MauledAgain

Though tax law is not the only area of law, or life, that is complicated by the twists and turns of retroactive repeals and pretending something that existed didn’t ever exist, it certainly is a contender for being at the top of the list of law practice areas afflicted by yet another sort of complexity that bedevils not only tax practitioners but also taxpayers trying to comply with the law. Worse, there are times that the “pretend it never existed” becomes “pretend it never existed except for the times we pretend that it does exist.”

The provision in question is section 121(d)(11). Last week the Office of Chief Counsel to the IRS issued CCA 201429022, in which it explained the status of that particular paragraph of the Internal Revenue Code. The question presented to the Chief Counsel was a simple one. Is section 121(d)(11) still in effect?

Section 121(d)(11) was originally enacted as section 121(d)(9) by section 542(c) of P.L. 107-16, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). It became section 121(d)(10) when re-numbered by section 101(a) of P.L. 108-121, the Military Family Tax Relief Act of 2003, and then became section 121(d)(11) when again re-numbered, this time by section 403(ee)(1)-(2) of P.L. 109-135, The Gulf Opportunity Zone Act of 2005.

Section 121(d)(11) provides that when deciding if a taxpayer qualifies for the section 121 exclusion on gain from the sale of property acquired from a decedent, the taxpayer may take into account ownership and use by the decedent in determining whether the ownership and use periods required by section 121 have been met. Section 121(d)(11) was effective for estates of decedents dying after December 31, 2009, but under section 901 of EGTRRA, it would not apply in taxable years beginning after December 31, 2010.

However, section 301(a) of P.L. 111-312, The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRUIRJCA) repealed section 121(d)(11), as though it “had never been enacted.” Nonetheless, section 301(c) of TRUIRJCA provided that the executor of a decedent dying in 2010 could elect to apply section 121(d)(11) as though the repeal in section 301(a) did not apply to property acquired or passing from the decedent. Subsequently, section 101(a)(1) of P.L. 112-240, The American Taxpayer Relief Act of 2012 (ATRA) repealed the title of EGTRRA that contained section 901. Section 101(a)(1) of ATRA does not repeal section 301 of TRUIRJCA nor does it reenact section 542(c) of EGTRRA.

Thus, when the dust and smoke of this jumble of legislative juking and dodging cleared away, the bottom line is a bit less complicated. If the decedent died in 2010, and the executor makes the election under section 301(c) of TRUIRJCA, section 121(d)(11) does apply, despite being repealed as though it never existed, and the decedent’s periods of ownership and use can be taken into account in determining if section 121(a) applies to the property acquired from the decedent. Otherwise, the decedent’s periods of ownership and use are ignored. Thus, for property acquired from decedents dying before or after 2010, or in 2010 if the executor does not make the election, the decedent’s periods of ownership and use are irrelevant.

So section 121(d)(11), originally enacted as section 121(d)(9) but repealed before it could spring into life under its original terms, survives for a very limited number of taxpayers. So the answer to the question of whether it is still in effect is the classic, “It depends.” It is, for a very few taxpayers, and it is not, and never was in effect, for most taxpayers.

It’s getting to the point where it is difficult to decide what is worse, a Congress that like the present one, does nothing other than gripe and complain, or a Congress that does things but produces the sort of muddled legislative history summarized in the preceding paragraphs. But, as too often now happens, they make it harder than it needs to be.

A recent commentary from The Institute for Policy Innovation bemoans the possible derailment of the Permanent Internet Tax Freedom Act by the addition of unrelated provisions to the legislation. Since its inception, the movement of legislation through the Congress has been hampered by extraneous amendments, a snag in the process that ought to be eliminated. On that point, I agree with the commentary.

The commentary points out that if the legislation does not pass, the existing moratorium on certain internet taxation will expire. The current moratorium prevents internet access taxation, and also prevents states from requiring use tax collection by out-of-state retailers with no connection with the state. The commentary carries the headline, “The Senate’s Plan to Increase Your Taxes,” and projects tax increase amounts that include both internet access taxes and use tax collections.

When it comes to internet access taxation, expiration of the moratorium, which in all fairness cannot be considered a plan of the Senate or even a plan of those who are using the legislation for other purposes with no avowed intention of derailing it despite their inability to see that outcome as a consequence, the commentary is correct. Letting the moratorium expire would permit states and localities to impose access taxes, and those taxes would qualify as tax increases.

