MauledAgain

The headline caught my eye. The words, Former TV Anchor Glad She Challenged IRS, caused me to think that perhaps a ground-breaking tax case in which the taxpayer prevailed had just been decided. That’s not what happened. The story was a follow-up to a month-old Tax Court decision, Hamper v. Commissioner, T.C. Summ. Op. 2011-17 (Feb. 25, 2011). In that decision, the Tax Court held that a television anchor woman was not allowed a deduction for the cost of clothing, contact lenses, make-up, and grooming items such as manicures, haircuts, and teeth whitening. The case was so run-of-the-mill that I didn’t bother to comment about it.

The story attached to the headline indeed demands some comments. It provides a frightening insight into why some very avoidable tax return preparation errors occur. The former news anchor “decided to share her story as a tale of caution during tax season.” She stated, “I would hate for anyone else to go through this.” There’s much to be learned.

First, the taxpayer explained that she took the deductions in question because, “Other TV anchors told her they did it [take the deductions].” The lesson is that something is not right just because other people are doing it.

Second, the taxpayer explained that the “professionals who prepared her taxes over the years told her it was fine.” That is scary. They should have known better. The lesson is that when relying on a profession, check out the person’s credentials. Try to find out how their clients have fared in terms of IRS audits and subsequent litigation. That may be difficult to do, but it’s worth the try.

Third, when she was audited, the taxpayer learned that “[h]er tax preparer offered little help, so she called” a tax accountant. The lesson is that using a tax preparer who is not willing to stand by his or her work is unwise.

Fourth, the tax accountant, when interviewed for the story, explained, “Anietra [the taxpayer] felt, as well as I felt, that the clothing she purchased would be an ordinary, necessary job expense.” The lesson is that feelings have nothing to do with tax law and tax law interpretation. When students practicing appellate advocacy begin their responses with, “Your Honor, I feel that . . . ,” I interrupt and ask them what they are thinking. Feelings might matter when it comes to deciding if a witness is credible or if punitive damages are warranted, but no matter what sort of feelings are triggered by reading tax law – and they’re usually not good feelings – the answer rests on cerebral analysis, not emotion.

Fifth, the tax accountant in question further explained, “The tax code says you can deduct all expenses ordinary and necessary to maintain your income.” The lesson is that reading one provision in the Internal Revenue Code is insufficient because there often are other provisions that limit what the first provision says. In this instance, section 162(a), which provides a deduction for ordinary and necessary expenses of carrying on a trade or business, and section 212(1), which provides a deduction for expenses paid or incurred for the production or collection of income, are overridden by section 262, which disallows deductions for personal, living, or family expenses. Numerous cases had explained that the cost of clothing suitable for everyday wear – in contrast to apparel such as welders’ gloves, and firefighter gear – are personal expenses nondeductible under the tax law. One need look only at IRS Publication 529 to learn this simple rule. This error is the flip side of one that I described in Unmasking the Deductibility of Halloween Costumes, where a taxpayer decided that because the costume in question was unsuitable for everyday use, its cost was deductible, without taking into account the fact that there was no trade or business purpose for acquiring the costume.

Sixth, the tax accountant in question explained that, in his opinion, “the IRS trampled on Hamper’s rights and fined her unnecessarily.” The lesson is that taking a position for which there is not only no authority but for which there is established authority to the contrary is foolish. The penalty – which, incidentally, is not a fine – was imposed because the taxpayer, and by implication her tax return preparer who disappeared as soon as the IRS showed up, was negligent.

Seventh, the tax accountant argued, “I’ve never in all my years of practice seen a situation where the IRS imposed a penalty. They’ve been waived in every other case.” The lesson is that tax law reflects more than just what one person has seen or experienced. The accuracy-related penalty that was imposed on the taxpayer has been imposed on many other taxpayers.

The taxpayer “hopes that others can learn from her experience.” I wonder if that will happen. Five years ago, in a post that no longer shows up because of the page size limitation on monthly archives on blogger.com, I tried to alert people to the very bad advice being offered with respect to these sorts of expenses. Here is a republication of the relevant portions of Personal Grooming Expense Deduction? Dream On:

If March roars in like a lion, which it did here, surely tax season debuts each year with the usual scavenger hunt for deductions. This year is no different. What is particularly annoying is that with the tax law so complicated, no one benefits when erroneous information further complicates taxpayer attempts to comply and tax return preparer attempts to be of service to their client. I confess to being easily annoyed when bad tax advice makes the rounds. The latest entry, or should I say re-entry, into the find-a-deduction sweepstakes is the "personal grooming expense deduction."

The February 2006 issue of "Costco Connection" has a tax-savings article in which the author, Howard Scott, in a paragraph headed "Seek out other expenses" writes: "Do you incur personal grooming expenses because image is important?" [To get to the page, after clicking on the URL, click on "Smart Tax Tips" at the bottom left, and then click on "15 Tax Talk" on the right-hand side.] My thanks to Greg Stewart of Spokane, Washington, for bringing this to the attention of the ABA-TAX listserve's subscribers.

There is no such deduction. There is a long list of cases denying deductions for personal grooming, no matter the connection it might have to the conduct of a trade or business. For example, in Thomas v. Comr., T.C. Memo 1981-348, the Tax Court wrote: "Whether or not petitioner was required as a condition to her employment to be neatly coiffed, the expenses she incurred for this purpose are inherently personal in nature and cannot be considered as business expenses."

Technically, Scott has done nothing more than to ask a question. But considering that it follows a list of other questions, all focusing on deductions that would be available if the answer is yes, the inference is that a "yes" to the question would trigger a deduction. The inference surely is intended, considering the litany of items covered by the list of questions. After all, if the intent simply is to get taxpayers thinking about anything, why not ask questions such as "Do you have a pet dog?" or "Did you go to the movies?" Answering "yes" to these questions would not generate a valid tax deduction.

Is it fair to suggest that the question claims a personal grooming expense deduction exists? In light of other advice in the article. yes. Scott explains that even if a taxpayer has an accountant, the taxpayer knows his or her business better than the accountant does. In most cases, that's true. Scott then writes that the accountant might be "conservative." Perhaps. I'm sure he means conservative in the cautious and not political sense. Being conservative, Scott concludes, "often translates into a reluctance to implement new stratagies." So does this mean claiming a deduction for personal grooming expenses is simply a new strategy? I don't think so. Claiming impermissible deductions is a strategy almost as old as the income tax law. Refraining from doing so is not my definition of conservative. It's my definition of sensible, law-abiding, and prudent.

It may appear that I'm "picking on" Howard Scott. That's not what I'm trying to do. I didn't seek him out. He put his article into the public spotlight, and many taxpayers have read or will read it. All I want to do is to alert people to two simple things. First, there is no deduction for personal grooming expenses. Second, beware of what you read about taxes and rely only on advice from people whose tax-advice-giving reputations you can and do trust. Before relying on advice from Scott, I'd want to know more about him.

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Following up on someone else's research, I looked around, and here is what has been found. The Costco article describes Scott as a "longtime writer and tax preparer specializing in small businesses" and explains he "has published more than 1,700 magazine articles and three books." Among those 1,700 articles must be the one appearing in Pizza Today and the two-paragraph "Avoiding an Audit" advice in Remodeling Online. According to this report, Scott not only is a free-lance writer and tax consultant, he also is a beekeeper.

Why have I invested my time in this story? Because umpteen million Costco customers will read the article. Tax practitioners are bracing themselves for clients arriving with a copy of the Costco article, along with grooming expense receipts, ready to argue that Costco's expert says that a deduction is available. No sooner had someone wondered aloud if people would take Scott's advice to heart than someone else answered affirmatively. A client arrived with a copy of the Costco article and announced she should be allowed to deduct the cost of her pedicures. Why? She often wears sandals and her toes need to look nice. The client's job? She sells carpets. Turned out the client was sufficiently informed about taxes and after a few minutes, let on that she was rattling her tax practitioner's cage. Most clients are not so savvy. Several years ago, another subscriber reported, clients asked about the "$5,000 vacation deduction." I wonder where that idea originated. Wherever it did, like the new ones that are popping up, they need to be discredited before innocent taxpayers get into trouble relying on them.

But for every client with some understanding of basic tax law, there are a dozen who grab onto the idea of a tax-savings deduction with the grip of a drowning person reaching for the life preserver. Add in the vanishing breed of people who do their own returns, some of whom surely will take the grooming expense question's intended inference to its logical conclusion, and there's real reason to worry about the impact of bad tax advice in an age when bad advice can circle the globe in minutes.

* * * * *

And here's hoping no one gets stung by claiming a deduction for personal grooming expenses.

Well, there was a hope dashed. At least for Ms Hamper, who was hung out to dry by her tax return preparer.

A week ago, in Some Tax Back-Peddling?, I asked whether the Pennsylvania governor’s expressed willingness to permit municipalities to impose impact fees on drillers was “the crack in the dam that eventually will open up the state to a more sensible tax policy.” I answered my own question with a hedge, “Perhaps. Perhaps not.” I noted that the cracks in the anti-tax strategy will widen as people begin to realize that a “no tax” philosophy hurts citizens in the long run, and that even the “anti-tax” governor has had to acknowledge that “there are problems, that the problems need to be given attention and resolved, and that at least a user or impact fee is in order.”

