MauledAgain

As expected, the proposed Philadelphia “soda tax,” about which I commented in Yes for The Proposed User Fee, No for the Proposed Tax, has raised all sorts of questions and has encountered opposition from a variety of people and organizations. Though my criticism of the tax rested primarily on the dubiousness of singling out sugared beverages while ignoring other unhealthy dietary substances, as more people look at, and think about, the proposed tax, the more problems with it are discovered.

The other half of the mayor’s deficit-elimination proposal, the trash collection user fee, also has encountered opposition. According to this report, City Council member Frank DiCicco thinks that an increase in the property tax “makes more sense than a flat trash fee. Ditching the trash fee would require a 12% increase in the property tax rate.

Based on the revenue projections provided by the mayor for his two proposals, if a 12% increase in the property tax rate would be required to offset the trash collection user fee, it would take a 3.5% to 9% increase to raise the revenue that the soda tax supposedly would raise. The wide variation in the projected rate increase reflects the very wide $30 million to $77 million revenue estimate that the mayor and his staff attributed to the soda tax proposal. The simple fact is that no one really knows whether the soda tax would generate revenue based on current sales, or generate much less revenue because of a combination of purchases being shifted out of the city and people substituting other beverages that are not taxed.

The unfortunate aspect of this story is that the city of Philadelphia is at the end of the road when it comes to taxation, and its leaders and perhaps too many of its residents are unwilling or unable to reform the system. There are too many vested interests. If the city does not adopt either of the mayor’s proposals, where else does it get the revenue? DiCicco is not alone in turning to the property tax. But is that a viable or sensible option?

The problem with using property tax increases to raise more revenue is that it compounds what already is a flawed tax system. Until the underlying property valuation issue is resolved, and properties are reassessed in a sensible manner, the property owners who are over-assessed will suffer even more detriment, and those who are under-assessed will reap more windfall, if rates are increased. Those increases could reach 21% if city council chooses to use property tax increases while rejecting the mayor’s proposal.

The mess that masquerades as a real property tax system has been the subject of a long series of MauledAgain posts. Beginning with An Unconstitutional Tax Assessment System, and 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, Testing Tax Bureaucrats Just Part of the Solution, and A Citizen Vote on Taxes, it momentarily ends with Freezing Real Property Tax Reassessments: A Nice Idea. One doesn’t need to be a tax professional to understand the depth of the disarray. One needs only to read newspapers and blogs, and listen to radio and television news. And if those sources aren’t satisfying, chat with neighbors and property owners.

It’s bad enough that the real property tax system is dysfunctional. It’s alarming that some in city council are thinking about raising real property tax rates even though the assessment foundation on which the system rests is beyond flawed. It’s distressing that the alternative includes a conceptually and pragmatically flawed soda tax. But it’s worse.

While the city struggles with its tax revenue deficiencies, risking the imposition of a tax that makes very little sense as proposed, the folks who are responsible for the unavailability of a viable alternative, namely, an efficiently administered real estate tax, have struck back at the attempts to clean up the mess. According to this story from last week, five board members of the Bureau of Revision of Taxes have sued the City of Philadelphia in an effort to derail the reforms that are underway to give the city the opportunity to fix the real estate tax. The board is trying to remove from the May 18 primary ballot the referendum question that asks city voters to decide if the BRT should be replaced with two new entities. If the board succeeds, the current property tax inequities and inaccuracies will continue. In an atmosphere of political bickering and litigious self-interest disguised as, at best, questionable concerns, what are the chances that the city can fix its tax system so that mayors and city councils need not dabble in soda taxes?

Ideally, the city would fix its property tax system, and then adjust rates as part of the process of balancing a budget. However, so much time was lost with political nonsense while attempts were being made to fix the property tax system that the city has run out of time. Its choices are terrible. Either it magnifies the shortcomings of the real property tax system, or it turns to an unwise, administratively inefficient, and possibly legally flawed tax on sugared beverages. It faces this brutal choice thanks to decades of political patronage run amok. Ultimately, failure to design and properly maintain one tax system has opened the door to another that might be impossible to design and maintain, properly or otherwise. Other jurisdictions, including the federal government, ought to heed this lesson, because the tax price of a flawed tax system is orders of magnitude higher than the cost of fixing the flawed system before it fails.

Jonathan Salant has written an article for Bloomberg, Business Lobbyists Push to Revive Estate Tax They Tried to Kill, that should be required reading for every citizen above the age of twelve. It is an eye-opening analysis of what happens when lobbyists think in the short-term only to find that the long-term arrives far more quickly than is expected.

Nine years ago, the anti-estate-tax crowd prevailed on the Congress to repeal the estate tax. Regardless of where one stood on the issue, the outcome was a compromise that not only satisfied few, if any, but also created a two days of crisis in the future. That future is now, with one of those days 70 days behind us, and the other less than ten months ahead. What’s this about?

The deal that was reached phased out the estate tax, by causing the exemption to increase as the past decade progressed, along with decreases in the rates, particularly the top rate. By 2010, the rate would be zero. In effect, the estate tax died on December 31, 2009. So, too, did some people unlucky enough to live another day. Much has been written about the failure of the Congress to deal with the “estate tax disappearance of 2010,” including the seemingly real possibility that at some future point in time the Congress would enact a retroactive amendment reinstating the tax as of January 1, 2010. That sort of outcome poses a variety of practical impediments, conceptual concerns, and even constitutional issues. But that’s just the half of it.

Having demonstrated once again its inability to act with any sense of urgency on just about anything of importance, the Congress not only let January 1, 2010, come and go without doing anything about the estate tax “disappearance,” it’s in no hurry to deal with the second day of crisis. On January 1, 2011, the estate tax, as it existed ten years ago, will rise like a phoenix from the ashes of tax devastation. The rates will reach 55 percent. The exemption will shrink.

The prospect of the estate tax coming back to haunt the estates of the wealthy who benefitted from its diminishment and temporary one-year repeal is too much for the very lobbyists and interest groups that advocated the deal that was reached in 2001, yes, the deal that created this deadline that looms over the anti-estate-tax crowd like a nightmare from the Taxes of Interest Groups Past.

So, according to Salant, a parade of advocates “for small businesses, construction companies, manufacturers and other trade groups are racing the clock to convince Congress to reinstate the federal estate tax they’ve fought for years to abolish.” Think about it. The anti-estate-tax crowd is pushing for its return. Wow.

How has this bizarre turn of events come about? Simply, the anti-estate-tax crowd realizes that if nothing is done, the bane of its existence will return in full flower. So dozens of lobbyists and interest groups are begging the Congress to enact an estate tax bill providing for a $10,000,000 per-married-couple exemption and a top rate of 35 percent. One lobbyist, according to Salant, explained, “Clearly, we can’t live with what’s going to come in 2011.” No kidding. But had these folks been successful in their 2001 attempt to do away with the estate tax, 2011 would simply be, in estate tax terms, just another year like those preceding it.

The opponents of the estate tax are beginning to believe that Congress might do nothing, and let the estate tax of nine years ago resume in 2011. On this point, they are analyzing things rationally and correctly. The risk of Congress doing nothing increases by the day. When the House tried to extend the estate tax as in effect for 2009 into 2010 and beyond, with an increased exemption, Senate Republicans blocked the legislation from being enacted. It’s ironic that by blocking legislation with a 45 percent rate and a $7 million exemption, the Senate Republicans increased the chances of the estate tax in 2011 and beyond coming in at higher rates and lower exemptions. In the long-run, from the perspective of the anti-estate-tax crowd, that’s a steep price to pay for no estate tax in only 2010. It’s yet another example of the inability of our nation’s legislators, particularly certain ones, to look at things in the long-term, even when doing so would be in their own best interests.

According to sources quoted by Salant, the longer Congress delays, the less likely it will do anything. Allegedly the Senate Majority Leader is “very reluctant” to have the Senate take up the issue, and supposedly, as the year progresses, “the stronger his hand is.” Sometimes I wonder if some television producer could generate profits by televising members of Congress playing poker. If the way in which they’re handling the estate tax issue, to say nothing of other major and serious matters, is any indication, I’d not be inclined to conclude that the house (or the senate) has the advantage.

But, as usual, the real losers in all of this are the American citizens, particularly those who don’t benefit from the elimination of the estate tax or the companion reduction in income taxes for the upper income brackets. Unfortunately, I don’t think Americans can simply say, “I’m out. Deal the next round without me.” It’s not that sort of game. In fact, it’s not a game at all, but that message doesn’t seem to get across in Washington.

Peter Pappas, of the Tax Lawyer’s Blog, expresses concern, in Opposition to Increased Taxes is Not Opposition to All Taxes about the ramifications of something I wrote in Snow, Budgets, and User Fees. This is the sentence that alarmed Peter: “[I]f the anti-tax crowd continues to influence the unwitting and uninformed by appealing to emotional distaste for taxation, it might persuade the entire nation to eliminate all taxes and user fees.”

