MauledAgain

An interesting newspaper article from a few weeks ago, Ticking time bomb: Crisis looms in Pa.’s dwindling pension plans, provides a lesson in the dangers of irresponsibility in taxation policy and demonstrates how today’s tax cut, or rejected increase, becomes tomorrow’s tax increase of two or three times as much, perhaps even more. Though the article deals with the situation in Pennsylvania, it describes a situation challenging other states, and not just with respect to pension costs. Similar analyses can be developed at federal, state, and local levels for a variety of expenses.

In short, the problem for Pennsylvania is that it, and its local governments, have failed to fund pensions that they are contractually obligated to pay. The longer an employer waits to fund a pension plan, the more must be invested to obtain the same return on the investment. Toss in some negative investment experience, and the shortages compound themselves. The problem is one of scale, namely, more than 3,000 local plans and three-quarters of a million participants, who at the moment draw average pensions “of about $22,000.” Pension payments are funded in party by state and local contributions derived from tax revenues, in part by participant contributions, and in part by investment returns.

In 2001, in reaction to pension fund investment returns that had exceeded expectations during the 1990s, the legislature voted itself 50 percent increases in their pensions, while voting for 25 percent increases in pensions for government and school district employees. Those already retired, upset at not being covered by the increases, persuaded the legislature to increase their existing pensions by an unfunded cost-of-living adjustment. Because the investment returns had been doing so well, employer contributions were reduced. That did not last long, because downturns in the stock and other markets brought the robust investment experience to an end. During the same period, employee contributions, as a percentage of salary, increased. In turn, legislation reduced the number of years that an employee must work in order for the pension to vest, and increased the pension from twice the number of years worked to 2.5 times the number of years worked.

By 2003, with investment returns crashing, the actuarial computations determined that state and local governments, as employers, would need to increase significantly their contributions. To do so would require tax increases. To avoid those tax increases, the employer contributions were adjusted, through special legislation, to amounts lower than what were necessary to fund future pensions, and the increased contributions, if required, would be made ten years later. The hope was that in the meantime investment returns would exceed previous expectations and offset the need for increased employer contributions. That didn’t happen. So in about a year and a half, an even larger, much larger, state and local government employer contribution will be required. The dollars supposedly saved in 2003, and the tax increases avoided, pale in comparison to the hit that taxpayers will take in 2013. Employer contributions, according to some computations, will need to quadruple by that year. The following year they will need to be even higher.

One consultant compared the situation to a homeowner who owes money on a mortgage. The homeowner has a job, is saving money, and making payments. But when the homeowner loses her job, she can continue to make payments by dipping into savings. But when savings run out, she’s in trouble. Counting on increases in savings that outstrip the decrease caused by using savings to pay the mortgage is a risky move. But that’s what the Pennsylvania legislature did. So, too, did other legislatures.

The estimate is that the state faces a $4 billion pension funding obligation. Local governments face a similar amount in total. Individual school districts, for example, are looking at 600 percent increases. It means that services will be cut. The number of children in a classroom will increase to levels that impede education, and too many school districts cannot afford to have the children in their care suffer through reduced educational quality.

One must laugh when one of the proposed solutions is considered. In short, it’s a repeat of the stunt pulled off in 2003. State and local governments will be given a much longer time over which to fund the pensions. Though buying time, it will cost more. In 2023, the same problem will re-emerge, but with shortfalls not in the range of $8 billion, but perhaps $20 or $30 billion. Most experts doubt that the next ten years will bring investment returns similar to those of the 1990s. Another proposal is to direct federal stimulus payments into the funds, which means other state programs won’t get the funding that otherwise would be available. No matter what solution is discovered, some experts are predicting that the multiplier needs to return to 2, and the number of years for vesting must return to its pre-2003 level. Another possibility is to do what employers in the private sector have been doing for many years, that is, shifting from defined benefit pension plans to defined contribution plans. What that does, in effect, is to shift the risks and rewards of investment returns onto the employee. If the market does not perform well, the defined contributions do not purchases as much of a retirement annuity. All of these proposals have their advocates and distracters, with arguments being tossed about from every perspective. That’s not surprising.