Now comes news that the governor of an adjoining state, also “famous” for his “anti-tax” stance, has had to own up, through an aide, that “new revenue sources” will be needed in New Jersey to pay for highway, bridge, tunnel, and public transportation repairs and expansion. Whether those new revenues come in the form of new taxes, higher rates on existing taxes such as the state gasoline tax, or user fees such as tolls, reality has again showed its face.

New Jersey’s Transportation Commissioner explained that although planned borrowing will buy the state some time, in about five years, the collision between public need and inadequate funding will be inevitable in the absence of tax and fee increases. Some legislators, though, object to borrowing, because it shifts the burden created by today’s use of public infrastructure to tomorrow’s taxpayers. At the very least, says one legislator, voters should have an opportunity to approve or reject increases in state debt. The governor, in either a surprising retreat from or a revealing indictment of his populist image, claims that voters have no say in whether the state borrows billions of dollars. Ironically, New Jersey’s governor is doing the same thing that his predecessors did, an approach that the governor was keen to criticize while on the campaign trail. If the legislature manages to enact a voter approval requirement, and the voters reject borrowing, the judgment day of tax and fee increases will arrive sooner rather than later.

Slowly, governor by governor, legislator by legislator, the folks who signed on to the “theory” of a low-tax, no-tax, cut-tax theory of public finance are discovering that reality is the true test of theory. In some ways, listening to candidates rail about how the nation would be better off if the income tax were ripped out by its roots or taxes cut to the bare bones or less, only to discover that application of these ideas cause economies to stagnate and people to suffer and die, reminds me of hearing teen-agers and some young adults proclaim that they know so much more than do their parents, until reality hits when they have children of their own. It’s not until a person gets out of the think tank and into the trenches that he or she understands the full depth and extent of a problem. It’s not until the candidates enter office and become enlightened by having access to the reality of public responsibility that they discover the short shelf life of campaign “sound bites.” That’s why a person not caught up in the compromises of electioneering can say, “There is a choice; pay the taxes and fees necessary for safe and efficient roads that are good for the economy and the people, or let the roads and bridges fall apart, causing the economy to sag, vehicles to break, and people to die.” A candidate cannot say that without risk of losing to an opponent who announces, “I hate taxes, you hate taxes, so vote for me, because we really don’t need more taxes, what we need are fewer and lower taxes, and with reduced taxes the public infrastructure will be so much better.” The latter claim is so much more enticing, but it’s a siren song nonetheless.

Almost five years ago, in A New Book on Taxation of Residence Sales: Don't Leave Home Without It, I reviewed Julian Block’s “HOME SELLER’S GUIDE TO TAX SAVINGS.” I concluded that it was “useful,” “solid, well-organized,” and a book that “every real estate agent and broker in the country who handles residential home transactions ought to acquire.” I must not have been alone in that conclusion, because the book has now appeared in a new printing. That suggests to me that people are buying it. As an author, I know that’s good news. Nor was I alone in my reaction, as similar and even more effusive praise for Julian’s book has appeared in Money, the New York Times, Forbes, and a variety of other magazines, newspapers, and professional association newsletters.

The new version is no less useful, no less well-organized, and no less informative. Julian continues to provide numerous examples, and to delve into “almost every possible variation on the home sale theme” as he did the first time around. He continues to focus on the issues specifically affecting surviving spouses, divorced and unmarried individuals, unmarried couples, owners of condominiums and cooperatives, and those who have used part of their residence as an office in home, to mention some of those to whose problems he gives attention. The checklists in the book have been retained and updated to reflect developments in the tax law. The discussion of record retention remains no less important than it was five years ago.

At a time when taxpayers are realizing losses on the disposition of residences because of the housing market collapse, Julian chapter on when losses can and cannot be deducted is especially timely. No less important is the chapter that deals with insolvency, foreclosures, and debt cancellation. There are chapters on casualty losses, home improvements in the form of medical expenses, and the mortgage interest deduction, though again Julian leaves the details of other home-related tax issues, such as real estate tax deductions and the computation of depreciation for home offices, to other books. That makes sense considering the basic theme of the book is residence sales.

There continues to be all sorts of misinformation circulating on the Internet and among home sellers, and there accordingly continues to be a need for Julian’s book. My suggestion five years ago that real estate agents and brokers get themselves a copy is no less valid today than it was then. The numbers of people selling homes without using realtors continues to increase, and they, too, would benefit from having a copy of Julian’s book.

“HOME SELLER’S GUIDE TO TAX SAVINGS” is available from PassKey Publications, as well as at outlets such as Amazon and Barnes and Noble. For more information about Julian Block, see his web site.

The mileage-based road fee, also known as the vehicle-miles traveled user fee, continues to get attention. The latest entry in the discussion is the Congressional Budget Office’s report, Alternative Approaches to Funding Highways. This report adds to the growing analyses contributing to, and the knowledge necessary for, the continuing study of how to deal with rapidly declining revenues available for maintenance of the nation’s highways, bridges, and tunnels.

My first foray into this issue was six and a half years ago, in Tax Meets Technology on the Road. That post was followed three years later by Mileage-Based Road Fees, Again, which triggered a series of posts over the next several years, including Mileage-Based Road Fees, Yet Again, Change, Tax, Mileage-Based Road Fees, and Secrecy, Making Progress with Mileage-Based Road Fees, Mileage-Based Road Fees Gain More Traction, and Looking More Closely at Mileage-Based Road Fees. Readers know that, as I pointed out in Pennsylvania State Gasoline Tax Increase: The Last Hurrah?: “What I support is the mileage-based road fee, a 21st century concept that seems to elude legislatures and politicians still living in the 19th and 20th centuries.”

The CBO report should help in dragging legislatures and politicians into 21st century public revenue approaches. It provides a comprehensive analysis of the advantages and disadvantages of the vehicle-miles traveled user fee. It’s well worth reading, and all I want to do is to highlight some aspects of the report that I happened to have found particularly enlightening.

The report confirms what most people would guess. “Most of the costs of using a highway, including pavement damage, congestion, accidents, and noise, are tied more closely to the number of miles traveled than to the amount of fuel consumed. (Because of the way passenger vehicles are regulated, their emissions of local air pollutants, such as particulate matter and sulfur dioxide, also are more closely related to miles traveled. The cost of local air pollution from trucks, which is regulated differently, is fuel related.)” The report explains that, “Fuel consumption depends not only on the number of miles traveled but also on fuel efficiency, which can differ from one vehicle to another and can change with driving conditions; therefore, charging highway users for the full costs of their use, or in proportion to the full costs, could not be accomplished solely through fuel taxes.”

The report also confirms the wisdom of funding highway, bridge, and tunnel maintenance with user fees rather than with monies from general revenues. It explains the efficiencies of user fees as contrasted with general tax revenues when applied to specific public sector services. Though, as the report points out, it is possible to raise the necessary revenue with slight increases in general tax rates, user fees are required to generate incentives for users to reduce their highway use costs, to produce less inequity in terms of who uses and who pays, and to avoid the distortions that arise from using existing inefficient general tax revenue systems.

The report adds another response to those who are concerned about the impact of vehicle-miles traveled fees on low-income individuals and those who live in rural areas and necessarily must travel more miles. According to the report, “VMT taxes are qualitatively similar to fuel taxes in their implications for equity. Like fuel taxes, they satisfy the user-pays principle, but they impose larger burdens relative to income on people in low-income or rural households. However, to the extent that members of such households tend to drive vehicles that are less fuel efficient, such as pickup trucks or older automobiles, those highway users would pay a smaller share of VMT taxes than of fuel taxes.”

The report points out that if vehicle-miles traveled user fees are intended to “maximize the efficiency of highway use,” they would need to reflect vehicle type, time of day, and nature of the highway. Working these factors into the system in turn raises privacy concerns, because it would then be possible for governments to know where and when a particular vehicle was traveling. Though various solutions have been proposed – including an option to pay fuel taxes in lieu of mileage-based road fees, restricting the amount of information provided to governments, and passing information through intermediaries – the report notes that similarly calculated fees already are in place, such as with the EZPass system.

One of the major issues in adopting a mileage-based road fee is implementation. It is not an issue that is easily resolved. As the report explains, “Estimates of what it would cost to establish and operate a nationwide program are rough. One source of uncertainty is the cost to install metering equipment in all of the nation’s cars and trucks. Having the devices installed as original equipment under a mandate to vehicle manufacturers would be relatively inexpensive but could lead to a long transition; requiring vehicles to be retrofitted with the devices could be faster but much more costly, and the equipment could be more susceptible to tampering than factory-installed equipment might be. Despite the various uncertainties and impediments, some transportation experts have identified VMT taxes as a preferred option.” Another issue is whether a vehicle-miles traveled user fee should be implemented and administered nationally by the federal government, or handed off to the states with federal encouragement and coordination. The report also addresses the perceived advantages and disadvantages of introducing private sector participation or even control over highway user fee collection, and issue I have discussed numerous times. Among the various posts that examine and de-bunk the myth of private sector superiority when it comes to dealing with public assets are Selling Off Government Revenue Streams: Good Idea or Bad?, Are Citizens About to be Railroaded on Toll Highway Sales?, Turnpike Cash Grab Heats Up, Selling Government Revenue Streams: A Bad Idea That Won't Go Away, Turnpike Lease: Bad Policy and Now a Bad Deal , How Do Toll Road Lessees Make a Profit?, The Pennsylvania Legislature Gets It Right, Killing the Revenue Idea That Won't Die, Are Private Tolls More Efficient Than Public Tolls?, More on Private Toll Roads, and Tax Profiteers Resume Takeover Attempts.

