MauledAgain

On Monday, the Tax Court released an opinion, Cheung v. Comr., T. C. Summary Op. 2012-114, in which it rejected a taxpayer’s argument that the definition of a term found in the Internal Revenue Code should be set aside in favor of a definition from another federal agency. Though it is readily apparent why the taxpayer wanted to take this approach, the Tax Court emphasized that when a term used in the Code is defined in the Code, it is improper to look elsewhere for the definition.

The taxpayer purchased property #1 on October 31, 2003, moved into the house on that property, and lived there until March 31, 2009. On July 26, 2004, the taxpayer married, and on January 18, 2006, his wife moved into the house on property #1, and lived there until March 31, 2009. On March 31, 2009, the taxpayer purchased property #2, and he and his wife moved into the house on that property.

The taxpayer and his wife filed a joint return for 2008, on which they claimed a first-time homebuyer credit. The IRS audited the return and asked for additional information to substantiate the credit. The taxpayer provided the IRS with a U.S. Department of Housing and Urban Development settlement statement showing the taxpayer as the purchaser of the house on property #2 with a settlement date of March 31, 2009. The IRS issued a notice of deficiency that, among other things, disallowed the credit.

The first-time homebuyer credit is not available unless, among other things, the taxpayer is a first-time homebuyer. Section 36(c)(1) defines a first-time homebuyer as “any individual if such individual (and if married, such individual’s spouse) had no present ownership interest in a principal residence during the 3-year period ending on the date of the purchase of the principal residence to which this section applies.” The taxpayer argued that he qualified under that definition, under the definition of first-time homebuyer appearing in statements on the HUD web site for HUD and FHA purposes, and under the definition of first-time homebuyer appearing in an article published in the Home Guides section of the San Francisco Chronicle. The definition appearing in the Chronicle matched the definition appearing on the HUD web site.

The taxpayer argued that section 36(c)(1) requires that only “one of the spouses has no present ownership interest in a principal residence during the three-year period ending on the date of the purchase of the principal residence for which the credit is claimed. Thus, if one spouse is eligible under I.R.C. § 36(c)(1), then both the spouses (the couple) are eligible.” Petitioners claimed that this interpretation was consistent with the definition found on the HUD web site. That definition provides that a first-time homebuyer is [a]n individual who has had no ownership in a principal residence during the 3-year period ending on the date of the purchase of the property. This includes a spouse (if either meets the above test, they are considered first-time homebuyers).”

The IRS argued that because the taxpayer, during the three-year period ending on March 31, 2009, owned property #1, he was not a first-time homebuyer within the meaning of section 36(c)(1). It did not matter, according to the IRS, that the taxpayer’s wife was a first-time homebuyer because she did not have an interest in a principal residence during that three-year period.

The Court held that the definition of first-time homebuyer appearing on the HUD web site is “not controlling for purposes of section 36.” The definition that is controlling is the one found in section 36(c)(1). The Court also held that the taxpayer’s interpretation of the section 36(c)(1) definition as requiring only one spouse to have lacked an ownership interest in a principal residence during the three-year period was incorrect. The Court pointed to the parenthetical language in the definition, which makes it clear that if a married couple purchases a principal residence and files a joint return, both spouses must meet the requirement that no interest in a principal residence be owned during the three-year period. This point had previously been made by the Court in Packard v. Comr., 139 T.C. No. 15 (Nov. 5, 2012).

It is a canon of statutory construction that when a statute uses a term and defines that term, the definition in that statute trumps definitions of that term found elsewhere. Looking to a definition not in the statute is an approach that makes sense only if the term is not defined in the statute. Though that happens more often that it should, it is not the case with the section 36 first-time homebuyer definition. As I tell my students, it’s not enough to read a newspaper description of a law, or to read a summary on a web site. The analysis should begin with the statute.

Like turkey, cranberry, and football, sharing a moment of thanks on the fourth Thursday of November has become a tradition on the MauledAgain blog. With the exception of 2008, an omission for which I don’t have or remember an explanation, I have consistently addressed the underlying purpose of Thanksgiving since 2004: In that year there was Giving Thanks, in 2005, A Tax Thanksgiving, in 2006, Giving Thanks, Again, in 2007, Actio Gratiarum, in 2009, Gratias Vectigalibus, in 2010, Being Thankful for User Fees and Taxes, and in 2011, Two Short Words, Thank You.

Last year, taking a lawyerly approach, I incorporated by reference all the people, events, and things for which I am grateful. I do that again, and I will make that list even longer:

I am thankful the sun comes up every morning and that I’m still around to notice. I am thankful that people rallied to help others during and after the hurricane superstorm. I am thankful that there is a chance intelligent discourse about the nation’s problems might trump the shrill voices of the disaffected extremists on both sides.

I am thankful for family, immediate and extended, of every imaginable degree of relationship. I am thankful for the help I receive as I dabble with family history research.

I am thankful for my friends, near and far, long-time and new. I am thankful for their stories, their attention, their advice, their jokes, and their laughter.

I am thankful for the readers of MauledAgain, including those who send me possible stories. I am thankful for my friends at the gym who also supply me with tax stories. I am thankful for the students who energize the classroom, the readers who take time to look at what I have written, the taxpayers and judges who give me things to discuss.

I am thankful that so many of my eighth grade graduating class found a way to get together in the spring at a “first time in 47 years” reunion. I am thankful that we have continued to gather informally during the intervening months. I am thankful for all that my classmates have accomplished, and for the memories that they safeguarded and then shared.

I am thankful that the members of the church to which I belong stepped up to support in many ways a renovation of the chancel that was much needed and that is now complete. I am thankful for the talents of my friend, the organ builder, who is producing a musical instrument which I am sure I will mention next Thanksgiving.

I am thankful people are reading this. Happy Thanksgiving.

A recent news report highlights the confusion faced by Greenleaf Compassion Center when it has tried to determine whether the New Jersey sales tax applies to the legal medical marijuana it will be selling as the operator of New Jersey’s first legal marijuana dispensary. The Center has delayed opening its store until it gets an answer. The State Health Department wants the group to open even though the tax issue has not been decided. Hello? Should they collect the tax or not? The legislator who sponsored the legislation explains that he intended the sales tax to apply. But his legislation has no provision with respect to the issue. Hello? If you intend something, write it down.

A look at the New Jersey sales tax law is instructive. Under section 54:32B-3(a), a sales tax is imposed on “receipts from every retail sale of tangible personal property or a specified digital product for permanent use or less than permanent use, and regardless of whether continued payment is required, except as otherwise provided in this act.” I think marijuana is tangible personal property. That means it is time to continue reading. Section 54:32B-3(b) adds additional transactions to the list of taxable items, but none are relevant to the Center’s question. Section 54:32B-3(c) addresses the sale of prepared food and the sale of food and beverages from vending machines. Section 54:32B-3(d) imposes the sales tax on hotel rent, section 54:32B-3(e) addresses admission charges, and section 54:32B-3(f) focuses on telecommunication services. Sections 54:32B-3(f) and (g) have been deleted, section 54:32B-3(h) applies to dues, and section 54:32B-3(i) subjects parking and vehicle storage fees to the tax.

With the general provision appearing to make sales of medical marijuana subject to the New Jersey sales tax, the next step is to ascertain if there are any other provisions that set forth exceptions. Of those that exist, one appears relevant. Section 54:32B-8.1(a) provided exceptions for medical items, including “drugs sold pursuant to a doctor's prescription” and “over-the-counter drugs.” Section 54:32B-8.1(b) defines a drug as “a compound, substance or preparation, and any component of a compound, substance or preparation, other than food and food ingredients, dietary supplements or alcoholic beverages: (1) recognized in the official United States Pharmacopoeia, official Homeopathic Pharmacopoeia of the United States, or official National Formulary, and supplement to any of them; or (2) intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease; or (3) intended to affect the structure or any function of the body.” An over-the-counter drug is defined as “a drug that contains a label which identifies the product as a drug, required by 21 CFR 201.66. The label includes: (1) a "Drug Facts" panel or (2) a statement of the "active ingredient" or "active ingredients" with a list of those ingredients contained in the compound, substance or preparation.”

It appears from this explanation from the New Jersey Department of Health that a doctor’s prescription is required, and can be provided by having the physician register with the Department and then creating a patient record for the patient. Though the word “prescription” is not used, the process is the same, namely, an authorization by a licensed and registered physician for a patient to use a regulated product for health purposes.

Does medical marijuana fit within the definition of a drug? It appears so. It is a substance. It is not food, nor is it a legal food ingredient. It is not a dietary supplement. It is not an alcoholic beverage. It is intended for use in the mitigation of disease.