As several experts have mentioned, there is no “silver bullet” to solve the problem. I certainly don’t have an answer. I unquestionably do not have an answer that would make people happy. However this turns out, there are two lessons to be learned. First, spending tomorrow’s anticipated income before it is received is too risky, particularly for governments. It was a bad decision to increase pensions, increase multipliers, and decrease vesting terms simply because it was assumed that investment earnings in the future would continue at 1990s rates. Anyone who studies market histories knows that these things run in cycles. Second, trying to avoid fixing the roof in order to save a few dollars today is foolish, because in the long term the cost of fixing the entire building and everything in it significantly exceeds the short-term savings. Assuming that the property will continue to increase in value is an unsound decision, yet it’s one that way too many people made during the past few years, one that contributed to the current economic mess. When the penny-wise, pound-foolish decision rests on a desire to avoid tax increases in order to placate the anti-tax and anti-tax-increase crowd, the consequences are far more extensive than they are for one building owner. Trying to avoid tax increases is no less foolish than trying to avoid increases in repair costs.

Yet one more lesson is that governments need to match actual revenues with expenses, rather than spending unpredictable future revenue before it materializes. Isn’t it especially galling that legislators gave themselves pension increases twice what it gave state and local government employees? That alone explains the root cause of the problem. Legislators need to learn to think more about the common good and less about vote acquisitions and campaign paybacks. There’s something about the word servant in civil servant that seems to be escaping legislatures. The cost of that shortcoming has caught up with them. And with us.

Congressman Charles Boustany, ranking member of the Ways and Means Committee’s Subcommittee on Oversight, questioned the wisdom of the provisions in the pending health care legislation that would require the IRS to administer enforcement of “numerous parts of the health insurance system.” In his remarks, he called this “one of the most troubling expansions of IRS power is the power to approve a taxpayer’s health insurance as sufficient to meet the definition of minimum coverage required to be purchased by law.” Elaborating, he explained:

This is the so-called “individual mandate.” Under the Senate’s individual mandate, the IRS would be in charge of verifying that every American taxpayer has obtained acceptable health coverage for every month of the year. If the IRS determines that a taxpayer lacks acceptable insurance for even a single month, then the IRS would have the power to impose a new tax on that taxpayer, even auditing the taxpayer and assessing interest and penalties on top of the tax. This is an unprecedented new role for the IRS – one that will inject the IRS even further into the personal lives of American families.

Apparently Boustany was speaking not only for himself, but also for other Republican members of the House, according to this report which describes some of their statements describing the same or similar concerns.

There seems to be little dispute over the impact on the IRS of requiring it to administer the requirement that everyone purchase health insurance. For an agency already overwhelmed with tax administration, enforcement, and collection, and woefully underfunded, having this burden added to its responsibilities could cripple it. The IRS cannot keep up with the mistakes and errors on the 236 million tax returns that it processes, let alone the tax evaders who don’t even file returns. The IRS computer system is so antiquated that it leaves the agency incapable of doing things that ought to be easily accomplished. The Congressional Budget Office estimates that if the health care legislation is enacted with this IRS responsibility in place, the agency will need $1 billion a year in additional funding to meet that responsibility. Some members of Congress have suggested that the funding would be forthcoming, but all spoke in terms of dealing with the issue after the health care legislation is enacted, rather than making it part of the package. Why? Could it be that adding the cost of administration to the legislation would make the legislation a bit more expensive than it otherwise appears to be?

I agree that the IRS ought not be administering a provision that deals with the obligation of individuals to obtain health insurance. The notion of mandatory insurance is not a new one. States require motorists to carry liability insurance. Are those requirements administered by the state’s department of revenue? No. It’s in the hands of their department of transportation, department of motor vehicles, or equivalent agency. So why does the Congress dump this responsibility on the IRS?