Peter is concerned that individuals who do not oppose all taxes but oppose “high taxes” will be viewed in the same light as is the anti-tax crowd and perceived as being “opposed to any government.” Peter correctly points out that opposition to “high or increased taxes” does not necessarily translate into opposition “to the concept of taxes” nor belief that governments should not exist. Peter also expresses concern that the anti-tax crowd “regularly accuse those who favor higher taxes of wanting to eliminate the private sector and destroy capitalism.”

Peter also is correct in arguing that “[b]oth side’s arguments are logically unsound and designed merely to frighten people by demonizing the opposition.” Peter considers the debate about the “proper rate of taxation” to be “one of degree and not of kind.” However, when he argues that “[e]veryone but Sacco and Vanzetti believes we need some government,” I disagree. There are far too many people in this nation, and abroad, who would be more than willing to live in a world bereft of government, because they think, foolishly I believe, that their lot in life would be better if there were no government. Sacco and Vanzetti are dead, but these other folks are very much alive and very dangerous.

Why is the anti-tax crowd dangerous? It’s dangerous because it trumpets a pernicious message that appeals to far more people than should give it heed. The siren song of “no taxes” is silly, even aside from the effect that a successful “repeal all taxes” campaign would have on government. However much a person “saves” by the repeal of all taxes is dwarfed by the costs that person will incur to acquire the services formerly provided by government. As Peter points out, “We all believe that there should be at least some communal pooling of resources to achieve certain national aims that cannot or should not be left to the private sector.” Aside from the exaggeration that “all” so believe, for I am convinced that there are those who do not, Peter does describe the justification for the existence of government and the imposition of taxes and, I think, in a similar way, user fees.

The sentence that I wrote was not intended to label everyone opposed to tax increases or to levels of taxation above some defined amount as members of the anti-tax crowd. The sentence that I wrote was to point out the danger in the growing popularity of the anti-tax movement, particularly as it finds followers among “the unwitting and uninformed.” Peter Pappas is not unwitting and uninformed, he is not a member of, nor at risk of becoming a member of, the anti-tax crowd. But there are too few people like Peter Pappas who, despite having a position on some tax issues different from mine, is willing to think through and analyze the complex, sometimes tedious, and often frustrating nuances of taxation. He is unlikely to fall victim to an “emotional distaste for taxation.” He and I, and others who accept the need for government and taxation and are willing to debate the issue, as Peter puts it, of “how much government [and taxation] we should have,” belong to a diminishing segment of political society. Polarization is ripping the nation apart, and it is fueled not by the sort of disagreements and debates that folks like Peter and I have, but by the tax hatred vitriol spewed by the anti-tax crowd. The recent rise in anti-government, anti-tax acts of violence corroborates the concern that as the nation faces the need to deal with an increasing need for “communal pooling of resources,” the pain of the necessary sacrifices will make the anti-tax crowd’s poison seem deceptively soothing.

The post that contained the sentence that alarmed Peter focused on the very question that he addresses. One instance, addressed in the post, was simply the dual question of how much snow plowing do people want, and how much in taxes are they willing to pay for it? The same can be asked of many other services and functions that government provides. So long as the anti-tax crowd’s voice in the discussion gets increasingly louder and more seductive, the greater the risk that more and more people will find themselves convinced that snow plowing can be done without paying taxes to finance its cost, and that the same could be said of every other service and function. The notion that one can get something without paying for it has become a cultural poison in our society, and the anti-tax crowd, with the polemics removed, for the most part is a manifestation of the resistance to paying for what one wants. Thus, the point in my post, to the anti-tax crowd, if you don’t want to pay for it, you’re not going to get it.

On Friday, in Yes for The Proposed User Fee, No for the Proposed Tax, I commented on the proposed trash collection user fee set forth in the latest budget proposal from the mayor of Philadelphia. I support the fee, but I acknowledge that there are issues with it that need to be addressed. For example, I explained:

But when the service is provided for a fee, does it make sense to charge the same amount? Bridge tolls for passenger vehicles do not vary based on the number of people in a vehicle or on the weight of the passengers and cargo, even though heavier vehicles put more wear and tear on the bridge. In theory, it would be possible to charge residents for trash collection by the pound, but the cost of installing scales and training the collectors, to say nothing of how weighing would slow down the pace of the trash trucks, makes such an idea impractical.

Technically, bridge tolls for commercial vehicles and trucks sometimes do vary by weight, because those vehicles generally must carry a weight designation. Digital technology, such as E-Z Pass, makes it easier to tailor the toll to the weight of the truck, but even under that system passenger vehicles pay the same fee, unless they are pulling trailers and thus in effect consist of multiple vehicles, regardless of the number of passengers or weight of the suitcases in the trunk.

Concern has been expressed about the impact of a user fee on low-income individuals. The proposed fee contains a discount for persons who qualify, in some manner, as low-income individuals, but the details of how that discount would be administered remains to be seen. Renters would not be charged by the city, because the fee would be imposed on the property owner. Thus, many low-income individuals, who are represented disproportionately among renters, would not incur the fee unless the landlord passed it on. According to this report, some landlords, such as the Philadelphia Housing Authority, already pay a fee for trash removal, and thus these landlords' tenants would be unaffected.

Although a flat fee is easier to administer, is it possible to design a system that sets the fee according to the burden that the individual puts on the trash collection, incineration, and landfill system? In theory, weighing the trash comes in second place, but it would be difficult unless scales and digital technology to record weight and transmit it to the billing department were acquired and installed. That's expensive. The first-place theoretical approach would be wholly unworkable, because it would analyze the trash to determine how much of it was more easily handled and how much posed more serious and expensive burdens on the system. Although toxic materials are not permitted in trash, it happens, far more often than one would expect. But there's no feasible way to set a user fee in this manner. According to the same story, the city considered a "pay as you throw" system but decided it would be too complicated. Indeed, it would. It also would encourage people to dump their trash in places where they ought not be dumping, a problem that already afflicts the city and that would become much worse.

The city rejected the idea of basing the trash collection fee on the value of the property. According to the same story, the unreliability of property assessments in the city makes that approach difficult to defend. Another problem, not mentioned in the story, is that the value of a property is no indication of the amount of burden on the trash collection and landfill system generated by the residents of that property, nor is it that much better a measure of ability to pay.

Perhaps an answer lies in the city's attempt to increase recycling efforts. Because I've been recycling for more than 40 years, having started with newspaper recycling fund raising long before recycling was mandated by government, it's too easy for me to assume that everyone recycles. I live in a township that requires recycling, and in a neighborhood where residents routinely recycle. Yet that's not the case, apparently, in many areas of Philadelphia. The city does have a program called RecycleBank, which provides residents with coupons, that can be redeemed at local businesses, for recycling. Is there not some way to make the reward for recycling tied to a reduction in the trash fee? How would a resident "prove" that he or she has recycled, and that the amount of recycling is sufficient to earn a specified credit? One possibility is to have residents take recycling to a recycling center, where their contributions to environmental and economic value could be measured. This option, though, doesn't work well for those people who have difficulty getting out of their house or getting around, let along lugging empty cans and bottles or stacks of newspapers to a recycling center. Another possibility would be to license entreprenuers, preferably youngsters with too much time on their hands, to collect recycling and remit to the supplier a significant portion of the fee that is collected. The logistics of such an approach are challenging. How does one prevent these enterpreneurs from defrauding the elderly and others who are in need of the service? Would the unions object to these money-earning opportunities being farmed out to non-union youngsters? Under the circumstances, though, it's worth exploring and trying to make work.

If the City Council rejects the trash collection user fee, it has two choices. It can impose or increase taxes or other fees. It can cut services. Imagine, though, if the city decided to pick up trash every two weeks or once a month. Surveys indicate that city residents would rebel at such a notion. If the matter were put to a vote, it is highly unlikely that any sort of consensus would be reached on what should be cut. A few would vote to cut library hours, a few would vote to cut back hours on recreation centers, a few would vote to close city swimming pools, a few would vote to close some firehouses, a few would vote to eliminate eleventh and twelfth grade from the public schools, a few would vote to shut down public health centers, and the list would go on until one realized that each program would be the favorite cutting candidate of one percent of the population. When a city works at such cross-purposes, and a sense of the common weal disappears, chaos ensues. The current budget crisis is the beginning of a much bigger crisis. Whether the downslide ends at this point depends on whether city residents, through participation in the hearings that City Council will hold, can set aside self-interest in an effort to spare themselves the consequences of refusing to pay more while also refusing to accept less.

According to this Philadelphia Inquirer story, the mayor of Philadelphia, reluctant to cut any more essential services and squeezed by declining tax revenues from existing taxes, will propose a 2010-2011 budget that includes a $300 annual trash collection user fee and a 2-cent-per-ounce tax on beverages containing sugar. The $300 fee would be reduced, probably to $200, for low-income residents. Revenues from these two proposals are projected to make up for the current deficit in the city's budget. Not surprisingly, it is far easier to estimate the $100 million that the trash collection fee would generate than to determine how much revenue would be forthcoming from the so-called soda tax. Estimates for the latter range from $30 million to $77 million annually.

Paying separately for trash collection is not a new idea. In many localities, residents must hire private contractors, who charge whatever fee the market will bear but that will also make their enterprise profitable. In other localities, the government does the trash collection but invoices the residents separately. In some places, trash collection is provided by the local government without a separate fee, but a special fee must be paid for removal of appliances, large items, and other materials above and beyond some ill-defined notion of regular trash.