Unless there is some provision tucked away in some obscure place – and there could be, as I am not an expert in New Jersey sales tax law – the conclusion appears to be that medical marijuana is not subject to the New Jersey sales tax. So if the legislator who sponsored the legislation wanted the sales tax to apply, an amendment to the sales tax law would have been in order.

This question is going to pop up in an increasing number of states. Absent the insertion of specific language into a state’s legislation, tax practitioners across the nation will need to analyze existing provisions to construct advice for their clients. As I tell my students, you are in law school not so much to learn what the law is but to learn how to learn what the law is, because both law and the circumstances to which it applies keep changing.

A recent Tax Court case, O’Connor v. Comr.,, T.C. Memo 2012-317, makes it clear that amounts received by a taxpayer for participating in a medical study must be included in gross income. O’Connor was paid $5,550 by Covance Clinical Research Unit, Inc., for participating in a medical study examining gout. O’Connor had suffered from gout for many years before participating in the study. In addition to the $5,550 cash payment, for 10 days and 9 nights, Covance provided O’Connor with meals and lodging, and subjected him to a variety of medical tests. O’Connor did not report the $5,550 on his return. While the IRS was auditing the return, O’Connor filed an amended return reporting the payment but the IRS did not process it. The IRS issued a notice of deficiency, and one of the items listed as a reason for the deficiency was the failure to report the $5,550 payment.

In holding that the payment must be included in gross income, the Tax Court rejected O’Connor’s argument that the payment was excluded under section 104 as a payment received on account of physical illness or physical sickness, and his argument that the payment was excluded under section 102 as a gift. The section 104 argument was rejected because O’Connor did not allege that he suffered physical injury or sickness on account of the gout study, and did not prove a causal link between the payment from Covance and the gout. Because O’Connor did not produce his contract with Covance, the Court was unable to conclude that the payment was for anything other than O’Connor’s participation in the study. The section 102 argument was rejected because O’Connor did not introduce any evidence demonstrating that Covance paid him out of detached and disinterested generosity. That Covance did not consider the payment to be a gift was reinforced by the fact it issued a Form 1099-MISC to O’Connor for the payment.

The result in the case is not surprising. The fact that a taxpayer sought to exclude such a payment is not surprising. What also is not surprising is that cases dealing with the determination of what constitutes gross income will continue to be with us no matter what is done with tax rates, no matter what sort of flat tax or similar arrangement is adopted, no matter the level of simplification applied to tax deductions and credits. Until and unless income taxes are repealed, the question “what is gross income?” will persist, in tax law courses and in tax practice. And if income taxes disappear, the inquiry will shift to questions such as “what is consumption?” or “what is value added?”

One of the many things I try to get across to my students is that the demands of practice are many times the demands of law study. I don’t know how many believe me, and how many think I’m just trying to make excuses for why my courses are, in the words of students and faculty, rigorous and demanding. I point out to students that one of the challenges that too often trips up lawyers is the need to meet deadlines. Students are not well-served when they are granted extensions in the absence of extenuating circumstances. Another point I make is that when dealing with areas of the law in which they are not experts they need to do exceptionally well-designed research and, especially if they are unable to do the research, call in a colleague who has the requisite expertise. Though it sounds like a joke, I tell the students who plan to practice in areas other than tax law to make friends with their tax-focused classmates, and I tell those interested in tax to make friends with their classmates generally, because they will need help from those practicing in the areas of bankruptcy, domestic relations, business organizations, labor law, securities law, real estate, and banking law, to name but a few.

A recent Tax Court case, Bond v. Comr., T.C. Memo 2012-313, illustrates the reality of the dangers to which I try to draw my students’ attention. The taxpayer is an attorney, and although according to the court’s opinion he is admitted to practice before the Tax Court, his biography indicates that he does not specialize in tax law. The taxpayer also was president and sole shareholder of two corporations, and served as an adjunct law professor at Albany Law School.

On September 10, 2010, the IRS sent a notice of deficiency to the taxpayer, with six adjustments to the taxpayer’s 2005 and 2006 tax returns. On August 31, 2011, the Tax Court set the case for trial on February 6, 2012. The Court ordered the parties to file pretrial memoranda by January 23, 2012. The IRS did so on January 20, 2012, but the taxpayer did not. In the meantime, on December 23, 2011, the IRS filed a motion to compel the taxpayer to respond to the IRS’s interrogatories and a motion to compel production of documents. Those motions were granted on December 28, 2011, with a requirement that the taxpayer respond by January 13, 2012, and a requirement that if the taxpayer did not respond, he must file a response by January 13, 2012, stating adequate reasons for the failure to respond. The taxpayer did nothing. The IRS, on January 20, 2012, filed a motion to impose sanctions. When the case was called for trial on February 6, 2012, the taxpayer had still not complied. At trial, the taxpayer moved for a continuance, which was denied. The case was set for trial on February 8, 2012, and the taxpayer promised to file the pretrial memorandum “in the next day or two” and to exchange documents with the IRS. When the case was recalled for trial on February 8, 2012, the taxpayer informed the court that he was “not ready for trial,” had not provided the IRS with the documents on which he intended to rely, and had no complied with the IRS’s request for information. The taxpayer explained that he “had obligations in my law practice and with clients,” and admitted he had not reviewed his own exhibits. The taxpayer again moved for a continuance, claiming that he “really have not had an opportunity to discuss . . .” at which point the Court interrupted him and said, “Well, that’s not true. You had the opportunity. You just didn’t take advantage of it.” Despite that reaction, the court continued the case, and rescheduled trial for April 23, 2012. During the trial, the taxpayer’s “testimony was in large part a criticism of the Internal Revenue Service” and on cross-examination his testimony “indicated that many of his claimed deductions appeared to be founded on frivolous legal reasoning.” At the end of the trial, the court ordered the filing of simultaneous opening briefs by July 9, 2012. On July 9, 2012, the IRS filed its brief. The taxpayer did not file a brief. On August 17, 2012, the court ordered that the record in the case be closed. On August 31, 2012, the taxpayer moved to reopen proceedings so that he could file a reply brief, which the court denied on September 4, 2012.

The taxpayer claimed that he did not file a brief because he had not received the IRS’s brief. The court rejected the excuse as making “no sense.” In light of the taxpayer’s previous failures to comply with deadlines, the court applied Rule 123(b) and held that the petitioner failed to properly prosecute his case and was in default. Accordingly, the court sustained the IRS’s determinations.

When the court then turned to the IRS’s determination that the taxpayer was liable for the accuracy-related penalty, it held that the IRS met its burden of proof. The court explained that the taxpayer had not adequately substantiated the deductions disallowed by the IRS, failed to present any legal authority for the deductions disallowed disallowed by the IRS, and had claimed deductions obviously disallowed by the statute. As an example of an unsubstantiated deduction, the court noted that although the taxpayer claimed deductions for self-employed health insurance expenses, he did not prove that he had health insurance coverage or that he paid for health insurance. As an example of deductions contrary to law, the court noted that the taxpayer claimed as deductions domestic relations litigation expenses paid in previous years, improperly characterized by the taxpayer as ordinary and necessary business expenses. As another example, the court noted that the taxpayer had claimed contributions to political campaigns as charitable contribution deductions, in violation of section 162(e)(1)(B).

Law students and lawyers can learn several things from examining this case, rather than going through the experience themselves. As unfortunate the outcome for Mr. Bond, the consequences provide lessons for others who perhaps can be spared a similar fate by paying attention.

First, missing deadlines, particularly those set by a court, and especially those set by a court that out of mercy or kindness provided continuances that it was not required to provide, is self-destructive. Sometimes a missed deadline cannot be avoided, such as the proverbial attorney hit by a truck while crossing the street on her way to the courthouse. Usually, though, some avenue exists to deal with deadlines. There are times when it makes sense to get help, especially if an attorney’s success generates so much work that the attorney is swamped with tasks and deadlines.

Second, claiming deductions for expenses clearly not allowable as deductions can bring nothing but aggravation in the long run. The opinion does not disclose who prepared the returns. If it was someone other than the taxpayer, the preparer did not do him any favors. If the taxpayer prepared the returns, the question is whether the taxpayer did so in knowing violation of the tax law, or in mistaken understanding of the tax law. The former is beyond unfortunate, and the latter is another lesson in why it sometimes makes sense to get help with a task.

Third, there are times when it is counter-productive for a person to serve as his or her own attorney, even if the person is an attorney. This is particularly true when venturing into areas of law with which the person has insufficient familiarity or expertise. The demands of handling a case in the Tax Court are easy for experienced tax practitioners to satisfy, but can be daunting for those who do not spend much of their professional time dealing with tax law.

