MauledAgain

A reader sent me a link to a Hallmark e-card that you might want to share with your family, friends, colleagues, and clients. Or not.

I confess. I laughed and laughed. And replayed it several times.

The reader began his email, “Since tax day is rapidly approaching . . .” Indeed, it is. Some of us are finished with our tax returns. Some of us managed to finish without screaming. But there are others, who scream.

Perhaps the next tax scream card will be a card for taxpayers who are being audited.

Many people dislike paying taxes. Some people dislike, or even fear, the prospect of sitting through and taking an exam in a tax course. Very many people dislike preparing and filing tax returns.

How badly do people dislike tax return preparation? According to a WalletHub Survey, the list of things Americans would rather do than prepare tax returns demonstrates the extent to which tax return preparation is disliked, and in many instances postponed until the last minute. Of those surveyed, 77 percent would rather do laundry, 60 percent would rather mow the lawn, 48 percent would rather teach their children budgeting, 47 percent would rather cook Thanksgiving dinner for their in-laws, 43 percent would rather change a baby’s diapers, 23 percent would rather miss a connecting flight, 13 percent would rather spend a night in jail, and 8 percent would rather have their arm broken. My connection with tax is undeniable, because I’d rather do tax return preparation than doing laundry, mowing the lawn, breaking an arm, or spending a night in jail.

Asked what they would do for a “tax-free future,” 27 percent would accept an “IRS” tattoo on their body in exchange for future freedom from tax return preparation and filing. Another 11 percent would clean toilets at Chipotle. Ten percent would be willing to stop talking for a month. Four percent would be willing to kill someone. That’s far more frightening that taxation.

When asked what the fear most about tax returns, 36 percent feared making math errors, 26 percent feared identity theft, 19 percent feared getting audited, and 19 percent feared not having enough money to pay tax due. The fear of math errors should be alleviated by tax return preparation and other software. The risk of being audited is so low that very few need worry. The big risk is identity theft, and that is an issue that should concern, if not disturb, everyone. It’s widespread, and yet to be sufficiently suppressed.

The survey did reveal a bright side to the agonies of taxation. Even though almost 90 percent are dissatisfied with the IRS, and even though almost 60 percent think their taxes are too high, only 19 percent would hide money offshore even if they were guaranteed that they would not be caught. I would have guessed an outcome higher than that. I’m pleasantly surprised.

And, no, this is not an April Fool's Day joke. It's very real. I'll let others offer their April Fool's tax stunts.

When I was teaching the basic tax course, at the beginning of almost every semester during which the course was offered, at least one student would come to my office, seeking advice and help because they dreaded the thought of taking the tax course. No, they weren’t afraid of being bored to death. They feared “math,” and explained that they “were no good with numbers.” Some were near tears, and a few shed some. I explained to them, as I explained to the entire class on the first day, that every student had dealt with numbers since they were very young. I pointed out their use of telephone numbers, addresses, birthdays, zip codes, test scores, asking for allowances, telling time, and noticing speed limits. By the end of the semester, they realized that “math” did not dominate the course, nor does it overshadow the language, logic, and policy issues that permeate taxation.

There is another fear of tax that extends far beyond enrollment in a tax course. And that is the fear of the IRS, or, more specifically, the fear of being audited by the IRS. It is a very real fear for those whom it afflicts. I have known people, some very educated, who almost trembled at the thought of having to interact with the IRS, particularly during an audit.

Now comes a report on a NerdWallet survey that asked people about their tax fears. Roughly 70 percent of taxpayers are concerned about making a mistake, paying too much, or not getting the biggest possible refund. But concern is not fear. Concern does not paralyze the brain and the body. Concern simply encourages greater care, deeper thought, and one more review.

So how many taxpayers fear the audit? According to the survey, only 11 percent. Another survey generated a similar outcome, slightly higher at 14 percent. To put this in perspective, the report reveals that Americans have other fears that are more widespread. One-third fear reptiles. Twenty-eight percent dread public speaking. Twenty-two percent are afraid of death. And almost as many people, 8.5 percent, fear zombies as fear IRS audits. The extent to which these fears overlap wasn’t evident.