Dumping administration of the health insurance purchase obligation on the IRS would not be the first time that the Congress turns, not to the agency charged with the area in question, but to the IRS. Not too long ago, in Tax Talk at the Gym, I recounted a conversation I had with someone who had asked me about what was then my latest book and the one preceding it. I rattled off a partial list of the Internal Revenue Code provisions in question, such as the work opportunity credit, the Indian employment credit, the various disaster employee retention credits, the many tax incentives for energy production and conservation, and those dealing with family and household transactions. Then, as I reported in my previous post:

he stopped me and asked why the tax law was filled with so many provisions that weren't a matter of revenue collection but expenditures. The answer is an easy one, because it's asked every semester by students in the basic tax course. Why not have the Department of Energy write checks to companies and individuals who are doing things to develop or conserve energy instead of administering the grants through tax refunds? Why not have the Department of Labor reimburse employers who hire members of targeted groups? The answer rests in the Congress' confidence with those other agencies and with the supposed speed with which tax refunds can put money in the taxpayers' hands in contrast to check-writing programs.

Administration of the health purchase obligation does not involve putting money in taxpayers’ hands, and thus any supposed speed advantage of the tax system as compared to check-writing is irrelevant. Administration of the health purchase obligation involves reviewing whether a person has satisfied that obligation, and imposing a fee (erroneously called a “tax”) similar to a fine or penalty on those who do not comply. Many federal agencies impose fees, fines, penalties, and other charges. The IRS does not collect the annual entrance fee imposed by the National Park Service. It does not collect amounts charged by the FCC for licenses. The list of charges imposed and collected by other agencies is long. Why can’t this administrative and collection task with respect to health insurance be put into the hands of those at the Department of Health and Human Services? Why the IRS?

Four years ago, in the frighteningly-titled ”Professor Maule Goes to Washington”, I challenged Congress’s practice of relying on the IRS to do the work of other agencies:

I understand that the Congress, which consistently criticizes the IRS, has a habit of demonstrating its true thoughts about that particular federal agency by putting into the tax law provisions that deal with matters that are within the purview of other federal agencies because the IRS appears to be more capable of administering these programs, but it's time for Congress to demand of the other agencies the same sort of competence that it attributes to the IRS when it turns to the IRS to handle its pet project of the week.

If there is to be health care reform that curtails health costs, that makes delivery of health services more efficient, that rewards and encourages preventative care, that discourages short-term-attractive but long-term-foolish self-insurance, the purchase obligation needs to exist. Additionally, because free health care for all provided and managed by the government is an unwise choice and one not favored by most people, the system needs to be a sensible one, and thus must impose on individuals the same sort of personal responsibility for health care that states have brought to motor vehicle ownership. Just as questions about motor vehicle insurance, the name of the insurance company, the policy number, the serial numbers of the vehicles, the names and ages of those driving the vehicles, and similar information that, to paraphrase Boustany, “inject [state agencies] into the personal lives of American families,” so, too, making certain that every American has health insurance is going to require that a federal agency ask questions about health insurance, the names and ages of those covered by the insurance, the name of the insurance company, the policy number, and other information necessary to determine that a person is in compliance.

My objection is not that there ought not be a health insurance purchase obligation, nor is it with the fact that no such obligation has any teeth unless it is administered, nor with the fact that in order for it to be administered relevant information must be obtained from individuals. My objection is that the Congress, yet again, has picked the wrong agency. As I wrote, presciently, in Not to Its Credit, when addressing a pile of credits cluttering the Heartland, Habitat, Harvest, and Horticulture Act of 2008:

It's not that I object to the goals. I object to the Internal Revenue Service being turned into a institution that is focused more on the technical requirements of energy production activities than on administering revenue laws. I wonder why financial incentives to produce and conserve energy aren't administered by the Department of Energy. Well, I know the answer. The Congress, though every now and then publicly trashing the IRS and characterizing it as harmful, then turns to the same agency to administer its favorite incentives programs. Which should speak more loudly to America? What Congress says when it grandstands or what it does when it overburdens the tax law and the IRS because it apparently doesn't trust other agencies to administer laws relating to agriculture, energy, employment, or health? (emphasis added)

