MauledAgain

Almost four years ago, in Why Teaching Isn’t Just a Matter of What One Knows or Understands, I commented on the conviction of a then Hamline University School of Law tax professor, Robin Kimberly Magee, for failure to file state income tax returns for at least 17 years. I speculated that, considering her personal statement in her no-longer-online biography, she was protesting against government, refusing to file because being required to file state income tax returns is tyranny, or acting on a belief she was not subject to the law.

In the meantime, after she was convicted, Hamline University terminated Magee, who had been granted tenure in 1994 after having been hired in 1990. Magee then sued the dean of the law school, the university’s trustees, and a St. Paul, Minnesota, police officer, alleging that they had “worked in concert” to terminate her position at the law school. She claimed that her constitutional rights had been violated, that there had been intentional interference with her employment contract, and that her contract had been breached. The district court dismissed her section 1983 claim with prejudice, and her state law claims on jurisdictional grounds. Magee appealed, and the dismissal was affirmed.

Roughly a year later, Magee sued the university and the dean, alleging that her dismissal was the result of racial discrimination. The action was dismissed based on the doctrine of res judicata, because the claim in the first lawsuit arose out of the same transaction as the new claim. Again, Magee appealed. Last month, the United States Court of Appeals for the Eighth Circuit affirmed the dismissal. The court explained that both lawsuits rested on “Magee’s termination from employment as well as the series of events precipitating that termination.”

In Why Teaching Isn’t Just a Matter of What One Knows or Understands, I wondered if Magee would “enlighten us by explaining why she hadn’t been filing state income tax returns.” Though there are indications that she disagreed with how the police handled a case on which she had worked in 2007, that doesn’t explain her failure to file reaching back to 1990. Nor, even if it is assumed something happened before 1990, would it explain why refusing to file state income tax returns is an appropriate or effective approach to dealing with an issue. So we still don’t have an answer. I doubt we will get one. The entire story remains puzzling, sad, and worrisome.

It’s a simple tax question with a complicated response. The facts that raise the question aren’t difficult to understand, though they do raise some people’s eyebrows. Harold Hamm, a billionaire, was ordered by a state court to pay $995.5 million to his former wife as part of the divorce proceedings. Both parties appealed the lower court decision. Yet Hamm send his ex-wife a check for $975 million. Why? Sue Ann Arnall, his former wife, rejected the check. Why? It seems that cashing the check would have a detrimental effect on her appeal. A that point, a wonderful tax issue popped up.

The tax issues are simple to spot. Is Hamm entitled to deduct the $975 million? First, does the amount constitute deductible alimony? Second, is the sending of a check that is rejected considered payment sufficient to support the deduction?

As for the first issue, it is difficult to determine from the facts if none, some, or all of the $995.5 constitutes deductible alimony. The payment was to be spread out over nine years. But that fact alone is not determinative. But in order to address the second issue, assume that at least some portion of the payment constitutes deductible alimony.

As for the second issue, it is generally understood that payment, for a cash-basis taxpayer, occurs when a check is mailed, even if it does not reach the other party until the following year. Does the other party’s refusal to accept the check mean that payment has not been made? Though there are cases dealing with the other side of the question, namely, whether the recipient has income if the check is rejected, I could not find much of anything on point considering the impact on the person delivering the check. So it becomes helpful to engage in a bit of reasoning.

For the recipient, rejection of the check does not prevent the receipt of income for tax purposes if the recipient is entitled to the payment. That is why, in the classic example, turning away from a paycheck in December in an attempt to move the income into the following year isn’t effective. On the other hand, if the employee arranges with the employer before the services are performed to prohibit the employer from making the payment until the following year, the income can be deferred. This suggests that the treatment of the person sending the check should reflect whether the person to whom the check is being sent is entitled to it. In the Hamm case, it appears that Arnall’s right to the check was dependent on how things turned out on appeal. It is possible that on appeal Hamm’s obligation could have been reduced or eliminated.

Another analogy can be found in the treatment of gifts for gift tax purposes. A gift tax is due on certain gifts. Suppose a person writes a check, notes “gift” on it, and mails it to someone who doesn’t want it. Surprising as it might be, accepting the gift could generate adverse tax or other consequences that the intended donee wants to avoid. The check is returned to the donor with a note of “thanks, but no thanks.” Is the donor obligated to pay a gift tax? No, because no gift has been made.

In many respects, the placing of the check in front of Arnall isn’t very different from making an offer during a negotiation. Surely, if Hamm had said, “How about if I pay you $975 million?” no deduction would be allowed. Making the offer more enticing by waving a check in front of her wouldn’t change that outcome. And putting it on the table in front of her, or in her mailbox, or in her purse does not change the outcome if she hands it back or rips it up.

Thus, if I were presented with this fact situation and asked to decide, I would conclude that no transfer had taken place, that accordingly no payment had been made and no alimony deduction would be allowed. On the other hand, Robert Wood, in this commentary suggests that Hamm’s “deduction sails through just fine.” That’s possible, but it doesn’t answer the question of whether it *should* sail through. Due to budget restrictions imposed by the Congress, all sorts of things sail through on tax returns, whether or not they should.

But, fortunately or unfortunately depending on one’s point of view, this fact situation no longer exists as a possible case. According to this report, Arnall changed her mind and cashed the check. That simply leaves the not very uncommon question of whether any part of the payment constitutes alimony. To the extent that it does, there is a deduction.

A few weeks ago, in A Tax Policy Turn-Around?, I wrote about how the income tax cuts for the wealthy backfired, causing the rich to get richer, the economy to stagnate, public services to falter, and the majority of Kansans to end up worse than they had been. I suggested that perhaps Republicans were beginning to realize that there are limits to tax cuts, and that tax cuts for consumers are more valuable than tax cuts for money stashers. But perhaps there’s another play in the Kansas Republican tax game plan.