So why is the number of people fearing IRS audits so much smaller than one would guess after interacting with people? The report suggests it is because many taxpayers do not have the opportunity to do the things that are more likely to trigger audits. Slightly more than two-thirds of taxpayers claim the standard deduction, and thus have no itemized deductions to be audited. Most taxpayers generate income that is reported on Form W-2 or Form 1099. Increasing numbers of taxpayers have their returns prepared by tax professionals, and accordingly perceive reduced chances of their returns containing errors that would catch the attention of the IRS. Many tax return preparers offer audit protection, usually for an additional charge, and some offer other audit assistance promises.

But the biggest reason for the low percentage of taxpayers fearing IRS audits is the fact that the IRS is performing fewer and fewer audits as the years go by, thanks to reduced funding by the Congress. The overall audit rate is 0.84 percent, which is less than one in a hundred. Even taxpayers with income of $10,000,000 or more are audited only at a rate of 16.22 percent, and most taxpayers aren’t in that economic ballpark. For most taxpayers, whose income is in the $25,000 to $1000,000 range, the audit rate is 0.5 percent, or one in two hundred.

But fear, of course, is not logical. If a one in two hundred chance of being audited explains an audit fear rate of 11 percent, then why do 8.5 percent of Americans fear zombies? The answer, of course, is that fear is emotional. What triggers someone’s emotions, whether positive like elation or negative like fear, varies from person to person. And, because fear is irrational, in the end, there’s no explaining it.

A recent Tax Court decision, El v. Comr., 144 T.C. No. 9 (2016), presented an issue of first impression, specifically, whether section 7491(c) shifts the burden of production to the IRS when it asserts that the taxpayer owes the section 72(t) 10-percent additional tax. The Tax Court held that the answer is no. The Court’s analysis is an excellent lesson in statutory interpretation similar to what I have tried to help students in the introductory tax course learn.

The facts of the case, as they relate to this issue, are simple. The qualified plan in which the taxpayer was a participant made loans to the taxpayer, of which $2,802 was taxable. The plan issued a Form 1099-R to the taxpayer reporting a taxable distribution of $2,802. The taxpayer did not file a federal income tax return for the year in question. The Tax Court concluded, based in part on the taxpayer not disputing these facts, that the $2,802 was includible in the taxpayer’s gross income.

The IRS determined that the section 72(t) 10-percent additional tax applied. The IRS argued that section 7491(c) did not impose on it the initial burden of production with respect to the section 72(t) additional tax. It presented two reasons. First, the section 72(t) tax is an “additional tax” and not a “penalty, addition to tax, or additional amount.” Second, because the issue was whether the taxpayer qualified for any of the exceptions to the section 72(t) tax listed in section 72(t)(2), even if the section 72(t) tax is an “additional amount” for purposes of section 7491(c), the burden of production with respect to statutory exceptions should be on the petitioner. Because the Tax Court disposed of the issue by focusing on the first reason, it did not address the second.

Section 7491(c) provides, “Penalties.--Notwithstanding any other provision of this title, the Secretary shall have the burden of production in any court proceeding with respect to the liability of any individual for any penalty, addition to tax, or additional amount imposed by this title.” The Tax Court noted that the terms “penalty, addition to tax, or additional amount” mirror, in part, the title of chapter 68 of the Code, which is “Additions to the Tax, Additional Amounts, and Assessable Penalties.” According to the Tax Court, what these terms have in common is that they refer to amounts that are assessed and collected as taxes but are not themselves taxes or surtaxes. The Court had previously held, in Pen Coal Corp. v. Comr., 107 T.C. 249, 258 (1996), that Congress used the phrase “any additional amount, or any addition to the tax” in section 6214(a) to ensure an understanding that the Court’s jurisdiction encompasses items that are to be assessed, collected, and paid in the same manner as taxes, including the additions to tax and other additional amounts not labeled as “additions to tax” described in chapter 68.

