MauledAgain

The other day when I was at the gym, a retired fellow asked me what was going to happen with the estate tax, which as of today has become a zero tax. As we conversed, a crowd grew. Clearly it's a topic that interests people. What impressed me was the depth of knowledge that several people demonstrated about the issue. At least a few have been paying attention. I told them, of course, that no one knows what's going to happen. The fellow who started the conversation with me told us several times that he really wanted and needed to know. So do the rest of us, someone noted. But they made a good point. The taxpayers of this country deserve to know what's going to happen, which means, of course, that they deserve to have had a Congress deal with the matter long before now.

Much has been written, and I have no intention of repeating it, about the various issues that must be confronted because of the failure of the Congress to do its job. Should people make more gifts this year than they planned to make? Should people amend their wills? Should people make transfers to grandchildren? A long list of commentators have mapped out some strategies, though all admit that at some point it becomes a gamble. During the conversation at the gym, I repeated something I've noted to others in earlier conversations, and that's the possibility of drafting tax-contingent clauses in the will. One could set up a will so that different dispositive provisions were triggered depending on the estate tax situation at the time of death. It's not perfect, but it gives the decedent-to-be a little bit of control that otherwise would be lost.

One of the vexing issues is the possibility that when, or perhaps if, Congress gets around to doing something with the estate and other transfer taxes, it will make the changes retroactive to today. Pity the person who dies today, without having had the benefit of mapping out an estate plan that could take into account a tax situation unknown until weeks, months, or even years after death. It is wrong for the Congress to put someone in that position, but that is what the Congress has done. Someone at the gym commented to the effect that retroactivity would be unconstitutional, but I pointed out that although there is some debate about the matter, it appears very likely that a challenge on that basis would fail, unless the lag time were quite long, and even then there's no guarantee.

Thousands of commentators have shared their predictions of what Congress might do, though few go out on a limb and pick one specific possibility, and no one wants to project a timeline for Congressional action. Don't expect me to add to the list of possibilities or to make a projection as to what Congress will do or when it will deal with the matter. I simply don't know. Meteorologists do a better job with weather forecasts than anyone can do reading the Congressional crystal ball.

What I can offer is my condemnation of the Congress for putting America into yet another economic mess. Several commentators have noted, cynically perhaps, that members of Congress benefit from having the estate tax issue held open because it encourages lobbyists for the various positions to rustle up more cash for the campaign coffers of members of Congress. Far be it for me to criticize a cyncial observation. Truth be told, I think these commentators are making a valid point. It's not unlike members of Congress to put personal objectives, including raising re-election funds and grabbing power, ahead of what needs to be done for the national economic good. One look at the bribery involved in crafting a health care bill tells us quite a bit about the value system in play on Capitol Hill.

Almost nine years ago Congress enacted tax legislation but subjected most of it to a cut-off date in 2010. Absent Congressional action, in 2011, these changes will disappear and the pre-2001 tax law will spring back into force. Actually, it's more complicated. During the past eight years, Congress made some of the 2001 changes permanent. Some expired by their own terms. Many were themselves amended, in ways that will cause the pre-2001 law that returns to be a modified version of what it was. Why did Congress impose this strange sunset provision when it enacted the changes? The answer is simple. Congress did so in order to make the cost of the tax cuts for the wealthy appear to be less than what it would have been had there been no expiration date. Ultimately, it made the upcoming federal deficits appear smaller, though as reality was encountered as the decade progressed, the deficits went through the roof.

Almost nine years ago, Congress knew it had to deal with this estate tax question. Each year, it put the matter on the back burner. What's the rush? This is the sort of thinking that brings students into faculty offices begging for extensions of time, that causes partners to demand midnight work from associates, that even causes some law school faculty to run around in a frenzy on the morning of the first day of a semester's classes trying to photocopy materials for an imminent class session. To all of this, I often remark, admittedly with sarcasm, "What a surprise it must be to discover that a paper is due tomorrow, that a meeting with a client in the morning has been scheduled for weeks, or that a class is scheduled for the first day of the semester." And so the Congress neglected its responsibility to take good care of the nation. It let the issue rest until there was no time to deal with it, and then, because there was no time to deal with it, the Congress decided it would not deal with it.