Now comes a report that Kansas politicians are examining ways of “undoing” the tax cuts that caused so much damage. Of course, the easiest thing would be to return to tax law status as of the day before the cuts. In other words, undo the income tax cuts. But instead, proposals have been floated to eliminate sales tax and income tax exemptions, to increase alcohol and tobacco taxes, to raise sales taxes, to delay additional income tax cuts, and to make the trigger for even more income tax cuts more difficult to reach.

These proposals need to be split into two groups. One group, consisting of the last two proposals, simply addresses the need to prevent further damage. The other group, consisting of the first three proposals, addresses the need to undo the damage caused by the tax cuts that already went into effect.

The proposals in the first group make sense. If the first set of tax cuts for the wealthy created damage, there’s no point in piling on even more catastrophic economic outcomes. Of course, delaying additional cuts and increasing the trigger for even more cuts is the second-best approach. The best approach would be to remove from the statute any sort of risk that more tax cuts would be thrown into the economic mess.

The proposals in the second group are wicked. The burden of undoing foolish tax cuts for the wealthy would be imposed on the non-wealthy. It is common knowledge among those who study taxes that sales taxes and taxes on alcohol and tobacco are regressive, that is, they consume a higher percentage of income the lower the income. The sales and income tax exemptions under consideration appear to be those that benefit the middle class and lower-income class more than they benefit the wealthy.

In some respects, it’s a matter of timing. If a legislature announced that it was simultaneously reducing income taxes on the wealthy and increasing taxes that burden everyone else, more than enough people presumably would object. Instead, the tax cuts for the wealthy are accompanied by nominal tax cuts for everyone else, and then a few years later taxes that burden the non-wealthy are jacked up. Clever, but wicked. Is it a matter of time before we see the same stunt being pulled at the federal level?

In his latest column for the Philadelphia Inquirer, Joseph DiStefano reports that Mark Vitner, of Wells Fargo Securities L.L.C., tries to explain why there are fewer jobs in Pennsylvania in 2014 than there were in 2007. After describing the lost jobs, Vitner points out that, contrary to popular belief, all those Marcellus Shale don’t create all that many jobs, and that manufacturing employment has plummeted. What does Vitner propose? Tax breaks for “capital spending, improvement, research and development, and infrastructure spending.”

Would tax breaks work? Probably not. Like the economic benefits of shale gas, a good chunk of the economic benefits from these sorts of tax breaks would flow to investors outside the state. That’s if anyone went for the deal. Would tax breaks be enough to persuade businesses to locate in, and workers to seek jobs in, a state with a horrific transportation infrastructure? Businesses need good roads and bridges, and so do workers. Would tax breaks be enough to pay sufficient wages to workers so that they could avoid the crumbling school districts in the state? Would tax breaks be enough to bring the sort of weather, climate, and environmental quality that businesses and workers prefer? Probably not.

The state is in an economic mess because its imitation version of the federal cut-taxes-for-the-wealthy-and-cut-spending-for-the-common-good experiment similarly has failed. Unless the root causes of that failure are addressed, short-term tax breaks not only are unlikely to fix things, they are likely to make things worse.

According to a recent report, several Republican senators are considering an increase in the federal gas tax. Tempted by reductions in the price of gasoline, which would make the increase less noticeable and more palatable, they are paying attention to the fact that the highway transportation fund is underfunded by $100 billion, and the fact that the nation’s transportation infrastructure is falling apart, earning a D+ from the American Society of Civil Engineers.

Though I prefer implementation of a per-mile user fee, I am sufficiently aware of political realities and logistic issues to support a gasoline tax increase as the next best option. The anti-tax crowd may be shocked by the support of Republicans for a tax increase, but it isn’t rocket science to understand that there are costs to maintaining a highway system and those costs must be paid.

The surprise is that President Obama does not support an increase in the gasoline tax, though apparently he is “open to compromise.” He would pay for transportation infrastructure funding with the elimination of “unfair tax loopholes.” I disagree. If somehow the Congress could be persuaded to eliminate unfair tax loopholes, and I have my doubts it could or would do so, the revenue gains ought not be diverted to solving problems with a different tax system. The gasoline tax is, for all practical purposes, a user fee. Those who use the highway system ought to be the ones who pay for it.

Shocking as it may be to those readers who tell me that my positions are biased, this time around I support the Republican proposal to increase the gasoline tax. Of course, those few Republicans don’t speak for the large number of Republican members of Congress who will go down to the last bridge collapse obstructing any sort of tax increase no matter the circumstances. It would not shock me to see these Republican senators targeted by the extremist right-wing zealots during the next election cycle.

More than seven years ago, in Deconstructing Tax Myths, I shared a list of different types of taxes. In addition to the usual income taxes, sales taxes, property taxes, and cigarette taxes, there were inventory taxes, accounts receivable taxes, food license taxes, and an assortment of telephone taxes, to name but a few. But missing from that list was a tax that came to my attention only within the past few days, and only because I came across some news articles explaining that it was expiring sooner than expected.

Ten years ago, after Hurricane Charley saddled insurance companies with billions of dollars in damage claims that caused some companies to go under, the state of Florida enacted a 1.3 percent assessment on insurance policy premiums to fund the state’s catastrophe fund. Technically the Florida Catastrophe Fund Emergency Assessment, the imposition quickly became known as the hurricane tax. According to several reports, including this one and this one, the tax is being terminated a year sooner than planned, because the fund now is solvent.