Fourth, no attorney is immune from the pressures of tending to clients and getting work done in a timely fashion. Having a good track record of meeting deadlines and racking up worthwhile accomplishments does not guarantee immunity from life and career unraveling. The key to avoiding this sort of mess is keeping an eye out for the small slippages that can turn suddenly into avalanches.

In a recent commentary, Sheldon Richman explains why FEMA should be abolished and governments should abandon disaster relief. According to Richman, the best approach to disaster relief is to leave it to the free market. He argues that by providing a free service, namely, disaster relief, government precludes what would happen in the absence of FEMA and its state analogues. Specifically, he contends that “entrepreneurs in a free market would provide” disaster relief, through insurance, related services, and mutual-aid associations. There would be, Richman argues, “elaborate networks of for-profit and nonprofit entities” that “would have planned ahead of disaster, mitigated damage, and provided post-disaster assistance.” According to Richman, “This approach would have been superior to what the government does, because freed markets have entrepreneurs risking their own resources to serve people; gauging success and failure, while governments have grasping bureaucrats and politicians, who get their money by force.” Richman claims that governments pushed private entrepreneurs out of the market through force. To those that would point out there was a reason the former way of dealing with disasters was abandoned, namely, it did not work, Richman responds that government was not “pressed into service because of the inadequacies of civil society.” Instead, he claims that “ambitious politicians and bureaucrats crowded out private solutions in quest of votes and power.”

History has demonstrated that there are crises of such magnitude that only an entire society, through government, can respond. Although it is possible for private enterprises to fight wars, respond to natural disasters, and put humans on the moon, government can do these things much more efficiently and effectively because of the government’s power to organize and regiment activities. People dealing with an invasion or the wreckage generated by a storm or earthquake don’t need private enterprise with its advertising, bait-and-switch, non-transparent ownership, shoddy services and products, and addiction to the bottom line. People struggling with the consequences of a catastrophe don’t need to be treated according to the size of their bank accounts, the amount of money in their wallets, or the number of “loyal shopper” cards that they carry.

It is probably true, as Richman contends, that without FEMA or state disaster relief agencies, people would not “just sit around in the rubble for the rest of their lives.” The problem is that some people would be confined to such an existence because they lack the resources to dig out from under the impact of disaster. But when Richman claims that people, and giving him the benefit of the doubt, even some people, would “do something, learn from their experience, and take precautions to minimize damage in the future,” I disagree. There is a long list of things that “people” and the free market private sector could do to minimize damage in the future, but that they have not done. They scoff at warnings. They belittle science, or anything that would nick the bottom line. In recent years, government, too, has failed to use its power to prevent future damage, such as prohibiting development on barrier islands or initiating a sea wall height increase project in Manhattan, because the same private sector worshipped by Richman uses its lackeys in the Congress to block just about any government action that gets in the way of its profit-maximization-at-any-cost agenda.

The track record of private enterprise, and the so-called free market in which it has operated and wants to operate, is spotty. Though there have been outstanding examples of private sector organizations that have done well not only by their customers and employees but also by their communities, there are too many embarrassing examples of free market behavior gone badly wrong. That there is a correlation between the size of the business and its beneficial or adverse impact on society is no surprise, as small business owners tend to have a personal, face-to-face connection with the people in their communities who are their customers, employees, and neighbors, whereas the big outfits tend to view customers and employees as fungible, replaceable commodities. Though most small community-focused businesses are willing to step up and help when disaster strikes, the same attribute that makes them so valuable – small size – becomes a liability. Something bigger is needed, and it isn’t Enron, Adelphia, Worldcom, or any of the other disconnected, non-transparent, bottom-line-addicted, opportunistic, and failed behemoths that have demonstrated why the public at large needs something bigger than the largest private sector entity to protect the interest of society. One only need read reports about the non-responsiveness of the private sector to understand the false premises on which Richman builds his case. The recent episode in New York, where government officials have had to step up to protect the interests of residents who find the private sector utilities non-responsive, as described in this report, among others, is a brutal indictment of how private sector enterprise remains impervious to society generally. Perhaps in a free market consumers would have some individual power, but because the giants of the private sector have monopolized segments of the free market, violated laws designed to keep the market free, manipulated market forces, and misled customers and employees, the market is not free. The only antidote is the coming together of people to unite their small individual forces into a huge force. That’s called government, that’s why it has the power Richman doesn’t like, and that’s why it needs to exist and to exercise that power. Otherwise, the megaliths of the private sector run amok, claiming that any steps taken against them will hurt the better-behaved small businesses that the behemoths are trying to absorb or destroy.

Given the choice between relying on taxpayer-funded FEMA or consumer-financed private sector enterprises behaving as described in this report, I think most Americans who give it any serious thought would vote for FEMA. The people on Long Island made that very clear last week. What they have shared of their experiences counts much more than laments over well-deserved societal regulation of the private sector administered by society’s agent, government.

In a recent commentary, Jeffrey Frankel explores the correlations between the voting patterns of individual states and the social, cultural, educational, and financial behavior and views of individuals living in those states. His point is that these sorts of generalizations are dangerous, and he supports his point by showing what happens when doing so is extended beyond the common stereotypes tossed about in the press and through social media.

What disturbs Frankel is the notion that people in rural areas and in the exurbs reflect self-sufficiency and personal responsibility, whereas people in urban areas wallow in decadence and are dependent on government. Using data drawn from various sources, he concludes that statistically, people living in so-called red states “are, on average, less prone to pay income taxes, more prone to receive subsidies from the federal government, less physically fit, less responsible in their sexual behaviour, more prone to inflict harm on themselves and on others through smoking, drunk driving and misuse of firearms, and more prone to freeride on the healthcare system, compared to blue-staters.” He adds that “it is the states with high percentages of people who pay no income tax that tend to vote Republican.” Put another way, blue states are makers and red states are takers. He shares similar observations with respect to rates of obesity, exercise, healthy nutrition, smoking, fatal accidents due to drunk driving, firearms assaults, safe sex, pregnancy, sexually-transmitted disease, sexual activity, and contraception use.

To me, and I could be wrong, the problem with analyzing this sort of data by state is that it treats everyone in the states as a homogenous group. Yet in so-called red states, with one or two exceptions, 40 to 45 percent of the vote goes blue, and in so-called blue states, with several exceptions, 40 to 47 percent of the vote goes red. On the other hand, if red voters outnumber blue voters in states with higher rates of zero tax payments, smoking, lack of exercise, firearms assaults, etc., and if they were not responsible for these higher rates, is it possible for the smaller number of blue voters to jack up a state’s rates to levels higher than those in states whose residents are predominantly blue voters? Charles Murray, a noted conservative-libertarian, took a look at this in his book, Coming Apart. He did his analysis by zip code, not state. He determined that in areas with high levels of income and education, traditional values of diligence and family were strongest. He concludes that those who practice desirable values fail to encourage others to follow along, being too attached to what he calls non-judgmentalism, whereas those who preach these values tend to fall short in living up to them.

Again, the problem I have with Murray’s conclusion is that the people in the red states who are preaching something may not be the people who are behaving in a contrary manner. But once again, the numbers are such that I wonder how, if a majority of residents are preaching and practicing hard work and personal responsibility, the state ends up on the low end in the rates of contrary behavior. Yet in looking at positions with respect to government spending, the same pattern emerges. Opposition to government spending is paramount in red states, or, more specifically, among red voters who make up the majority of voters in red states. Yet opposition to cutting social security benefits is very strong in Arizona, opposition to cutting agricultural price supports is very strong in Oklahoma, Kansas, Nebraska, and similar prairie states, cutting water subsidies encounters opposition in states like Utah, and so on. To be fair, opposition to cutting other programs is no less strident in blue states and among blue voters. The disconnect between political philosophy and political practice looms large.

How does this square up? Frankel offers this analysis:

Do these statistical relationships between personal responsibility and voting behaviour have analytical implications? How can one explain such counter-intuitive results? I have pondered this puzzling question. I am still not sure of the answer. But here is what I have to offer.

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It stands to reason that some people are less self-aware than others, and less knowledgeable on how the budget adds up, for whatever other reason. We hear repeatedly of seniors who tell politicians to keep the federal government away from their medicare, of ranchers who support the Tea Party or right-wing militia while collecting farm subsidies.

The people who suffer the biggest gap between their perceived and actual share of the federal pie are likely to be getting a disproportionate share and yet to believe the opposite. If they believe that others are getting more than they themselves are, they are more likely to buy into the angry belief that other social groups are freeriding on society, and the ideology that government spending is wasteful and needs to be cut back, without realising that this includes the benefits they themselves receive. Perhaps these people are more likely to vote for Republican politicians, who tell them what they want to hear. It’s a theory, anyway.