There are a variety of words to describe the manner in which the Congress has handled the estate tax question. Irresponsible is my favorite. Short-sighted is another good one. Unwise, incompetent, and outrageous also come to mind. There also are some phrases that can be used. Derelict in its duty. A breach of its fiduciary obligation. Perhaps there's a new game here. The winner is the person who, in 10 minutes, can come up with the most words describing this mess. Would people play? They already are. One thing that struck me during my conversation at the gym on Wednesday was the intensity of the criticism levelled at the Congress. Do its members get out and meet with people or are they surrounded by their posses and moneyed interests? Are members of Congress so clueless that they think they're earning points by chucking aside their obligations? Someone suggested that Congress ought not be permitted to return to Washington, because it's either not doing what it should be doing or is doing something in a manner that makes things worse. I would not so easily let the Congress off the hook. My inspiration comes from the Emperor Frederick II, who barricaded the cardinal electors (though after making certain that a select few did not make it in), until they reached a decision. Perhaps the Congress ought to be sequestered until it fixes the estate tax issue. Perhaps if its members are unwilling to go to the people and listen to everyone, rather than to their patrons, the people will need to bring their frustration to the Congress.

There may not be any constitutional requirement that Congress do its job properly and in a timely manner, nor a provision that prohibits the Congress from creating the mess in the first place. Nor is there any statute that can be invoked to compel the Congress to live up to its responsibilities, particularly when the responsibility is one of its own making. But there is more to law than just a constitution and statutes, regulations and cases, rulings and decrees. There is a moral imperative, an overarching array of dedication to the national interest, respect for the citizens, decent treatment of the taxpayers, adherence to diligence, integrity, common sense, and fiduciary duty, and a deep understanding of the difference between the good and the expedient. Whether the Congress ever had or exercised this set of values is debatable, but what's not in dispute is the conclusion that the current Congress fails miserably in this regard. It is morally bankrupt. It earns a zero.

I noted previously, in New Jersey to Follow in California’s Tax Footsteps?, that New Jersey faces some difficult decisions if the intentions of its governor-elect are to be accomplished. The governor-elect, along with his political allies, want to cut taxes. To do so, they would need to cut spending, because New Jersey cannot print money and there are limits on its ability to continue borrowing. I pointed out one disadvantage to its practice of "borrowing" from the state unemployment insurance compensation fund in Monday's A Tax Lesson to Be Learned.

According to a recent article in the Philadelphia Inquirer, the chair of the New Jersey Senate's Budget and Appropriations Committee wants to review the budget impact of the various deductions, credits, exclusions, and exemptions available to taxpayers in New Jersey. This legislator pointed out that each of these items represents forgone revenue. Of course, revoking any of these items would be interpreted by the governor-elect's party, to which the Budget and Appropriations Committee chair does not belong, as a tax increase. The interesting twist is that the legislator proposing this review has introduced legislation that would require the governor to come up with the list of tax deductions, credits, exclusions, and exemptions. Hello? Why should the governor be required to generate the list? Did the governor impose these various tax breaks? Of course not. Every one of these tax breaks was enacted by the legislature. Why can't the legislature maintain and generate the list? Is it the same incompetence that led a member of the House of Representatives, many years ago, to write to the IRS asking for a copy of recently enacted legislation because he could not find a copy and did not understand a question from a constituent? Why is that incompetent? Surely he had a copy, and if he lost it, surely his staff should have been able to find a copy, considering he was a member of the legislature that enacted the legislation. What made it worse was that this member of Congress had voted in favor of the legislation. Legislators, do your own work and stop foisting your work, and blame for your mistakes, onto the executive branch.