All things considered, Floridians did well. A Pennsylvania tax on wine and liquor sales, enacted to provide revenue needed after the Johnstown Flood, remains in place, despite efforts to repeal it and despite the fact that full recovery from the effects of the flood was made decades ago.

According to some experts, another serious hurricane in Florida might require restoration of the hurricane tax. In the meantime, it should get added to the list. That list is one that will continue to grow.

Back in March, I reacted to a proposal by then gubernatorial candidate Tom Wolf to change the Pennsylvania income tax so that high-income individuals would pay at rates higher than those paid by middle-income individuals, who in turn would pay at rates higher than those imposed on low-income individuals. In Pennsylvania’s Ban on Graduated Income Taxes: Credits and Exemptions, I explained that the core question is how such a proposal could be implemented given that the Pennsylvania Constitution prohibits a graduated income tax. That same Constitution allows for an exemption applicable to poverty-level-income individuals, which has the effect of subjecting them to lower tax rates than apply to the other individual taxpayers. In that post, I asked, “Does it make a difference if the effect of a graduated income tax is accomplished through a credit rather than an exemption? If the answer is yes, then how difficult would it be to switch from the proposed exemption to a larger credit available to more individuals?” I concluded with these words: “And depending on who is elected in the fall, it should be an interesting tax legislation season as 2015 opens. Stay tuned.”

Candidate Tom Wolf is now governor-elect Tom Wolf, soon to be Governor Tom Wolf. So his proposal has not faded away as do most proposals by candidates who lose elections. His proposal is now front and center. Several days ago, Professor Anthony C. Infanti picked up on the issue, in a Philadelphia Inquirer opinion commentary entitled “Reform Pa.’s flat tax rate.” Prof. Infanti points out the same obstacle that I noted, namely, that the proposal runs up against the provision in the Pennsylvania Constitution prohibiting graduated income taxes and limiting the exemption to poverty-level-incomes. He suggests it is time to amend the state’s constitution to permit graduated income tax rates. I agree. Every other state with an income tax manages quite well with graduated rates, free of what Prof. Infanti calls the “excessively rigid uniformity requirement” of the Pennsylvania Constitution. The alternative, retaining one rate but amending the state’s constitution to permit a variety of scaled exemptions, which does get pretty much to the same result, is cumbersome and much more difficult to finely tune.

Of course, there will be opposition to the proposal. In order for the very small percentage of individual taxpayers who would incur higher taxes to persuade the majority of taxpayers who would benefit from the proposal to campaign against the proposal, they will need to deceive the majority with misleading claims. They will allege that the proposal would raise taxes on the middle class. They will allege that the only fair tax is a flat tax. They will allege that a flat tax is a simpler tax. Those are some of the tactics used at the federal level, with varying degrees of success, so I would expect to see the same tactics unveiled in Pennsylvania when the governor presents a tax reform plan to the legislature. If explained properly, Pennsylvania voters might get the chance to figure out who their friends in the legislature are and are not.

Readers of MauledAgain know that I prefer paying now for necessary transportation infrastructure repairs rather than paying later. Though it is easy to find people who advise postponing paying bills for as long as possible, there are two considerations that make that advice dangerous. First, there is the cost of accidents, injuries, death, and property damage caused by defective transportation infrastructure during the period between when the repairs should be made and when, if at all, they are made. Second, the cost of the repairs continues to increase while the work is delayed. I’ve made this point, that it is foolish to choose short-term tax benefits that will bring overwhelming long-term costs, in posts such as Liquid Fuels Tax Increases on the Table, You Get What You Vote For, Zap the Tax Zappers, Potholes: Poster Children for Why Tax Increases Save Money, When Tax and User Fee Increases are Cheaper, Yet Another Reason Taxes and User Fee Increases Are Cheaper, When Potholes Meet Privatization, When Tax Cuts Matter More Than Pothole Repair, and An Unanswered Tax Question for the Letter Writer.

Earlier this week, in A Tax Policy Turn-Around, I commented on the trend, in states controlled by the anti-tax crowd, of slowing down or halting tax cuts. I pointed out that it will take time for attitudes to shift. But there now is more evidence that people, or at least some people, are figuring out that the anti-tax crowd consists of a parade of Pied Pipers. They are beginning to figure out that although government and taxes might not be a good deal for the wealthy, it’s better for the 99 percent than is the unelected corporate governance machine that the wealthy are trying to substitute for democracy.

Yesterday, as described in this report, the wholesale gasoline tax in Pennsylvania increased by 9.8 cents; a comparable increase affected other liquid fuels. The money will be used to repair more than 80 bridges and more than 1,600 miles of roads. A spokesperson for the Department of Transportation pointed out the obvious: “[M]ost drivers . . . want their pavements smooth and their bridges in a state of good repair.” Though it is unclear how much of the increase will show up at the pump, if the entire increase is passed on to drivers, a person who drives 12,000 miles a year in a vehicle getting 24 miles per gallon will pay an additional $49. That’s quite a good deal, considering that the alternative is hundreds, perhaps even more than a thousand, dollars in repairs from hitting potholes or other road hazards. And compared to the cost of being on a bridge when it collapses, it’s a grand bargain.

What can a state legislature do when it needs money to fix its transportation infrastructure? There are all sorts of taxation choices, but Virginia’s legislature, as described in this report, decided that it would require out-of-state retailers to collect use taxes owed by Virginia residents under the existing use tax statutes. As I have explained in previous posts, such as How Difficult Is It to Understand Use Taxes?, and Apparently, It’s Rather Difficult to Understand Use Taxes, states ought not be compelling out-of-state retailers having no connection with the state to do their tax collection work. And absent authorization from the Congress, states are not permitted to do that. The Virginia legislature, however, confident that the Congress would enact pending legislation permitting states to force out-of-state retailers to do their collection work, decided to fund its transportation infrastructure repairs with the revenues it expected to collect once Congress permitted forcing out-of-state retailers to do the collection work.