Yes, it’s a theory, and it’s one that I explored last month in Dependency, Government Spending, Tax Breaks, and Middle School, concluding, “For one group of dependent Americans to attack another is absurd, especially when the attacking group thinks it can pull off this sort of nonsense because its dependency is not as visible.” Perhaps it is time for voters who dominate the outcomes in the red states to reconsider their antipathy toward government spending, now that it is apparent that most red states send to the U.S. Treasury less than they take back from it. Perhaps it is time to practice what is preached.

Eight years ago, in Taxing the Internet, I pointed out that “when it comes to taxing transactions and activities conducted on or through the internet, or taxing access to the internet, those transactions, activities and access should be taxed no differently from the way in which transactions and activities conducted through means other than the internet are taxed” and proposed that states should “tax retail transactions as catalog sales are taxed, imposing use tax collection responsibilities on those with sufficient nexus to the taxing state.” Three years later, in Taxing the Internet: Reprise, I reacted to the introduction of legislation allowing states to shift use tax collection responsibilities to merchants with no connection to the state, noting that despite the claims of advocates for this approach, state 1 has no “independent and sovereign authority” to impose a sales tax on a transaction that takes place in state 2, or to require a merchant in state 2 with no nexus in state 1 to collect use tax on behalf of state 1. I reminded readers that “What’s hurting states is their unwillingness to do what must be done to collect use taxes.” Three years later, in Back to the Internet Taxation Future, reacting to a reappearance of the proposal to permit state 1 to require retailers in state 2 with no state 1 connection to be taxed by state 1, I explained why progress had not been made, pointing out the inability of legislators and others to distinguish between sales and use taxes, the silliness of claims that internet retailers are not required to collect sales taxes at all for any state, the unwillingness of state legislatures and state revenue departments to identify and audit taxpayers not in use tax compliance, the mischaracterizations of the Supreme Court’s 1992 decision in Quill Corp. v. North Dakota, and the inability of legislators, state employees, and citizens to understand the limitations of the Due Process Clause. A week later, in A Lesson in Use Tax Collection, I took a look at California’s approach of requiring in-state business entities to register and report their out-of-state purchases, an approach not without flaws but a step forward in the correct direction. A little more than a year ago, in Collecting the Use Tax: An Ever-Present Issue, I revisited the issue, because a news report about Pennsylvania’s Governor Corbett attempt to deal with the problem of collecting use taxes from state residents who make purchases outside of the state. What had gotten my attention was misstatement of the law embodied within a quote from Christopher Rants, the president of the Main Street Fairness Coalition. The Coalition argued, understandably, that out-of-state on-line retailers not collecting sales or use taxes have an advantage over in-state, bricks-and-mortars retailers. But when Rants asserted that states “can only collect from out-of-state retailers on a voluntary basis,” he presented a proposition that is true only if the retailer has no nexus with Pennsylvania. If the retailer has a Pennsylvania nexus, it is required to collect the tax. The same sort of misunderstanding of sales and use tax imposition and collection law triggered A Peek at the Production of Tax Ignorance, where I debunked the assertion that a resident of Pennsylvania can shop in Delaware without paying sales or use tax.

Because states cannot compel a business to do use tax collection for it unless the business has nexus with the state, some states are attempting to expand the definition of nexus so that it makes nexus exist under pretty much all circumstances. For a variety of reasons, it is wrong, both as a matter of policy and as a matter of efficiency and administration, to require businesses lacking a real connection with a state to do use tax collections for the state. That argument was raised recently in a commentary by Bartlett D. Cleland of the Institute for Policy Innovation. Unfortunately, Mr. Cleland paints the effort to shift collection responsibilities as the imposition of a tax on the retailers, whereas in fact the retailers would not be paying a tax, but passing along a tax imposed on their customers. What is being imposed on the retailers is the aggravation and financial cost of being required to collect taxes for a state with which the only connection is the ability of a resident of that state to view a retailer’s web site on servers not located in that state.

Compelling a business to collect use tax for a state is not “a radical expansion of government taxing power.” It does not change the scope or computation of the use tax. What it does is to force out-of-state retailers to function as tax collectors for the state. It constitutes a radical expansion of government police power. In that context, objections can be raised that might not find strong ground if the proposal to expand nexus is viewed as an expansion of the taxing power. Similarly, when Mr. Cleland describes the proposal as one that would permit a state to engage in “taxing businesses anywhere,” it overstates the flaws of the proposal and makes it easier for the proposal’s advocates to defuse objections to the proposal. On the other hand, when Mr. Cleland describes the proposal as one that “would be to accept state government as limitless as the Internet,” he makes the point the way I think it should be made.

Compelling a business to collect use tax for a state is not, as Mr. Cleland puts it, “taxing without representation.” The use tax is imposed on the retailer’s customers. Compelling a business to collect use tax for a state is “forcing a business to do work without representation.” That is, in some ways, a more serious matter. The use tax itself, like a sales tax, can be passed along to customers, because they are the ones with an existing legal obligation to pay that tax, though few do. The cost and aggravation of functioning as a tax collector for a state in which the retailer does not do business can be passed along to customers only if the retailer wants to risk losing customers because of the price increase.

Perhaps a better approach is for states to seek voluntary contracts with out-of-state retailers, compensating them for serving as tax collectors. There may be state Constitutional provisions or legislation that prohibits contracting tax collection to out-of-state individuals or entities, though I doubt that is the case. For some businesses, being compensated to engage in use tax collection might help the bottom line.

To be clear, I do not disagree with Mr. Cleland’s dissatisfaction with the proposal to change the definition of nexus in a way that makes every business responsible for tax collection duties for thousands of state and local governments. I simply think that the objections should be articulated in a manner that reflects the problem, which is not an expansion of taxing power, but the imposition of involuntary tax collection duties.

About a month ago, in Say One Tax-and-Spending Thing, Do Another, I criticized the politicians and government officials who claim to oppose government spending but who nonetheless support the distribution of taxpayer dollars when doing so benefits a pet project or a beloved patron. Now comes a story about a political commentator who vociferously condemns the federal flood insurance program but who, it turns out, has on three occasions collected federal flood insurance money to rebuild his beach front house.

Understand, I’m not a fan of the federal flood insurance program in its current form because it fails to discourage the ever-increasing development on barrier items and in flood-prone areas. Casualty insurance companies will decline to issue insurance when the applicant’s property violates safety codes or otherwise presents too big of a risk. The amount of human suffering and property losses caused by destructive storms and earthquakes can be, and have been, reduced by insurance company insistence on risk mitigation.

Yet it boggles my mind that someone who thinks that the federal flood insurance program should be eliminated takes advantage of it, not only enrolling in its coverage, but collecting payouts three different times because a beach house is built where it will be knocked down. John Stossel, the commentator in question, agrees with me that the program foolishly is “encouraging people to build homes in high risk areas.” If that is how he truly feels, then why is he building and rebuilding his home in a high-risk area? Is he a subscriber to the philosophy of “do as I say, not as I do”?

Why is the federal government running a flood insurance program? The answer is simple. Private insurers declared the peril of flood to be “uninsurable.” The recent barrage of intensely destructive storms demonstrates the difficulty in providing flood insurance. The damage is so catastrophic over so wide an area that the premiums necessary to cover losses become prohibitively high. In addition, the government can order property owners in flood areas to purchase the insurance, whereas private companies cannot do so and are at the risk of having as customers only those property owners in extremely high-risk areas.

It is fairly easy to respect someone’s position when they live up to its principles. It is extremely difficult to respect the opinions of a person who fails to behave in a manner consistent with how they claim everyone else should be acting.

During debates about taxes and government, one of the examples posed as justification for using taxes to fund a federal government big enough for a twenty-first century nation and the challenges facing it is the role of the federal government in helping citizens cope with disasters. Though some hard-line extremists on one side are taking the “let them drown, let them die, let them starve, let them freeze” position, the vast majority of Americans understand the effectiveness of disaster relief funded and implemented at the federal level. Though some disasters are localized, many and perhaps most are interstate events.

Yet despite the general American understanding of the role a national government must play when dealing with national disasters, some politicians, their financial patrons, and their cronies prefer that the federal government, and in some instances, all governments, abandon their disaster assistance efforts. For example, as summarized in this report, House Republicans passed the Sequester Replacement Reconciliation Act of 2012, which, had the Senate agreed, would have eliminated the Social Services Blog Grant program which, among other things, funds disaster relief, even though it has lost 77 percent of its value since 1981 due to inflation and budget cuts. In the Budget Control Act, one of the provisions on which House Republicans successfully insisted was a $900 million cut from the budget of FEMA.