Something needs to be done, and soon, about the deteriorating condition of the nation’s infrastructure, including its transportation network. The report tells us that “According to the FHWA, in 2006, 47 percent of the miles traveled by all vehicles on roads eligible for federal funding occurred on pavement that, on the basis of a measure of surface roughness, was considered to be in good condition; 39 percent of travel occurred on pavement classified as acceptable but not good; and 14 percent occurred on pavement that was rated less than acceptable. Measures of congestion in urban areas developed for the FHWA show that congestion resulted in 4.8 billion hours of traveler delays and consumption of an additional 3.9 billion gallons of fuel in 2009 (34 hours in delays and 28 gallons of additional fuel per traveler).” Without a restructuring of the funding mechanism and accountability to make up for the nearly $40 billion annual shortfall in highway maintenance costs, this nation’s citizens will find themselves traveling almost all the time on less than acceptable payment and investing most of that time sitting in stalled traffic wasting and paying for energy. Once again, short-sightedness will prove to be a long-term mistake. This nation has had enough of that. The mileage-base road fee is as good a place as any to reverse the trend that is eating away at the foundation of the country.

My support for a user fee or tax on the companies drilling for, and extracting, Marcellus shale natural gas in Pennsylvania has been the subject of more than a few posts. For example, I discussed the reasons such a fee or tax makes sense in commentaries such as Tax? User Fee? Does the Name Make a Difference?, Polls, Education, Taxes, and User Fees, and Life for My Proposed Marcellus Shale User Fee?. Similarly, I have shared a my reactions to the failure of the state legislature to enact, and the refusal of the current governor to consider, such a tax or user fee. My analysis appears in posts such as A Classic Tax Increase Battle, Giving Up on Taxes = Surrendering Taxpayer Rights?, The Logic and Illogic of Tax, Texas Taxation as a Role Model for Pennsylvania?, and Voter Polls on Taxes and Electoral Polls on Taxes.

Now comes news that Pennsylvania’s governor admits he “would consider allowing municipalities to impose [impact] fees on drillers as long as the money generated stayed in those communities.” Is this the crack in the dam that eventually will open up the state to a more sensible tax policy? Perhaps. Perhaps not.

Some view the governor’s statement as no big deal, claiming that the governor previously made similar statement, including comments during the gubernatorial campaign. Others see it as an interesting backing-off by a politician strongly opposed to “any levy” on the drilling and extraction industry. Considering that the governor had been arguing, since taking office, that any sort of tax or fee imposed on these companies would obstruct the job creation that they foster, this is a significant retreat. Only a few weeks ago the chair of the governor’s Marcellus Shale Advisory Commission reacted to the notion of a tax or impact fee on the companies with the statement, “I think the governor made it very clear . . . no means no.”

The governor admits what I and others have been saying for months. There is an impact to the local communities, and that impact needs to be addressed “in some way, shape, or form.” That’s a good start.

The governor continues to insist that any revenue from impact fees, or, I suppose, user fees, on the natural gas companies must not find its way to Harrisburg. In some respects, this makes sense. To the extent that the heavy vehicles of drilling and extraction companies damage roads and bridges – damage that sometimes is visible and damage that will show up in the future – it makes sense to let the localities in which those roads and bridges are located to funnel the revenue from impact and user fees into repair of that infrastructure. It’s more efficient than having the money flow to Harrisburg so that the legislature can fight over how it gets allocated to the localities. There are drawbacks, however, to the local approach. Will localities try to attract drillers to their area by enacting fees that are less than those imposed by other areas? Possibly, though, as I stated in earlier posts, the gas companies will go where the gas can be found. Differences in rates or fee amounts among localities might affect the timing, in terms of where the companies go next, but eventually, if there is natural gas, the companies will come. This problem also can be alleviated somewhat by having the fees imposed at a county level or through use of an cross-jurisdictional authority not unlike a sewer authority. Yet the biggest disadvantage to a local impact fee is that the impact often falls beyond the boundaries of the locality or county where the drilling occurs. A solution to this challenge might be enabling legislation that permits, for example, down-stream localities to impose impact fees on drillers and extraction companies that pollute the headwaters of the stream or river. That, however, is not an easy approach to administer.

Some legislators consider impact fees to be less effective and less efficient than extraction or severance taxes. As one legislator put it, “If you ask a suburban Republican legislator to tell their constituents, ‘Yes, we're going to let your kid's tuition at Penn State go sky-high, we're going to let your property taxes go sky-high, and yet we're not going to tax the drillers,’ I don't think those constituents are going to like that." No, they won’t. They’ll find out that they voted for something other than what they thought they were voting for. It’s pressure from people who begin to realize where the uncompromising “no tax” philosophy – which still has adherents in the legislature – sells the state’s residents short, that will widen the cracks in the anti-tax strategy that have appeared with the governor’s acknowledgement that there are problems, that the problems need to be given attention and resolved, and that at least a user or impact fee is in order.

In The Logic and Illogic of Tax, I explained how critics charged that the budget cuts proposed by Pennsylvania’s governor will require local governments to increase taxes to prevent cuts in services that would adversely affect Pennsylvanians. It didn’t take long for those predictions to come true. According to this report, Philadelphia plans to increase real property assessments in 2010 so that the revenue collected from the real property tax increases by 20 percent. This will prevent the governor’s proposed cuts from, to use a city official’s terminology, devastating the city, though even with the local tax increase, education and health care services in the city will be painful. Who is hurt? The proposed cuts answer that question. Reductions are planned for programs that assist the homeless, that seek to prevent the spread of HIV, that seek to abate lead, that provide services at city health centers, that fund after-school and summer youth programs, and that are used by the Department of Human Services. It’s a good insight into who really matters to the governor and his supporters. In the meantime, by shifting the problem to the local level, the governor has found a way to deflect citizen anger.

The impact of the proposed cuts is even worse that initially predicted. According to another report, economically distressed localities in Pennsylvania now face reductions in the ratings assigned to their bonds, which will increase their financing costs, in turn making their budget shortfalls larger. Some poor school districts will lose as much as one-fourth of their budgets because of the governor’s proposed cuts, and additional cuts will be required when funds otherwise spent directly on education are diverted to pay for those increased financing costs. Worse, in some instances financing will be unavailable, requiring even further cuts. On the other hand, school districts serving wealthy neighborhoods require less state aid, are barely affected by the proposed cuts, and continue to have easier access to financing at lower cost. The bond financing problems also affect local municipalities, which will be stuck with the cost of repairing damage done by heavy trucks to roads designed for automobiles and to bridges not engineered to handle the gas extractors’ traffic. Similarly, sewer and waste treatment facility authorities in rural areas will encounter similar financing woes, as they try to repair and replace plants overwhelmed with the waste water generated by untaxed drilling and extraction. It would be interesting to map the voting patterns in wealthy and poor neighborhoods with the outcome of the gubernatorial election. It might provide yet another insight into who really matters to the governor and his supporters.

Yet another story specifically illustrates the impact of the axe-wielding budget cutting frenzy fueled by the effects of the anti-tax movement. Among the items chopped by the House of Representatives in its mad dash to cut for the sake of cutting was a 93 percent reduction in federal funding for poison centers, a cut buried so deep it didn’t make the list in Spending Cuts, Full Disclosures, Hearts, and Voices. Pennsylvania’s governor, riding the same “cut, baby, cut” train, proposes to eliminate completely all state funding for poison centers. For all intents and purposes, poison control centers will need to close down. It’s not as though there are hundreds of poison centers and that closing some would generate some sort of efficiency. The entire nation is served by only 57 centers, that handle more than 4 million calls each year. The poison control center in Philadelphia serves one-third of Pennsylvania and the entire state of Delaware. One call to the center costs the center roughly $30 but often eliminates the need for a $500 emergency-room visit. Every dollar invested in the poison center saves consumers and government agencies between $7 and $14 in medical care costs avoided by the earlier intervention. This sort of legislative short-sightedness is no less silly than that which causes the Congress to cut funding for the IRS that in turn reduces revenues by huge multiples of the spending cuts. In fact, it’s worse. Cutting funding for the IRS is part of a strategic initiative to eliminate the income and other taxes, whereas cutting funding for the poison centers couldn’t possibly be intended to increase the 82 people who die every day from poisoning. But that’s the effect it will have. Worse, the lives that are saved when poison centers issue public service alerts, such as the one it published after figuring out that people were suffering carbon monoxide poisoning from sitting in cars with idling engines and tail pipes stuck in snow banks, will now be lost. It’s rather frightening to live in a country where some people would rather cause the closing of poison centers, despite the increase in poisoning deaths that would ensue, because they will resist to the last penny any attempt to revoke ill-advised and unjustified tax cuts and any effort to make businesses pay for the costs they impose on the public.

A bill introduced a few days ago by Representative John Lewis proposes a new tax break. According to the Library of Congress bill tracker, the actual text of the bill has not yet been provided. If that link doesn’t work, as often is the case with Library of Congress legislative links, try this one, though when last checked, it too did not have the text of the bill. The title of the bill, however, provides enough information to warrant serious questions about the wisdom of enacting yet another revenue-reducing tax break. The bill’s title is as follows: “To amend the Internal Revenue Code of 1986 to provide that a deduction equal to fair market value shall be allowed for charitable contributions of literary, musical, artistic, or scholarly compositions created by the donor.