But, as these stories go, Congress did not pass the pending legislation. The Virginia legislature, though, had included in its legislation an alternative revenue source in the event that the federal legislation was not enacted. There’s no indication how many legislators voted for this “backup tax plan” thinking that it was unlikely to happen. Under the backup plan, the tax on wholesale gasoline sales increase by 5 cents per gallon. Surely this will be passed on at the retail level.

Interestingly, one of the opponents in Congress to enactment of the federal legislation is from Virginia. He had told state officials that the federal legislation was controversial and had been batted around for years. He told them “it was foolish . . . to count on revenues from a bill that” had not become law, and that they “should not assume legislation would be enacted within their time frame.”

With gasoline prices dropping, motorists might not notice the 5-cent per gallon increase. On the other hand, there’s a good argument that motorists face a higher fuels tax because their fellow citizens are not paying use taxes that they ought to be paying. If Virginia needs revenue, why not enforce the existing use tax law? To the extent that it costs too much money to collect the use tax, the legislature ought to re-think the wisdom of relying on a tax structure, namely the sales and use tax system, that is difficult to administer, inefficient, and regressive. There are better alternatives. Imposing involuntary tax collection servitude on out-of-state retailers with no say in whether the tax exists, its rates, or the scope of items to which it applies is wrong. And relying on the hope that Congress will let states do that indeed is foolish. Counting chickens before they hatch is risky, whether on the farm, in the derivatives market, or during a tax policy session.

Readers of MauledAgain know that I do not subscribe to the theory that tax cuts for the wealthy will trickle down and improve the economic condition of everyone. What has happened with tax cuts for the wealthy is a downturn in the economic status of everyone but the wealthy, not only in terms of household income and household wealth, but also in terms of public goods and services, such as transportation infrastructure, education, and health services. Though I have focused for the most part on the federal income tax cuts for the wealthy, similar tax cuts were enacted in states under control of the same political party that brought us the federal tax cuts.

Among the states that jumped on the “tax cuts for the wealthy” bandwagon, encouraged by campaign contributions from the wealthy, was Kansas. The folks who were running Kansas, under the leadership of governor Sam Brownback, chopped taxes for the wealthy. What happened? The rich got richer. The Kansas economy stagnated. Public services were impaired. The people of Kansas woke up, realized they had been sold a pig in a poke, and almost voted Brownback out of office in a state that is overwhelmingly Republican.

Now comes news, in a report by Rachael Bade, that other Republican governors are taking heed. She explains that Ohio governor John Kasich is advancing a tax plan that protects “against revenue gaps.” The Republican governors of Wisconsin and Arizona are delaying their goal of axing the income tax. Republicans in Missouri, stymied in their attempts to match the Brownback tax cuts in Kansas, are expressing gratitude for having had their plans thwarted. Republicans in Georgia and Iowa are moving much more slowly than planned in their respective attempts to gut state income taxes.

In Indiana, the senate majority leader is calling the experience “a cautionary tale on a national scale.” He then makes a statement similar to what I have been writing as I cautioned against these reckless tax cuts: “ We all like low taxes … but we have to ensure the stability of a revenue stream to provide basic services that our citizens expect.”

For the moment, Republicans have not abandoned the supply-side nonsense advocated by Arthur Laffer, the instigator who sold Republicans on the disproven theory that cutting revenue will increase revenue. Instead, they are talking about slowing down the speed with which cuts are adopted, shrinking the size of the cuts, and backing away from promising that tax cuts will solve problems. In Kansas, Republicans admit that they may need to undo at least some of the tax cuts. Ohio’s governor, for example, will not produce a plan that assumes revenue growth generated by tax cuts for the wealthy. One Republican was unwilling to admit that “the Laffer theory is disproven,” but then confessed that in his state “revenue numbers aren’t as robust as we need.” No kidding. Another Republican advised his colleagues to warn voters that “not all tax cuts pay for themselves.” No kidding. It’s fun to watch themes, warnings, and words from MauledAgain pop up in the mouths of the tax-cut fans. Unfortunately, some Republicans are still talking about the wealthy as being “job creators” even though it is now more widely understood that what creates jobs is demand from consumers, who far outnumber the handful of wealthy getting tax cuts.

One device that some Republicans are considering is a trigger mechanism that stops planned tax cuts if revenues fall short. I like that idea. I think it ought to go further. I think that tax cuts should be returnable, that is, if the jobs don’t appear, the people who promised to create jobs, or who paid politicians to make that promise for them, should pay a penalty in the form of the previously received tax cuts plus interest.

It’s true that Republicans haven’t yet reversed course. It takes time to make a U-turn. But it seems Republicans are slowing down the tax cut bandwagon and are changing its course. Even if it doesn’t do a one-eighty, perhaps Republicans will realize that the best way to create jobs and fuel the economy is to cut taxes for consumers, very few of whom are beneficiaries of tax cuts for the wealthy.

It’s all a matter of practical politics. If a Republican tax-cutter can barely squeak by in a re-election campaign in one of the most Republican states in the country, what will happen to his counterparts in states that are barely Republican? The writing on the wall has been read, at least by the members of the party who still have their wits about them and aren’t running around the country spewing forth idiotic economic theories and bizarre social concepts. Tax policy: never a dull moment.