Disasters demonstrate yet another consequence of trying to shrink or eliminate government, particularly its function of leveling the playing field. According to a study focusing on Social Vulnerability to Environmental Hazards, inequality was the most important predictor of vulnerability to storm damage. The sorts of factors contributing to vulnerability are the circumstances that federal and state government programs are designed to eliminate, such as lack of access to information and technology, health problems, inadequate housing, and access to political power. Another study,On Risk and Disaster: Lessons from Hurricane Katrina, lack of affordable housing, substandard housing, insufficient financial resources to evacuate in advance of storms, and inadequate education and literacy skills shift the impact of disasters disproportionately onto the poor in the absence of government intervention.

In the meantime, according to this story, the Forest Service ran out of funds to fight forest fires. So it was forced to use its funds slated for fire prevention. Congress eventually transferred some money to the Forest Service, but it still came up short. The formula used for funding the fire fighting efforts is based on an average of the previous ten years of fire fighting costs, but that formula does not work in an era of rapidly expanding fires. There are more fires, they affect wider areas, and they burn more intensely. This trend will continue, just as the trend of increasingly devastating hurricanes and superstorms, a longer tornado season marked by more severe storms afflicting wider areas, and more damaging snowstorms, floods, and mudslides, awaits the nation.

In an age of spiraling disasters and their consequential economic devastation, cutting government is flat out foolish. It’s also immoral.

Once again, thanks to a reader, I have another opportunity to demonstrate why I object to spending tax dollars to finance the sports stadium projects of multimillionaires and billionaires. I’ve tackled this topic on several occasions: eight years ago in Tax Revenues and D.C. Baseball, earlier this year in Putting Tax Money Where the Tax Mouth Is, and two weeks ago in Taking Tax Money Without Giving Back: Another Reality.

This time around, according to this commentary, our attention is drawn to what happened with the financing of the Yankee Stadium parking garages. When the new Yankee stadium was built, the owners managed to extract all sorts of public benefits to assist them. New York City waived $2.5 million in taxes. New York State waived $5 million in taxes. Federal tax breaks amounted to $51 million. New York City dished out $32 million to replace public parks seized by the state legislature. The state’s Empire State Development Corporation contributed $70 million. Some claim that public investment in the stadium and its parking garages comes in at $1.3 billion. Critics has opposed the garages because sufficient public transportation existed in the area, and because the garages are not what is needed to revitalize the neighborhood. Critics predicted that the garages would not be economically feasible.

So what happened? As predicted, the garages are an economic failure. Not surprisingly, the Bronx Parking Development Company has defaulted on $237 million of bonds that qualified for tax-exempt status under three tax systems, city, state, and federal. New York’s mayor has proposed that, “If the owners of the parking garage can’t make money, that’s sad. We’ve got to find a way to help them.” Really? What about the people who can’t make money because the jobs for which they are educated and qualified have been shipped overseas? Should “we” help them? If welfare is so bad, as the anti-tax and anti-government forces claim, why do we find the same folks supporting public assistance for millionaires and billionaires? Why?

Since the inception of this blog, each year when Halloween rolled around, I have focused on a connection between that holiday and taxation.
In Taxing "Snack" or "Junk" Food (2004), Halloween and Tax: Scared Yet? (2005), Happy Halloween: Chocolate Math and Tax Arithmetic (2006), Tricky Treating: Teaching Tax Trumps Tasty Tidbit Transfers (2007), Halloween Brings Out the Lunacy (2007), and A Truly Frightening Halloween Candy Bar (2008), Unmasking the Deductibility of Halloween Costumes (2009), Happy Halloween: Revenue Department Scares Kids Into Abandoning Pumpkin Sales (2010), and The Scary Part of Halloween Costume Sales Taxation (2011), I have aimed for the light-hearted, the ridiculous, or the goofy when describing how Halloween and taxation can intersect. My habit of playing with words found a ready environment when writing about tricks and treats.

This year, Halloween and its eve (which, yes, I know, grammarian friends, is redundant) have brought the worst sort of reason to explore the tax side of Halloween events. It’s not a time to play word games. It’s no fun to consider what the great storm of 2012 has done in terms of deductions for disaster losses, casualty losses, medical expenses, and the tax consequences of business interruption insurance payments and property insurance receipts. This sort of event puts candy and costumes into the background. Tax, of course, doesn’t go away. Nor will the anxiety, the pain, the sadness, the disappointment, and the sorrow that has descended on so many people. There are no deductions for those. Just prayers.

About five months ago, in Are Private Tolls More Efficient Than Public Tolls?, I described why it is wrong to put public assets into the hands of private sector entrepreneurs so that they can enrich themselves at public expense, and how attempts in the distant past and the recent past to provide travel access through private highways failed. I explained, citing earlier posts, how privatization of public highways works for the entrepreneur only by disadvantaging the public. Aside from raising tolls, the entrepreneurs play all sorts of political games to force motorists to use their highways, such as “persuading” legislators to enact laws lowering the speed limits on public highways, adding unnecessary traffic lights and stop signs, and forbidding the widening of, or other improvements to, public highway alternatives to the privatized toll road. Now comes a report describing how the ringleader of the anti-tax movement is partnering with a billionaire to stop construction of a public bridge that would compete with the billionaire’s privately owned, highly tolled, and terribly maintained bridge.

A good bit of commerce and traffic flows between Detroit, Michigan, and Windsor, Ontario. Most of the travel between the two cities goes across the Ambassador Bridge. The Ambassador bridge is owned by billionaire Matty Moroun. The bridge is in terrible condition. The pathway for bicyclists and pedestrians, required by the charter authorizing the bridge, has been closed. Twice in the last three years, a state court has held Maroun’s bridge company in contempt for failing to update access roads and make other improvements required by state and federal law, and put him in jail for one night. Moroun also has been ordered to take down a duty-free shopping complex built on public land on the Detroit side of his bridge. And he faces a new set of fines for selling bad gasoline at that complex and disregarding orders to stop selling the noncompliant gasoline.

To deal with the deficiencies of the privately-owned bridge, authorities in Michigan and Ontario agreed to build a new bridge. Moroun proposed building a second privately-owned bridge, and sued sued to prevent the construction of the proposed public international bridge. Under the agreement, Canada would pay for the construction. The incentive for Canada is that the Canadian end of the privately-owned bridge terminates in local Windsor streets. The proposed new public bridge would connect directly to Canada’s limited access highway system.

Stymied in his litigation efforts to prevent the construction of the new public bridge, Moroun paid more than $4 million to put a proposed Michigan state constitution amendment on the ballot. The amendment would prohibit the building of public international bridges unless approved by two-thirds of the Michigan legislature. Moroun then shelled out more than $9 million to purchase ads supporting his proposed constitutional amendment, falsely claiming that the cost of the proposed bridge would fall on Michigan taxpayers. These misleading, to use a gentle adjective, have been roundly criticized, yet polls show that the proposed amendment is favored by Michigan residents 47 percent to 44 percent. A substantial number of Michigan residents do not live or work within 25 miles of the proposed bridge location, and thus presumably see no direct personal interest in its construction. Moroun’s ads don’t mention the fact that the new bridge would add 12,000 jobs during the first four years of the construction, and 8,000 jobs permanently.

So enter Grover Norquist, king of the anti-tax movement. About a year ago, in Tax Policy, Elections, and Money, If the Government Collects It, Is It Necessarily a Tax?, and Debunking Tax Myths?, I explored the unwarranted and excessive influence that the unelected Norquist holds over federal, state, and local tax policy and decision making, described the adverse effect of his efforts on the American people and the nation’s economy, and concluded, based on his own words, that his anti-tax stance is simply part of his strategy to destroy government.

Norquist, who does not appear to have any connections to Michigan other than his desire to eliminate its taxes, showed up at a press conference to support the billionaire’s proposed constitutional amendment to block a public bridge so that he can maximize his profits while failing to maintain his private bridge properly and failing to comply with court orders. Legal experts are debating whether the constitution amendment would apply to a project already approved, with some concluding that courts would reject retroactive application.

So a so-called billionaire job creator uses his tax cut money to fund opposition to the creation of jobs. People fall for the billionaire’s misrepresentations, and fail to understand what is in their own best interests. An anti-tax, anti-government crusader joins forces with the ultra-wealthy in an effort to continue a privatized bridge that has brought fortune to its billionaire owner and troubles for its users and the neighborhoods of Windsor through which its traffic flows. Will it take another catastrophe, such as a collapse, or a vehicle falling through a pothole, for the public to rise up in indignation? Will the cry then be the familiar “How did the government let this happen?” If so, my response will be, “How did you people let this happen?” I know the answer. You voted the wrong way, and you got what you voted for.