Objections to the proposed trash collection user fee in Philadelphia is that it would not reduce any taxes currently being paid by those who would be subject to the fee. If the $100 million is used to pay for trash collection, what happens to the funds that until now were being funneled into those costs? Because of the deficit, those funds don't really exist, so one would not expect an increase in funding for other activities or a reduction in other taxes. However, the mayor seems ready to propose reinstatement of leaf collection and expanding the program for cleaning up empty lots.

It is unclear whether the trash collection fee will be the same amount for someone living in a rowhouse as it is for a store, an office, or some other commercial building. If I recall correctly, the commercial enterprises must contract for private collection of their refuse. Another point of difficulty is the application of a single user fee no matter the amount of trash generated by a particular residence. When trash collection is funded from general revenues, it is possible to justify the imbalance in services received by comparing the situation to the imbalance in services received when some residents need police attention because of a burglary and others don't. Many government services are of the sort most people don't care to need, such as fire fighting, burglary investigation, and ambulance calls. People prefer to live fire-free, crime-free, and healthy. But when the service is provided for a fee, does it make sense to charge the same amount? Bridge tolls for passenger vehicles do not vary based on the number of people in a vehicle or on the weight of the passengers and cargo, even though heavier vehicles put more wear and tear on the bridge. In theory, it would be possible to charge residents for trash collection by the pound, but the cost of installing scales and training the collectors, to say nothing of how weighing would slow down the pace of the trash trucks, makes such an idea impractical.

All things considered, I would vote for the trash collection user fee. I would try to institute others, but that's beyond the scope of the news report in question.

On the other hand, the tax on sugary beverages is a non-starter for me. It's not just the issue of whether the city has the authority to impose the tax, or the issue of whether it can sneak it into the business privilege tax. Nor is it the issue of whether the city has the authority to levy a different business privilege tax on vendors of certain types of beverages. What disturbs me about the proposed tax is that it singles out one sort of food or beverage as though sugary drinks impose a cost on society that no other food or beverage does. In What Sort of Tax?, I questioned why soda would be singled out for taxation if the justification for the tax was a concern about the adverse impact of obesity on health. I again shared my criticism of a soda tax in The Return of the Soda Tax Proposal after the idea of singling out sugar-flavored beverages, but not any other unhealthy food or beverage, resurfaced. Today, I repeat that question. Why not a tax on red meat? Why not a tax on sugary chewing gum? Why not a tax on high cholesterol foods? Why not a tax on ice cream? Why not a tax on the sugar packets used to sweeten coffee?

One member of City Council asked, "If you were going to go out on the street and ask, 'Would you pay more per ounce of soda so you can have your street plowed?', I think people would say, 'Yes,' " But is there any indication that a soda tax would fund street plows? Should snow removal be funded by a soda tax? Or is there some other, better source of revenue? Surely soda consumption does not cause snow. Where's the connection?

Another member of City Council has decided to support the soda tax but oppose the trash collection user fee because the latter is, in his opinion, "more regressive and hurtful than a property tax." Aside from the anti-regressivity offered by a reduced rate for low-income residents, the trash collection user fee is no more regressive than the soda tax, because soda consumption does not increase with income. If anything, soda consumption is proportionately higher among lower income individuals in part because it is cheaper than the fancy coffees and other beverages that tend to be consumed more often by those with higher disposable incomes.

Instead, I would support a "healthy diet" tax, one that would target foods and beverages that contribute to poor health. The tax would raise revenue that could be used for city health services and funding activities that get people off their chairs and onto the playing field or into the gym, such as city parks and playgrounds, recreation centers, and youth programs. If effective as a deterrent, the tax would decrease the number of people with health problems attributable to unhealthy diets, or at least reduce the severity of those problems, thus permitting the city to incur lower expenses for ambulance service, public health clinics, and other services the costs of which increase when the health status of the populace worsens.

So I would vote no for the soda tax. Incidentally, as I pointed out in The Return of the Soda Tax Proposal, I gave up soda a long time ago, so I'm not voting from self-interest. After all, I generate less trash than anyone else in my neighborhood, but I don't fuss about the fact that my taxes aren't discounted to allow for the disproportionately reduced burden that I impose through my generation of refuse. No, I simply don't think one particular type of unhealthy beverage or food should be singled out to bear a burden that is generated by many types of unhealthy beverages and foods.

Recently, in Snow, Budgets, and User Fees, I concluded my thoughts with this prediction about the impact of cutting taxes and user fees too sharply:

Of course, if the anti-tax crowd continues to influence the unwitting and uninformed by appealing to emotional distaste for taxation, it might persuade the entire nation to eliminate all taxes and user fees. What must be understood is that we would then be living in a country with no national defense, no police protection, no fire fighting services, no snow removal, no trash pick-up, no airspace allocation for airliners, no food, housing, or medical care for the folks who have lost jobs because of corporate greed and corruption, no prescription drug approval, no highway maintenance, no national or state parks or recreation areas, and all other sorts of inadequacies. What we would have is a large-scale version of those youngsters rioting in center city Philadelphia, except that the rioters would not simply be expending excess energy because they have nothing better to do. They would be fighting for survival. The price that would be paid would far exceed the inconveniences of taxes and user fees.

Now comes news from a city that has chosen to cut back services rather than raise taxes. According to this CNN report, officials in Colorado Springs, Colorado, have decided to remove the trash cans from its neighborhood parks, to eliminate evening and weekend bus service, and to remove one-third of the city's street lights. Brilliant. Well, ok, sorry. Brilliant it's not, and that's not simply because there will be less night-time lighting. Brilliant it's not because it's a short-term solution to a long-term problem that will generate even more long-term problems requiring far more resources to fix than the few dollars being saved by making the city dirtier and less safe. No trash cans? There will be more litter blowing around on the streets. No bus service during evenings and weekends? That means more vehicular traffic, with its accompanying pollution and congestion. Reduced lighting? That means an environment more conducive to accidents, pedestrian injuries, and crime. And in what appears to be a theme, the city is selling its police helicopters. The decision to close community centers that serve children and seniors is apt to put a lot of youngsters on the streets, and we know what happens when youngsters are out on the streets with nothing to do rather than busy with supervised after-school activities or jobs.

In Colorado, state and local governments cannot raise taxes unless voters approve. When asked to increase taxes, residents of Colorado Springs voted no. One politician reacted by saying, "You can cry about the fiscal situation ... or you can take it as an opportunity to change, reinvent yourself and innovate and that's what we're going to do in Colorado Springs." Change surely there will be. From illuminated streets and sidewalks to darkness. From clean parks to wind-blown litter. From energy-saving and pollution-reducing bus service to vehicular congestion.

Colorado Springs is considered by some to be a "libertarian paradise." Not only is its philharmonic orchestra privately funded, a not unusual situation that makes sense, but its garbage collection is privately funded. If that means that a private enterprise has a franchise to collect fees from residents for garbage collection or that multiple enterprises are permitted to compete to do so, that's close enough to a user fee to satisfy my prefernce for user fees. But what happens if the private sector enterprises decide to close down and leave because the residents of the city, accustomed to and intent on paying as little as possible, resist increases in the garbage collection fee. Those who argue it cannot happen should visit towns where there are no services of a particular kind because the economics did not work out. So much for the joys of the free market.

Perhaps in this "libertarian paradise" they can simply get rid of the police department. The town can rely on its residents using privately-held weapons to combat criminal activity. Surely posses and vigilante groups operating in the private sector are so much more efficient, safe, and sensible than police departments. Yes, I'm being sarcastic.

Yet one of the city's politicians argues that government should not provide the services that it has been providing, and that "the solution may be in weaning people off of government services. The larger the government is, the more conditioning with certain people that they don't need to take personal responsibility of their life." So according to this official, individuals, acting in their own capacity, and not the city, are responsible for illuninating the streets, providing airborne police protection, and driving vehicles rather than taking the bus.

This politician continued his explanations with this comment: "Should it be doing all of these things, or should it really be focused on the vital things that clearly have a public interest?" Excuse me, but is the city of Colorado Springs focusing on vital things that clearly have a public interest when it cuts back street lighting, police protection, neighborhood park trash cans, and bus service? What remains as a a vital thing that clearly has a public interest? Perks for the city officials? Money to dish out to influence voters? The key to the answer is the phrase "certain people" in the official's claim that, "The larger the government is, the more conditioning with certain people that they don't need to take personal responsibility of their life." So somehow by having evening and weekend bus service for people who need to commute to evening and weekend jobs conditions those people to be irresponsible? So somehow by illuminating the city's streets people are encouraged to be irresponsible? Sorry, but none of this resonates with logic.