However this story turns out, it seems absurd that a member of Congress who pleads guilty to tax evasion would not immediately resign. Even if Representative Michael Grimm eventually gives in to the calls for his resignation or is removed in some way from holding office, his failure to step down as part of the plea is an affront to hard-working Americans who do their best to comply with the tax law. To remain in office is equivalent to sitting on a local township board of supervisors that enacts ordinances placing stop signs at certain intersections, and then driving through them without stopping. If the lawmaker is unwilling to comply with the law, how can the lawmaker expect anyone to refrain from being a lawbreaker? Oh, wait, perhaps that’s the game. If a member of a legislature does not like a law, and fails to persuade enough of the other legislators to repeal it, then simply break the law and encourage others to do the same. That’s an exaltation of de facto legislation trumping de jure legislation, which is a terrible aspect of people, especially politicians and their masters, putting themselves above the law.

The crime to which Grimm pled guilty carries a sentence of up to three years in prison. How can Grimm carry out the duties of his office if he is sitting in a prison? As an aside, why is his sentencing delayed until June 8? Does it take almost half a year to decide what should be done?

Grimm claims that the charges are “trumped up”. He was charged with hiding income from a business. Has he offered evidence that all of the income was properly reported? Surely if that’s the case he would have a wonderful opportunity to make fools of the prosecutors who brought the case. That he hasn’t is no surprise, for a public “servant” who has threatened reporters and has a long list of other criminal charges pending against him. Yet somehow, this guy was re-elected. What message does that send about law, society, and civilization?

I’m torn between being pleased and being disgusted. The confusion was sparked by a report I heard several mornings ago on the local news station, though I cannot find an online version of the report. That disconnect between what a radio station airs and what it puts online is a topic for another time and another blog, though not mine.

Why would I be pleased? The gist of the report was advice to people who sell things on eBay. The advice was good. The reporter explained that if a person sells something on eBay for more than they paid for the item, the difference is a profit that is subject to income tax. The reporter also explained that most of the things people sell that have been piling up in their garages don’t generate profits, and thus don’t trigger income tax issues, because these people generally sell the items for less than they paid for them. The reporter also noted that if a person receives money for performing services advertised on eBay, or any other website for that matter, the money is subject to income tax. I’m pleased because at least someone has picked up on the message I shared almost ten years ago, in The First Ten Tax Urban Legends.

Why would I be disgusted? Well, the reporter started the story with an example of something that has been sold, or was being sold, on eBay. According to the reporter, and I found several stories, including this one, someone scooped up vomit from a roadside after someone named Harry Styles unloaded the contents of his stomach, and then put it for sale. I confess I don’t know who Harry Styles is, or at least I didn’t until I did some research for this blog post, but the idea of scooping up someone’s vomit, let alone engaging in the packaging and shipping integral to selling it, turns my stomach. Turns out he is a singer, songwriter, and member of a boy band. Someone somewhere is going to discover that their child has invested in a pop star’s vomit. Maybe civilization indeed is heading into the cosmic toilet bowl.

Thankfully, I’m past the point in my career where I would try to impress the tax world by writing a law review article on The Taxation of Vomit Sales. I wouldn’t even dare to make it an exam question, even though there’s a point to be made that the income tax in its present condition is enough to make people sick to their stomachs.

It could have been worse. At least I wasn’t eating a meal when the report came on the radio.

The governor-elect of Pennsylvania included in his campaign platform a promise to seek imposition of a severance tax on the energy companies producing natural gas in Pennsylvania. Not surprisingly, as reported in this story, those companies have fired back, claiming that an extraction tax “would harm the state’s economy” and have “a crippling effect on jobs.” Using a line offered by every industry opposing a tax, a spokesperson argued that the governor-elect’s plan “threatens to stifle energy production and the jobs that go with it.” This claim is shopworn and disproven.

Consider that every other state in which gas companies are extracting natural gas has a severance tax. The companies continue to do business in those states, continue to retain and hire workers in those states, and continue to thrive. They are doing so well that they are contributing to the decline in oil prices and the reduction of funds flowing to non-domestic oil producers.

The governor-elect’s plan includes removal of the makeshift impact fee imposed on the gas companies. Thus, the amount in question is not the full amount of revenue expected to be raised by the proposed severance tax but a net amount, taking into account the impact fees that no longer would be paid.

And what would happen with the revenues from the severance tax? Consider the possibilities, which are not mutually exclusive. It could be used to pay for infrastructure repair and improvements required by the consequences of extracting and transporting natural gas, such as road and bridge deterioration and environmental destruction. Doing so would create thousands of jobs in a variety of industries. Those workers would in turn pay taxes on their salaries, and the businesses from whom they would purchase goods and services would also pay taxes on their profits. The benefits would multiply. The revenue could be used to reduce other taxes, which would permit those taxpayers to purchase goods and services, in turn generating more sales tax and income tax revenues.

There is work that needs to be done, and it won’t get done if no one pays for that work. To the extent that the gas companies contribute to the need for that work to be done, jobs aren’t created when the bulk of the revenue is transported out of state. There may be arguments focusing on the appropriate severance tax rate, requiring analysis of the environmental and infrastructure costs triggered by gas extraction. If the gas companies have work that needs to be done, they will continue to hire and retain employees to do that work.

One of my favorite examples of tax misinformation is the persistent claim that the Internal Revenue Code is a gargantuan multi-million word compilation that fills thousands of pages. Though the tax code surely is a monstrous thing, the monstrosity arises from the content. It doesn’t take very many words to generate misguided content.

My first foray into the “size of the tax code” issue occurred more than ten years ago in Bush Pages Through the Tax Code?. I revisited the issue many times, starting with Anyone Want to Count the Words in the Internal Revenue Code?, and continuing with 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, Tax Ignorance Gone Viral, Weighing the Size of the Internal Revenue Code, Reader Weighs In on Weighing the Code, Code-Size Ignorance Knows No Boundaries, Code-Sized Ignorance Discussion Also Is Growing, and The Scary Specter of Code Size Ignorance.