Though I have been accused of being a fan of raising taxes to support increased spending, the reality is that I favor spending reductions when the spending is unwarranted. Unwarranted spending arises in a variety of circumstances.

There are the padded invoices funneling tax dollars to someone’s cronies. That’s wrong. There are the expenses that bring no return, or a benefit less than what has been spent. When dealing with public funds, that’s wrong. There is the spending that would not be necessary but for the negligence of someone whose inattention causes damage to public property. Though the spending is necessary, the cause of the spending is wrong, and ultimately reimbursement should be sought.

And then there is the foolish spending. I first met foolish spending when I was a child, and I listened attentively as my father and his siblings complained about a decision of the Philadelphia School Board to install carpet in an elementary school. I remember one of my uncles commenting, “We don’t need our schools to be Taj Mahals.” Someone else opined that a contractor was getting some sort of deal. One of my aunts pointed out that it is foolish to install carpet in a building where most of the occupants are prone to throwing up, and that cleaning tile floor is much easier than cleaning carpet. Looking back, perhaps I should have said, though surely I would have been admonished for interrupting the adults, that perhaps some contractor running a carpet cleaning business was in on the deal.

Recently, a reader brought to my attention to what I think presently holds the prize for Taj Mahal spending at a school. According to this story, the school district in Allen, Texas, opened a $60 million high school football stadium. The funds came from a bond issue for which 63 percent of those voting gave approval. School district officials explained that it was not their intention to recoup the costs, and that it is not practical to do so.” Although it is expected that revenues will exceed the cost of operations, it is very unlikely that the bond issue will be paid back with anything other than taxpayer dollars.

The stadium in question has a 38-foot wide high-definition video screen, spacious weight rooms, separate practice areas for the wrestling and golf teams, and concrete rather than aluminum stands. The absurdity of the cost is highlighted by the fact that in today’s dollars, the Cotton Bowl cost $4.5 million, and the stadium currently being built by the University of North Carolina-Charlotte is tagged at $45 million. Someone’s making money on this deal, and it isn’t the taxpayers and it isn’t the students.

The absurdity of the decision to spend $60 million on a football stadium is exacerbated by the fact it was done during a bad economy, at a time when school districts are laying off teachers, working with outdated textbooks, enlarging class sizes, and producing students whose world ranking in core subjects continues to drop. It raises questions about priorities. As Ross Perot put in thirty years ago, when there was outrage at the spending of $5.6 million for a high school football stadium, also in Texas, “Do we want our kids to win on Friday night on the football field or do we want them to win all through their lives?” The father of one football player provided a comment that could be considered a response: “There will be kids that come through here that will be able to play on a field that only a few people will ever get the chance to play in.” So it’s good to fork over tens of millions of taxpayer dollars to benefit a few kids? In return, what do the taxpayers get? A more educated nation? A nation whose citizens are competitive in a global marketplace? A healthier citizenry? Or just another version of taxpayer-funded entertainment for the benefit of a select group? What about facilities for the debate team? The language clubs? The science fair? The math contestants? Do they not matter?

The report that I read, one of dozens, used two phrases to describe this use of taxpayer money. One was “monumentally stupid.” The other was “pathetically ridiculous.” I’m having difficulty deciding which is the better description. What I can choose is the report’s final two sentences: “The voters of Allen, Texas ought to be ashamed of themselves, look in the mirror, and ask themselves what’s more important, a cool football stadium or their children’s future? So far, they’ve answered that question incorrectly.” Indeed they have.

Sometimes it’s easy to determine when an idea is gaining traction. The signal is the increase in the frequency and intensity of criticism of, opposition to, and misrepresentations about the proposal. Most ideas that move society ahead leave behind a few people, usually those who have a vested interest in keeping society from moving ahead or who have profited from the disadvantages afflicting society because of the deficiencies that the idea seeks to ameliorate. Such is the case with the mileage-based road fee. I first explored this idea eight years ago in Tax Meets Technology on the Road. A few years later, I visited the topic repeatedly, in posts such as Mileage-Based Road Fees, Again, Mileage-Based Road Fees, Yet Again, Change, Tax, Mileage-Based Road Fees, and Secrecy, Pennsylvania State Gasoline Tax Increase: The Last Hurrah?, Making Progress with Mileage-Based Road Fees, Mileage-Based Road Fees Gain More Traction, Looking More Closely at Mileage-Based Road Fees, The Mileage-Based Road Fee Lives On, and Is the Mileage-Based Road Fee So Terrible?

Over the past few years, particularly during the most recent twelve months, opposition to the mileage-based road fee has become more strident. Today I want to address the objections that have been raised.

One objection that comes up constantly is the claim that the mileage-based road fee is an unwarranted invasion of privacy. This assertion is made, for example, by Anthony Gregory, Felix Salmon, and Ed Morrissey. There are several responses to this concern. First, even though implementation of a mileage-based road fee could provide some information that otherwise would not be available, the jurisdictions that have implemented the fee have not done so, as explained, for example, by James M. Whitty and by the Oregon Department of Transportation. Second, even if the GPS or other system put in place to implement the fee revealed where a vehicle was driven, it would reveal nothing that is within the realm of a reasonable expectation of privacy. It would not disclose who is in the vehicle, what items, legal or otherwise, are in the vehicle, what the people in the vehicle are saying, or what music they are playing. Third, the system put in place to implement the fee would provide little or no information that isn’t otherwise collected by road cameras, traffic light cameras, existing electronic tolling systems, credit card records, the eyes and ears of traffic enforcement officers, and similar technologies and practices currently in place.

Another objection is that people won’t accept a mileage-based road fee or the systems adopted to implement it. For example, Felix Salmon explains that New York taxi drivers went on strike in opposition to the insertion of GPS devices in their cabs. Those devices, however, were intended to be used solely for the tracking of the taxis, in response to complaints about coverage, refusal to pick up passengers, taking unnecessarily longer routes to jack up fares, and similar problems. The drivers were objecting because they knew that the plan would put an end to their shenanigans. It’s not surprising they objected. On the other hand, Brad Plumer reports that after trying the system, 70 percent of drivers had a favorable reaction, thus negating the claim of widespread opposition.

Yet another objection is that the mileage-based road fee would encourage increased fuel consumption because the gasoline tax would be reduced or eliminated. In fact, as indicated, for example, in this report, where the fee was implemented on a trial basis, drivers subject to it decreased fuel consumption. The Oregon Department of Transportation gives an example of why the fee does not encourage the purchase of less fuel-efficient vehicles:

Consider the example of a Prius that gets 48 miles to the gallon and an SUV that gets 15. If gas is selling for $3.30 a gallon (including the 30 cent state gas tax), the Prius will pay 6.9 cents per mile, and the SUV will pay 22 cents per mile in fuel costs and user fees. Taking out the gas tax and adding in a 1.5 cent per mile fee, the Prius will pay 7.8 cents for every mile it drives. Because it’s unlikely that lower mileage vehicles will transition to a VMT fee anytime soon, the SUV will remain on the gas tax and continue to pay 22 cents for every mile driven—nearly triple what the Prius pays, providing plenty of monetary incentive to buy a fuel efficient vehicle.

Although the mileage-based road fee can be adjusted so that fuel-efficient vehicles get a discount, Anthony Gregory claims that doing so would be a consumption tax and a “new invasion of privacy.” The gasoline tax is a consumption tax. The mileage-based road fee is a user fee, and to adjust a user fee to reflect the environmental and energy burden imposed on society by a vehicle is within the bounds of reasonable approaches to paying for vehicle transportation. As for it being a “new invasion of privacy,” that is simply is not so, because for decades state motor vehicle departments have been aware of which vehicles have been purchased, and the fuel-efficiency classification of vehicles is about as public as information can be.

Still another objection is that the mileage-based road fee fails to take into account the fact that some roads are costlier than others. This, too, can be managed through the mileage rate imposed when a vehicle travels a particular road.

Even another objection is that mileage-based road fees do not take into account the fact that vehicles have different weights and cause different amounts of damage to highways, bridges, and tunnels. Again, the mileage rate can be adjusted based on the weight of the vehicle, much like existing tolls are scaled to reflect the weight of, and number of axles on, a vehicle. However, Anthony Gregory, for example, claims that making such an adjustment in the fee would make the system “more invasive and arbitrary.” More invasive and arbitrary than what? Existing toll systems? What is arbitrary about the weight of a vehicle or the number of its axles?