Though this may seem to be a tempest in a teapot, or the detritus of a Tea Party, it's more like a canary going quiet in a mine. As the weeks and months of 2010 progress, we will be reading and hearing more stories about state and local governments cutting back services because the powers-that-be either stand in the way of appropriate tax increases or dupe the less affluent and the poor into voting against taxes on the wealthy, without disclosing that the less affluent and the poor will bear the burden of the service cuts that accompany the fiscal irresponsibility that plagued the nation at the federal level during the past decade and that is spreading like a viral disease among states and localities. Today, Colorado Springs. Tomorrow, your town and my town. But, hey, at least we'll be free of taxation and we can tea party all day and all night, well, at least during the day because there won't be any lights on at night, no bus to take us there, and no trash cans into which we can put the soiled tea bags.

About a month ago, in Caveat Emptor, Law Students Seeking Outlines, I expressed disapproval of an enterprise that encouraged the sharing of outlines by law students for a long list of reasons that I explained in that posting. I had half expected to hear from someone at Outline Depot defending the enterprise's operations but I did not. I had one comment, from a current law student, who tried to persuade me that using old outlines was the way to get through law school successfully, at least for him.

So imagine my surprise when late last week I received an email from Outline Depot. The subject caused me to laugh. "Easy money at Villanova Law!" Are you kidding me? I had to open this email. So I did. It was an invitation! Here's what it said:

Apply to be an on-campus rep for OutlineDepot today!

It's super easy and you can start earning extra cash instantly.

OutlineDepot.com

Wow. Instead of criticizing my position, instead of arguing in favor of law student outline use, instead of offering empirical proof that using old outlines works, the folks at Outline Depot decided to follow some variation of the old adage, "If you can't beat them, join them." In this case, it must be "If you can't disprove their position, invite them to join you." Or perhaps it was a matter of the wisdom that one catches more flies with honey than with vinegar. Who knows what the Outline Depot folks were thinking?

Unfortunately, it isn't going to work. I haven't applied and will not apply to be an on-campus representative for Outline Depot, or any other business that trades in law school outlines. Even an offer of five million dollars, which by my calculation would set me up for life, will not change my mind. No, I don't think such an offer would be forthcoming. My guess is "extra cash" is something less than that. Much less. I'm laughing again.

So what am I to think? An enterprise that engages in circulation of old law school outlines invites an outspoken critic to represent it. Actually, I know what I think. What do you think?

Early this week I wrote about Taxes and Anger. Today I will describe how taxes can trigger disgust. There’s simply no point in getting angry. It’s simply so beyond that.

On Tuesday I sat down to do the tax returns for TaxJEM, Inc., the corporation through which I marketed and update computer-assisted tax law instruction exercises for law students and others interested in determining how well they understood federal income tax law. The federal 1120S, which is filed for federal income tax purposes, was easy. The Pennsylvania PA-20S/PA-65, which is filed for state income tax purposes, was manageable despite the bizarre attempt to use one form for both S corporations and partnerships. The Pennsylvania RCT-101, which is filed for Pennsylvania corporate franchise tax purposes, was disgusting. It’s not just that the RCT-101 combines the franchise tax, the loans tax, and the corporate net income tax. It’s not just that the RCT-101 must be used by S corporations even though the corporate net income tax does not apply. It’s not just that the form is six pages long, printed in small font with places to enter numbers that must be written in extremely small script. It’s not the absurd layout. It’s the computation of the franchise tax. I’ve filled out this form for several decades, so it’s not a surprise. It’s just that the more I deal with the form the more I wonder why it needs to be what it has become.

The RCT-101 requires the taxpayer to fill in book income for the current year and each of the preceding four years, but if there are any short years, those, too must be entered. The amounts are totaled, and divided by the number of years, which is usually five. The result is “average book income,” and if it is less than zero, it is reset to zero. Then it is divided by .095. This is an attempt to determine what amount of investment would generate that income. How many people or companies are getting a 9.5% rate of return these days?

Next, the taxpayer is required to enter, on line 7, the shareholders’ equity at the end of the current year. On line 8, the taxpayer must enter the shareholders’ equity at the beginning of the current year. The next step is priceless. I’ll quote. “If Line 7 is more than twice as great or less than half as much as Line 8, add Lines 7 and 8 and divide by 2. Otherwise enter Line 7.” Think about that for a while. Pick two random numbers and put one in line 7 and one in line 8. Then figure out the next step. If you have flashbacks to the SAT or some other standardized test that asked what you would be viewing if the object had a transverse axis more than twice as great as its length but less than half as much as its width, I apologize. It is an averaging device, but why not just average lines 7 and 8? Granted, this is a creature of the legislature and not the people who create the form, but does it really need to be so disgustingly complicated? Why?

If the outcome of the computation is less than zero, it is reset to zero. Then it is multiplied by 0.75, and the result is added to the amount that was generated when average book income was divided by 0.95. The combined amount is divided by two. Then $150,000 is subtracted, and if the result is less than zero, it is reset to zero. At this point, I am finished, because TaxJEM, Inc. is small. Trust me, it’s not worth anything near $150,000. But if subtracting $150,000 yields a positive dollar amount, it is then multiplied by the “proportion of taxable assets or apportionment proportion,” a percentage which requires filling out yet another schedule on the form, a process that might involve filling out a manufacturer’s exemption schedule that is a separate four-page folded-over delight whose center pages contain 32 rows and 10 columns. In other words, there are 320 little boxes, or cells, each possibly commanding a number.

Though I defend the need for taxes, I do not try to justify unjustifiable complexity. The state of Pennsylvania is trying to phase out the franchise tax, but economic conditions and budget deficits have stalled that endeavor. That’s too bad. This is a tax, and a form, that needs repeal or serious overhaul, sooner than later. Surely simplification ought to outweigh whatever considerations brought about this level of computational complication.

The news that Philadelphia already has incurred $11.5 million in snow removal costs this winter isn’t the startling part of this story. Three huge snowstorms blanketing a large city will require huge outlays to clear roads and sidewalks. What’s surprising is the news that Philadelphia had budgeted zero, yes, that’s zero, for snow removal costs for the 2009-2010 winter season.

In another story, it was reported that Governor Rendell “understood Philly's decision not to budget for snow. ‘Based on the previous years, I think it's a decision based on sound evidence. Philly is not the only city taken unawares.’” The meteorologists who predicted a colder than normal winter with significant snowfall would disagree. According to another source, the snow removal budget was set at zero because the city faced a “massive cash crunch.” The state agency that must approve the city’s budget wants the mayor to return to the practice of budgeting for snow removal, and using that money to fix other street problems if snow does not materialize. The city’s budget director responded that “We said to each other that if it did snow, we would simply find the funding for that elsewhere. And that's what we're doing.” No one has yet identified where the snow removal funds are being found. It remains to be seen what programs are being cut. Interestingly, according to still another source, the Pennsylvania Department of Transportation has spent only $132 million of its $182 snow removal budget.

The cost of snow involved more than the cost of snow removal. The snowstorms deterred people from coming into the city to shop, caused workers who stayed home to cancel visits to restaurants, stores, and other establishments, compelled businesses to close, and scared away tourists. So the tax revenue that would have been generated by shoppers, by workers buying lunch, and by tourists spending money in the city went down. Sales tax revenues alone are estimated to have fallen by $8 million.

These developments demonstrate the risks of relying on general revenues to pay for specific government services. Though not every government service can be funded through a dedicated revenue source, it makes sense to convert to a user fee system. The primary advantage of a user fee is that it lets people see why they are writing checks to a government. If people pay for services indirectly, they are more likely to conclude that because they pay taxes they ought to get every service that they want. If, instead, people were required to pay a user fee for snow removal, they would see a direct connection between the fee and the service. If it did not snow, the fee would be zero for the year. Another advantage is that when people see the actual cost of a service, they have more incentive to reduce the cost by making fewer demands. A user fee for trash removal encourages people to make less trash and to do more recycling. A snow removal fee would be lower if what the city needed to do was reduced, so perhaps people would grab shovels and start removing snow so that city employees could reduce their time on the streets, and thus city payroll, by an hour or two. Perhaps all those youngsters rampaging in Center City last week could be put to productive use in the snow removal effort. By the time they’re finished, they won’t have the energy to be destructive forces that add to the cost of government.

User fees also focus attention on the benefits of planning ahead. A system of collecting general revenues to pay for specific services makes it too easy to spend today and worry about tomorrow later, only to discover that when tomorrow arrives, it brings a crisis. Planning ahead is difficult when taxpayers are encouraged by the anti-tax crowd to oppose all taxes. Greater reliance on user fees would bring the spotlight to bear on the silliness of the anti-tax crowds slogans. When the leaders of the anti-tax movement start yelling “We want trash pickup but don’t want to pay a trash removal fee” or “We want our streets plowed but don’t want to pay a snow removal fee,” those who at present are being seduced by the anti-tax instigators will realize what those anti-tax folks really preach. It will be easier to see that they are claiming a right to all that they want and freedom from any responsibility to pay for what they take or use. When they defend themselves by claiming that they don’t oppose all taxes, and don’t mind paying taxes – or presumably user fees – for trash pickup or snow removal, they don’t do a very good job of listing government expenditures that they would cut in order to eliminate most taxes. Most of them don’t realize that they get many more benefits from the existence of government than they admit.