But when it comes to the use tax, it is wrong to classify the tax as an increase. The use tax is an existing tax. People who are not paying the tax and thus violating the law are not facing a tax increase when they are obliged to comply with the law. The tax obligation exists and is not being increased when it is being collected. The use tax issue presents a different concern. States struggle to collect the use tax, as I have explained in posts such as Collecting the Use Tax: An Ever-Present Issue, a person who purchases taxable items in another state is required to pay the use tax, but does so only if avoidance is pretty much impossible because the purchase is a big-ticket item that needs to be registered, such as a vehicle or boat. Thus, for example, a resident of Pennsylvania who goes to Delaware, a state without a sales tax, to make a purchase owes a use tax to Pennsylvania. Pennsylvania cannot compel the Delaware merchant to collect the Pennsylvania tax. Nor should Pennsylvania be permitted to require the Delaware merchant to collect the tax if the purchase is made when the resident goes to the Delaware merchant’s web site, unless the Delaware merchant otherwise has enough activity in, or connection with, Pennsylvania to be subject to Pennsylvania jurisdiction. Letting the moratorium expire would open the door to states trying to compel out-of-state merchants to do tax collections, but it would not increase the use tax that already is owed. What would increase is the administrative burden and expense faced by out-of-state merchants.

One solution that ought to be considered is a simple one. If state 1 wants to collect an existing – not increased – tax from its residents’ purchases from out-of-state merchants, it ought to offer those out-of-state merchants a financial incentive to do the collection. Surely whatever cost there is in re-programming web sites and in-store point-of-sale terminals to collect the sales tax – something already done by the national retail businesses – can be more than offset with a payment equal to a percentage of the use tax being collected. Though the state would not necessarily receive as much as it would if the residents paid the existing tax, the state would be getting something, which is more than the nothing that that states usually receive.

The commentary’s main point, though not articulated as precisely as it could or should be, is important. Legislation addressing an issue ought not be sidetracked with unrelated matters. But that is not enough. Legislators ought to be focusing on ways of collecting an existing tax using sensible processes, and commentators ought to be encouraging productive efforts by legislatures.

I must admit I was surprised to discover someone asserting that “Obviously retired people do not pay INCOME TAX.” I had not previously encountered this myth. In another post, a commentator provides some of the flawed reasoning behind this sort of assertion, explaining “there are some small percentage who retire before age 65 and these retired people do not pay taxes (due to no income, except that they are well-off to live on past earnings.” Someone who is retired and living off of accumulated savings surely has investment income, which is taxed. Retired individuals, no matter the age at which they retire, are taxed on their pensions, their retirement income, and in some instances, on a portion of social security benefits. To claim that retired people do not pay income tax is just one more unfortunate tax myth.

It isn’t difficult to find web sites that contain statements claiming that children do not pay tax. For example, an answer to the question How many taxpayers are there in the U.S.? was tagged as “wrong” because “Children do not pay tax.” The statement was followed by another erroneous assertion. A similar reaction appeared in response to the question Is it really true half the country doesn’t pay income tax?, from someone who not only claimed that “children do not pay income tax,” but also delivered several other questionable assertions.

Though there are some exceptions to certain state taxes based on a person’s status as, for example, unemployed or elderly, the federal income tax does not contain any blanket exemptions based on age, physical condition, or occupation. A tax liability exists if taxable income exceeds zero, or if a taxpayer has positive taxable income but qualifies for a credits that reduce tax liability. Those credits, however, are not sufficient to exempt all children from having federal income tax liability. A child of any age, with gross income exceeding whatever standard deduction is available, has federal income tax liability.

The assertion that the Internal Revenue Code consists of 70,000 pages is one of my favorite tax myths because it is so silly, so easily debunked, and so indicative of America’s tax ignorance. As I’ve explained in a series of posts, starting with Bush Pages Through the Tax Code?, and continuing with Anyone Want to Count the Words in the Internal Revenue Code?, Tax Commercial’s False Facts Perpetuates Falsehood, How Tax Falsehoods Get Fertilized, How Difficult Is It to Count Tax Words, A Slight Improvement in the Code Length Articulation Problem, and Tax Ignorance Gone Viral, Weighing the Size of the Internal Revenue Code, Reader Weighs In on Weighing the Code, and Code-Size Ignorance Knows No Boundaries, I have explained why the Code is nowhere near 70,000 pages, how the misinformation was developed and spread, and why the Code is no more than two thousand pages long.

This myth persists because some people want it to persist. There is political advantage in convincing people that the Internal Revenue Code is a behemoth. It makes it easier to eliminate the Code, the income tax, the Internal Revenue Service, and, eventually, government. If the campaign succeeds, it would not be the first time a group of politicians had their way by fueling misinformation and spreading myths.