Why does this proposed new tax break make little sense? Aside from generating a reduction in tax revenue at a time when the federal budget deficit poses a significant threat to the nation’s economic welfare, the bill gives special treatment to a narrow class of taxpayers that is not available for other taxpayers who provide benefits to charities in the form of benefits originating in the taxpayer’s labor. Under current law, a person who performs services for a charity is not permitted to deduct the value of the person’s services. The principal justification for this treatment is that the person performing the services does not include the value of the services in gross income. This principle applies even if the person’s labor produces tangible property for the charity. Think, for example, of volunteers whose labor contributes to the construction of a building for a charity.

Under the proposed legislation, a person who creates a book, a song, a mural, a painting, a sculpture, or some other “literary, musical, artistic, or scholarly composition” and who donates it to a charity will be entitled to a deduction even though the person does not include anything in gross income. Perhaps the bill has language to distinguish between something created for the charity and something created for sale to the public that the person donates to the charity after deciding that public disinterest in the item requires removal of unsold products taking up space needed for newer creations.

Even if the proposed legislation is limited to “literary, musical, artistic, or scholarly” items created for a charity, and I don’t think that it is, the proposal is unwise. Consider a group of people who volunteer to build a structure for a charity. Some of the people work on the foundation, some lay bricks, some do carpentry, some wire the switches and light fixtures, some put down tile, and so on. One of the volunteers paints a mural on the side of the building. Why should that volunteer obtain a tax break when the other volunteers do not? Has the sense of fairness totally departed from the nation’s capital?

As seemingly written, taxpayers who paint the walls of the building being constructed for a charity are likely to claim that they are artists. And, in a sense, they are. Is not all of life art in the widest sense of the word? What about the volunteer who designs and carves a banister for the stairway? What about the person who lays tiles in an artistic style? Will the people who volunteer at a soup kitchens claim that they are sharing “artistry” in putting together a soup with a unique blend of ingredients? There is, of course, those skills wrapped into the phrase “culinary arts.” Is it sensible to create a situation in which government and private sector resources will be invested in the determination of who is and is not an artist and in the identification of things that constitute art and the things that do not? All of this discussion ignores the additional complexity of investing resources into the determination of the value of the items within the scope of the legislation.

And it can be even more alarming. Consider this tantalizing question. Is the person who volunteers to do a tax return for the clients of a charitable organization making a charitable contribution of a literary composition? A scholarly composition? An artistic composition? You decide.

Addendum: Joe Kristan already did decide. His post is an absolute must-read.

Legislative Follow-up: Thanks to an alert from Russell A. Willis, III, I learned that the text of the bill has now appeared, and can be found at Govtrack. Nothing in the text of the bill addresses any of the concerns that I raised.

Additional Note: The bill requires that the item in question be created no less than eighteen months before contribution. Careful planners will find ways to delay the actual contribution, perhaps through transferring use rather than title to the charity until eighteen months elapse, or by having the volunteer create but hold onto the item for eighteen months. The eighteen-month rule might foreclose the soup kitchen example, but when it comes to something like a shawl or chair restoration ministry, it's fairly easy to advise the volunteers to make the shawl or fix the chair and then wait eighteen months to transfer title to the charity. Other than creating jobs for tax practitioners for whom this bill would create work, at the expense of charities and volunteers paying for the advice unless the tax practitioner decides to create the advice and then contribute it eighteen months and a day later, the proposed legislation is yet another example of well-intentioned theoretical ideas failing when they arrive in the practice world.

Ten days ago, in The Logic and Illogic of Tax, I noted that although at least 60 percent of Pennsylvanians support a tax on Marcellus shale natural gas extraction and production companies, the governor continues to oppose any sort of user fee or tax to compel these companies to defray the economic burdens they impose on the state and its citizens. Somewhat rhetorically, I wondered “how a person whose anti-tax stance is contrary to the wishes of at least 60 percent of the population gets elected.” Last week, following up on that post, I noted in Texas Taxation as a Role Model for Pennsylvania? that the governor seems single-mindedly intent on turning Pennsylvania into another Texas, an outcome that does not bode well for most Pennsylvanians. Now comes a new poll from the Franklin and Marshall College Floyd Institute for Public Policy Center for Opinion Research that confirms widespread opposition not only to the governor’s anti-tax stance but to the budget cuts he proposes to defray the cost of opposing tax increases.

The latest poll shows that 62 percent of Pennsylvanians support a tax on the natural gas extraction and production companies. Even more – 72 percent – support new taxes on the sale of smokeless tobacco. Slightly more than half want the sales tax expanded to cover more items. On the other hand, only 37 percent support an increase in business taxes, only 36 percent support an increase in the sales tax rate, and only 27 percent support an increase in the state income tax. In terms of spending cuts, the only proposal to gather more than majority support – specifically, 60 percent – is a reduction in the number of state employees. When it comes to reducing pay and benefits for public employees, only 45 percent step up in support, while 43 percent support cuts in prison funding, a mere 28 percent support the governor’s 50-percent cuts in state funding for public universities, an mere 26 percent support his proposed cuts in Medicaid, and a paltry 19 percent favor his plan to reduce state funding for local school districts.

So again, I ask, how is it that the state has a governor so out of tune with a majority of its citizens? It’s not a matter of someone who has been in office for several years or more who has evolved or changed. The governor has been in office for barely two months. Something seems strange. The governor’s response is rather interesting. As reported in this story, Corbett quipped, “We didn't campaign based on polls, and we're not going to govern based on a poll." But somehow he was elected at the polls.

There are several possibilities for the disconnect between the governor and the populace. The evidence is insufficient to identify any one of them as the sole explanation.

One possibility is that the people responding to the Franklin and Marshall poll didn’t vote. In other words, the segment of the state’s population that voted in the gubernatorial election is not representational of the state’s population generally. In that instance, those who chose not to vote and who dislike what the governor plans to do have only themselves to blame for sitting out the election. Eligible voters who think that by not voting they are sending some sort of signal that they are abstaining nonetheless are casting votes in favor of the person for whom they would not have voted had they shown up at the election booth last November.

A second possibility is that voters did not understand what Corbett was saying during the campaign, or misunderstood what he was saying. Although this seems unlikely because Corbett was very up-front with his opposition to taxes and his desire to chop state spending, it is not implausible that some people figured this was campaign rhetoric and that he didn’t mean what he said. To his credit, Corbett meant what he said. It’s just unfortunate that what he means and says is not the prescription for the state’s ills.

A third possibility is that too many voters subscribe to the “don’t raise taxes and don’t cut spending” approach that has created the fiscal mess afflicting the federal government and all but one or two state governments. I previously addressed this oxymoronic perspective more than a year ago in Poll on Tax and Spending Illustrates Voter Inconsistency and six months ago in A Grander Delusion: Cut Taxes, Don’t Cut Spending, Cut the Deficit . More specifically, too many voters favor tax reductions for themselves, spending cuts for programs from which they don’t benefit, and spending increases for programs from which they benefit. Matched against the array of taxes and spending programs, consensus becomes impossible. It can manifest itself in the sort of outcome evident in Pennsylvania, a governor whose policies, when reduced to details, conflicts with the wishes of the state’s population. Here’s an example. The poll also revealed that only 35 percent of respondents want to put tolls on the state’s major highways. Would a fair guess be that most of those 35 percent do not drive, drive infrequently, or do not use the major highways? One of the many advantages of user fees is that it connects what the citizen is paying with what the citizen is getting, a concept consistent with a recent study showing that letting taxpayers designate the use of what they pay causes them to “look more favorably on paying taxes.”

A fourth possibility is one that I raised in The Logic and Illogic of Tax, reflecting information provided in, among others, this story and this report. The latter goes so far as to suggest, “The governor isn't ignoring the polls because he's a man of principle, but he's ignoring the polls because the people of Pennsylvania don't want what's good for his billionaire campaign donors from Boca Raton and from Oklahoma.”

A fifth possibility is one that can be discovered by reading the comments to the previously cited report, or the comments to the many other stories dealing with government budget crises. It is manifestly apparent that many people do not understand macroeconomics, microeconomics, tax policy, or public finance. Of course an extraction tax would be passed by the taxed companies onto their customers, but those customers are principally in other states. Pennsylvanians, in the meantime, are paying for the taxes imposed by other states on the companies that sell gasoline, oil, and all sorts of other products to Pennsylvanians. In other words, failure to tax out-of-state companies, while other states are taxing Pennsylvania companies and, by taxing out-of-state companies doing business in Pennsylvania indirectly taxing Pennsylvanians, causes public revenue to flow out of Pennsylvania into other states. Who really pays those extraction taxes imposed by Texas? Come to think of it, it appears the governor also doesn’t understand public finance and tax policy, else in his fervent attempt to emulate Texas – see Texas Taxation as a Role Model for Pennsylvania? – he would follow its blueprint and tax the extraction companies. This reasoning brings the spotlight back to the fourth possibility.