Ultimately, user fees give citizens who decide that they don’t want the user fee to vote to eliminate the service that the fee provides. Of course, if the anti-tax crowd continues to influence the unwitting and uninformed by appealing to emotional distaste for taxation, it might persuade the entire nation to eliminate all taxes and user fees. What must be understood is that we would then be living in a country with no national defense, no police protection, no fire fighting services, no snow removal, no trash pick-up, no airspace allocation for airliners, no food, housing, or medical care for the folks who have lost jobs because of corporate greed and corruption, no prescription drug approval, no highway maintenance, no national or state parks or recreation areas, and all other sorts of inadequacies. What we would have is a large-scale version of those youngsters rioting in center city Philadelphia, except that the rioters would not simply be expending excess energy because they have nothing better to do. They would be fighting for survival. The price that would be paid would far exceed the inconveniences of taxes and user fees.

Joseph Stack was angry. A lot of things went wrong in his life, as outlined in a posting that was taken down from the internet but not before bloggers like Peter Pappas preserved it. Stack’s violent reaction to the miseries of his life have triggered all sorts of commentary, some of it constructive and some of it not very helpful.

When anger leads to someone crashing an airplane into a building, one question is what could or should have been done, by that person or others, to dissipate the anger or vent it in some other, non-violent manner. The answer reaches far beyond taxation. In this instance, Stack selected one particular thorn in his life, a particular aspect of the tax system, and made it the focus of anger that was fueled by all sorts of incidents that riled him. That is not an unusual pattern of behavior.

Already, some are claiming that this unfortunate episode should be the catalyst for reforming the tax system. For example, Aaron Greenspan, after describing the maze of federal and state tax and other filings that he must submit in running a business, calls for tax simplification. I agree, and I agree with Greenspan that simplification ought to be pursued because it is the right thing to do, not because a criminal act has highlighted a particular person’s anger about taxes (and all other sorts of things). Unfortunately, after accusing the IRS of making too many errors, of ignoring taxpayer complaints, and of engaging in abuse, Greenspan proposes that “We should make the agency [IRS] do the calculations for us . . as a recent New York Times article by Randall Stross suggested.” Please. Just last month, in Federal Ready Return: Theoretically Attractive, Pragmatically Unworkable, I explained why, in yet another post on the matter, it makes no sense to commit federal income tax liability computation to the IRS. I’ll add another reason. Doing so makes it easier for the proponents of complexity to argue that complexity is no longer an issue because “the IRS is taking care of it.” We ought not allow the designers of complexity to hide behind the Ready Return excuse.

Greenspan, however, also suggests that it is understandable why someone would be angry at the IRS. He describes the inappropriate behavior of IRS personnel that came to light in hearings before Congress. Yet subsequent revelations have demonstrated that much, if not most, of the testimony was contrived, and that the entire process of holding hearings was yet another ploy of the anti-tax crowd to build up citizen resistance to taxes, as though magic angels will show up to plow streets, drive fire trucks, chase down criminals, assist the injured, and defend the nation. Those hearings ended up making it easier for Congress to shift blame for its actions onto the IRS. And apparently, and certainly in Stack’s case, it succeeded.

In his posting, Stack complains about an uncodified provision of the Tax Reform Act of 1986, which precluded technical services providers, such as Stack, from making use of a safe harbor relief provision set forth in yet another uncodified provision, section 530 of the Revenue Act of 1978. The Congress made this decision because it had concluded technical services providers were using the safe harbor provision as an abusive tax shelter providing benefits far beyond what was intended to be generated by the safe harbor provision. Congress used the revenue generated by the Tax Reform Act of 1986 change to offset the revenue loss created by a totally unrelated provision providing tax benefits to other taxpayers. There is a good explanation of the technical aspects of this issue in Joseph Henchman’s Tax Foundation post,, “Austin Suicide Pilot Allegedly Upset By Denial of Ind. Contractor Status to Non-Ind. Contractors.”

Though violence is no answer, it is understandable that a taxpayer in Stack’s position would be annoyed, frustrated, even angered, by what Congress did, and by its inability to deal with the employee versus independent contractor issue at the root of this particular set of uncodified provisions. Yet Stack came to the conclusion that the IRS was responsible, and did not steer his anger in the direction of Congress. The Congress has done a very good job making Americans think that all their tax woes, all their tax complaints, all their tax unhappiness, all the pitfalls in the tax system, and all the aggravation that federal taxation causes them is the work of the IRS.

One ironic aspect of this tragedy is that Stack could have avoided the independent contractor versus employee tax hurdle that he cites as one of many things in life that angered him. In his posting, Henchman points out that this issue “seems to have vanished over the last 20 years, since the consultant can incorporate himself or herself.” I wonder if Stack knew that. Why should citizens be compelled to undertake ploys and maneuvers to get to where they want to be, tax-wise, because the tax law is unduly complicated? Perhaps if someone had helped Stack with his tax issues when he confronted them, things would have turned out differently? But how many people have the ability to provide accurate and sensible tax advice? Not as many as the current tax system, riddled with complexity, special interest provisions, sloppy drafting, incoherent arrangements, and malformed tax policy, requires.

It’s time for America to wake up. At the end of his post, Greenspan suggests, “We as voters should tell our government that we want all of these things,” and by “these things” he means simplification, improved on-line access, accountability, reasonable attempts to empathize with taxpayers, and that well-intentioned but misguided Federal Ready Return proposal. Greenspan is correct. As voters, we elect members of Congress. We don’t elect the IRS Commissioner or IRS employees. Yet, when incumbents run for office, voters continue to send almost all of them back to Washington. Most changes occur when a member of the Congress retires, resigns, dies, or chooses not to run for re-election. Somehow, Americans, who hold the Congress in very low esteem, seem to think that the failures and dysfunction of Congress are caused by everyone except their two Senators and their representative. Happy with a $50,000 pork barrel bone, they send the same person back to do more damage, ignoring the $10 million burden on people living in their district caused by Congressional incompetence, sloth, and corruption with respect to the federal tax system.

It won’t get better until American voters decide to make it better. It won’t get better if the electorate continues on the same path. It won’t get better when attempts to change things are obstructed by those with vested interests in the mess that generates so much anger among the Joseph Stacks of the nation. Hopefully the nation is learning that effective change requires more than changing a few things in Washington. Those who have contributed to the deficiencies of the federal tax system ought to step aside, and the electorate needs to send that message convincingly, in the voting booth. Piloting the anger into an office building brings the wrong sort of change in the form of innocent individuals’ deaths, and it makes it too easy for the advocates of the existing federal income tax system and its deficiencies to dismiss calls for change as the agenda of a fringe element. The need for tax law change is not so limited. The call for change must be heeded, sooner than later. Far more than several lives and an office building hang in the balance.

A thought-provoking suggestion from Rob Nassau at Syracuse has turned attention to the question of whether it would make sense for the IRS to hire law school graduates to be tax auditors. Nassau suggests that if the IRS hired 2,500 law school graduates and “put them to work auditing people and corporations, ... 2,500 well-paying jobs that more than paid for themselves” would be created.

Let’s look at this from the perspective of the IRS. We need to assume that the IRS has the funds to hire 2,500 new auditors or else the idea goes nowhere. If the IRS had the resources to hire 2,500 people to audit tax returns, would it make sense to hire law school graduates? I don’t think so. Aside from perhaps one or two law school graduates who worked as IRS auditors before entering law school, students graduating from law school have not learned the skills required to audit tax returns. There simply are no courses in which law students are taught tax auditing. That’s because people don’t go to law school to become tax auditors. So the IRS would need to put these 2,500 law school graduates into training programs. But if the IRS is going to do the training, then why hire law school graduates who are going to command salaries high up on the GS pay scale? It would make more sense to hire college graduates who have accounting degrees, because they’re at least part-way to where they need to be to become tax auditors, and thus require less training than would the law school graduates. College graduates would not be earning salaries as high on the GS pay scale as would law graduates. In the past, the IRS has even hired people to be tax auditors who did not have college educations, and although that is probably an unwise choice in this day and age, but it demonstrates that in terms of tax auditing, the marginal utility of a law school education, especially one shallow in tax law and replete with theoretical courses, isn’t very much compared to the alternatives.

One of the comments to Paul Caron’s posting on the suggestion hit the nail on the head. Someone with the username save_the_rustbelt noted, “Hire lawyers to do audits? Sorta like using a screw driver to pound nails.” Exactly. This commentator then described a deposition in which a trial lawyer did not know the difference between revenue and income. Strange, because that’s something all lawyers should know whether or not they decide to practice tax.

Someone named Bma shared a desire for clarification, with this comment: “If the good professor means create attorney jobs (requiring Bar admission) in Chief Counsel, they would not be ‘auditing people and corporations.’ I'm confused....” I posted a response to Bma suggesting that Chief Counsel could not absorb or use 2,500 attorneys, even with the huge regulations backlog and the number of cases being litigated. How could the Chief Counsel’s office deal with training 2,500 new attorneys? I’m guessing that the nation’s law schools graduate only a few hundred students who, because of prior work experience, enrollment in a law school Tax Clinic, or a summer job, would be ready to take on the tasks facing Chief Counsel attorneys under circumstances requiring minimal training by the office. The overwhelming percentage of law school graduates leave their alma maters having taken no tax courses or one tax course. And too many who have taken one tax course are far more expert in arguing about what the tax law should be, rather than learning and understanding what the tax law is. Not only are they not ready to be tax auditors, they’re not ready for much else.