Perhaps in the rush to be succinct, people present general rules as absolutes. For example, a responder in this threadadvised that “And yes, alimony is always taxable to the recipient, regardless of the form in which it is paid.” Similar advice, tainted by yet another error confusing gross income with taxable income, shows up in this commentary, which claims that “Alimony is always taxable income to the recipient.”

However, those statements are incorrect. They need to be qualified. For example, section 71 provides that if the divorce or separation instrument specifies that the alimony payments are not includible in the payee’s gross income and not deductible by the payor, they are not includible in gross income and not deductible. As another example, alimony paid while the spouses are members of the same household do not qualify as “alimony or separate maintenance payments” that are includible in the payee’s gross income and deductible by the payor. The use of the term “Generally,” or the phrase, “Unless an exception applies,” would change the statements from incorrect absolutes to accurate representations.

One of the most persistent, widespread, and enticing tax myths is the unfounded claim that the flat tax is simple. Three years ago, the Heritage Foundation claimed that the flat tax “is simple.” Sixteen years ago, Dick Armey characterized the flat tax as “simple.” For the past several decades, advocates of the flat tax have argued its simplicity by focusing on rate structures and ignoring everything else.

In 2011, I explained, in The Flat Tax Myth Won’t Die that the flat tax “does absolutely nothing to address the question of timing. It does not simplify, for example, installment sale rules, or the dozens of nonrecognition provisions that pepper the Code.” I also pointed out:

A flat tax does not resolve the continuing debate with respect to international taxation. The question of how nonresident aliens and foreign corporations should be taxed, and the question of how American taxpayers should be taxed with respect to overseas operations, is not one that goes away if section 1 is reduced to one tax rate.

Repealing nonrecognition provisions would generate cash flow burdens that would stifle the economy, and retaining those provisions to sustain the economy amounts to retention of tax complexity requiring multiple volumes to explain.

The flat tax, of course, is a sound bite, a nice-sounding phrase that suggests a magic solution to a complex set of problems. It is yet another indication of a theory struggling to survive when it meets reality. It’s a myth, one that falls flat.

Most people do not understand income tax rates. Some law students enrolled in the basic income tax course struggle to understand tax rates. What confuses people is the difference between marginal tax rate and average tax rate. It is not unusual for someone to look at a federal tax rate schedule, find the bracket that fits their income, and conclude that they pay that percentage of their income in federal income tax. This generates all sorts of inaccurate claims to the effect that people with a certain income pay tax at a particular rate. For example, this writer claims that “Americans who take home over $400,000 are mandated by law to pay 39.6 percent in income tax.” Aside from the fact that tax brackets are based on taxable income and not take-home pay, in 2013, the year the article was published, a single person with, for example, $410,000 of taxable income does not pay an income tax of 39.6 percent. That person’s tax liability of $120,064 is 29.3 percent of taxable income.

Aside from the erroneous use of gross income rather than taxable income in selecting a tax bracket, the principal problem with the misuse of the tax rate schedules is the treatment of what is a marginal tax rate as though it were an average rate. For example, if taxable income of up to $50,000 is taxed at 20 percent, and taxable income above $50,000 is taxed at 30 percent, a person with taxable income of $60,000 would be subject to a tax liability of $13,000 ($50,000 x .20, plus $10,000 x .30). It is easy for someone in that situation to claim that they are taxed at 30 percent, but in fact, their tax liability of $13,000 is 21.7 percent of $60,000. Failure to understand the difference generates exaggeration, which in turn triggers more resentment than is warranted.

What makes this myth even more insidious is that when phase-outs are taken into account, and tax liability is divided by taxable income, the average rates are highest not for those with the highest taxable incomes, but for those in the middle brackets, and in some instances, for some taxpayers in lower brackets. I explained this tax quirk in A Foolish Tax Idea Resurfaces.

Americans’ confusion with average and marginal tax rates provides fertile ground for the growth of misleading claims and absurd hyperbole. The myth that people are taxed at the highest nominal marginal rate on all of their income is a myth that needs to die.

Retailers operating in states that do not have sales taxes entice out-of-state purchasers to cross the border to make purchases by emphasizing the notion of “tax-free” purchases. An article about a particular incident of this approach triggered A Peek at the Production of Tax Ignorance, in which I repeated an earlier explanation about the use tax, the tax imposed by the purchaser’s state of residence on out-of-state purchases of items brought back into the state of residence.

What sustains this myth is a combination of ignorance, experience, and revenue department inefficiency. Most taxpayers do not understand that a use tax exists, the conditions under which it applies, and their legal obligation to pay it. Most taxpayers who cross the border to make purchases in states without sales taxes and return home with their purchases do so without any adverse effect, aside from the classic situations involving vehicles, boats, and a few other “big ticket” items. Revenue departments have insufficient resources and mechanisms to collect use taxes aside from “big ticket” items, and because the cost of collecting use taxes is a much higher percentage of the tax when compared to the cost of collecting in-state sales taxes, use tax collection is inefficient and spotty, as I explained in Collecting the Use Tax: An Ever-Present Issue.