The Tax Court concluded that the section 72(t) additional tax is a “tax” and not a tax is a “tax” and not a “penalty, addition to tax, or additional amount” within the meaning of section 7491(c). It provided three reasons. First, section 72(t) calls the exaction that it imposes a “tax” and not a “penalty”, “addition to tax”, or “additional amount”. Second, several Code provisions, such as section 26(b)(2), 401(k)(8)(D), (m)(7)(A), 414(w)(1)(B), and 877A(g)(6), expressly refer to the section 72(t) additional tax by using the unmodified term “tax”. Third, section 72(t) is in subtitle A, chapter 1 of the Code, with subtitle A bearing the descriptive title “Income Taxes”, chapter 1 bearing the descriptive title “Normal Taxes and Surtaxes,” chapter 1 providing for several income taxes, and additional income taxes being provided for elsewhere in subtitle A, whereas, in contrast, most penalties and additions to tax are in subtitle F, chapter 68 of the Code. The Tax Court noted that in Ross v. Commissioner, T.C. Memo. 1995-599, it had relied on some of the same reasons in holding that the section 72(t) additional tax is a tax and not a penalty for purposes of section 6013(d)(3). The court also pointed out that its construction of section 72(t) is consistent with its legislative history, which indicates that section 72(t) was enacted to “impose an additional income tax on early withdrawals” to discourage early withdrawals from retirement accounts for nonretirement purposes and, in the event of such early withdrawals, to recapture a measure of the tax benefits provided. The court acknowledged that although section. 7806(b) provides that “[n]o inference, implication, or presumption of legislative construction shall be drawn or made by reason of the location or grouping of any particular section or provision or portion of” the Code and that “descriptive matter relating to the contents of * * * [the Code cannot] be given any legal effect”, it had previously held, in Corbalis v. Commissioner, 142 T.C. 46 (2014), that it is permitted to consider the similarity of terms and provisions within the Code, as well as any descriptive matter, as an aid to interpretation.

Thus, because the section 72(t) additional tax is a “tax” and not a “penalty, addition to tax, or additional amount” within the meaning of section 7491(c), the burden of production with respect to the additional tax remained on the taxpayer. Because the taxpayer failed to introduce any credible evidence showing that he was not liable for the section 72(t) additional tax on the distribution from the qualified plan, the Tax Court sustained the IRS determination on this issue.

It’s easy to put all wealthy individuals into one tax policy basket, accusing them of wanting nothing but lower taxes. But as I have pointed out from time to time, not all wealthy individuals support the never-ending cry for reduced taxes on the wealthy. There are rational, sensible tax policy voices among those in the highest income and wealth brackets, but those voices are drowned out by the cacophony of those who remain wedded to the discredited supply-side tax philosophy.

Now comes news that almost four dozen millionaires in New York have advised New York governor Andrew Cuomo that the people of New York would be best served by an increase in the state income tax rate applicable to incomes over $2 million. The plan getting most attention would raise the top rate for incomes between $2 million and $10 million from 8.82 percent to 9.35 percent, for incomes between $10 million and $100 million to 9.65 percent, and in excess of $100 million to 9.99 percent. For a person with annual income of $5 million, the increase in the state income tax bill would be roughly $25,000.

What motivates these millionaires is the realization that, in the long run, insufficient tax revenue erodes the infrastructure on which the economy rests, an economy that generate the income and wealth held by the millionaire and billionaires. Similarly, as the number of “New Yorkers who are struggling economically” increases, there is a decrease in the amount of purchased goods and services, in turn harming the overall economy. Put simply, though these millionaires did not articulate it in this manner, a healthy state economy, just like the national and global economies, depends on demand-side activity. The death of supply-side, trickle-down economic theory is a slow one, but its final breath draws nearer.

In the letter, the millionaires explained that state's millionaires "have both the ability and the responsibility to pay our fair share. We can well afford to pay our current taxes, and we can afford to pay even more." Opponents of the tax increases, clinging to their blind allegiance to the anti-tax movement, re-asserted their opposition to all revenue increases, stating, “Whether it’s income taxes, property taxes, business taxes, user fees, or tolls, we don’t support raising taxes or asking hard-working New Yorkers to dig deeper into their pockets to pay more.” These same folks, though, have no qualms about people reaching deeper into their pockets to pay the costs of failing infrastructure and stagnant economies.

The concern is not that the writing is on the wall for outdated trickle-down economic theory. The concern is that some people are unable to read that writing or to understand what it means or why it is there.

The call for tax cuts for the wealthy continues. More than several candidates for the Presidency, including some who have since dropped out of the race, claim that tax cuts will solve just about every problem that the nation faces. Though they advertise the tax cut cry as beneficial for working Americans, it fact almost all of the proposed cuts, like the ones enacted at the beginning of the century, go to the wealthy.

It’s not just a federal tax issue. The same folks who advocate tax cuts for the wealthy at the federal level also take their campaign to the states, and in many instances, to localities. In every instance, the advertising is the same. Tax cuts provide more money for the wealthy, so that the wealthy can hire more employees and create jobs. Of course, that hasn’t happened and will not happen. As I’ve explained many times, for example, in Job Creation and Tax Reductions, people don’t create jobs unless they need workers. They don’t need workers unless they have customers who want to purchase the goods and services that they would provide. If the American middle class and those living in poverty or near-poverty don’t have money, they don’t make purchases. In fact, they cut back on purchases. And that, understandably, causes the owners of capital and the entrepreneurs of the business world to cut, not create, jobs.