The current disconnect in Pennsylvania probably is attributable to some combination of the preceding five factors, though the second possibility deserves little weight and the fourth carries much more impact than people realize or prefer. None of these factors is unchangeable, though decades of trying to get more Americans to the voting booth and efforts to curtail external interference in the electoral process have repeatedly come up short. Increasing voter education with respect to public finance, economics, and tax policy has always been difficult, and will become increasingly so as politicians continue to axe funding for education, perhaps because an educated electorate is perceived to be a danger, and a badly educated electorate – getting its learning from anyone who shows up on cable television or the internet, credentialed or not – seems to be more conducive to the sort of politics now afflicting this nation.

Perhaps in the long run, the short term exacerbation of the public finance crisis will be a good thing. Perhaps, after voters figure out that by voting for a “no taxes” gubernatorial candidate they ended up voting for increased local taxes, they will re-evaluate the “we can have guns and butter without anyone paying much of anything in taxes” promises of the siren-song politicians. The tough talk is more than “no taxes, cut spending.” The tough talk is, “You can avoid more state and local taxes by gutting public education, health care, police and fire protection, highway maintenance, and just about every other benefit you take for granted and will need to purchase on the private market at a higher price, or you can maintain quality education, acceptable roads, public safety, and the other benefits of well-run government by getting out of your head the idea that life as an adult brings the same ‘something for nothing’ that blessed a few too many children.” The problem is that people willing to provide that tough talk aren’t going to get elected, because the people financing campaigns want nothing of it, even if a majority of the voters believe it, want to hear it, and want to see it put into action.

Last week, in The Logic and Illogic of Tax, I questioned the claim by the governor of Pennsylvania, Tom Corbett, that if he succeeds in preventing the imposition of taxes or user fees on Marcellus shale gas drillers and producers, those businesses will decide to “move here and use the state as a base to drill deeper, to the gassy Utica Shale.” Corbett claims that this can happen “as long as ‘we don't scare off these industries with new taxes.’” I pointed out that taxes or no taxes, there’s money to be made, lots of money, and that gas drillers won’t stay home if Pennsylvania imposes on them the burden of paying for the costs they impose on the state and its citizens. I noted that every other state with natural gas resources imposes taxes and user fees, and the gas companies have not abandoned those states.

In his Wednesday Philadelphia Inquirer column, Joe DiStefano shared the outcome of his attempt to prove or disprove the governor’s claim. DiStefano spoke with Sid Smith, a Texan who lives in the Philadelphia suburbs and works in center city. DiStefano asked Smith if the oil companies that left Pennsylvania some years ago, such as Atlantic Richfield, would likely seek to move their corporate headquarters back to Pennsylvania. Smith’s response, “[T]hey’re not dying to come back.” Apparently, it is easier to do business in Houston because one government agency is responsible for “real estate, leasing, licensing, and tax questions.” Pennsylvania’s tax and regulatory regime is, in contrast, too complicated.

The prospect of a tax or user fee isn’t the issue. Echoing my comments in The Logic and Illogic of Tax, that the gas companies will show up, tax or no tax, Smith explained, “Companies want the gas, and they’ll pay the tax.” He added that “Pennsylvania may be passing up a good thing that could benefit all industries.” Texas, for example, raises so much revenue from its energy taxes that it doesn’t have an income tax. Its energy taxes did not discourage gas companies from doing business there. But rest assured, the governor will not permit logic and common sense to get in the way of his inflexible opposition to making gas companies defray the costs otherwise imposed on the state and its citizens. Those costs, according to Smith, include the “drilling byproducts and wastewater accumulating” in rural Pennsylvania. Says Smith, “Ponds like that are never a good story on any property.” The governor must think that when it comes time to deal with the short-term and long-term consequences, the taxpaying public should foot the bill.

Pennsylvania’s new governor also expressed hope that “Big Gas will make Pennsylvania the Texas of the natural gas boom.” In his Philadelphia Inquirer column, John Baer considers what that would mean. He also wonders what it is about Texas that has such appeal for Tom Corbett. Is it because Corbett, “a law-and-order former prosecutor” likes the fact “Texas executes more people than any state in the nation”? Is it because Corbett likes the fact that public employees in Texas have no bargaining rights? Is it any wonder that Texas state employees “rank last nationally in benefits and haven't gotten a cost-of-living raise in a decade”? Or perhaps it is the wonderful public education system in Texas, ranked 30th in a 2010 CNBC report that puts Pennsylvania in fourth place. Baer points out that this year’s U.S. News & World Report rankings of top-50 universities lists four in Pennsylvania and two in Texas, while its top-50 college rankings put eight in Pennsylvania and zero in Texas. In the meantime, the governor of Texas proposes to cut $9 billion from education funding. What a role model for Pennsylvania’s new governor. Baer then provides several “appealing” things about Texas, including its rank as 45th in tax burden, compared to Pennsylvania’s 10th-place position.

Is it any wonder that Texas scores so badly in education? “You get what you pay for” has more than a ring of truth to it. It’s also true that Texas came in first place in that 2010 CNBC poll in technology, transportation, business friendliness, cost of doing business, quality of life, and state economy. How did that happen? Obviously, businesses prefer low taxes, move to Texas, causing in-migration of population from other states with those people bringing with them the education acquired elsewhere, and then oppose and market opposition to tax revenues to fund public education. So will the children of those who emigrated to Texas be as well educated as their parents? What’s next? Yet another $9 billion funding reduction? At what point comes the proposal to close all the schools because doing so will save money and permit reducing taxes to even lower levels? Perhaps if someone demonstrates that the stream of budget cuts pushed the children of Texas higher and higher in educational achievement, I would buy the argument that it’s all about efficiency. It’s not. Let’s see where Texas stands in quality of life 10, 20, 30 years from now, when the fruits of underfunding education are ready for harvest.

Texas, at least, knows that it can tax its energy sector, even to the point of amounts exceeding the costs those businesses impose on the state, without chasing out those companies. I could say that I wonder why it is so difficult for Pennsylvania’s governor to understand that Pennsylvania can and will become the “Texas of Natural Gas” even with a modest tax, but I don’t so wonder, because I’m confident the governor understands that point. It’s simply that he rejects the idea of gas companies paying their own way. I explained why in The Logic and Illogic of Tax.

Consider a no-energy-tax Texas as the role model for Pennsylvania. I wonder how Pennsylvanians would vote if they knew that’s what they would be getting. Sadly, that’s a question that can be asked about too many electoral outcomes.

My post on Monday, Getting Specific with Tax-Related Deficit Reduction Ideas: Making Section 85 Fairer and Simpler, brought a helpful response from Mary O’Keeffe of Bed Buffaloes in Your Tax Code. Mary focused on my observations that the change in social security taxation set forth by the Congressional Budget Office, which I endorse, would, in my words, require “some retirees not currently filing tax returns [to] file them” and that “I would not be surprised to discover that most retirees file tax returns in any event, for a variety of reasons.” Mary pointed out that under current law, many retirees do not file tax returns, and that in 2008, when retirees were required to file returns in order to obtain the $300 rebate, “complete and utter chaos” prevailed because there were so many retirees who had not been filing federal income tax returns for many years.

So I stand corrected. Many retirees apparently are not filing federal income tax returns. Almost all of the retirees who talk taxes with me file tax returns, but perhaps that is why they talk taxes with me! Unfortunately, most retirees who are not required to file a return are living on the edge, because they have so little income, aside from social security, which is the reason they aren’t required to file. The few who aren’t required to file because their income is significant but attributable almost entirely to tax-exempt interest are the exception. Mary pointed out that according to a Social Security Administration fact sheet, for roughly one-fifth of married couples receiving social security and two-fifths of unmarried persons receiving social security, their social security benefits account for 90 percent or more of their income.

However, it seems that switching to a system that requires retirees to include in gross income the portion of social security benefits representing gain, that is, the excess of benefits over what the retiree paid into the system, will shift, at most, few retirees from the “does not need to file” to the “must file” category. The reason is that, for retirees who have little or no other income, the standard deduction and personal exemption will “shelter” the social security gross income. In 2011, a married couple, both over 65, has a combined standard deduction and personal exemption of $21,300 (standard deduction of $13,900 ($11,600 plus (2 x $1,150)) plus personal exemption of $7,400 (2 x $3,700)). An unmarried individual has a combined standard deduction and personal exemption of $10,950 (standard deduction of $7,250 ($5,800 plus $1,450) plus personal exemption of $3,700). According to this information, the typical annual social security benefit payment for a married couple, both of whom are entitled to benefits, is roughly $22,500. Considering that under the CBO proposal approximately 80 percent, or $18,000, would be taxed, a married retiree couple could have as much as $3,300 of other income without needing to file a return. For unmarried retirees, according to the same source, the typical annual benefit is roughly $13,500. With 80 percent, or $10,800, being includable in gross income under the CBO approach, the unmarried retiree would have little room for additional income (demonstrating either that the social security system tilts in favor of unmarried retirees or the tax law tilts in favor of married couples, or a little of both).

Thus, individuals and married couples relying solely on social security generally would continue to be free of return filing obligations. The same can be said of those relying on social security plus a small amount of other income. Those with more than de minimis amounts of other income already are required, for the most part, to file returns under current law. Thus, retirees with other income exceeding $25,000 reduced by one-half of social security benefits pretty much are required to file under current law and would continue being required to file. The few retirees who would move from the “does not need to file” to the “must file” category are those who, under the proposal, would have additional other gross income to push their combined other income and currently taxable social security benefits over the standard deduction/personal exemption cut-off.