Many states are making efforts to educate the public with respect to use taxes. Some are trying to incorporate some sort of flag in state income tax forms. The effectiveness of those efforts is low. Until people become accustomed to paying use taxes, the myth will persist because the non-compliance persists. At some point, states might decide to bring tax education into their K-12 systems, and some have, to some limited extent, but until it is pervasive, this myth will endure.

Though there are rare instances in which a tip can be characterized as a gift excluded from gross income, as a general proposition tips are included in gross income. It takes a very unique set of facts to pull a tip out of gross income by demonstrating that it is a gift, as I described some years ago in Should a Tip Be Excluded from Taxation as a Gift?. Thus, claims that, as a general proposition, tips are gifts and not taxed, are wrong. As the court in Cracchiola v. Comr., 643 F.2d 1383 (9th Cir. 1981), stated, “Petitioners’ first argument, that tops are not income is wholly without merit.”

It is understandable why this myth circulates and has traction. Most people who collect tips are paid very little, rely on the tips to make a living, and are unhappy to learn that tips are included in gross income. Worse, certain employers are required to report tip income on Forms W-2 issued to employees based on formulas, so that occasionally an employee might end up paying taxes on an amount of tips slightly higher than what the employee actually received. These situations also are very rare.

Another reason for this myth’s endurance is confusion generated by discussion of sales taxes. In most states, sales tax is computed with respect to the cost of goods and services exclusive of tips unless the tip is built into the stated price. Explanations of this principle often includes the words “tips are not taxable,” which people take out of context. The context provides the modifier “for sales tax purposes,” which should preclude treating the statement as applicable “for income tax purposes.”

Sometimes, people say to me, quite excitedly, “The IRS Gave Me a Refund,” or “The IRS Is Giving Me a Refund.” Closely related to the “I’m Getting a Refund and Not Paying Tax” myth, this myth reflects two misperceptions.

In some instances a refund, or a portion of a refund, arises from a refundable credit. In these situations, the money paid to the taxpayer is coming from the United States Treasury courtesy of the United States Congress, or from a state treasury courtesy of a state legislature.

In many instances, the refund is nothing more than the IRS returning to the taxpayer some, or in some rare cases all, of what the taxpayer has paid in through withholding and estimated tax payments. I suppose that those who are concerned that the federal government or a state government might run out of money before the refund is paid are overjoyed when the refund arrives, but as a realistic, practical matter, simply getting one’s money back isn’t a joyous occasion. Actually, it’s a bit sad, because the money that is being refunded hasn’t earned interest.

Though I haven’t kept a count, I know that there have been dozens of times when someone would tell me that because they were getting a tax refund they weren’t paying tax. More than a few students entered my basic federal income tax course thinking the same thing, as evidenced by conversations in and out of the classroom, and as indicated on responses to semester exercises.

Whether a person has a tax liability cannot be determined simply from the existence of a refund. Though a person who is not getting a refund because additional tax is due surely is paying taxes, a person who receives a refund can fall into one of two categories. Some taxpayers receive a refund because they have a zero tax liability, and had taxes withheld, paid estimated taxes, or qualify for a refundable credit. But many taxpayers receive a refund and yet have a tax liability. The refund arises because they had taxes withheld and paid estimated taxes in amounts exceeding the tax liability.

When people want to know whether or not they are paying income tax, they need to look at the line on the return that shows “tax liability.” The lines for refund and for additional payment simply reflect the extent to which the amounts that have been paid match with the tax liability. A taxpayer who has $10,000 of federal income taxes withheld from wages and who has a tax liability of $7,500 rejoices at the prospect of a $2,500 refund, but ought not declare, “I’m not paying taxes.” That taxpayer has paid $7,500 in federal income taxes. Worse, they have made an interest-free loan of $2,500 to the applicable federal or state government.

Most taxpayers understand that income reported on a Form W-2 or Form 1099 must be reported on their tax return. Whether they understand why those amounts are gross income, they usually understand that “the IRS knows about it, so I had best report it.” Many taxpayers take a leap, and conclude that if the IRS doesn’t know about it, there’s no need to report it. Coupled with that misperception is the proposition that if it’s not on a Form W-2 or Form 1099, the IRS doesn’t know about it. Thus, we find this advice: “If she has no w2 or 1099, no income then she does NOT have to file.”