It gets better. The interim president of a group that has lobbied for disclosure of the tax expenditures points to a tax compact between New Jersey and New York as an example of a tax expenditure. It should be noted that the compact is something to which the legislature agrees. Under the agreement, each state absolves its residents from income taxes on compensation earned in, and taxed by, the other state. According to this person, the agreement costs New Jersey $1.5 billion a year. It is unclear whether this amount represents wages earned by New Jersey residents in New York, multiplied by the appropriate New Jersey income tax rates, or a more sophisticated determination that in the absence of the compact New Jersey revenues would increase by that amount. Why the difference? If New Jersey chose to tax its residents on New York compensation, its law would also provide those residents with an income tax credit for the income taxes those residents paid to the city and state of New York. Considering the relative tax rates, those credits would wipe out the putative New Jersey income taxes. It appears that this lobbyist doesn't quite understand the impact of the tax credit because, to quote this person, "Most of the people who live in New Jersey but work in New York pay more to New York than they would to New Jersey, which means that if New Jersey could end or rework the agreement, the state could receive more in income taxes while its individual residents would pay less." That sort of analysis would not earn a passing grade in a state and local taxation course. Moreover, the tax compact is designed to achieve administrative efficiency, because the cost of administering and auditing the credit would otherwise add to New Jersey's spending. If the suggestion to rework or eliminate the tax compact implicity includes a proposal to eliminate the credit for income taxes paid to other states, aside from a variety of constitutional, policy, and statutory arguments that might foil such a move, as a political matter it is foolish and would have the effect of encouraging New Jersey residents working in New York to move to New York. The net effect would be to banish to other states individuals who pay other taxes to New Jersey.

It boils down, once again, to a legislature being quick to dish out tax breaks, quick to spend money, but slow to take on responsibility for its actions, slow to keep track of what it does, yet quick to ask others to do its work. Ought not legislators be held to the same standard of expertise that applies to people working in other occupations and jobs? Do not the taxpayers deserve better?

Imagine. A fund designed to make payments to those in need. A tax levied to put money into that fund. In good years the fund balance grows. In bad years the fund balance decreases as payments are made to those whom the fund assists. The level of taxation is set to keep the fund solvent. That's how it should work.

Imagine. When the fund, in good years, has a high balance, politicians seeking to increase spending in other areas of government without raising taxes, see the fund, flush with cash, and dip into it. Whether they intend to "repay" what they pilfer isn't known. But if they don't, the taxes levied to put money into the fund will need to go up when the fund balance dissipates.

Imagine. Times turn tough. Legitimate claims against the fund increase. The fund balance disappears. The fund then tries to borrow, but from whom and at what cost? Ultimately, the fund faces the prospect of showing its empty pockets to those with legitimate claims.

Is this some sort of end-of-the-year parable? Is it a re-hashing of the warnings periodically issued about the sorry financial state of the Medicare and Social Security trust funds? No.

Stop imagining. It's not fiction. It's a real story, with tax lessons for all.

According to this Philadelphia Inquirer story, this is what happened to the New Jersey unemployment compensation insurance fund. When the economy was going well, the taxes levied on employers and employees caused the fund to grow, even as it took care of the unemployment compensation claims made by those who lost their jobs. Unemployment was low, so the funds outlays were less than the taxes being collected on employers and employees. The tax rate on employers fell, as the legislation setting up the fund was designed to let the employer tax rate "float" depending on the fund balance. The arithmetic was done in a manner that let the fund hold reserves so that if unemployment increased, which would cause both an increase in unemployment compensation claims and a decrease in tax collections, the fund would be in a position to meet its obligations.

Unfortunately, New Jersey politicians eager to spend money without raising taxes looked at the fund balance and decided it was theirs to use for purposes other than unemployment compensation. So they took $4.7 billion from the fund. Their short-sightedness, a terrible lack of ability or willingness to look ahead, backfired.

The economy took a tumble. Unemployment skyrocketed. So, too, did legitimate unemployment compensation claims. The fund dried up. It dried up much sooner than it would have had the $4.7 billion not been pilfered. If the fund were a private trust, the trustees would be nailed for breach of fiduciary obligation. Unfortunately, there's no such fiduciary obligation imposed on politicians. In the meantime, the fund borrowed almost $1 billion from the federal government so that it could continue to pay claims.