Perhaps some in Congress deliberately intended for the IRS to be given this responsibility, and others were too inattentive to realize that this happened. Why? Because the use of “anti-IRS” sound bites by certain politicians, not unlike the IRS-as-enemy overtones in the statements by Boustany’s and others sharing the same sentiments, gives the opponents of the legislation ammunition to persuade the public that they should rise up in opposition. How difficult would it be to amend the legislation to replace the IRS with HHS, and thus silence the IRS-as-enemy crowd?

Earlier this week, in The Tax Price of a Flawed Tax System, I commented on the a report that at least one member of Philadelphia’s City Council would suggest substituting an increase in the real property tax for the proposed trash pickup fee. On Wednesday, according to this Philadelphia Inquirer story, Council member Frank DiCicco confirmed that he plans to introduce legislation that would raise the property tax by 12 percent. The increase would terminate when economic conditions improved, with some sort of sunset provision yet to be determined. DiCicco mentioned the possibility of a termination provision that would kick in after anywhere from two to five years.

As can be expected, several other members of City Council agree with DiCicco. They consider it “more fair” than the trash pickup fee. Others disagree. They focus on the disarray that afflicts the real property tax assessment system, one that leaves property owners with assessments out of proportion, some higher, some lower, with property values. It will take at least two years to fix that system, and in the meantime a moratorium on reassessments has been put into effect.

The quandary in which Philadelphia finds itself is a good teaching moment, not only for those offering Tax Policy courses, but for citizens and voters in general. If compelled to choose between a real property tax increase or a trash pickup fee, under the circumstances in which Philadelphia finds itself, what sorts of advantages and disadvantages ought to be considered? How much weight should be given to those factors? Consider the trash pickup fee as proposed, rather than variations that could alter the various factors that are relevant.

An increase in the real property tax exacerbates the inequity that is built into the system as it now exists. Those whose properties are relatively over-assessed will be at a greater disadvantage, whereas those whose properties are relatively under-assessed will enjoy even more of an unjustifiable advantage.

An increase in the real property tax is easier to administer. Increasing the tax by 12 percent requires far much less effort than putting in place a separate billing system for those property owners that would be subject to the proposed trash pickup fee.

An increase in the real property tax would apply to all property owners. The proposed trash pickup fee would not apply to certain commercial and multi-unit residential properties, which already have arrangements in place to pay for trash removal.

The proposed trash pickup fee is regressive, because even despite a suggested reduction for low-income individuals, it is a fixed amount and does not vary according to income. Accordingly, the fee would be a relatively much smaller portion of a high-income individual’s income than it would be for a low-income person. An increase in the real property tax, at least theoretically, would be progressive, because generally the higher a person’s income, the higher the property’s value. However, the combination of warped assessments and the ownership of higher valued properties by fixed income owners who purchased those properties years ago dampens the strength of the argument that the real property tax is that much more progressive that the proposed trash pickup fee.

The proposed trash pickup fee does not take into account the quantity or weight of the trash left for collection by a particular resident. Unlike the property tax, where at least some sort of attempt is required to be made to relate the tax to the value of the property, the proposed trash pickup fee does not offer any incentive to cut down the trash removal and landfill burden because it does not shift costs to those generating a higher proportion of trash.

The proposed trash pickup fee does connect a user fee to a particular service, so that to some extent, albeit weakly, taxpayers can see the relationship between the payment to a government and the service being provided. In contrast, the real property tax is not specifically connected with any particular city service.

The amount paid on account of a real property tax increase is deductible for federal income tax purposes. In contrast, the proposed trash pickup fee would not be deductible.

An increase in the real property tax might bring court challenges on the grounds that the increase violates the tax uniformity clause of the state Constitution. On the other hand, there do not appear to be any plausible legal challenges to the proposed trash pickup fee.