This myth gets people in trouble. For example, one commentator suggested, “First of all, work in the underground economy: No w2’s or 1099’s.”

The reality is simple. Items that are gross income must be reported on tax returns whether or not a Form W-2 or Form 1099 is issued to the recipient of the income. Some types of income cannot be reported on such a form because there is no one to issue the form. For example, a taxpayer who finds a $100 bill on the street and keeps it has gross income, but will never receive a Form W-2 or Form 1099. In some instances, payors are not required to issue Forms 1099 if the amount in question is less than a specified amount, usually $600. That rule, designed to reduce reporting burdens on payors, does not mean that amounts of less than $600 are not gross income.

From time to time, someone asserts that because they have been paid with property and not cash, the payment is not subject to the income tax. Not only have I heard this from people generally, I’ve also heard it occasionally from students in the tax course. Fortunately, it’s usually early enough in the course for a correction to be made in how they understand the definition of gross income.

The “it’s not cash, so it’s not taxed” myth flourished in the early days of the barter boom. Some barter exchanges at the time listed “tax free” as one of the advantages of bartering. Eventually, the IRS engaged in an education effort that eliminated almost all of the barter under-reporting, at least among the commercial barter exchanges. There surely are barter transactions taking place in settings that are informal and occasional, with participants thinking that the absence of cash makes the transaction nontaxable.

What fuels the “it’s not cash, so it’s not taxed” myth are several perceptions. One arises from a notion that things usually taxed, such as wages and interest, are almost always paid in cash, a concept that some people translate into a conclusion that to be taxed, it needs to be in cash. Another arises from the rationalization that the lack of liquidity arising from the receipt of property rather than cash permits dispensation from taxation because of the lack of cash with which to pay tax.

This particular myth doesn’t circulate as often and as widely as the “IRS enacts Code provisions” myth. Whether it disappears entirely remains to be seen.

It is not uncommon to discover someone’s assertion that the IRS has enacted a particular Internal Revenue Code section or even the entire Code. For example, in this presentation, readers are told that in 1996, “IRS enacts IRC Section 4598” but that simply isn’t true. Congress enacted section 4598. In this commentary, we are told, quite incorrectly, that “Every year, the IRS enacts certain changes to the tax code.” A merchant servicing company claims that “In January 2011, the IRS enacted section 6050W.” It is unquestionable that this myth has multiple variants.

As I explained in The Precision of Tax Language:

The IRS DOES NOT ENACT INTERNAL REVENUE CODE SECTIONS. It is the CONGRESS that enacts Internal Revenue Code sections. That’s very basic stuff. Extremely basic stuff. Understandably, many of the propaganda ministries have a not-so-hidden agenda of trying to persuade people that it’s the IRS that generates the tax laws, as part of the effort to discredit the IRS and taxes generally. But tax professionals know, or at least should know, better.

An interesting twist to this myth is that it’s not so much a tax myth as it is a civics myth. As I also wrote in The Precision of Tax Language, “For some reason, although all Americans over the age of, say, fourteen, should understand that statutes are enacted by legislatures, the teaching of what was once the ubiquitous Civics course has been shelved in most school districts.”

Because I no longer teach the basic federal income tax course, I no longer have the opportunity to evaluate how deeply imbedded this myth is in the minds of law students. Early in the semester I reminded them, or perhaps explained to some of them for the first time, that Congress enacts provisions of the Internal Revenue Code. Shortly thereafter, when administering the first out-of-class graded exercise, I presented to them a situation in which they needed to react to some variant of the “IRS enacts Code sections” myth. The internet was a treasure trove of possibilities to work into the facts of the exercise.

I wonder how many tax law professors use this simple technique, dealing with a rather uncomplicated legal principle, to disconnect their students from myths, to identify which students have been paying attention, and to give students the opportunity to engage in remedial education.

But it’s not just law students who need remedial education. There are tax professionals, members of Congress, entrepreneurs, journalists, and all sorts of other people who need to pause and unburden themselves of their mistaken notion of who gives us tax laws.

Misperceptions about taxes abound. I’m not referring to the parade of rationalizations from the tax protest movement, though the terrible consequences of being led astray by its misinformation, as I described in For Would-Be Travelers on the Noncompliant Federal Income Tax Protester Path can afflict those who fall prey to tax myths that find traction for reasons other than tax protest.

There are numerous tax myths. Though not infinite, there are more than enough to warrant a short blog series calling attention to the more common myths, and those that are most likely to create problems for significant numbers of taxpayers. They are discussed in no particular order, because alphabetizing them isn’t particularly useful and there is no good way to determine which ones are the most prevalent.