Consequently, the "floating" tax rate mechanism is set to trigger an increase in the employer portion of the unemployment compensation insurance tax. Set to occur on July 1, it's a whopping increase. The rate would move to the highest permissible rate. Employers who at the moment are collectively paying $1.7 billion into the fund each year would pay $2.7 billion. Some employers are facing a tax increase of $270 per employee and others as much as $700 per employee, with rates varying depending on the particular employer's employment hiring and firing history. It will take several years of increased taxes and presumable declining unemployment compensation claims, to restore the fund to financial health. As early as April 2009, the state's labor commissioner disclosed the fund's condition and the looming tax increase.

New Jersey Republicans, however, consider tax increases to be evil upon evil, and want to block the automatic tax hike. So they are considering other options. One option is to have the state put money into the fund. The fund needs $2 billion in order to prevent a tax hike this July, but that would not prevent the tax hike trigger from kicking in on July 1, 2011. The difficulty with this option is that the state's general fund faces an $8 billion deficit, so there's no reasonable expectation that the state can come up with money that, in effect, would repay some of what the politicians "borrowed" -- or should we say "stole" -- from the fund in years past. Another option is to amend the tax rate trigger legislation so that the tax increase is reduced or eliminated. The foolishness of this idea is that the fund deficit would continue to grow, and the situation would compound itself in upcoming years. For example, if $2 billion is not made up during the next fiscal year, the following year would bring a $4 billion shortfall. Yet another option put forth by the Republicans is to ask the federal government to forgive the almost $1 billion that the fund has borrowed from it. This approach is doubly flawed. First, eliminating the fund deficit does not generate cash that can be used to pay pending and forthcoming claims, unless the unspoken aspect of this option is to borrow even more from the federal government with the intention of having that amount also forgiven as a debt. Second, shifting the burden onto the federal government shifts the burden onto taxpayers throughout the country, which is problematic in and of itself but worse, impractical because at least half of the states are in the same position of owing money to the federal government to repay loans undertaken to fund unemployment compensation insurance fund deficits. Still another option is to cut unemployment compensation benefits, but as the article puts it, this "could created a fierce backlash." Indeed.

Looking ahead, two politicians have proposed an amendment to the New Jersey Constitution prohibiting the sort of "borrowing" from the fund that caused this crisis. Voters will make a decision on that proposal in November. For the moment, though, the only viable choice is to let the automatic tax increase kick in. This will drive the newly elected governor crazy, considering he got himself elected on a campaign promise that benefits of all sorts from the state could be increased while taxes were not just being held steady, but cut. Cut! Welcome to reality, Mr. Christie.

Among the lessons to be learned from this mess, aside from the stupidity of eating next year's seed corn, is the prospects that lie ahead for the Social Security and Medicare Trust Funds. For years, federal politicians have used these funds to finance the deficits arising from cutting taxes for the wealthy while simultaneously increasing federal spending, chiefly to finance a war. When claims against those funds begin to increase and the funds begin to call back the loans made to the Treasury general fund, a crisis orders of magnitude bigger than the one facing New Jersey -- and several dozen other states -- will paralyze the nation. Consider the options. Unlike the New Jersey unemployment compensation insurance legislation, there is no automatic tax hike trigger that would increase social security and Medicare taxes on employers or even employees. So one option is to have the federal government put money into the fund, that is, to pay back the money borrowed from the funds. Where does the federal government, already wallowing in astronomical deficits, get that money? Increase taxes? Consider the hue and cry over that one. Perhaps the federal government could print money. That would cause inflation, devalue the dollar internationally, and probably trigger another economic collapse. Another option is to ask the trust funds to forgive the debt. Wait. That won't work. Perhaps the federal government should ask China, Japan, Saudi Arabia, and the other nations that financed the "raised military spending while cutting taxes for the wealthy" stupidity of the past decade to forgive the debt. Ha ha ha. One can imagine what would be asked in return. Think about an IRS with its headquarters in Beijing, Riyadh, or Tokyo. Yet another option is to cut Medicare and social security benefits. Expect yet another "fierce backlash."