There are two objections to the mileage-based road fee, implicitly raised by Stephen Frank, that present serious concerns. One is that some jurisdictions are not following appropriate procedures as they consider implementing the fee. I agree. No fee or tax should be adopted without the appropriate process being followed. The other is that some jurisdictions propose using the revenues from the fee to fund things other than roads, bridges, and tunnels. Again, I agree. I have addressed the inappropriateness of diverting user fees in posts such as Soccer Franchise Socks It to Bridge Users, Bridge Motorists Easy Mark for Inflated User Fees, Restricting Bridge Tolls to Bridge Care, Don't They Ever Learn? They're At It Again, A Failed Case for Bridge Toll Diversions, DRPA Reform Bandwagon: Finally Gathering Momentum, When User Fee Diversion Smacks of Private Inurement, Toll Increases Ought Not Finance Free Rides, Infrastructure, Tolls, Barns, Jackasses, and Carpenters, and Using Tolls to Fund Other Projects.

At least one critic, Felix Salmon, thinks that the mileage-based road fee is all about reducing congestion, and claims that national implementation of such a fee is difficult, offering little marginal upside compared to charging fees to enter cities. The problem with this perspective is that it treats traffic congestion in cities as imposing a social cost but ignores the social costs generated by vehicles used outside of cities.

Perhaps it is Anthony Gregory who raises the curtain on where much of the opposition to the mileage-based road fee is originating. He advocates a “free market in road maintenance” and asserts that government cannot mimic the market, and can only distort it. What distorts the free market is the flood of cheating, Enron-style management, defective and dangerous products, misleading warranties, planned obsolescence, monopolistic practices, and other unacceptable behavior that infects the “free” market, and would destroy it but for the intervention of society as a whole through its instrument, government regulation. Gregory admits that he wants government out of roads, and a return of roads to the private sector. Anthony, we’ve been there, done that. I discussed the history of private highways, and the eventual abandonment of that inefficient system, in Are Private Tolls More Efficient Than Public Tolls?

The short version of the attempts by private money-seekers to discredit the mileage-based road fee and push for privatizing highways is instructive. The same crowd that blasts any transfer of public funds to private individuals to save lives, protect health, provide food and clothing for the needy, or otherwise benefit anyone not part of the ruling oligarchy turns right around and looks for any edge, valid or otherwise, to divert public resources into their own private pockets. A mileage-based road fee, necessary because of the impact of declining liquid fuels use and reduced revenues from liquid fuels taxes, thwarts the effort to incorporate the nation into a private fiefdom. For that reason, it will be subjected to criticism, and for that very same reason, it must continue to be supported until it fully replaces the liquid fuels tax.

It never stops. Usually it is a proposal to permit businesses to claim deductions for expenditures that otherwise would be capitalized and recovered, if at all, over a period of time through depreciation or similar deductions. Now comes a proposal, discussed in this Tax Foundation blog post, to deduct all expenditures related to the operation of their business in the United States, an approach often called expensing. The justification for the proposal is that it would “get people and businesses to invest their money and create jobs.”

As I discussed in The Failure of Tax Policy Deductions: Specific Evidence, a Congressional Research Service study demonstrated the futility of using expensing to stimulate the economy. The report did not surprise me, as I had previously criticized expensing as an inefficient and misdirected approach to dealing with the problem. Existing expensing focuses on expenditures for equipment, not jobs, as I noted in Who’s More Important in the Tax World? People or Machines?. Previously, I had examined the flaws of equipment expensing in Just Because It Didn’t Work the First 50 Times Doesn’t Mean It Will Work Next Time. About a year later, I criticized the Obama Administration for proposing a change in the tax law that would allow full expensing for equipment, in If At First It Doesn’t Work, Try, Try, Try Again. A few months later, in When the Bonus Depreciation Tax Deduction is Not a Bonus for the Economy, I took apart the argument that letting businesses deduct equipment expenditures won’t help the economy. Because businesses already have deductions for compensation paid to employees, a proposal to permit expensing for all expenditures essentially is a proposal to permit expensing for expenditures made for buildings and equipment. We’ve been there, done that.

An example might help demonstrate why the jobs problem needs to be solved from the other direction. Consider a typical small business owner, almost all of whom generate taxable income that puts them below the top rate. Many of them do not benefit from the expensing proposal because they do not have the funds to spend, nor are the banks willing to lend money to them. Many of those that might have some funds or loan resources available do not need to spend money on equipment or to hire employees because their business receipts are not growing or are growing very slowly. When asked why their business is stagnating, the answer almost always is that their customers are buying less, are eating out less, are doing more work for themselves rather than retaining a business, for example, to mow their lawns or paint their living rooms. Why is that? Because the usual and potential new customers of these businesses have lost their jobs, have been the target of pay cuts, are dealing with increased health care costs, or have decided to build up nest eggs because they fear they are next on the list of jobs outsourced to some other country. Until these people resume spending, return to paying businesses to mow their lawns and paint their living rooms, the economy will stagnate.

The proponent of the proposal says that the issue is determining “what it takes to get people and businesses to invest their money and create jobs.” I disagree. As the analysis in the preceding paragraph shows, the question is not how to encourage businesses to spend money, but how to encourage customers to patronize businesses. The answer is to get money flowing back into the hands of the vast middle class and those living near or below poverty so that they can pump money into businesses at a level sufficient to entice businesses to hire people. No business is going to hire someone simply because the compensation is deductible, as it has been for decades. No business is going to buy equipment simply because the expenditure is brought within the scope of deductible expenses.

The proponent of the proposal also suggests that by making a company’s investments and expansion costs deductible, it reduces the percentage of its income that is taxed. That’s true, but as I’ve pointed out many times, in posts such as Spreading the Wealth: Not Necessarily Inconsistent with Growing the Economy, Taxing Capital to Help Capital, Job Creation and Tax Reductions, and Why the Tax Compromise is a Mistake, under existing law any business, and any taxpayer in a high bracket, can reduce their income tax liabilities by hiring people and deducting the compensation. They don’t do that, and for a good reason. They don’t have anything for these would-be employees to do, because not enough people are coming into their stores or buying their services.

The Tax Foundation blog post suggests that the proposal is on the right track. To the extent that the proposal eliminates the on-again, off-again inconsistency of existing expensing provisions, and shoves aside the ever-changing prerequisites for qualification, thus eliminating some of the uncertainty that contributes to business decision hesitancy, it is not as problematic as current and previous expensing provisions have been. However, it nonetheless amounts to nothing more than a windfall tax break for those businesses, chiefly large enterprises that are buying equipment. Giving a tax deduction for an expenditure that already is being made surely is not an incentive to make that expenditure. The solution to job creation is not supply-side, but demand-side. Some members of Congress understand this. Others don’t, continuing to drop raw eggs on the concrete floor from three stories up, in the belief that the eggs won’t break.

When Congress creates provisions to benefit specific taxpayers in specific areas that have been economically disadvantaged, it ends up creating definitional problems that need to be solved. This, in turn, adds to judicial workload, though it creates jobs for lawyers. When the provisions are inserted into the tax law administered by the IRS, rather than into the law dealing with economic assistance handled by other agencies, it adds the the Tax Court’s workload, though it creates jobs for tax lawyers.

A recent case, Blakeney v. Comr., T.C. Memo 2012-289, presented this sort of situation in the context of a provision designed to assist rehabilitation of the areas affected by Hurricane Katrina. Section 1400N(d)(1)(A) of the Internal Revenue Code allows a special depreciation deduction for “qualified Golf Opportunity Zone property.” In turn, section 1400N(d)(2)(A) defines that term as property that satisfies five conditions. The IRS agreed that four of the conditions – dealing with the type of property, when its original use began, when it was acquired, and when it was placed in service – had been met. The parties disputed whether the taxpayer met the requirement that “substantially all of the use of [the property] is in the Gulf Opportunity Zone and is in the active conduct of a trade or business by the taxpayer in such Zone.”