How do tax myths get started? Sometimes a person does not understand what someone else is explaining, orally or in writing. Sometimes someone tries to help someone else but makes a mess of the explanation. Sometimes the myth arises from a well-intentioned attempt to put a complicated concept into simple sentences.

No matter how they start, tax myths, like other misinformation, are difficult to squelch. Once they take root, they spread like poison ivy or bamboo. Cut down in one place, they show up somewhere else. Hopefully, those who read the upcoming posts will dismiss any tax myths to which they subscribe, and find something useful to help them free others of their unfortunate attachment to one or more of these myths.

It’s a common complaint, tinged with a bit of humor, often heard when summer driving season rolls around. Highway construction slows traffic, and motorists are confronted with the ubiquitous “Temporary Inconvenience, Permanent Improvement” signs. The joke is “Temporary Improvement, Permanent Inconvenience.” Sometimes it seems that way. But reality is no joke.

Almost seven years ago, in Funding the Infrastructure: When Free Isn't Free, I reacted to the interstate bridge collapse in Minnesota by pointing out, “From that tragedy came at least one lesson. This nation had best repair its infrastructure, particularly highways and bridges. The catch? The repairs cost money. Where will the nation get the money it needs for this task?” I deplored the narrow-minded, single-focused opposition to raising funds to pay for preventative repairs. The attempt of the previous Administration’s Transportation Secretary to explain why it made no sense to raise those funds was baffling then and just as moronic today. I predicted that it would be only a matter of time before the infrastructure disrepair adversely affected people’s lives, health, and economic condition, noting “ When enough bridges collapse and highways fall apart, the trucks won't be moving products, such as fuel, food, clothing, and, yes, even military supplies. If you think that won't affect economic growth, you don't understand economics.” I predicted:

The problem with rejecting tax increases until the funding allocation system is fixed is that more people will die, more people will be injured, more property damage will occur, and more transportation bottlenecks will stifle the economy while Congress wiggles and squirms and the Administration and politicians wave slogans in the voters' faces. "No tax increases" sounds great until one realizes it's not unlike the "No more spending" family budget vow that looms in the way of paying for the baby's food. Perhaps "No more unnecessary tax increases" would resonate with those whose ability to analyze economic problems goes beyond three-word sentences.

For people living in the greater metropolitan Philadelphia area, the rising tide of infrastructure collapse is becoming brutally evident.

On June 2, transportation officials closed a bridge on I-495 in Wlimington, Delaware, effectively closing I-495 itself. The detrimental impact on Delaware, its people, and its economy, is difficult to ignore, as explained in reports such as this one. Granted, the problem that necessitated the closure was not so much one of unrepaired deterioration but a matter of unregulated or badly regulated decision making that led to the dumping of dirt that shifted support columns. Eighteen days later, drivers in Montgomery County, Pennsylvania, awoke to the news that yet another bridge over the Perkiomen Creek has been closed because of structural deficiencies. There are six bridges over the Creek, and now two of them are closed, for an indefinite period. These bridges won’t fix themselves for free. There is no guarantee that either of these bridges will re-open before a third or fourth bridge is closed.

There has been, not surprisingly, quite a bit of griping about these and other closures. The resulting traffic jams cost drivers time and money. Along with diversion of business to other areas, as described, for example, in this report, the traffic tie-ups are costing businesses revenue and thus profits. Just as it is foolish, in the long run, to avoid a few dollars of gasoline taxes in the short-term only to be confronted with much higher front-end alignment repair costs, to say nothing of death and injury, so, too, the short-term bonanza of avoiding revenue increases to fund infrastructure are dwarfed by the price America will pay for the past 15 years of catering to the “freedom means everything is free (at least for me)” crowd. And the price will be more than the lost revenue, closed businesses, increased fuel costs, and wasted time. Much more.

In Funding the Infrastructure: When Free Isn't Free, I concluded:

The fact that I, like most others, do not like taxes does not mean I will reject them when they are necessary. It would be better, and easier, to talk about "user fees" because that's what the federal gasoline tax and the proposed mileage-based road fees are. Properly structured, set at a price that reflects the true cost of building and adequately maintaining a highway, bridge, interchange, or other facility, these user fees would not only move the debate from the silly place it now occupies but also would make the prospect of additional bridge collapses and road failures the highly unlikely outcome most people thought was the case.