As many predicted, beginning almost ten years ago, the ultimate price to be paid for the "we want it all and we want it now" screech of the wealthy who didn't want to pay taxes, joined by those who did not benefit from the tax cuts but imagined themselves someday being among the lowly-taxed economic elite, is soon to be paid. Now that the promised economic paradise offered by the tax-cuts-for-the-wealthy advocates has not materialized, a surprise and disappointment to some but a totally expected outcome to those who understand economic reality, the pain of foolish choices is going to afflict the entire nation and, quite possibly, most of the planet. It's time to set aside the false promises, the deceptive arguments, and the selfish motives of those who put individual greed above collective good, and to take the difficult and agonizing steps that need to be taken if unemployment, social security, and Medicare trust funds, let alone the nation, are going to survive and prosper.

Earlier this week, along came the news that Pittsburgh’s mayor has abandoned his effort to have the city enact a tax on tuition. This decision was announced during the height of the holiday season, and it surely is a welcome gift to those students and parents who are footing the bill for their undergraduate and graduate education. When the proposed tuition tax was first made public, I ripped into the idea in Funding City Services to Tax-Exempt Schools: Impose User Fees, not Taxes.

In my critique of the tuition tax proposal, I stressed the advantages of imposing user fees for the specific services provided by the city of Pittsburgh to the schools and other tax-exempt organizations carrying on activities within its limits. Not that I am under any illusion that Pittsburgh’s mayor, his staff, or executives at those tax-exempt organizations read MauledAgain or took note of my suggestions, but it is interesting that part of what persuaded the mayor to ditch his goofy idea was a pledge made by those organizations, along with some for-profit businesses, to come up with increased transfers to the city in the form of payment for services rendered by the city. The mayor’s decision may also have been influenced by the widespread outcry against his idea, as at least one of the positions I’ve taken on MauledAgain happened to correlate with those taken by the overwhelming number of people who commented on the issue.

The mayor also explained that he is forming a coalition to develop a plan that it will take to Harrisburg in search of state help for the city’s financial problems. Considering the financial mess in which the state finds itself, Pittsburgh won’t be coming away with state cash. Instead, the best for which it can hope is legislative approval of other money-raising plans, such as an increase in the annual per-capita tax imposed on people working in the city, or broadening the payroll tax to include those working for tax-exempt employers.

Whether the tuition tax proposal has been terminally set aside is questionable. Although the tax-exempt organizations in Pittsburgh pledged to contribute more money, they did not sign up for as many dollars as the mayor had requested as a price for dropping his tuition tax initiative. Nor, it seems, did they bring their pledges up to the amount that they had been contributing a few years ago. So long as the city needs money to deal with its financial problems, much of which is the same sort of seriously underfunded public employee pension plan disaster facing the state and many municipalities, it’s risky to conclude that a money-raising idea, even one as ill-advised as a tuition tax, has been relegated to the dustbin of history.

That said, for the moment, at least, students attending Pittsburgh schools, and their parents or other tuition providers, can breathe a sigh of relief and enjoy their holidays without worrying about scraping up money in January that they didn’t plan to spend and might not even have. Like some holiday presents, this one may not last into perpetuity. I know of only one gift for today that does, and it’s not one that a mayor or legislature can duplicate. To all those for whom it matters, Merry Christmas.

The area where I live has been clobbered with a snowstorm that comes in second on the "inches piled on" list. I'll spare everyone my bewilderment at the way snow shoveling reveals the existence of muscles that no machine in the gym seems to recognize and my desire that the phrase "global warming" be forever shelved in favor of the more believable "climate change." Instead, I want to share how even a near-blizzard snow storm gets me thinking about tax.

Twice on Saturday, once on Sunday, and once on Monday, township plows came down my street and cleared away the snow. I think that on Sunday they also dropped some cinders and salt or salt-like substance. The result was a street that was pretty much passable almost the entire time, and certainly since early Sunday morning. When the plows went by -- I was out there shoveling on several of the occasions -- what passed through my brain was the thought that my township property taxes were funding this service. As I drove to Swarthmore on Sunday morning, I noticed several PennDot plow trains on I-476, and again thought about the various taxes that paid for the equipment, supplies, and labor. Actually, I was beginning to draft this blog post in my head.