So which one would you pick? Even though the trash pickup fee lacks a connection to quantity or weight, as I would prefer it have, it gets my vote. Admittedly, I favor user fees because I think it is important for taxpayers to see the connection between taxes that are paid and the benefits that are obtained in return. The mayor, when asked about the proposed trash pickup fee, appeared open to the possibility of adapting it to a quantity or weight measurement. Other jurisdictions take that approach, so it can be done. Yet even if it isn’t part of the fee at the outset, it ultimately makes less sense to rely on an increase in property taxes that are measured by flawed assessments and that would be vulnerable to challenge. My prediction is that City Council will end up going for the real property tax increase.

We will find out. Stay tuned.

In November of last year, in New Jersey to Follow in California’s Tax Footsteps?, I asked how the governor-elect of New Jersey, who prevailed in the election by promising to cut taxes, would deal with the inconsistency between public demand for state services and public demand for low or no taxes. This inconsistency was corroborated by a poll, on which I commented in Poll on Tax and Spending Illustrates Voter Inconsistency.

On Monday, the Philadelphia Inquirer published a report that New Jersey’s governor planned to ask the legislature to cap real property tax increases a 2.5 percent per year. This limitation requires an amendment to the state constitution. He also plans to cut state aid “to towns, schools, and colleges. Another trick is to replace the checks that are mailed on account of real property rebates with a credit that applies a year later. That’s a one-time gimmick.

Currently there is a 4 percent limit on property tax increases, to which there are exceptions that permit local property taxes to be raised by more than 4 percent. The governor plans to seek elimination of those exceptions. The exceptions were designed to accommodate extraordinary items, or items that are expenses imposed on localities but authorized by state legislators and thus not within the power of local officials to reduce or eliminate.

Here’s the problem with across-the-board tax increase limitations. There are expenses that will increase by more than the cap, and that officials are powerless to reduce. For example, state law guarantees public workers a defined pension benefit that cannot, at this point, be reduced to the extent it is vested on account of past services. Under the governor’s brain child, if a locality’s pension costs go up 20 percent, it must cut other services. By how much? That depends. For example, assume a locality’s total budget is 1000, and pension costs are 100, and other costs are 900. Assume that under state law, the pension costs for the following year increase to 150. Under the governor’s proposal, the budget is limited to 1025. That means the locality must cut 25 from other expenses. It cannot cut the pay of workers who have contracts. What does it cut? Snow removal? Trash collection? The point is simple. If the cost of the services that the residents want increase by 5 percent, taxes need to increase by 5 percent, unless there are cuts that can be made that represent expenses arising from fraud or inefficiency. When asked to identify specific instances of fraud or inefficiency that could provide the basis for savings, the anti-tax proponents revert back to theoretical commentary and strike out when faced with the practicalities of the details.

The key to balancing government budgets is not a simple matter of limiting tax revenue and triggering a free-for-all among the proponents of particular state services. The key is to price out and advertise the cost of each service that voters tell their representatives that they wish to receive. Pennsylvania has a similar property tax limitation in place, but it can be exceeded if the voters approve a budget that is based on an increase above the cap. By shifting responsibility onto voters, and making it clear that they must pay for what they want, particularly with respect to items that take the form of a user fee, governments can move away from spending decisions that are made by legislatures without any specific directive from voters. The cap ought not be an iron-clad revenue increase restriction that has no bearing to the actual costs of providing government services, but a cap on the spending decisions that are not specifically authorized by voters.

Ultimately, when complaints about high taxes circulate, the response, “You voted for it,” should either dampen the griping or inspire people to reconsider, and cut back, their government services wish list. The debate before each tax referendum, though probably loud, intense, and heated, will be educational, worthwhile, and productive. Imagine how cathartic it will be to listen to the proponents of a tax for a particular service debate those who do not want to pay taxes to provide that service. It will take the issues out of the back rooms and put them on the table Tying ownership of the expenditure process with ownership of the taxing process makes much better sense in the long-run than unworkable and impractical absolute revenue caps.

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.