Mary also pointed out that for people whose earnings over a long period were at the maximum, social security benefits could reach $28,000 a year. It is rare for retirees of this sort to have no other income, at least until they get to the point where they require long-term medical care, in which case their medical expense deductions will bring their taxable incomes and tax liabilities down to zero. In instances where that does not happen, is it any less inappropriate to tax someone with social security gross income of $28,000 than it is to tax someone with interest income of $28,000?

If, as a matter of policy, the nation’s citizens determine that people living solely on social security ought not pay federal income tax, the solution is, as I pointed out in Getting Specific with Tax-Related Deficit Reduction Ideas: Making Section 85 Fairer and Simpler, to increase the standard deduction and personal exemption amount. Though this would also protect from taxation individuals who are not receiving social security benefits but whose income is less than the combined amount, does it not make sense to conclude that if a person living solely on $15,000 or $20,000 of social security benefits ought not be taxed, then a non-retired person trying to live, and perhaps trying to raise a family on, as little as $15,000 or $20,000 of other types of income also ought not be taxed? In other words, what’s so special about social security gross income in contrast to dividends, capital gains, salary, or interest?

The Congressional Budget Office has released its Reducing the Deficit: Spending and Revenue Options, in which it sets forth dozens of ideas for reducing the federal budget deficit. Some of the ideas relate to spending cuts, and others relate to tax increases. Almost every tax increase proposal has its opponents, some well organized and some probably being galvanized into organizing if their particular special tax favor comes under increasing scrutiny. Of the 35 tax-raising ideas, most have been around the block more than a few times. Suggestions to raise individual rates, to reduce or eliminate the tax break for capital gains, to phase out the mortgage interest deduction, to eliminate the state and local tax deduction, to impose additional limitations on the charitable contribution deduction, to tax carried interests as ordinary income, to replace the exemption for interest on tax-exempt bonds with a direct subsidy to state and local governments, to name but a few, have been around for years, if not decades. Each time one of these proposals moves into the spotlight, those who benefit from the tax break jump in to preserve the advantage that it gives them.

One option that caught my eye did so because it is something that I’ve advocated for a long time. One of the ideas floated by the CBO is to tax social security and railroad retirement benefits in the same way that distributions from qualified retirement plans are taxed. When Congress first decided to include a portion of social security benefits in gross income, its legislation contained a complicated algorithm that put into gross income the lesser of half of the taxpayer’s social security benefits into gross income or half of the excess of the taxpayer’s modified adjusted gross income over a threshold tied to the taxpayer’s filing status. I questioned this approach, and argued that the easiest and fairest way to hand the matter was to permit taxpayers to receive tax-free social security benefits until they had received back the contributions they had put into the system, which come out of after-tax dollars. Thereafter, everything that the person receives is “profit,” because it exceeds the investment the person has made. One objection to my approach was that it would cause low-income retirees to be taxed when they ought not to be taxed. My response was simple. If the standard deduction and personal exemption deduction, when combined, are sufficient to prevent taxation of truly low-income individuals, then there would be no taxation of low-income retirees. Another objection to my approach was that people don’t know how much they have paid into social security. My response, that the Social Security Administration has that information and provides it annually even to those who have not yet retired, fell on deaf ears. Instead, those who value the theoretical over the practical prevailed, and the Congress enacted its convoluted approach, meaning that a retiree not entitled to social security benefits whose income consisted of interest would be taxed whereas their neighbor receiving social security benefits would not be taxed. To make matters worse, some years later Congress, in need of revenue to fund some other tax breaks, increased the one-half element of the computation to 85 percent, but in an even more byzantine manner that necessitated creating another set of thresholds and arithmetic gyrations that required more time and expense for retirees and challenged everyone’s patience with the tax law. These computations generate a “bubble” that, in effect, imposes a higher marginal tax rate on lower-income taxpayers than is faced by upper-income and wealthy taxpayers, as described in The Joys of IRC Section 86, and in More Joys of IRC Section 86.

Thus, the option put forth by the CBO is one that taxpayers should welcome. The CBO goes so far as to propose that the SSA could provide social security recipients with the amount of the benefits that are taxable. The computation would be patterned after the one used for private pensions. Using actuarial factors, the retiree’s expected return from the social security system would be calculated. The total that was paid in by the retiree using after-tax dollars would be divided by the expected return to provide a percentage reflecting the portion of each payment that would be excluded from gross income, leaving the rest of the benefit taxable. This approach works for private pensions, so there is no reason it cannot work for social security, which is, in effect, a public pension.

The CBO points out three disadvantages with the option. First, there would be some retirees not currently filing tax returns who would be required to file them. Though no statistics are provided, I would not be surprised to discover that most retirees file tax returns in any event, for a variety of reasons, including claiming credits to which they are entitled. Second, some low-income retirees would end up paying taxes, but to me, that is no reason to exclude social security from taxation while taxing retirees’ pensions and interest income. Instead, if low-income individuals are paying federal income taxes, it’s because the standard deduction and personal exemption deduction aren’t sufficient to shield them. Third, some retirees would view taxation of social security as a reduction in benefits, but that concern existed when social security benefits were first brought into the tax base, and has not proven to be a serious issue. Fourth, the SSA would have more work to do, but I’m confident that its computer systems could generate the necessary information with a minimum of programming adjustments.

On balance, the CBO option is fair, simple, and efficient. It eliminates one of the absurd bubbles in the tax law. It makes sense. Even if I had not been advocating this approach for the past several decades, I still would support the CBO option. The simplification will be welcomed by the millions of retirees who either slog through the long worksheet or pay a tax professional to make the computations for them. The simplification also will be welcomed by tax law students, and many tax practitioners. It will bring into gross income the social security benefits that represent “profit,” including the social security benefits of upper-income taxpayers, who end up excluding 15 percent of their benefits even if some portion of that 15 percent represents a return exceeding what was paid in using after-tax dollars. In short, there is no reason to treat the computation of taxable social security benefits any differently from the computation of taxable private qualified retirement plan benefits.

On Tuesday, the new governor of Pennsylvania, Tom Corbett, revealed his budget plans. As reported in multiple sources, including this article, Corbett took a three-fold approach. He omitted any tax increases. He restored suspended tax reductions, and resumed the film tax credit, which I lambasted most recently in When Spending Exceeds Revenue, Hand Out Tax Credits? Really?. He chopped enormous sums from state spending on assisting the mentally ill and educating future generations, and plans to seek pay reductions for the public workers after he cuts 1,500 state jobs.

Critics predict that the proposed cuts, if enacted, will require local governments to increase taxes. Otherwise, thousands of mentally disturbed individuals will go without treatment and supervision and students will be packed into classrooms because of reductions in teaching staffs, to mention just two of the impending crises looming for Pennsylvanians. Though Corbett tried to make his budget cuts look like a gift to the middle class, and supporters tried to liken his plans to a middle class family trying to cut spending in difficult times, the cost of his plans will fall on the middle class, either through increased local taxes, decreased services such as lower quality education for their children, or a combination of both.

Corbett was compelled to cut spending drastically because of his refusal to increase taxes. Thus, although, as reported in this article, surveys show at least 60 percent of Pennsylvanians support a tax on Marcellus Shale natural gas extraction and production companies, Corbett continues to dismiss the idea of requiring corporations to pay for the social, environmental, health, and other costs of their activities in the state. The logical case for taxing Marcellus Shale producers has been made by many, including myself. In Tax? User Fee? Does the Name Make a Difference?, and again in Giving Up on Taxes = Surrendering Taxpayer Rights?, I suggested that a key to breaking the stalemate with respect to the Marcellus shale issue could be reliance on user fees rather than a tax. Later, in Life for My Proposed Marcellus Shale User Fee?, I described how even some Republican legislators had owned up to the need to compel Marcellus shale producers to bear the burden of the costs they have been imposing on Pennsylvanians, including the yet-to-be-determined and possibly catastrophic costs of dumping into the state’s waterways, according to this report, mystery fluids that have not yet been tested. Even the reality that every other state in which natural gas is produced taxes the producers doesn’t overcome the total resistance of the governor to taxing natural gas extraction.

Corbett’s reasoning for his refusal to support a tax, or user fee, on Marcellus shale producers defies logic. According to this article by Joe DiStefano, Corbett wants gas companies to “move here and use the state as a base to drill deeper, to the gassy Utica Shale.” He hopes that “Big Gas will ‘make Pennsylvania the Texas of the natural gas boom,’ as long as ‘we don't scare off these industries with new taxes.’” Why does this analysis defy logic? Consider the two choices now facing gas producers. Choice one: Don’t go to Pennsylvania and thus don’t make the money that could be made by conducting operations there. Choice two: Go to Pennsylvania, make money, don’t pay any taxes. This is an easy decision. Choice two wins. Now consider the two choices facing gas producers if they were subject to a tax or user fee to compensate the state’s citizens for the environmental, health, road system, and other damage caused by gas production. Choice one: Don’t go to Pennsylvania and thus don’t make the money that could be made by conducting operations there. Choice two: Go to Pennsylvania, make money, pay some taxes representing the true cost of doing business, and still make lots of money. This still is an easy decision. Choice two wins. Corbett seems to think that gas producers would select choice one. But does he really think that? Of course not. Then what is he thinking?