When someone complains about paying taxes, one of the questions I pose is this: "Who will plow the streets?" The smart-alecks from places that it doesn't snow, a rapidly diminishing list of locales, can reply, "Who cares?" but most of the anti-tax crowd goes quiet and some begin to modify their stance with some sort of "We're not against all taxes" explanation. I've yet to hear any sort of workable alternative arrangement to see to the removal of ice and snow from public highways.

Proof of the value of taxes in providing services to the citizenry can be found in the experience of Philadelphia residents and businesses. Once again, most streets remain choked with snow. Before using the size of the storm as an excuse, this problem occurs every time there is a snow of more than a few inches. The city has insufficient equipment and labor to get the job done. It's not even a matter of needing three or four times as many days to clear out the streets. Some years, the arrival of spring is what solved the problem. In the meantime, God have mercy on those living on snow-clogged streets who need an ambulance or the services of the fire department. It's one thing for emergency crews not to be able to respond during the height of a storm, but when the period of inaccessibility reaches a matter of days, it becomes downright dangerous. This is especially so when the problem is insufficient tax revenue to fund the work. It also appears as though some towns in New Jersey also are suffering similar problems. What I do not know is if this is a "first" for them or a common experience.

If Philadelphia had available funds, it could reach into the ranks of the unemployed, buy some shovels, and put these folks to work clearing out the streets too narrow for plows, and perhaps rent some plows and put those who are capable to work driving some extra equipment. Is this feasible aside from the funding issue? Certainly. The proof is what the Philadelphia National Football League franchise did to get ready for the San Francisco 49ers-Philadelphia Eagles game on Sunday. True, game time was postponed from 1 p.m. until 4:15 p.m. to buy some time, but the organization went out and hired 1,700 people and put them to work clearing the stadium and the parking lots (and apparently, neighboring streets that the city had not cleared). Though some of the 1,700 were folks with jobs taking on contracts with the Eagles, many others were folks looking to make some money. Reports are that many of them were paid $10 an hour to shovel and otherwise move snow out of the seating areas at the stadium. The Eagles could do this because they had some cash in reserve. The city of Philadelphia doesn't have the money. Its revenue shortfalls are a combination of yielding to pressure for reduced taxes, hordes of people not paying taxes, serious problems with its tax assessment and collection systems, and tax breaks dished out to corporations not in need of social welfare payments. One argument for reducing taxes, an argument that Philadelphia accepted to some extent, is that higher taxes deter people and businesses from settling in the city. Today's question is what effect do days and days of unplowed streets have on people and businesses thinking of moving into the city.

Speaking of resources, I have neither the time nor the money to do a study that analyzes the correlation between the taxation policies and tax rates of the governmental entities on which snow fell last weekend and the quality of snow removal and street clearing that those entities offer. Though such a study might plow away my suggestions, I suspect that it would demonstrate the value of taxation and the risks presented by the objectives of the anti-tax advocates.

Too often, the only people who get to vote on taxes are legislators. Granted, citizens can vote on taxes indirectly by making choices among those running for a seat in a legislature, but there’s no guarantee that a candidate will vote on taxes in a manner consistent with what the candidate claims he or she or do. However, every once in a while, in some states, citizens get the opportunity to vote directly with respect to a tax proposition. That is going to happen in May of 2010. According to this Philadelphia Inquirer story, the vote was 15 to 2 in favor of the proposal to put a tax issue directly to the voters.

On Thursday, Philadelphia City Council voted in favor of legislation that will place on the ballot a referendum to amend the City Charter. The amendment will terminate the Board of Revision of Taxes as of the end of September 30, 2010, and create an Office of Property Assessment and a separate Board of Property Assessment Appeals as of October 1, 2010. The proposed appeals board would consist of seven people appointed by the Mayor, but the Mayor would be required to select from a list of nominees prepared by an independent panel. City Council would then vote to confirm or not confirm the Mayor’s appointments.