Jefferson VanderWolk correctly asserts that there is a “lot of tax due that the IRS doesn’t collect,” claims that the IRS has a shortage of good field agents, and claims that “its current field agents don’t fully understand a lot of what they are seeing, especially in the files of well-advised taxpayers who have done complicated tax planning.” Let’s assume this is true, and it probably is to some extent though I’m not ready to tag every field agent as deficient in the manner VanderWolk suggests. VanderWolk then argues a point that is almost impossible to rebut, namely, that law graduates “who can’t find jobs would rather be employed with a non-law salary than not employed at all.” Somehow, he then takes these premises to this conclusion: “And their legal education would certainly make them better candidates to deal effectively with audits of well-advised taxpayers.” I totally disagree, but for the few law graduates who because of other experience are capable of dissecting the complex transactions that are involved in the sort of tax planning to which VanderWolk refers. Even law students who have worked in Tax Clinics, though perhaps ready to audit tax returns with earned income tax credit, innocent spouse, dependency exemption, and similar basic issues, are totally incapable of dealing with tax returns filed by taxpayers whose tax planning has been put together by tax practitioners with years and years of experience. Yes, they could be trained, but that brings us back to the problem that people with accounting degrees or tax practice experience would require less training.

The person posting under the name save_the_rustbelt concluded, “There are too many law schools and the real solution is becoming very clear.” Again, I disagree. There are too many people in this country who do not get the legal advice that they need. The problem reflects the inability of many of these potential clients to pay attorney fees at levels that attorneys need to charge in order to service the huge debt they incur from attending law school. They incur huge debt because they are financing the “scholarly” writing of law faculty many of whom spend far more time writing than teaching, and when they are teaching, aren’t preparing their students to be of use to law firms or the IRS or anyone else when they graduate because those law firms, or the IRS, must then do the training that is required. The problem isn’t that there are too many law schools. It’s that there are too many law schools not giving the practice world graduates who are ready to do what needs to be done. I’ve discussed these issues in posts such as Evolutionary Changes in Legal Education, How A Transformative Recession Affects Law Practice and Legal Education , and Graduation Day: A Time to Think.

The point isn’t that law schools should teach students to become tax auditors. People don’t need to go to law school to become tax auditors. Law schools should not be teaching people to be tax auditors or rocket scientists. Nor should law graduates be funneled into tax auditing simply because they need jobs. They should be funneled into legal jobs in which their skills are required, and in order to maximize the number of legal jobs in which their skills are required, they need to leave law school with more skills than they currently do.

Yes, notice carefully the commas. It does not say (with apologies to Lynne Truss, author of "Eats, Shoots & Leaves," a must-read for anyone who cares about the quality of his or her writing, a book brought to my attention by my librarian friend whose grammar and punctuation skills make mine look mediocre at best) "Snow Jobs and Taxes." That's another, very different, post, and though it may show up here someday, it's not this morning's topic.

According to a CNN report issued on Sunday, economists estimated that at least 90,000, and perhaps as many as 150,000 jobs "could be lost in February" on account of the snow. They point to two factors. The snow kept people from going to work. The snow kept people from being hired.

If the economists are correct, not only are unemployment benefits going to increase, or perhaps not decline as much as had been expected, but tax revenue will fall because of the reduction in wages. At best, tax revenues will not fall but will increase far less than they would have if jobs had increased as expected. If the economists are correct, the snowstorms of February, which have not necessarily run their course, will turn out to be, at best, a speed bump in the path to economic recovery. At worse, they could be a snow drift that brings economic growth to a standstill.

So are the economists correct? I don't know, but I have my doubts.

First, to the extent that hiring processes slowed, they will resume. There have been days during February when travel has been possible, interviews could be held, and hiring decisions made. Yes, there are delays that might cost a new employee a week, or two, of employment, but that's not the same as four weeks of full unemployment for the job applicant.

Second, have the economists taken into account what I call the storm offset? Snow removal contractors have hired some temporary help, especially when they have more equipment than employees to operate it. If shovels are included in the term equipment, surely there was a temporary bump-up in employment, though probably not enough to offset the delayed hiring. Are the 90,000 and 150,000 figures net of this phenomenon? The storm offset also includes the self-employed, those folks who own a shovel and walked their neighborhood finding opportunities to earn $30, $50, or $100 to clear a sidewalk or driveway. I doubt these folks are on the economists' radar.

Third, when the economists conclude that the snow kept people from going to work, are they taking into account the people who, having decided or having been compelled to stay home, opted for working from home? Anecdotally, I know more than a few people who did so. The economists are using information from the January 1996 blizzard. But they are forgetting that in 1996 the notion of working from home by taking advantage of the internet's capacities wasn't much more than a prospect on the horizon, aside from a very limited number of us who were experimenting with the internet as a means of virtual office presence. Fourteen years is a lifetime in the history of the internet and the impact it has made on the workplace.

Fourth, though some individuals who cannot get to their jobs don't get paid, many others are paid whether or not they show up. A substantial proportion of the latter group make up for their absences, if not by working from home, by going into work on a Saturday or by putting in extra hours on other days. Again, this may not offset all of the job losses, but it's unclear if the economists took this into account, or evaluated whether data from 14 years ago is as relevant as they appear to think it is.

One ultimate measure will be payroll tax withholding for February. Let's see if that information finds its way into the mainstream media.

Unlike the states that try to make out-of-state vendors responsible for use tax collection on behalf of in-state residents who fail to file use tax returns, California has turned to its in-state businesses and requires them to register as use-tax taxpayers, to file returns, and to make payments of the tax. Most states try to avoid the cost of administering and auditing in-state taxpayers because it is cheaper to make out-of-state vendors, who happen to have no voting rights in the state, do the state’s work. As I have pointed out, most recently in Back to the Internet Taxation Future, unless the out-of-state vendor has sufficient contacts with the state in question, there are Due Process Clause problems with this ploy to get someone else to do the state’s work.

The California approach is a good lesson in how states should deal with the issue. Granted, the California approach is not without issues, but those are for the most part the types of issues that pop up when a new law is enacted or, as is the case in California, an existing law is given more attention, and is amended so that it can be enforced effectively. According to this Forbes article, at least 180,000 California businesses are now required to register as potential payers of the use tax. There is nothing new or unusual about the scope of the requirement, namely, any items subject to use tax which the business purchases from out-of-state vendors and then uses within California must be reported, the use tax calculated, and then paid. As might be expected, businesses are asking for a postponement in the filing deadline, currently April 15, mostly because they are somehow unprepared despite the law and the various instructions having been enacted and released last fall. The best that they may achieve is a one-month postponement, which the California Board of Equalization is authorized to approve, but according to this more recent Forbes article, the member of the Board of Equalization supporting a one-month postponement doesn’t know if he has the requisite number of votes. Another complaint is that businesses that do register are being ordered to pay use tax going back to 2007. Yet the requirement to pay use tax has been in place for a long time, so it isn’t as though these businesses are being asked to pay a new tax, or to pay a tax that they did not owe.

The new registration requirement applies only to businesses with gross receipts exceeding $100,000 that are not already registered. Small businesses, those with gross receipts of $100,000 or less, and individuals not conducting businesses are not within the scope of the new requirements. This means that, despite however much revenue the new requirement might generate, another huge chunk will continue to go unpaid, contributing to the state’s budget deficit.

If a business does not register, the Board of Equalization will estimate its out-of-state purchases, compute a use tax, and pursue collection of the tax and penalties. Why this entire arrangement is not made applicable across the board for all businesses and individuals is unclear, though a good guess is that it might have something to do with politics.

There isn’t yet sufficient data available to permit anyone to figure out if California’s sensible and legal approach will let in pull in proportionately more unpaid use tax than the indefensible and legally questionable approaches taken by states unwilling to invest in collecting their own taxes. My guess is that California’s approach will turn out to be worth the effort, and that other states eventually will follow suit, to a greater or lesser extent.

The use tax collection story is a never-ending one. There will be more. Stay tuned.

According to news released on Tuesday, Pennsylvania's Governor Ed Rendell is proposing that the state reduce its sales tax rate by 2 percentage points and eliminate many of the exemptions currently available. The state-wide 6 percent rate would be reduced to 4 percent, with similar reductions in the cities that have higher sales taxes. The exemptions for food, clothing, and medicine would not be affected. Current exemptions for candy and some beverages, for example, would terminate. According to the report, the change would increase sales tax revenue by $1.4 billion annually.

According to the governor, in an interview on a local television statement and as noted, for example, in this report, the combined effect of ending 86 exemptions and decreasin the sales tax rate would generate annual savings of $17 to the "hypothetical average Pennsylvania household."

Something doesn't make sense. First, is it possible that there are so many purchases of candy and beverages that 4 percent of their total sales price would not only offset the loss of 2 percent of sales of currently taxable items but also generate $1.4 billion in revenue? Do Pennsylvanians purchase $35 billion worth of the 86 items proposed to lose their exemption? That's what must be purchased and taxed at 4 percent in order to generate $1.4 billion of revenue, and that's not counting what must be purchased to raise revenue to offset the revenue loss from the rate reduction. Second, if the proposal is going to increase revenue, how does the average household save $17?