What Corbett apparently is thinking are memories of the past few months. According to this report, oil and gas producers pumped $835,720 into Corbett’s campaign to become governor. One driller alone gave $305,000 to Corbett. That driller will never be subject to tax because he sold his company to Royal Dutch Shell for $3 billion. It’s difficult to imagine that if the driller in question, or more precisely, his corporation, had been compelled to pay user fees for the damage that it has caused to, and the usage it has imposed on, Pennsylvania, that the prospect of walking away with “only” $2.9 billion would have deterred him and his corporation from digging for money in Pennsylvania. According to the same report, seven years ago, when Corbett first entered politics, he was the beneficiary of a $480,000 donation from an Oklahoma gas driller. How happy should Pennsylvanians be that an Oklahoman’s money can dictate the outcome of Pennsylvania elections? There is no question that these “campaign donations” are not gifts. The “contributors” want something in return, and it’s very clear what that is. They want to make money without bearing the burden of the true cost of making that money. Sound familiar?

Something is very wrong with the governor’s budget. It is infected by the same disease that afflicts similar proposals throughout the country. The formula is simple. Cut taxes for the wealthy, and refuse to impose taxes on multibillion corporations and multimillionaire individuals. Justify this position by claiming – without proving – that this generates jobs. As jobs decline, or barely hold steady, cut government spending, and seek pay cuts for middle class workers. Pay no heed to the accompanying consequences, as middle and lower classes then face higher costs, receive fewer services, and find the income from the jobs they do manage to find inadequate to support any sort of decent living. Make the cost of college education for the children of the middle and lower classes more expensive, if not altogether unavailable. Cut the quality of public education, hoping that fewer youngsters learn what they need to learn to become educated citizens who can see through the nonsense spewed out by those caught up in the “pay me and I’ll deliver to you” game that only the wealthy can afford to finance.

When Corbett proclaims that “Limited government means not mistaking someone else’s property for your own” as a defense of his anti-tax stance, he seems to forget that a user fee or tax on a multibillion-dollar corporation is nothing more than compelling the corporation not to treat Pennsylvania’s roads, streams, forests, wildlife, or the health or safety of its residents, as its own. The two-facedness of this approach is so blatantly obvious, one might wonder how a person whose anti-tax stance is contrary to the wishes of at least 60 percent of the population gets elected. But one need not wonder. That answer is just as blatantly obvious.

Bad tax ideas can find their way into the tax law. It can happen for all sorts of reasons. What’s unusual is a successful effort to remove bad tax ideas from the Internal Revenue Code. Yet, that did happen. Unfortunately, that success is going to turn out to be a short-lived accomplishment if the Obama Administration has its way.

The bad tax idea in question is the nefarious phase-out of itemized deductions and personal and dependency exemption deductions. The two phase-outs in question entered the tax law in 1990, when Congress enacted the Omnibus Reconciliation Act of 1990. The phase-outs were implemented for one reason, and one reason only. They permitted Congress to enact a hidden tax increase, that is, to raise taxes without touching the tax rates in section 1 of the Code. This allowed members of Congress to tell Americans that Congress had not raised taxes, when, in fact, it had.

These sorts of phase-outs are bad ideas for several reasons. They are absurdly complicated, adding almost a dozen lines to worksheets accompanying individual tax returns. Taxpayers generally don’t understand the phase-outs, and even most tax economists from time to time erroneously describe them. The phase-outs create a “bubble,” which has the effect of creating a higher marginal tax rate on the upper middle class than exists for the taxpayers at the top of the income pyramid. By creating marginal rates in the “middle” of the income array, phase-outs create economic distortions that can produce deadweight losses.

In Getting Hamr'd: Highest Applicable Marginal Rates That Nail Unsuspecting Taxpayers 53 Tax Notes 1423 (1991), I denounced the phase-outs for the reasons described in the preceding paragraph, providing examples of how the phase-outs had the most disadvantageous effect on taxpayers other than those at the top of the income pyramid. A few years later, I responded to a call to reduce the phase-outs with a plea for a better solution, in Don't Phase Out the Phaseouts, Kill Them, 70 Tax Notes 911 (1996). As a consequence of my unbridled opposition to phase-outs, I was invited to work with the American Bar Association Section of Taxation Tax Structure and Simplification Committee’s Phaseout Tax Elimination Project, whose report recommending repeal of these phase-outs was published in July 1997. Working alongside me on the project, and in many respects making effectively us a team of two or three, was Calvin Johnson, who teaches tax law at the University of Texas. While the Project’s proposal was working its way to Capitol Hill, Calvin summarized our report in a two-part article, Simplification: Replace the Personal Exemptions Phaseout Bubble, 77 Tax Notes 1403 (1997), available on his web site, and Simplification: Replacement of the Section 68 Limitation on Itemized Deductions, 78 Tax Notes 89 (1998), also available on his web site. Our efforts to rid the nation of this unnecessary complication and inequitable consequence of attempts to deceive the public eventually succeeded. In June of 1998, the proposal was introduced as H.R. 4053, though it was not until 2001 that it was adopted. In that year, Congress enacted section 68(f) and section 151(d)(3)(E) to provide for, yes, a phasing out of the phase-outs, and also enacted section 68(g) and section 151(d)(3)(F) to provide for complete elimination of these two phase-outs for taxable years beginning after December 31, 2009.

After too many years dealing with these, to use the words of Rep. Downey as reported in Taxes Raised “Marginally” on Well-to-Do Filers, 49 Tax Notes 599 (1990), “blisters” or “pustules” infecting the tax law, and having succeeded in getting rid of them, it was disheartening and disappointing to learn that the President yet again wants to put one of them back into the tax law, although in modified form. In his Fiscal Year 2012 Budget Proposal, the President suggests a 30-percent phase-out of itemized deductions. By limiting the cutback on itemized deductions to taxpayers with adjusted gross incomes over specified amounts, the proposal re-introduces the same sort of bubble that subjects the wealthy to a lower marginal rate than the rate affecting the upper middle-class. It also puts more complexity into the Code, a strange outcome considering the President’s criticism of the tax law elsewhere in the budget proposal as too complicated. I agree with the President when he calls the tax law a “complex, inefficient, and loophole-riddled mess” but I disagree with his proposal to make it more complicated.

This isn't the first attempt to resurrect these phaseouts. Six years ago, in Objections Raised to Elimination of Legislative Tax Deceit, I criticized efforts by the Center on Budget and Policy Priorities to repeal or delay the scheduled elimination of these phaseouts. Fortunately, its efforts failed. Nor is it the President's first attempt. Two years ago, in Tax Change Ought Not Be Tax Redux, a post that disappeared from the MauledAgain archive at blogger.com but that is republished here, I opened my criticism of his proposal with a similar reaction: "Just as a foolish idea is about to fade away from the tax law, the new Administration seeks to bring it back in an even more perverse form. I'm talking about tax increases masquerading as phaseouts." The attempt didn't work then. Will it work now?

Perhaps the President thinks that a phase-out is a clever way to raise taxes without admitting that taxes are being raised. After all, it worked several decades ago. Why would it not work now? It won’t work now because a critical mass of informed tax experts, tax practitioners, taxpayers, and even politicians understand this particular game, and won’t be so easily persuaded that all one needs to do to stake a claim to “not a tax raiser” status is to leave the section 1 rates alone. The debate over tax increases should be an up-front, transparent, on and not below the table, examination of the advantages and disadvantages of enacting or repealing gross income inclusions, gross income exclusions, deductions, tax rates, and credits. The rest of the “gimmickry,” as Congressional tax staff once described the phase-outs, should be ditched as unwanted, unworthy, and unnecessary obfuscation.

What the President seeks to do can be done much more easily, simply, efficiently, and sensibly by transforming itemized deductions into credits. This removes the higher tax subsidy that deductions provide to higher income taxpayers, and gives all taxpayers the same tax subsidy. Much has been written about this approach, and I simply encourage those interested in the issue to examine those analyses. In fact, as pointed out in the Citizens for Tax Justice analysis of the budget proposal, the President’s plan to restore the phase-outs would reduce but not eliminate the discrepancy in tax subsidy. So there’s no point in bringing back the absurdity of phase-outs when a much simpler, more equitable approach is available.

Let the phase-outs rest in Pease. Yes, that’s an inside joke for the benefit of those who remember the complete story of how these two phase-outs originally came into being.

The problem is simple. As related in this Philadelphia Inquirer article, the prices of various commodities and other items are soaring. Most people are keenly aware of rising gas prices, which are moving almost in lockstep with rising crude oil prices. The price of cotton has skyrocketed. The price of sugar has risen roughly 33 percent since last year at this time. The price of Cheese Whiz, used in those famous Philadelphia cheese steaks, is up almost 25 percent in one year. Soybeans are up 48 percent, wheat is up 62 percent, and corn, 78 percent. There’s also the implicit price increase taking place as manufacturers reduce the size of their products without lowering the price. These wholesale price increases have not yet fully hit the consumer, but they will, and soon. Also waiting in the wings are increased prices for products manufactured by Procter & Gamble, for clothing, and for maternity items.

My concern is that politicians, reacting to the already noticeable stream of price complaints that surely will grow into a resounding chorus of demands that something be done, will turn to the tax law and add a pile of credits and deductions in a fruitless (sorry) effort to hold back the tide. The naïve belief that every problem can be solved with tax law amendments is destined to make the situation worse.