Several days ago, I came across the wonderfully titled 20 Really Stupid Things In The U.S. Tax Code. Although the author points out a variety of tax law provisions and their impacts that truly are stupid, the claim that the Code is “now over 4 million words, 9,000 bloated pages” goes too far. As I explained in Anyone Want to Count the Words in the Internal Revenue Code?, the Internal Revenue Code consists of roughly 2,000 pages and approximately 400,000 words. Sitting behind me is a two-volume edition of the Code, which contains not only the actual Code but also legislative history and non-codified amendments. Of the 5300 pages in the two volumes, more than half consists of material that is not part of the Code (but that is included because it was at one time part of the Code or explains how or why something in the Code was added or how or why something that had been in the Code was removed.

What’s really stupid about the Internal Revenue Code is that most of what is in it need not be in it. But even after removing the junk, it won’t become the 27-page version that existed in 1913. The economy, business transactions, and financial activities are far more complicated than they were a century ago.

Last weekend a news story revealed the results of a poll of New Jersey residents. Asked for a reaction to increased fuel taxes to pay for repair of deteriorating transportation infrastructure and improvements to highways and bridges, 58 percent replied in the negative. One respondent stated, “We don’t need it.” It’s unclear whether this person was using the singular pronoun it to refer to taxes in the plural, or to the notion of transportation repairs and improvements. No matter which of the two choices was the person’s intent, the respondent is wrong.

As I pointed out late last month, in An Unanswered Tax Question for the Letter Writer, and in previous posts, including Liquid Fuels Tax Increases on the Table, You Get What You Vote For, Zap the Tax Zappers, Potholes: Poster Children for Why Tax Increases Save Money, When Tax and User Fee Increases are Cheaper, Yet Another Reason Taxes and User Fee Increases Are Cheaper, When Potholes Meet Privatization, and When Tax Cuts Matter More Than Pothole Repair, the nation’s transportation system is falling apart, and the cost of doing too little or nothing far exceeds, in economic terms, the cost of paying for what we use. Toss in the emotional cost of the deaths and injuries caused by collapsing bridges and broken roads, and the foolishness of letting the nation crumble is readily apparent. Of course, the costs would have been lower had we not postponed, year after year, necessary maintenance, and I wonder how many people who object to fixing the mess were part of the problem that created the mess, by holding firm to the “pay nothing to get whatever you want” mentality that they are quick to criticize when allegedly demonstrated by others but that they cannot see when they look in the mirror.

There once was a commercial with the tag line, “You can pay me now, or pay me later.” Slightly revised, it can apply to the infrastructure taxation issue. You can pay $50 now, or pay $500 later. Worse, for some unfortunate people, it can be revised yet again. You can pay $50 now, or you can pay later, with your life or limb.

Yes, respondent, we do need it, and it. We need infrastructure repairs and we need to pay for them.

For as long as I can remember, I wanted to be an educator, and for many years, I have been one. People ask me why. My answer is simple. Something deep inside me is annoyed, frustrated, disappointed, and even angry when I observe ignorance, or worse, the effects of ignorance. Ignorance kills. Ignorance leads to bad decisions. Ignorance generates nothing valuable. The notion that ignorance is bliss is a distraction created by those who benefit from someone else’s ignorance in the short-term, too ignorant to understand what will happen in the long-term.

Readers of this blog know that no small portion of my posts address tax ignorance. Considering how tax issues are entangled in the roots of civilization, tax ignorance poses a threat to societal success. It’s not just tax ignorance, of course, that threatens everyone, including the liberty claimed by so many who wallow in ignorance of what liberty costs. Ignorance is fertilized by a deteriorating education system, a biased media, and the deliberate and unwitting circulation of lies and stupidities by political operatives and naïve citizens.

The evidence of this growing danger to the republic popped up recently in the results of a survey conducted by Bloomberg Politics with respect to the federal budget deficit. When asked whether the annual deficit was growing, shrinking, or remaining the same, 73 percent said it was growing, up from 62 percent who selected that response two years ago. On the other hand, whereas two years ago 6 percent said it was shrinking, in the recent poll 21 percent gave that response. The correct answer, of course, to those who pay attention, is that the annual federal budget deficit has been shrinking.

So why do so many Americans give the wrong answer? It’s simple. Those who benefit from stirring up visions of financial collapse, runaway deficits, and hordes of lazy people grabbing entitlements have been peppering this nation with erroneous information, yes, propaganda, ever since the nation sent the architects of the 2007-2008 financial mess a ballot message. I suppose if you can’t win control of the nation by doing something productive, the next best thing is to lie one’s way into office with the assistance of the big money machines. Those machines, by the way, contribute far more to the federal budget deficit than do the people trying to eke out a living and feed their children.

And what is the ultimate goal? Here’s an example. How about letting multi-employer pension plans cut benefits to existing retirees? That’s what Congress is about to enact. Why? They claim spending needs to be cut. I wonder how many retirees facing a cut in their benefits will be angry, and I wonder how many will admit to having voted for those who are doing this to them. I wonder how many did research. I wonder how many were so beholden to some theoretical issue or some biased perspective that they ended up cutting off their noses to spite their faces.

As I’ve said, one gets what one votes for. Ignorance makes it far more likely that what one gets isn’t what one thought one was going to get, because when a person votes for what they think they’re getting but it isn’t what it appears to be, they’re a victim of the ignorance campaign. The unfortunate aspect of this tragedy is that ignorance is easy to defeat. Education, remembering that education isn’t what you hear at the corner bar, read on facebook, or hear when the politicians issue their talking points. To paraphrase my parents, God gave us brains and expects us to use them.