One of the two members of City Council voting against explained that the legislation “does not ensure job protections for those least able to protect themselves,” namely, the patronage employees. One of the dissenters thinks it is “unfair, unconscionable, dishonest, and immoral” to require BRT employees to pass a test demonstrating that they are qualified for their jobs and to stop engaging in political activity, proposed requirements the merits of which I discussed the other day in Testing Tax Bureaucrats Just Part of the Solution.

The text of the referendum is as follows: “Shall the Board of Revision of Taxes be abolished, and its powers, functions, and duties be reassigned to a new Office of Property Assessment (with respect to the making of assessments) and to a Board of Property Assessment Appeals (with respect to appeals from such assessments), with the members of the board appointed from nominations made by a Board of Property Assessment Appeals nominating panel?”

If I were a Philadelphia citizen voting on the referendum, I would vote in favor of it. That ought not be a surprise to anyone who has followed my commentary on the BRT’s shortcomings, which began with An Unconstitutional Tax Assessment System, and which was followed by 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?, This Just Taxes My Brain, Tax Bureaucrats Lose Work, Keep Pay, and Testing Tax Bureaucrats Just Part of the Solution.

But the fact that I would vote for the referendum tells us nothing about its fate. Will Philadelphia voters go to the polls intent on ridding themselves of the afflictions they have suffered as property owners under the BRT? Will they instead feel sorry for the patronage employees, many of whom probably will end up with jobs with one or the other of the new entities? Will Philadelphia voters know that the referendum is on the ballot? Will there be highly visible debate and unavoidable publicity as there has been for referenda touching hot-button issues? My guess is that as the April and May approach, various public interest groups, bloggers, reporters, and some politicians will make a big deal about what some are calling the biggest reform in Philadelphia government since the watershed changes of the 1950s. Trying to predict the outcome is like trying to predict a Super-Bowl winner immediately after NFL draft day. That said, I’m guessing – not predicting – that the referendum will pass. I think not only that too many Philadelphia citizens are aware of the special deals the BRT cut with its friends and the wildly inconsistent assessments causing many people to be overtaxed and some people to be undertaxed, but also that they will select “yes” when they enter the voting booth in May. We will see. At the very least, there will be yet a few more chapters in the Tale of the BRT.

As expected, the tale of Philadelphia’s Board of Revision of Taxes continues to grow. My commentary began with An Unconstitutional Tax Assessment System, which was followed by 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?, This Just Taxes My Brain, and, most recently, earlier this week, Tax Bureaucrats Lose Work, Keep Pay. Now comes news that the Mayor of Philadelphia has ordered the BRT’s patronage employees to do two things if they want “a chance at keeping their jobs.” First, they must abandon their political activities in the same manner as all other city workers do. Second, they must pass a civil service exam. Those who pass the examination will be put into the same pool as other applicants who pass, and hiring will take place based on the ranking attained by the test takers. The Mayor explained that making these changes will “impact all homeowners, all property owners throughout our city by creating a more accurate, more equitable, and more fair property assessment system in Philadelphia."

The test that the BRT patronage employees will be required to take will be limited to persons with clerical experience “supporting real estate appraisers for a governmental entity.” That means the BRT patronage employees who choose to take the exam will constitute most, if not all, of the applicants. The Mayor and his staff justify this limitation as a way of reducing the risk that the BRT would lose all of its patronage employees overnight only to see them replaced with individuals lacking experience. As a practical matter, as pointed out in comes this Philadelphia Inquirer article, the Mayor is being careful to protect the patronage employees in a manner that doesn’t guarantee them job retention but makes it likely enough so that City Council members who threatened to block the BRT reform legislation if the employees were not protected would be placated.