The taxpayer owned and operated two businesses. One was an electrical contracting enterprise and the other was a charter fishing operation started in 1999 and based in Orange Beach, Alabama, which is in the Gulf Opportunity Zone. On November 5, 2005, the taxpayer contracted for the purchase, at a cost of roughly $4,000,000, of a 68-foot yacht to be used in the charter fishing business. On February 10, 2006, the taxpayer took possession of the yacht in Palm Beach, Florida, which is not in the Gulf Opportunity Zone. Because of mechanical problems, the yacht did not arrive in Orange Beach until October 2006. After taking possession of the yacht, the taxpayer and the yacht’s captain took the yacht on a shakedown cruise, to the Bahamas, near the repair yards of the seller. A variety of mechanical and other problems plagued the yacht, which was required to stay in the Bahamas until repairs were made. After repairs were made, other problems developed. Eventually the yacht left the Bahamas and headed towards the U.S. Virgin Islands. In mid-May 2006, while approaching St. Thomas, the yacht’s generators began to fail, and several appliances stopped operating properly. The boat was moored in St. Thomas for repairs, and during that time it began to sink because of a hole that let water into the engine room. With the leak temporarily fixed, the yacht had to be taken to another marina to be lifted out of the water for permanent repairs. While the repairs were underway, the technicians caused additional damage. When additional electrical problems developed, the seller, who had warranted the yacht, directed the taxpayer to take it to Puerto Rico. In September, 2006, the taxpayer was told that the yacht was ready to be taken to Orange Beach, but its captain unexpectedly died. Eventually another captain was hired who took the yacht to Anna Maria, Florida, for more repairs. The yacht arrived in Orange Beach in October 2006. The yacht was made available for charter but there were no customers because the fishing season had ended. During the February –September 2006 period when the yacht was having its difficulties, it was chartered for five fishing trips in the Caribbean.

On the 2006 tax return, the taxpayer deducted almost $2 million of depreciation under the special provision in section 1400N(d)(1)(A). The IRS disallowed the deduction, concluding that substantially all of the yacht’s use during 2006 occurred in the Caribbean, resting its analysis on its decision that every day after the taxpayer took possession of the yacht was a day of use. The taxpayers argued that a day of use cannot occur unless the yacht is in condition to serve its intended purpose, and that the yacht was virtually inoperable during most of the time that it was in the Caribbean, thus causing substantially all of its use to occur after it arrived in Orange Beach.

The Court first determined that the yacht was used in Orange Beach, and thus in the Gulf Opportunity Zone, for the 74 days from when it arrived there until the end of the year. The fact that no one chartered the yacht did not mean that it was not being used in the sense of being available for charter.

When faced with determining how many days the yacht was used outside of the Gulf Opportunity Zone, the Court concluded that it was not being used when it was so broken that it could not leave the dock. However, because it was chartered on five occasions totaling 43 days, there were at least 43 days of use in the Caribbean, days for which the yacht generated income. Though the Court concluded that days of use in the Caribbean should also include days when the yacht was available for charter but not chartered, it noted that it could not tell from the record whether there were any such days, or, if so, how many.

The Court then turned to whether a use of 74 days in the Gulf Opportunity Zone and at least 43 days outside the Gulf Opportunity Zone constituted use that was substantially within the Gulfo Opportunity Zone. Though the Code and the regulations do not define “substantially” for this purpose, Notice 2006-77 defines “substantially all” as 80 percent. Notices, however, do not carry the force of law, are not accorded deference under the Chevron decision, and may be entitled to deference under the Skidmore decision, but the Court decided it did not need to determine whether Notice 2006-77 should be given deference. Instead, because at most 63 percent of the yacht’s use was in the Gulf Opportunity Zone, the court was “unable to say” that substantially all of its use was in that Zone. Because 63 percent is not substantially all, according to the Court, there was no need to decide if 80 percent is the correct test.

The word substantially is used in many places in the Internal Revenue Code. For example, regulations provide that the requirement of leaving in place substantially all of a building’s exterior walls as a condition for the rehabilitation credit is met if 75 percent of the surface square footage of those walls remain. It would be helpful if Congress, when using the word substantially in contexts that permit the application of a number, would make the effort to provide a number.

The Court did not reach an issue that was not present in the case but that could arise for a subsequent year. When customers chartered one of the taxpayer’s vessels, it went to fishing locations dozens of miles offshore set up and known only to the taxpayer. Would the days that the yacht is far offshore count as use within the Gulf Opportunity Zone? Had the yacht had been offshore for some of the 74 days, the taxpayer’s Gulf Opportunity Zone use percentage arguably would have been even lower.

At least in Pennsylvania, and most likely in other states, taxpayer dislike of real property taxes is pronounced. There almost always is proposed legislation sitting in the legislature that would repeal, amend, or otherwise do something to the real property tax. The latest, the Pennsylvania Property Tax Independence Act would eliminate the real property tax imposed by school districts, increase the state income tax to generate revenue dedicated to public education, increase the state sales tax to do likewise, and permit school districts to enact either a school district personal income tax or a school district earned income tax. An article last Sunday in the Philadelphia Inquirer described the proposed legislation as one that “would eliminate the school property tax and raise the sales and income levies to compensate.” There’s more to it than that. Not only would the state sales and state income taxes be increased, there would be new local income or earned income taxes. In all fairness, trying to summarize the details in a 170-page piece of proposed legislation is impossible in a short article or blog post, and that’s ignoring all the portions with the alarming “reserved” tag attached. What secrets await us when those provisions are revealed?

Eight years ago, in Killing the Geese, I analyzed a similar proposal, one that would eliminate school district real property taxes and replace the revenue with local income taxes, local earned income taxes, increased real property taxes, and business receipts taxes. I explained that the problem with real property taxes is not the tax itself, but the application of the tax to people “whose incomes are fixed and whose homes continue to increase in value.” I pointed out that the real property tax is not a hardship for people with large amounts of income of any sort, and that tagging the real property tax as a tax on the elderly is misleading because many elderly do not own homes and thus do not pay the real property tax, some elderly are awash in income and do not experience hardship on account of the real property tax, and many people who are not elderly do experience difficulties because of the real property tax.

I then argued that if the real property tax is to be replaced, an equitable tax is what needs to be enacted. I explained that that Pennsylvania state income tax, though not necessarily the most efficient tax, is the most equitable tax available. I pointed out that the earned income tax is a terrible tax, one that burdens workers while letting the landed gentry off the hook. My advice with respect to the earned income tax, which clearly has not been heeded by the drafters of the latest legislative proposal on the issue, was simple: “Get rid of it. Do not encourage its proliferation.”

Five years ago, in Taxes and School Funding, I commented on the electoral defeat of the local school district income tax proposal discussed in A Perplexing Tax Vote Decision. I noted that with the defeat, attention would turn to possible sales tax increases to fund education, possible state income tax increases for the same purpose, and cuts in school spending. I pointed out that the sales tax is no less regressive than the property tax, income tax increases encounter the widespread “people don’t want taxes increased, period” obstruction, and cutting school spending revives the decades-old debate about WHAT to cut, and often causes cuts that have adverse long-term consequences for the country. I concluded that the “tax question is not the problem but a symptom,” that the discussion “needs to focus on the tension between what people want schools to do and what people are willing to pay for whatever it is that schools do,” and that disclosure of the cost of “each program, each mandate, and each activity” is necessary.

At least this time around, the drafters of the most recent proposal took my advice on another point. I suggested that school districts be permitted to piggyback onto the state income tax. The most recent proposal includes a provision not quite a piggyback but close enough. It also includes an increase in the state income tax.

The proposal faces all sorts of challenges. According the the Department of Revenue, eliminating the school district real property tax takes away about $12.5 billion in revenue. The proposed increases in other taxes and the enactment of new local income or earned income taxes would raise about $9 billion. Do the drafters of the legislation intend to make up the $3 billion shortfall by cutting education funding? Or by increasing other existing taxes? Or by proposing other new taxes? Is that what the “reserved” provisions are for?

Opposition also comes from the Pennsylvania Budget and Policy Center. It claims that the school district real property tax works well, and that the number of people facing hardship because of that tax constitute only two-tenths of one percent of home owners. That number, however, reflects the number of homes lost because of delinquent tax payments, and thus is both an understatement and an overstatement. There are people who manage to hang onto their homes while cutting back on necessities such as health care in order to make their real property tax payments. And some of the homes that were lost were taken from financially well-to-do people who thought ignoring real estate tax bills was a legitimate tax planning device.

Interestingly, one of the proponents of the legislation claims that if enacted, she would save more than is possible through a mortgage modification. But the risk is that, if enacted, the replacement tax revenue might be much more than the proponents claim or think. As I warned in Killing the Geese,

The impetus for all of this legislative busy-ness is the public dislike of real property taxes. Of course, the public dislikes all taxes, so don't expect a parade down Harrisburg's main street when one bad tax is replaced by another bad tax. Expect another decade of maneuvering to get rid of the replacement tax. To the advocates of real property tax repeal I have these words of advice: Be careful what you wish for. You might get it. And then being pining for the "good old days."

Ultimately the issue isn’t what sort of tax, but who pays. I guarantee that those with the resources to do so are maneuvering into positions that will permit them to escape some, most, or even all of the burden of school funding.