There’s something not quite right in the collective psyche of the anti-government-spending crowd. Enraged by high taxes, they manage to put into office, and keep in office, people who dish out tax revenues as though there were no limits on taxation. Of course, the tax breaks go to those who are in least need of economic assistance. Their excuse, that they will use the tax breaks to help those in need, is hilarious, because the best way to help those in need is to direct assistance directly to them so that they can infuse those dollars into the economy. That makes the economy grow. Handing tax dollars to those who don’t need financial assistance is nothing more than helping some people grow their Swiss bank stash.

An excellent example of this flawed approach to taxation and governance exists in New Jersey. In When the Poor Need Help, Give Tax Dollars to the Rich, I criticized the decision by New Jersey’s Governor Christie to dish out tax credits to the Philadelphia 76ers in return for the team moving its practice facility to Camden. The state claimed that by giving away $82 million over 10 years it would get back $77 million over 35 years. That doesn’t add up, except for the private sector corporations and wealthy individuals who pocket the difference, which surely is much more than it appears to be. Why? Although these sorts of giveaways to the wealthy are defended by claims of job creation, the fact of the matter is that they simply move jobs from one state to another. In some cases, such as the 76ers, employees simply go to a new work location. In other cases, for every unemployed person who ends up with a job, someone, somewhere, finds himself or herself on the unemployment line.

Then, a few months later, in Fighting Over Pie or Baking Pie?, I criticized Christie’s decision to hand over more than $100 million in tax breaks to Lockheed Martin, which would transfer some employees from their current location to Camden, and to fork over $260 million to Holtec International. Again, the claim that somehow this money will find its way to those truly in need is seen for what it really is once it is understood that from the perspective of the taxpayer, this is a zero-sum game. In the end, whatever new jobs are created in Camden are offset by jobs lost elsewhere, either in New Jersey or in another state. For the nation, it amounts to a fight over pie rather than the baking of additional pies. The only folks who can play this game are those with enough spare cash to hand over huge campaign contributions to the “anti-spending” politicians who say one thing and do another.

And now comes news that yet another huge corporation is jumping on the tax break giveaway bandwagon. Subaru will get $118 million in tax breaks for moving its headquarters from Cherry Hill, New Jersey, to Camden, New Jersey. So how many Camden residents, almost all of whom are poor or destitute, will get jobs at that headquarters? I daresay none. I disagree with the false hope of the Camden city councilman who said, “There’s more jobs, hopefully, for our city residents.” What new jobs? Subaru employees are moving from one building to another. Some Subaru employees might have a slightly longer, or perhaps slightly shorter, commute. The employees working at the headquarters will stop at the same convenience store in the morning to get their coffee, and go to the same restaurants in the evening for dinner. Even their favorite lunchtime spots, if they dine out-of-office, will continue to get their patronage.

In the meantime, the residents of Camden continue to struggle. They continue to listen to proposals to cut their benefits, cut education spending, and cut job training spending. They hear themselves being called takers, selfish people claiming entitlements. They are criticized because they are deemed to be responsible for what is considered by some to be excessive government spending. And now they get to watch the state government toss tax revenue at an increasingly profitable private corporation so that it can build a building that none of them stand much of a chance of entering, let alone finding a job in it.

In recent years, in part because of economic conditions, an increasing number of people have turned to do-it-yourself projects. If the do-it-yourselfer has the skills and the time, there is much to be said in favor of taking this approach. Aside from money issues, there is, at least for some people, the satisfaction of having accomplished something, whether it is cleaning the gutters, building a garage, fixing a leaking toilet, or replacing windows. But sometimes, doing it yourself can be dangerous.

When I teach the basic tax course and the basic wills and trusts course, I warn students that there will be clients who bring them difficult issues because someone else decided to write their own will or do their own tax planning and created a mess. It is, I explain, more difficult to clean up a mess than it is to prevent the mess in the first place. But, I caution, they won’t always have the chance to help the client prevent the mess.

The example I use, half in jest and half seriously, is the idea of doing what I call a “self appendectomy.” Students usually react in horror. Then I tell them, “Self surgery happened.” I tell them about the boater who, with help from a physician via email, operated on himself. In looking for that link, I discovered that auto-surgery, though not a common event, has happened over the centuries. If you are curious, check out this list. I’ll leave the medical expense deduction questions to those looking for examination questions to pose to their students.

Now comes news, in the 2014 Office of Professional Responsibility Report, that suggests do-it-yourself tax preparation might not be that bad of an idea. According to the report:

The Government Accountability Office (GAO) addressed tax preparer competency in a recent report, GAO-14-467T, to the Senate Finance Committee. In its report, the GAO noted that 45 percent of preparers were subject to regulation by the IRS because they were attorneys, certified public accountants or enrolled agents, while 55 percent were subject to no regulation. It conducted site visits to 19 preparers and found that only two calculated the correct tax refund for its sample return. Although this is a small sample, GAO also found that some preparers did not even prepare the correct type of return.

The GAO concluded that its findings in this study are consistent with the results of GAO’s analysis of IRS’ National Research Program (NRP) database from tax years 2006 through 2009, which showed that both individuals and preparers make errors on tax returns. Most surprising, even startling, is that tax returns prepared by preparers had a higher estimated percent of errors—60 percent—than self-prepared returns—50 percent.

I confess that I would not have guessed that individuals doing their own tax returns make fewer errors than do tax return preparers. That’s just not what I would have expected.