One state where the “tax cuts for the wealthy are good for the economy” argument was adopted, and turned out to be a disaster, has been Kansas. As widely reported and as recalled in this article, the godfather of so-called “trickle down,” supply-side, cut-taxes-on-the-wealthy theory, Arthur Laffer, told people in Kansas, back in 2012, that Kansas would experience “enormous prosperity” if it cut its income tax rates. Kansas took his bad advice. As I explained in A Tax Policy Turn-Around? and Success for the Anti-Tax Crowd: Closing Down Education, Kansas is paying the price. And Kansas paid not only the price of a staggering economy, but also the $75,000 fee that was put in Laffer’s pocket for his consultation with the governor who pushed through the tax cuts.

Now Laffer claims that he is not surprised that the tax cuts created huge budget deficits. Kansas also has seen very little in the way of new jobs, and its economy has stagnated. Laffer claims that though he is not surprised by the deficits, he doesn’t know why they have occurred. Is he serious? He expected deficits but doesn’t know why? That sort of reasoning would not earn good grades in Economics 101. He tried to back out of this inconsistency by claiming that revenue would increase, though perhaps in the distant future. He argued that it could take ten years for revenue to begin to increase. If it begins to increase in ten years, how many years will it take before it generates enough to offset the deficits? Twenty years? Thirty years? And then how many more years before there is a positive return on the so-called “tax cut investment.” In the meantime, the wealthy are partying, and the middle class and the poor are struggling.

Another of Laffer’s justifications for cutting income taxes would also do poorly in Economics 101. Laffer claims that economic growth is higher in states that do not have income taxes than in states with income taxes. Even if that is true, the reason is simple. States without income taxes rely on other sources of revenue. Alaska, for example, sitting on a pool of oil, not only eliminated its income tax but paid dividends to its citizens. Though the other states without income taxes aren’t sitting on oil, so to speak, they pull in money from gambling, tourism, or higher taxes on sales or property.

Critics of the tax cuts have suggested they be rescinded. Laffer claims that doing so would be a “bad thing.” Somehow he does not see the consequences of the unwise tax cuts as being a bad thing. He insists that the governor of Kansas, for whom he feels sorry, did the right thing. No, he did not. The proof is in the outcome.

There’s nothing wrong with trying something when the economy is sick. But if the attempted solution does not work, it is best to acknowledge the failure and look for another cure. Laffer’s devotees claim he is brilliant. He probably is. But so was Einstein, who told us that insanity is doing the same thing over and over again and expecting different results. The supply-side, “trickle down,” tax-cuts-for-the-wealthy theory was tested, and has been found wanting. A brilliant person realizes when an experiment has failed, admits the flaw, backs off, and looks for another path. It’s time for demand-side economics to be given a chance.

There is a group of voters, and politicians representing them, who decry state and federal budget deficits. Yet most of these deficit-haters have supported cuts in IRS and state revenue department budgets, which in turn reduces revenue. Reduced revenue increases deficits, unless there are spending cuts. Using decreased revenue as an excuse to cut spending rarely works, because it is a technique that distracts attention from close examination of how much is being spent, and on what programs.

Some claim that through increased efficiency, imposing longer work hours on IRS and revenue department employees, and automating decision making previously provided by humans, revenues can increase despite cuts in department budgets. Though here and there some marginal success can be attained, for the most part, the nation gets what it pays for. Additional proof of this outcome has been shared in the Transactional Records Access Clearinghouse’s report, IRS Auditing of Big Corporations Plummets.

Information from the IRS reveals that “total revenue agent audit hours aimed at larger corporations – those with $250 million or more in assets – dropped by more than one third (34%) from FY 2010 to FY 2015.” It is not a coincidence that during “the same period, the resulting additional taxes the agents uncovered that has been lost to the government dropped by almost two-third (64%) – from $23.7 billion down to $8.5 billion.”

A closer look at IRS audits of huge corporations – those with $20 billion or more in assets – reveals that audit time dropped by almost one-half, and recommended additional taxes dropped by almost three-quarters. The translation is simple. It is becoming much easier for large corporations to escape audits, and thus succeed with questionable or even erroneous tax reporting. Accordingly, income tax revenues from corporations continue to fall.