The causes of the problem are simple. Demand is increasing. Supply is decreasing. Though the global economic malaise postponed the day when demand outracing supply would become overwhelming, it did not eliminate the inevitable. Demand is increasing because people in China, India, and other rapidly developing nations need and want food, clothing, concrete, electronics, vehicles, and hardware. The rate of demand is accelerating because global population is growing at an unrelenting pace. In the meantime, supply is decreasing for two reasons. Some items, such as crude oil, exist in finite quantities and are rapidly being depleted. Other items have been the victims of political unrest and devastating weather. Until I read the article, I had not known that the wheat crop in Russia, usually an exporter of a crucial global foodstuff, had been significantly reduced by heat and wildfires, or that dry weather had shrunk Argentina’s soybean crop. I knew about the price of oil going through the roof, and I had heard about the cotton shortage. But what else will soon join the list of items in short supply?

This is not the first time I have questioned the wisdom of using tax law to deal with a problem that needs another solution. Three years ago, in Can a Tax Rebate Band-Aid Stop the Economic Bleeding? I criticized use of tax rebates because they do not address the underlying economic problems. My concluding paragraph touched some nerves. I wrote:

The impending shortages of critical goods and materials, including oil, clean water concrete, steel, natural gas, health care, copper, agricultural products, and similar life-essential ingredients, will only worsen the problem. An ever-increasing world population, seeking more and more quantities of these and other items, coupled with the emergence of a small creditor group and massive hordes of debtors, is a recipe for disaster. Somewhere along the way, these conditions will trigger armed conflict, pestilence and pandemics, civil disorder, and breakdowns in societal structures. No one ever promised that the Dark Ages were a one-time event.

Joe Kristan, in a post headlined by one of my favorite captions, Good Morning, We’re All Doomed, explained that ever the optimist, he was confident of human ingenuity coming to the rescue, and not very concerned because similar warnings had been issued for decades, going back at least to Thomas Malthus in the 1830s. In Can Tax Rebates Help Prove Malthus Wrong?, I responded that there are shortcomings in the supply-demand curve theory of economics, argued that government borrowing to finance rebates worsened the situation in the long-term, and suggested that "people and governments [and not just government] mobilize to deal with these issues while there still is time." I then questioned the confidence in market-based solutions because I do not think that the market is a truly FREE market.

Several months later, in If Only It Were Prices Getting Depressed, I revisited the question of supply and demand, motivated by reports of increases in the price of oil, gasoline, and food, and by news of shortages of steel, lumber, timber, polyvinyl chloride pipe, and even, good grief, chocolate, hops, and barley. Joe replied, in Good on Taxes, Not so Good on Economics, taking issue with my supposed advocacy of government direction of markets. In Keeping Free Markets Free, I noted that “I am not advocating government management of the markets,” but seeking government regulation to prevent markets from being “hijacked by speculators, cheaters, shoddy artisans, defective manufacturers, cronyism-afflicted traders, and others whose greed surpasses their respect for the market's consumers.”

Although it is possible that some of the current supply and demand disequilibrium is caused by speculators, it seems to me that it is caused by the confluence of three major trends: political unrest, weather and climate disruption, and excessive population growth. Government intervention with respect to any of these issues sparks deep controversy, aside from the question of whether government of the United States can do much of anything about them on its own. These are global problems. If they are to be solved, they need to be addressed globally. The weather in Russia affects food prices in this nation. Political upheavals in African and middle Eastern nations affects energy and mineral prices here. Rapid population growth in developing countries puts demand-side pressure on the demand-supply balance. Enacting federal income tax law credits or deductions would be much like putting a band-aid on a hemorrhage. Yet I would not be surprised to see a Congress engage in such futility for the sake of obtaining campaign-time sound bites. By the time people figure out that tax law will not fix the wheat crop in Australia, the soybean shortage in Argentina, the demand for steel and concrete in China, the increasing use of oil in India, or the “revolt of the oppressed” in nation after nation, yet another “election cycle” will have passed. And the tax practitioners, though seemingly facing the prospect of even more fees to charge to help clients deal with an over-supply of legislative tinkering, will cringe at the thought of having to muddle through yet more bad legislation. I don’t think I have been wrong about the tension in the supply-demand situation, and yet I hope I’m wrong about the prediction of Congress using tax law to deal with issues it cannot or will not face head-on.

Last week came news, in What Harvey Dorfman did for the Phillies, of the death of Harvey Dorfman. Few people, even most baseball fans, knew who Harvey Dorfman was and what he did. Now many more people do know, thanks to the tributes pouring in from around the baseball world.

Harvey Dorfman was a sports psychologist, and, according to dozens of baseball players, an extremely good one. I understood, as soon as I read this quote from Roy Halladay, one of the Philadelphia Phillies aces, about why Dorfman succeeded. Halladay said, "He made you be accountable to yourself and accountable to him. I don't think you ever got the feeling that he was a psychologist. It wasn't warm and fuzzy, you know, it was 'Let's figure this out.' You didn't feel like you went in and told him all your problems and he gave you a solution. He teaches you to do it yourself."

The sentence, "He teaches you to do it yourself." grabbed my eye, as did the quip, "It wasn't warm and fuzzy." I thought of the many students who complain that they end up teaching themselves, somehow so blissfully unaware that it's precisely learning to teach one's self, to depend on one's self, to be accountable to one's self, is what it's all about. When I wrote about this a few years ago in Learning to Teach and Teaching to Learn, an article for the Gavel Gazette (the now-extinct newsletter of the Villanova University School of Law), I didn't address the "warm and fuzzy" issue, but "warm and fuzzy" sometimes gets in the way of learning, especially learning to teach one's self.

Dorfman drove home the point in an interview, reported in this story: "It's not like in school, where you get high grades for what you know." For all those students whose focus is on the acquisition of knowledge, here's yet another reason that properly taught law school courses – and those in other disciplines – focus on much more than knowedge. It's not what you know. It's what you do with it. It is, as Dorfman said, "what you do."

I never met Harvey Dorfman. I'm pretty sure I would have liked him. Our conversations would have been fun. Those will need to wait until the life beyond.

This morning came news of the death of Cynthia Holcomb Hall, who served on the Ninth Circuit Court of Appeals since 1984, and had served as a Tax Court judge from 1972 through 1981. I knew Judge Hall, whose chambers were directly below those of Judge Herbert L. Chabot, for whom I served as attorney-advisor from 1978 through the end of 1980.

During the 1980s I learned that one of my ancestral lines included the Holcomb family (with the details in this chart). Curious, I invested a few minutes this morning trying to determine if Judge Hall also belonged to “my” Holcomb family. My copy of Elizabeth Weir McPherson’s The Holcombe Family: Nation Builders, a hefty tome not only in terms of weight, did not include any information on Cynthia Holcomb. Next stop, google, which led me to a Wikipedia page that provided her birth date but not the names of her parents. Next, it was time to search the 1930 census, and I found her, with her mother, aunt, grandmother, and brother, in Hawaii, where, apparently, her father, a Navy Admiral, was stationed. From the census entry I determined that her mother’s name was Mildred Gould Kuck, so back to google! That led me to a genealogy page for the descendants of Thomas Holcombe of Connecticut. Following the links, I traced Judge Hall’s ancestry back to Gilbert Holcombe, who is known to be the brother of Christopher Holcombe, from whom I descend. Although it has not been definitively proven, many Holcomb researchers have concluded, by piecing together the evidence, that Gilbert, Christopher, and their siblings were the children of Thomas Holcombe and his wife Margaret Tretford (or Threthford). Even if that conclusion is erroneous, it does not undo the relationship between Gilbert and Christopher.

It then took only several minutes for me to set up my descent and Judge Hall’s descent from Thomas Holcombe (or whoever might be the father of Gilbert and Christopher if it turns out not to be Thomas, which is unlikely). I am her eleventh cousin once removed (she being an eleventh cousin to my father, who was roughly 6 years older than she).

My collection of “people to whom I am related” continues to grow, though I’ve yet to arrange and publish the information, aside from my My Cousins the Presidents venture. I shared a few in Relatively Speaking, Is It That Big A Deal? (fifth cousin four times removed to James Longstreet, the Confederate General, eighth cousin once removed to Georgia O'Keeffe, ninth cousin to Loudon Wainwright III, ninth cousin to Buster Crabbe, ninth cousin to Birch Bayh, Jr., and fifth cousin three times removed to Theodore Vail, founder of AT&T, ninth cousin once removed to Birch Bayh III, and ninth cousin twice removed to JonBenet Ramsey). There’s also Maxfield Parrish, Thomas Edison, Robert E. Lee, and William Butler Ogden, the first mayor of, and in many respects founder of, the city of Chicago (much to the delight of my son who presently lives there), to name but a few.

Judge Cynthia Holcomb Hall was an accomplished lawyer and judge, and also a superb ornamental garden designer. She will be missed.

Edit: Mary O'Keeffe, a public policy economist teaching -- among other things -- tax courses and blogging on tax and related issues (as well as from time to time providing comments and feedback to MauledAgain posts), noted that I had spelled Georgia O'Keeffe's name with one f. Oops. A quick google check explains how I went wrong: almost 500,000 hits using "O'Keefe" and 1.1 million hits using "O'Keeffe." Mary, who thinks she is not related to Georgia -- but I think with enough digging she may discover she is -- has several most interesting anecdotes that I hope she gets a chance to share. And, yes, I fixed the spelling in this post, but not the one from several years ago.