chocolate milk as a sugar-delivery vehicle in the same “food group” as soda and candy. The dairy industry thinks otherwise, and one of its campaign’s goals is to cause people to see chocolate milk as in a separate category because of the nutrients it provides. Opponents of chocolate milk sales in schools claim that there are no signs of calcium deficiency in children attending schools that don’t offer chocolate milk. They also claim, pointing to anecdotal evidence, that children will drink white milk if it’s the only thing available. While the debate picks up steam, no one has yet to calculate the number of schools that offer chocolate milk, the number of those schools thinking about pulling it off their shelves, and the number of schools that don’t offer chocolate milk but that are considering adding it to replace soda and other beverages removed from the menu.

What would help would be a gathering of facts rather than anecdotes, isolated studies, and theoretically-based conjectures. For example, there’s no debating the value of milk as a substance delivering essential nutrients to its consumers. Using information from this nutrition site, I created a table to compare the various characteristics, including sugar content, of four types of milk – there are dozens but I went with the most common:

Type	Chocolate Milk	Reduced Fat Chocolate Milk	Whole Milk	2% Milk
Calories	208	190	146	122
Fat (grams)	8.48	4.75	7.93	4.81
Cholesterol (mg)	30.00	20.00	24.40	19.52
Carbohydrates (grams)	25.85	30.33	11.03	11.42
…sugars (grams)	23.85	23.88	12.83	12.35
Protein (grams)	7.93	7.47	7.86	8.05
Calcium (mg)	280.00	272.50	275.72	285.48
Iron(mg)	0.60	0.60	0.07	0.07
Potassium (mg)	417.5	422.5	348.92	366.00
Vitamin A (Int’l Units)	237.5	567.5	248.88	461.16
Vitamin C (mg)	2.25	trace	trace	0.49

Nutritionally, chocolate milk provides more calories, more sugar, slightly more fat, and slightly more cholesterol than does white milk. It also provides Vitamin C and iron, whereas white milk pales in comparison, and chocolate milk also provides somewhat more potassium. The question therefore becomes one of whether the increased caloric and sugar intake is a price worth paying to get children to drink milk instead of something else. Despite the anecdotal evidence, and the assertion by one chocolate milk elimination advocate that children will not go on a “thirst strike,” it isn’t unlikely that children have turned, and would turn, to water instead of white milk. Water had the advantage of providing nothing much in the way of calories, sugar, or fat, but it also provides nothing much in the way of vitamins, calcium, other minerals, and anything other than thirst quenching qualities.

For teachers, the disadvantage of chocolate milk is that chocolate wires students at least as much as do sugar-containing foods and beverages. What is it like to teach the first class after lunch? Once upon a time, students were sent out to “recess” after lunch, presumably to burn off the energy generated from their meal, to give teachers a chance to eat their own lunch, and to pump fresh air into the youngsters’ lungs. Does recess still exist? It does, in some places, but where it persists, it has been eroded both in terms of time and in terms of permissible activities. So although sugar ingestion and caloric intake deserve attention, and although a good argument can be made that chocolate milk encourages at least some children to drink milk, the chief concern is the challenge of dealing with the consequences of children filled up on chocolate.

At one school, according to the article, a school superintendent reacted to a student petition in favor of flavored milk, and decided that the school would have “flavored milk Fridays.” On that day, students can select not only white milk, but chocolate milk and strawberry milk. Perhaps strawberry milk counts as a fruit serving? I remember some of my elementary school classmates drinking pink milk. Sorry, the color didn’t work for me. It still doesn’t. I wanted my chocolate. Of course, it was white milk for me. My parents and my teachers knew well enough that the last thing they or the school wanted or needed was school-age Jim Maule on chocolate.

Ultimately, several big decisions loom if a tax on sugar-laden foods moves forward. If chocolate milk is subjected to such a tax because it contains sugar, ought not white milk also be taxed? Granted, many fruits contain sugar, but I expect a “fruit exception” to be drafted into “sugar tax” legislation. If an exception is made for white milk, logic would dictate that combining exempt white milk with exempt strawberries should create tax-free pink milk. As for the chocolate milk, full use should be made of the vegetable exception. Chocolate is a vegetable, is it not?