More study would be helpful. Are the error rates among tax return preparers the same across the board, or do they vary depending on the preparer’s training and affiliation? How many individuals do their own taxes because they had a previous unfavorable experience with a tax return preparer? Are the types of errors the same? Do they involve the same issues or different issues? How many of the errors reflect fraud? Question, questions, questions. These present research projects for tax students looking for something to study as they prepare their theses or dissertations, and for tax faculty who need something about which to write. No, not me. I have other things to do. Yes, I have a list of do-it-yourself projects, including tax tasks.

Readers of this blog know that I am not a fan of permitting states to impose on out-of-state retailers the burden of collecting use taxes that are owed by residents. As this issue has resurfaced and taken center stage, I again tried to focus attention on what the issues actually are. Several weeks ago in How Difficult Is It to Understand Use Taxes?, and last week, in Apparently, It’s Rather Difficult to Understand Use Taxes, I explained that the issue does not involve sales taxes, does not involve new taxes, and exists beyond the confines of the internet. The solution, I propose, is for states to compensate out-of-state retailers for acting as tax collectors if those retailers choose to do so.

Thus, it was annoying to read the headline on the latest missive from the Institute for Policy Innovation. The commentary is headlined To Grow The Economy, Reject New Internet Taxes. Surely this is designed to strike an emotional chord in the vast majority of people who don’t like taxes. But the taxes are not new. Not by a long shot, as I have explained.

The disappointment is that the IPI makes good arguments. It points out the Constitutional impediments to requiring an out-of-state retailer with no contacts with a state to collect taxes for that state. It describes the administrative burdens of trying to comply with the use tax requirements of thousands of taxing jurisdictions. It draws attention to the fact that individual out-of-state retailers cannot vote in those other states. But those arguments are overshadowed by the reality of the issue.

What the commentary misses is that states willing to make an effort to collect use taxes can do so now no matter what the Congress does. Some states have been increasing their attempts, but generally enforcement of the existing tax is lax. Thus, painting this issue as a “new tax” issue distracts from a stronger argument that is more likely to bring support to the position that IPI advocates.

Imagine the reaction if the headline was Congress Ready to Let States Force Non-Resident Business Do Their Tax Collection Work. Would this spotlight on forced labor not bring the same sort of reaction that would be generated if a state tried to get nonresidents to shovel its sidewalks or collect its residents’ trash? That’s what this issue involves, and putting the spotlight on it would make it easier to squash this “do our work for us” mentality.

A recent Tax Court decision illustrates how tax law intrudes on what otherwise would appear to be the simplest of things. Imagine owning a rental vacation home. Imagine renting the vacation home to your brother or sister use the home for seven days. That’s a nice thing to do. For the family. But it’s not a nice thing to do for one’s tax situation.

The outcome in Van Malssen v. Comr. provides a road map for a journey taxpayers ought not to take. The taxpayers owned a vacation condominium, which needed some work. Focusing on 2008, the year in which the taxpayers permitted the husband’s brother to use the unit, the husband spent 81 days at the condominium, using 67 of those days to do repairs and maintenance, and the other 14 for personal purposes. The taxpayers rented the unit for 10 days to unrelated parties. The taxpayers claimed losses on their income tax return, reflecting the excess of rental deductions over gross rental income. The IRS disallowed the deductions to the extent they exceeded the gross income, taking the position that section 280A applied because the taxpayers used the residence for more than 14 days.

There is no question that days used by the taxpayer to do repairs and maintenance do not count as personal use days in determining whether the taxpayer used the dwelling unit as a residence. But there also is no question that personal use by members of the taxpayers family, which for this purposes includes siblings, is treated as personal use by the taxpayer, unless the family member pays fair rental and uses the dwelling unit as a principal residence. In this case, the dwelling unit was not the brother’s principal residence. Thus, the seven days of use by the brother are counted as personal use. This, along with the recharacterization of several of the travel days as personal use days, bringing the total to 24, which in turn triggers the limitation of section 280A(c)(5), essentially disallowing the rental deductions that exceed the rental gross income.

The lesson is simple. Taxpayers who are trying to avoid the rental deduction limitations must make certain that the days of personal use do not exceed the greater of 14 days or ten percent of fair rental days. The example I used when teaching the basic federal income tax class was the family that rented out the vacation home for 120 days during the summer, used it for 14 days, and then discovers that one of the older teenagers in the family used the property for a party during the fall, pushing the personal use total over the limit. The idea of thinking “What will this do to my tax situation?” when deciding whether to let a family member use the property, even if charged rent, surely strikes most people as silly, considering that most people would not even think of thinking about the tax aspect. As I told my students, after taking the Torts course, law students find themselves thinking differently as they work their way through the normal activities of life. The same can be said for other areas of the law, and those versed in taxation often let that “What will this do to my tax situation?” question run through their minds. But imagine the reaction when you say, “I can’t rent the vacation home to you because of tax constraints.” Most people will think you are making up an excuse for not being nice.

One thing that I do not understand about this case is the lack of any reference to section 280A(g). That provision requires excluding all rental income from gross income and disallowing all rental deductions other than those allowable in any event such as mortgage interest and real estate taxes if the “dwelling unit is used during the taxable year by the taxpayer as a residence and such dwelling unit is actually rented for less than 15 days during the taxable year.” In this case, for 2008, the taxpayer used the unit as a residence because the 24 days of personal use exceeded the limits. It was rented for 10 days. The brother’s days of use were treated as personal use days. The opinion does not mention this issue. My guess is that the parties did not raise it. Would it have made a difference? At first glance, it might appear that it would not. The bottom line of zero rental gross income and zero rental deductions is the same as the bottom line of rental deductions limited to, and thus equal to, rental gross income. But at second glance, the disallowed deductions are carried over to the following year, whereas there is nothing to carry over if section 280A(g) applies.