Any other approach does not bode well. Paying for repairs with borrowed money increases the nation's debt load, making it more likely that the foreclosure will destroy the country. Ignoring the problem and not spending money guarantees death and destruction on a far larger scale. Abandoning the infrastructure simply hastens the demise of the economy and ultimately the country. Unfortunately, the time has come to pay the price for so many bad transportation infrastructure decisions during the past 50 years. The even more unfortunate aspect of the matter is that most of those who made the bad decisions aren't around to see the consequences of their vote-pandering and ignorance or to deal with the consequences. The only good part of this is that voters will have a chance to ensure that those bad decision makers still around are deprived of additional opportunities to make a mess of things.

I wonder how many of the drivers inconvenienced by the closures and how many of the people economically disadvantaged by the closures are among those who voted for the “no tax” Pied Pipers. I wonder how many are beginning to understand that just as someone can look at a repaired bridge or repaved highway and think, “My tax dollars purchased this for me and others,” others can look at a collapsed or closed bridge or potholed highway and think, “This is what no-taxes gets us.” There’s a lesson to be learned. Let’s hope it’s learned in time.

New Jersey is in a quandary. A budget quandary. It’s not alone, but it presents an interesting example of the sort of choices that must be made when the “taxes and jobs” connection is invoked during policy debates.

The Republican governor, according to this report, has proposed filling the budget gap by taxing electronic cigarettes, increasing almost two dozen fees, and removing the provision that permits businesses in Urban Enterprise Zones to pay sales tax at half the normal rate. A member of his own party, the Senate minority leader, has objected to the proposals, arguing that the tax on electronic cigarettes would put a damper on an industry and cost jobs. Similarly, the sales tax exemption in question was designed to stimulate small businesses, presumably to create jobs.

On the other side, according to another report, New Jersey Democrats have proposed increasing the income tax rates on taxpayers with taxable incomes exceeding $1,000,000. The usual reply is that such a move would destroy jobs because the rich create jobs. Democrats are unhappy with Republican efforts to solve the budget problem by cutting pensions, a compensation-reduction move that also negatively affects jobs.

All that this proves is that the word “jobs” can be tossed around no matter what one wants to argue, and depending on the context, it can invite fear or it can be the bait that entices people to support a bad idea. The bottom line is that every tax affects jobs in two ways. Taxes both encourage the creation of jobs and encourage the elimination of jobs. Because wages are deductible, taxes encourage job creation. Because taxes reduce business cash flow, taxes discourage job creation. Because taxes provide revenue with which governments can hire people to provide necessary public services, taxes encourage job creation. This back-and-forth can continue for quite some time.

The lesson is that using job creation or job destruction as an argument when taxes are being debated is a waste of time. True, it works to fire up some voters and alarm some taxpayers, but as the past decade and a half has shown, most of the arguments presented with respect to the impact of taxes on jobs have turned out to be facetious at best. When arguing about taxes, what needs to be discussed are the purposes to which those taxes would be applied, and the connection between those purposes and the incidence of the tax in question.

Earlier this week, in a Philadelphia Inquirer op-ed, Nicholas E. Calio, president and CEO of Airlines for America, came out in support of the Transparent Airfares Act, which would allow airlines to specify how much of the cost for an airline ticket reflects taxes. The legislation also is supported by major labor unions and has bipartisan backing in Congress.

Under current law, airlines are required to include taxes and fees in the ticket’s base price. Consequently, unless a consumer has the time and skill to do extensive research, the ticket purchaser has no idea how much of what’s being paid is for taxes. That’s wrong. It’s one thing to disagree on whether there should be a tax or how much it should be, but it’s a totally different thing to hide taxes. When the tax is out in the open, people can see what it is, and then construct their arguments about the tax. If the tax is hidden, discussion of its appropriateness is curtailed or impossible, because it’s rather difficult to argue about something that the would-be debaters don’t know exists.

This is not the only example of hidden taxes. In 1990, as I explained in Objections Raised to Elimination of Legislative Tax Deceit, Congress enacted two phaseouts in order to raise effective tax rates without raising section 1 stated tax rates. I explained:

In this particular instance, Congress wanted to raise taxes without raising tax rates, because it concluded that it could tell Americans that it did not raise taxes by pointing to unchanged tax rates. However, "clever" minds figured out that if deductions, in this case itemized deductions and the deduction for personal and dependency exemptions, were reduced, the effect would be an increase in tax revenues. In other words, Congress "discovered" that it could raise taxes without raising tax rates and thus trumpet a self-serving proclamation that it had not raised taxes. The simple word for this is lying.