The answer appears to found in the fact that businesses pay sales taxes. Apparently, many of the 86 exemptions are items that are more likely to be purchased by businesses than by households. Business leaders and others contend that the proposed change would cause businesses to cut pay, cut jobs, move out of state, or make other economic decisions that would have an adverse effect on Pennsylvanians. On the other hand, many of the exemptions to the sales tax are the consequence of special interest lobbying. I commented on one specific example of this process in Another Step Toward Elimination of All Taxes?, which involved sales tax exemptions for helicopters manufactured and sold by a specific manufacturer. That the sales tax exemption mess ought to be cleaned up is clear, as I pointed out in Sales Taxes as Logically Illogical?. It may be that removing the inconsistencies in the exemptions, whether or not the overall sales tax rate is reduced, would increase the sales taxes paid by businesses. To cave in to the claim that taxes causes businesses to go under, move away, or cut jobs is to run the risk of surrendering to the argument that any tax on a business is harmful. Who's left to pay taxes?

Until a complete list of the exemption changes is provided, it is difficult for an individual to sit down and determine how he or she would fare under the proposed changes. It's not an easy determination. The actual computation isn't the challenge. The challenge is figuring out how much a person spends on each of the particular items that are subject to, or would be subject to, the sales tax. How much does a person spend on gum at the movie theater? How much does a person spend on candy? How much does a person spend on items currently taxed at 6 percent that would be taxed at 4 percent? Who has time to dig through receipts and rack up the numbers? Who has the receipts from which to determine the numbers? But how else can a person decide if he or she would save $17 a year? Or $10 a year? Or $40 a year? Or perhaps pay more sales taxes? It probably is easier for businesses to compute what they spend on various items, because businesses tend to maintain better records in this manner than do most individuals.

Get out those pencils and spreadsheets. Get out those receipts. Do some arithmetic. Have fun.

Those who wonder why the nation’s tax policy is such a mess, and who understand that tax policy is not developed in a vacuum but in the context of, among other things, federal spending decisions, will appreciate the insights provided by the latest exchanges in the continuing partisan dialogue in Washington concerning federal budgets and federal budget deficits. This dialogue reflects growing concern over the size of the federal budget deficits projected for the next decade. In short, these deficits could cripple the nation’s economy and put its security at serious risk.

Not too long ago, Senators Kent Conrad, a Democrat, and Judd Gregg, a Republican, came together to sponsor a plan to create a commission to deal with the deficits. The commission membership would be eight Democrats who are members of Congress, eight Republicans who are members of Congress, and two members of the administration. The proposal would put Congress in the position of choosing to accept or reject the commission’s determinations, and Congress would not be permitted to make changes or pick and choose among the commission’s ideas. Only those recommendations supported by at least 14 of the 18 commissioners would find their way to the Congress.

In late January, the Senate defeated the Conrad-Gregg bill. Sixty votes were required for passage. Only 36 Democrats, 16 Republicans, and an independent voted in favor of the proposal. Republicans who opposed the measure did so chiefly because of fear that the commission would recommend tax increases. Democrats who opposed the legislation worried that the commission might make cuts in entitlement programs. Several of the Senators who voted no did so because they didn’t like the idea of the no-change up-or-down vote concept that would apply. Objecting to the crafting of a budget deficit by a commission, Senator Baucus claimed, “Bureaucrats do not enact great legislation, senators do.” Seven senators who co-sponsored the legislation voted against it, including Senate Republican leader Mitch McConnell who had called the Conrad-Gregg idea “the best way to address the crisis.”

In response to the failure of the Congress to tackle the problem, President Obama has decided to create a commission by executive order. The President’s commission would consist of six members appointed by Congressional Democrats, six appointed by Congressional Republicans, and six appointed by the administration. It is believed that at least two of the six appointed by the administration would be Republicans. The 14-of-18 concept would be retained. However, the Congress cannot be compelled to vote up-or-down with no changes on recommendations coming from a commission established by the President. As can be expected, Republican members of Congress are complaining bitterly about the President’s plans.

Last Friday, according to various reports, including this article, House Republican leader John Boehner called the President’s commission a “partisan exercise” and claimed that it was “’rigged’ to promote Democrats’ spending policies.” Boehner called for a commission that includes Republicans. McConnell now explains that he prefers that any commission be restricted to recommending spending cuts.

There is inherent irrationality in how Congress is dealing with this crisis. For one thing, there seems to be a challenge in getting the facts right. The president proposes putting Republicans on the commission he plans to set up, but Boehner cries out for inclusion of Republicans as though the President is planning to appoint only Democrats. Such assertions are more than misleading; they are designed to stoke the fires of partisan bickering. When Baucus complains that the commission would be a group of bureaucrats, is he somehow overlooking the fact that the Conrad-Gregg bill would have put 16 members of Congress on an 18-person commission? Is he overlooking the fact that 12 of the 18 persons proposed to sit on the president’s commission would be named by members of Congress and thus could be members of Congress?

Congressional management of budget planning is similarly off base. McConnell claims that the problem is too much spending, but where was he when Republicans pushed through funding for war while also cutting taxes? A decision to spend hundreds of billions and more on war should be accompanied by increases in taxes to fund that spending. Somehow, the notion that paying for Medicare, health care, clean water, or any other beneficial social program is awful when it contributes to a budget deficit doesn’t extend to the logical implication that paying for war when it contributes to a budget deficit is no less awful. Worse, cutting taxes when expanding spending is totally inconsistent with the concept of balancing the federal budget, and one wonders how a Congress that created the crisis by cutting taxes while increasing spending is now making all sorts of noise about the horrors of deficit spending. Apparently deficit spending is permissible when it generates tax cuts for the wealthy but not when it is designed to assist the country in digging out of an economic mess caused by cutting taxes for the wealthy while increasing spending. On top of that, the Congress rejects a plan to deal with the problem, even to the point of co-sponsors voting against their own legislation. These are the folks who have been crafting tax policy. Is it any wonder that it is such a mess?

So it is annoying, disappointing, and alarming to hear a member of the United States Senate claim, “Bureaucrats do not enact great legislation, senators do.” When was the last time the Senate enacted great legislation? Surely not the inferior tax law tinkering that gets fed to the American people two or three times a year as members of Congress dole out rewards to their supporters. Bureaucrats cannot enact legislation because they are not legislators, but they can generate regulations and other administrative issuances, which usually are in far better shape than what comes rolling off Capitol Hill.

The deficit cannot be eliminated merely by cutting spending, unless Congress wants to strip the military down to pretty much nothing, eliminate Social Security and Medicare, and put an end to a variety of other programs. The nation faces huge deficits not only because tax rates on the wealthy are lower than they need to be, but also because the deficit reflects eight years of taxes that should have been collected but that were forgiven by a Congress anxious to reward the economic elite and ballooning interest payments on the debt undertaken to finance the deficits generated by trying to finance a war while cutting taxes. As I noted in Tax Incentives Can Do Only So Much:

Those thoughts rested on something I had pointed out in A Memorial Day Essay on War and Taxation, when I wrote:

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.

The time has arrived to pay that price. It will require more than tax credits aimed at stimulating an economy. It will require more than merely letting the tax cuts for the wealthy expire. It will require much, much more.

Perhaps some of that price could be avoided if those responsible for the bad decision-making of the past decade, and those who unduly benefitted from that bad decision-making, stepped up and repaid the nation for the economic damage that these bad decisions caused. That would spare the less fortunate the agony that will accompany the inevitable outcome of the entrenched budget deficits, whether that outcome consists of higher taxes on the poor, overwhelming cutbacks in assistance to those in need, or surrender of some kind to the nations and economic elite who have become the nation’s creditors. If anyone thinks that the banks were tough on people unable to pay mortgages, wait until the folks to whom the nation is indebted start their own foreclosure process against the United States. It won’t be pretty. It will be painful. And unless the Congress starts dealing with the problem in a realistic manner, giving up its habit of using national crises to advance their own electoral prospects, the pain will be long-lasting, deep, and irrevocable.

Several days ago, I received an email containing the text of an article by Eleanor Roberts, Main St. Needs Tax Loophole Closed. It was suggested that I take a look at the information on a web site that supports the same points that were made in the article, and makes even more errors in analysis, such as quoting politicians who conflate the sales tax and the use tax.

According to Ms Roberts, Massachusetts, admittedly in dire need of tax revenue, is collecting less tax than it otherwise could reach because “online-only businesses do not have to collect sales tax.” Several questions came to mind. First, is this an assertion with respect to Massachusetts or is it an assertion generally? Second, is this a situation that exists because Massachusetts law does not impose a sales tax
obligation on online businesses, or because Massachusetts revenue officials aren’t enforcing existing law?