Despite a test design that almost ensures job retention, BRT’s patronage employees griped about the changes. One employee, who is the Democratic leader of the 33rd Ward and who will need to resign that position if she wants to remain employed by the BRT and its successor, explained, “I’m totally disappointed. We’re all totally disappointed.” She asserted that she and the other clerks “are not responsible for the inaccurate property assessments” that triggered the outcry for reform. She offered, “"If one person can show me a property I've assessed, I'll plead guilty. We're tired of hearing we're the scum of the earth. Look, it's almost 5 o'clock and I'm still at work. We're not the assessors. We're the ants at the bottom of the hill. Why are you killing the little ants at the bottom of the hill?" The answer raises several issues. Are all of the assessment mistakes on account of what the assessors do? Or could it be that some are the consequence of erroneous database entries, typographical errors, omitted information, and other glitches arising during the time that patronage employees are handling data? We simply don’t know. A bigger problem is the notion that the patronage employees should be treated more favorably than other city employees. For good reason, city employees – like government employees at every level of government throughout the country -- are barred from engaging in political activity. Why should the BRT’s clerical employees get special treatment? For good reason, most city employees – like most government employees throughout the country – cannot be hired until they pass an exam that tests their qualifications. Why should the BRT’s clerical employees get special treatment? Why the disappointment? “I’m disappointed that I’m going to be subject to the same rules that apply to other city employees” isn’t a reaction that will gather much sympathy among other city employees or city taxpayers. Considering the manner in which applicants for the exam are being limited, the patronage employees ought to be thankful that they’re retaining an inside edge that should not be taken for granted.

Unfortunately, though intervening with requirements to put an end to the patronage arrangement, the Mayor did not liberate the School District from the roughly $4 million it contributes each year to the BRT. The Mayor directed that the money go into the city’s general fund rather than being used to compensate the BRT’s patronage employees, but there still remains the question of why tax money collected to fund public education ends up paying for something else. Perhaps it’s because public school students aren’t eligible to vote. It may be that because the school district is funded by taxes computed with reference to property assessed values, that it ought to be charged a fee for the services rendered to it by the assessors. Aside from the fact that no other county in the state charges its school boards for the services of its assessors, the $4 million fee appears to be a product of over-reaching. It is doubtful that it arises from arms’ length bargaining between the school district and the BRT. Philadelphia’s public schools and their students need all the help they can get. Reducing or eliminating this fee is a good place to start.

A colleague passed along some very important news about chocolate. According to this report, chocolate is pretty much a "superfood." The report shares "three more reasons" not to "break that chocolate habit," though it advises that it's the dark chocolate that should be consumed.

Chocolate, we're told, makes us smarter because "the flavonols in dark chocolate increase cerebral blood flow, which in turn may trigger the creation of new blood vessels and brain cells." There is a study indicating that eating a bit of chocolate before taking a cognitive test improves results.

Chocolate, we're told, increases the survival rate of heart attack victims. More research is needed to explain why this seems to be the case.

Chocolate, we're told, reduces cavities. There is a chemical in chocolate called theobromine which appears to "be just as good as fluoride at hardening tooth enamel." Chocolate-flavored toothpaste, anyone?

So here's a substance that improves health. The tax law is filled with incentives designed to improve health care. Ought not the growth, manufacture, sale, purchase, and consumption of chocolate be within the scope of those incentives or the ones being proposed as part of a solution to the healthcare crisis? It's also a substance that improves intellectual performance. Ought not the growth, manufacture, sale, purchase, and consumption of chocolate be included as something within the scope of the education credits?

Those familiar with my position on using the tax code for purposes other than raising revenue can understand that I am being facetious. Even though almost every other allegedly good idea, and a lot of bad ones, end up as the targets of tax credits, exclusions or deductions, there's no justification for making the situation worse. And worse it would be. If dark chocolate is the beneficial chocolate, how would it be defined? Would it include 40% dark? What about the 99% dark that I purchased in New York several years ago and that is edible only in very small bites. No, my point is not to advocate for a chocolate tax break but is to demonstrate the inanity -- or is that insanity? -- of turning to the tax law every time a new discovery or solution to some problem makes the news.

The report also notes that chocolate reduces blood pressure. So I suggest having some on hand when you sit down, in a month or two, for your annual tax return preparation routine. Nibble on chocolate as you gather up relevant financial and other records. Munch on high-quality chocolate as you crank up Turbotax or sit in your preparer's office. Savor some chocolate when it's time to look at the tax return's bottom line.

Chocolate might not get a tax break, but it makes a good break from taxes.

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.