I campaigned against these phaseouts from the start. For example, take a look at my letter to the editor, "Author, Don't Phase Out the Phaseouts, Kill Them," 70 Tax Notes 911 (1996). From July of 1996 through July of 1999, I chaired the Phaseout Tax Elimination Project of the American Bar Association's Section of Taxation Committee on Tax Structure and Simplification. The major accomplishment of that Project was the Report of the ABA Tax Section Committee on Tax Structure and Simplification: Phaseout Tax Elimination Project, issued in July 1997. Almost a year later, the elimination proposal found light of day in H.R. 4053, introduced by Mr. Neal, for himself and Mr. Rangel (June 11, 1998), and eventually found its way into enacted legislation through a path too long and tortured to recount in detail. Unfortunately, the current Administration decided to restore these hidden tax rates, an idea I deplored in A Foolish Tax Idea Resurfaces and in Tax Rates and Deduction Caps. This time around, the advocates of tax deception carried the day, and the phaseouts were brought back.

So it ought not surprise anyone who follows this blog that I agree with Nicholas E. Calio. He points out that 17 different taxes and fees are buried in ticket prices. I will admit that I cannot identify or name more than a few of those taxes. As Calio explains, when people purchase other items, the receipts show the base price, and separately state the applicable sales, transfer, or other taxes. There is no reason to treat airline tickets any differently, other than legislative desire to hide from people what they are requiring people to pay in taxes.

I have only one quibble. The proposed legislation would “allow” airlines to disclose the taxes separately from the ticket base price. The legislation ought to “require” airlines to do so. Even though airlines, if allowed to state taxes separately, most likely will do so in order to show that what they are charging is less than what it otherwise would appear to be, it makes sense, just to be cautious, to require the separate statement of taxes. Americans deserve nothing less.

Almost two weeks ago, in Is It Fraud, Negligence, or Simple Tax Hatred?, I wrote about a Republican member of Congress who claimed a property tax homestead exemption to which he was not entitled, was informed of its inappropriateness, made up the difference with a check that bounced, and then the following year again claimed the exemption to which he was not entitled. Perhaps there is something I do not understand, because for me a public official ought to make certain that he or she is in substantial compliance with the tax law. Minor errors will happen, but the egregious matters ought to be avoided. They provide too much issue-deflecting ammunition for one’s electoral opponents.

Now comes a report that Andrew Cuomo, governor of New York, has run into property tax trouble. Cuomo’s celebrity chef girlfriend, Sandra Lee, did some renovations to the house she shares with Cuomo, talked about the work in magazine interviews, but then refused to let the town assessor come into the house to see the work and determine the impact on the house’s assessed value. Making things more complicated is Lee’s failure to obtain the required building permits. Generally, building permits alert assessors that changes are being made to a property, changes that potentially affect the property’s value.

Cuomo, according to another report, claimed that he did not know that Lee had prevented the assessor from entering the house, and that exterior inspections were the only thing required under the law. According to yet another report Cuomo explained, “In terms of local rules, I’m not all that familiar.”

Cuomo’s opponent in the upcoming gubernatorial election charged Cuomo with evading property taxes and attempting to cover up the improvements. A spokesperson for the opponent said, "We are directly suggesting that Andrew Cuomo hid renovations to his home in order to evade the higher property taxes he would have to pay if those renovations had been properly permitted, as is required of other citizens. We are further suggesting that the governor is intentionally barring home access to his town assessor to conceal the amount of work that was done. We are also accusing Governor Cuomo and his government staff of not telling the truth in press reports about the extent of work done in the home.”

The assessor raised the assessment by guessing at what had been done inside the house, presumably relying on the magazine stories about the work. Lee explained that she will review the new assessment. If she does not file a grievance the assessment becomes final.

Unlike the member of Congress who deliberately claimed an exemption, once after being told it was inappropriate, and who paid with a bounced check, Cuomo is not a Republican. He is a Democrat, but one who has made property tax reduction one of his objectives. This is not the way to do that, but it’s unclear to what extent Cuomo is involved in the renovations. The house was purchased by Lee, Lee arranged for and supervised the renovations, Lee discussed the renovations in magazine interviews, Lee barred the assessor from entering the house, and Lee is the one considering whether to file a grievance. Perhaps she is doing this at Cuomo’s behest, or with his guidance and blessing. But perhaps not. Perhaps Cuomo is somewhat like the stereotypical male who doesn’t pay much attention to interior decorating and the remodeling of kitchens. Lee is sufficiently well-off to pay for the renovations without even asking or telling Cuomo, especially as it appears to be her home for all practical purposes.

If Cuomo is in some way wrapped up in an effort to avoid property taxes, then he has caught the same tax hatred virus that has infected so many Republicans. If the situation is entirely of Lee’s doing, then Cuomo is suffering from, and will suffer the consequences of, failure to exercise an abundance of caution, to the extent of advising partners, friends, and associates to conduct their tax transactions with the utmost of care, lest their behavior boomerang back onto the public servant.