Under Massachusetts Code, ch. 64H, section 2, “An excise is hereby imposed upon sales at retail in the commonwealth, by any vendor, of tangible personal property or of services performed in the commonwealth at the rate of 6.25 per cent of the gross receipts of the vendor from all such sales of such property or services, except as otherwise provided in this chapter.” And under Massachusetts Code, ch. 64I, section 2, “…. an excise is hereby imposed upon the storage, use or other consumption in the commonwealth of tangible personal property or services purchased from any vendor or manufactured, fabricated or assembled from materials acquired either within or outside the commonwealth for storage, use or other consumption within the commonwealth at the rate of 6.25 per cent of the sales price of the property or services.” In other words, Massachusetts has in place the typical retail sales taxation arrangement. A sales tax is imposed on purchases made within Massachusetts, including online purchases made from Massachusetts vendors. A use tax is imposed on purchases made by Massachusetts residents from vendors who are not within the jurisdiction of Massachusetts, whether those purchases are made in person, through mail-order, or over the internet.

So the assertion that “online-only businesses do not have to collect sales tax” is not true. A company organized in Massachusetts, with offices in Cambridge and a warehouse in Boston, that sells goods to someone living in Worcester is obligated to collect and remit sales tax whether the Worcester resident walks into the Cambridge office, orders over the telephone, sends an order through postal mail, or uses the internet to place the order. If the company decided to accept only email and web site orders, the outcome would not change. Though it would be an online-only business, it would still be required, under Massachusetts law, to collect sales taxes. The same obligation would be imposed on vendors located outside Massachusetts if they have sufficient nexus, in other words, contacts, with Massachusetts to justify Massachusetts jurisdiction. These sorts of contacts include sending sales representatives into Massachusetts, maintaining offices there, owning or renting space for the storage of goods in Massachusetts, and so on.

When a state does not have jurisdiction over a vendor, and thus cannot require the vendor to collect sales tax, the state imposes a use tax on the consumer who made the purchase. Massachusetts follows this pattern. The practical problem is that Massachusetts does not want to focus its resources, time, and attention on noncompliant consumers. Like other states, it would prefer to have the vendors do the collection work for them, but the problem is that Massachusetts has no jurisdiction to compel this outcome. So when turning to the second question, it appears that the concern is not that Massachusetts is not enforcing its sales tax, but that it is not enforcing its use tax.

I dealt with this issue almost three years ago in Taxing the Internet: Reprise, in which I commented on the proposed Streamlined Sales Tax Agreement. I explained that “lobbying for the proposal … has been intensifying, orchestrated and led by state governments that somehow seem incapable of enforcing their own use taxes on their citizens.” It appears that Ms Roberts’ article is yet another attempt to sell an arrangement that runs up against basic principles. Some advocates of the SSTA claim that states can impose their sales taxes on vendors who have no contact with the state, simply because a resident of the state contacts the vendor out-of-state and purchases a product that the resident causes to be brought into the state.

Ms Roberts claims that, ”In 1992 the Supreme Court mandated that Congress take appropriate action to force the collection of sales tax over the Internet.” Though she gives no citation so that one can determine which Supreme Court case she wants to highlight, she surely is referring to Quill Corp. v. North Dakota (91-0194), 504 U.S. 298 (1992). Not only did the Supreme Court, in Quill, reject North Dakota’s attempt to require an out-of-state vendor to collect North Dakota use taxes, it imposed no mandate of any sort on the Congress. The Court merely made several observations about the Congress. First, it noted that “while Congress has plenary power to regulate commerce among the States and thus may authorize state actions that burden interstate commerce, … it does not similarly have the power to authorize violations of the Due Process Clause.” Second, it noted that its decision was easier to make because “the underlying issue is not only one that Congress may be better qualified to resolve,… but also one that Congress has the ultimate power to resolve.” Third, it noted that Congress was free to disagree with the Court’s analysis. Fourth, it concluded that “Congress is now free to decide whether, when, and to what extent the States may burden interstate mail order concerns with a duty to collect use taxes.” Fourth, it noted that “Congress has the power to protect interstate commerce from intolerable or even undesirable burdens.” The Supreme Court did not issue a mandate, that is it did not command Congress to do anything. It simply pointed out that Congress has the power to regulate the collection of use taxes, but also that it cannot authorize states to impose requirements that violate the Due Process Clause.

Three years before I wrote Taxing the Internet: Reprise, I analyzed a variety of tax issues that arise when internet transactions are involved. It is useful to look again at some of what I shared in Taxing the Internet:

On the one side is the argument expressed in the title of Dick Armey's Philadelphia Inquirer commentary: "Cyberspace is the last frontie; don't let them tax the internet" . . . Armey advocates keeping the internet tax-free, though that is a misleading goal. The internet has not been tax-free, is not tax-free, and will not be tax-free. Armey argues chiefly against taxing Internet access, but he doesn't distinguish between that sort of imposition, and taxation of transactions conducted through the Internet. The principal argument that he and other "don't tax the internet" advocates raise is the wisdom of letting Internet technology grow and mature without the hindrance of taxation. If we were to abolish taxes on all who need to grow and mature, there wouldn't be much left to tax.

On the other side are the folks who advocate taxing all internet transactions. Chiefly advanced by some state legislators, who are seeking to increase state tax revenues, the argument is that any connection whatsoever between the transaction and the state entitles the state to subject the transaction to its tax system. The best example is that of on-line sales and the extent to which a state sales or use tax should apply. Suppose consumer A, living in New Jersey, uses the Internet to access the web site of a retailer located in Illinois, looks at products, orders a product, pays using a credit card, and receives the shipment in New Jersey. Does a sales tax apply? The answer is found in the tax treatment of a similar transaction, in which the person's neighbor looks at a print catalog, phones the retailer, and makes the purchase. New Jersey cannot require the retailer to pay a sales tax because the sale does not take place in New Jersey, and New Jersey cannot require the retailer to pay a use tax unless the retailer has a sufficient "nexus" (or set of contacts) with New Jersey to justify imposing the tax. Without getting into all the technical analysis, sending a catalog into New Jersey is not sufficient nexus. Why should the Internet transaction be treated any differently? What New Jersey can impose is a use tax, on the purchaser, but effective administration and enforcement of use taxes seems to escape state legislatures. The hole in tax revenue caused by inefficient use tax enforcement existed long before the Internet came into being, but the Internet brought attention, and the attention brought the state legislatures the temptation to make the retailers do their use tax administration and collection for them.

States are strange in this respect. Because Delaware has no sales tax, and Pennsylvania does, many Pennsylvanians drive to Delaware to purchase items on which they do not pay the Pennsylvania use tax. Delaware merchants use "no sales tax" plugs in their advertising. Unlike the Liquor Control Board, which sends undercover agents to the District of Columbia (where alcohol is much less expensive principally because of lower taxes) to look for vehicles with Pennsylvania license tags outside retail liquor establishments, and who then call ahead to officers "waiting at the border," the use tax division doesn't seem to care. Some states now include a "use tax" line on their income tax returns. How effective that will be remains to be seen.

My analysis rests on a premise that I shared at the beginning of that commentary, namely:

The overriding principle that should apply is this: when it comes to taxing transactions and activities conducted on or through the internet, or taxing access to the internet, those transactions, activities and access should be taxed no differently from the way in which transactions and activities conducted through means other than the internet are taxed. This principle, though, is ignored by those who take either extreme position with respect to taxation and the internet.

As I pointed out in Taxing the Internet: Reprise,

the last time I looked at the case law state 1 has no "independent and sovereign authority" to impose a sales tax on a transaction that takes place in state 2. Whether the state 1 resident travels to state 2, phones a merchant in state 2, or contacts the merchant in state 2 through the internet, state 1 is powerless to impose any tax until the state 1 resident returns to state 1 with the item. If state 1's legislature and tax bureaucracy cannot figure out how to do that, perhaps they can resign and make room for those who do.

I also pointed out something that needs again to be given attention:

As I re-read my three-year old Taxing the Internet, I see descriptions of the same arguments being advanced today by the "tax the Internet" crowd and by the "no taxes at all" group. The flaws in the rationales for taxing email continue to exist. I urge all those involved with, or interested in, this latest round of "tax the Internet" to read Taxing the Internet. Then it will be fairly easy to understand my proposal: "(1) tax access as is taxed telephone and cable access, (2) tax retail transactions as catalog sales are taxed, imposing use tax collection responsibilities on those with sufficient nexus to the taxing state, (3) eliminate and prohibit "Internet only" taxes, and (4) find another way to deal with spammers, casinos, and other social behavior that is considered unacceptable or inappropriate."

Now what are the odds that politicians will follow this sensible approach?

The odds of politicians doing the sensible thing remain low so long as arguments are advanced that rest on faulty analyses of Supreme Court opinions, faulty summaries of state statutory tax law, and unwillingness to insist that state revenue departments that seem to be unable to deal with use tax collection take lessons from those states that have done innovative things to bring their use tax collection procedures into the twenty-first century without shifting their responsibility to out-of-state vendors because those vendors are easy targets given their lack of voting rights in the state in question. Instead of arguing for the closing of a tax loophole that does not exist, the advocates of SSTA or other use-tax-collection-burden-shifting devices ought to lobby their state legislatures to compel their revenue departments to figure out how to do their job.