Worse, though the IRS planned to increase audits of businesses in FY 2016, the number of audits is 22 percent lower than in FY 2015. Another IRS plan, to increase audits of foreign corporations and S corporations with assets of $10 million or more, groups for which noncompliance is significant, has derailed. Audits of foreign corporations in FY 2016 are down 58 percent compared to FY 2015, and audits of large S corporations are down 20 percent.

These reductions match the funding reductions enacted by Congress. Between FY 2010 and FY 2015, Congress has caused the number of IRS employees to fall by 19 percent. In turn, this reduces taxpayer assistance, which contributes to increased noncompliance, and tax law enforcement, which encourages deliberate noncompliance. Yet while cutting the IRS budget, Congress has piled on more responsibilities, such as administration of the Affordable Care Act, a task that should be assigned to the federal agencies responsible for health.

What happens if this trend continues? If those responsible for this trend permit it to continue, and in fact require it to continue, are they responsible for what happens? Is the trend consistent with, and supportive of, their goal? What is their goal? Apparently it’s not deficit reduction.

The re-introduction of a soda tax proposal in Philadelphia has triggered a outpouring of objections, support, questions, criticisms, and re-evaluations. For example, as reported in many stories, including this one, a close look at the proposed legislation revealed that the per-ounce rate on soda sold from fountains would be higher than the rate applied to soda sold in bottles. Proponents of the tax promised to review and revise the language of the bill. The debate over soda tax proposals has been underway for almost a decade, and this blog has not been without reactions, starting with What Sort of Tax?, and continuing through The Return of the Soda Tax Proposal, Tax As a Hate Crime?, Yes for The Proposed User Fee, No for the Proposed Tax, Philadelphia Soda Tax Proposal Shelved, But Will It Return?, Taxing Symptoms Rather Than Problems, It’s Back! The Philadelphia Soda Tax Proposal Returns, The Broccoli and Brussel Sprouts of Taxation, The Realities of the Soda Tax Policy Debate, Soda Sales Shifting?, Taxes, Consumption, Soda, and Obesity, Is the Soda Tax a Revenue Grab or a Worthwhile Health Benefit?, Philadelphia’s Latest Soda Tax Proposal: Health or Revenue?,
What Gets Taxed If the Goal Is Health Improvement?, and The Russian Sugar and Fat Tax Proposal: Smarter, More Sensible, or Just A Need for More Revenue?

Two recent developments involving the Philadelphia soda tax proposal, one a letter of support and one a campaign in opposition, not only caught my eye but activated some of my brain cells. Both instances left me disappointed in how some approach the debate.

Earlier in the week, I spotted a letter to the editor of the Philadelphia Inquirer. According to the letter writer, “When I choose to eat out in Philadelphia, I pay the tax. When I decide to have a drink, I pay the tax. So, when you decide to have soda, pay the tax. It's your decision.” This approach misses the point. The issue isn’t what someone should do once the tax is enacted, if it is enacted. One issue is whether the tax should be enacted. The fact that someone pays a sales tax or an alcohol tax does not add weight to the argument for or against a soda tax. Another issue is whether a tax characterized as designed to improve health should be limited to just one of many allegedly unhealthy dietary items. The letter writer conceded this point by noting, “And evaluate your health status - and who will benefit from the tax.” The letter writer offered no proof that soda is more unhealthy than many of the other items, particularly those containing sugar, fats, and cancer-causing substances, that people ingest.

At about the same time, I heard a radio spot on a local radio station, and upon further research discovered that a group had been organized to campaign against enactment of the tax. What had caught my ear was the characterization of the tax as a “grocery tax.” According to the organization’s web site, No Philly Grocery Tax, the tax would be a “3¢ per ounce tax on everyday grocery items.” Sure, the site then adds “like sodas, sports drinks, juice drinks and some teas” but the initial characterization will cause people to think that a proposal is underway that will tax everything in their shopping cart. Once that seed is planted in most people’s brains, it’s difficult to root it out. Even if the tax was imposed on all unhealthy food and drink items, it still would not be a tax on groceries, because it would not reach a long list of healthy items.

Simplistic reactions and mischaracterizations, no matter from which side of an argument, do not serve the public well. Though they can help advance the cause of those who toss them about, they also can backfire. The ease with which people not only fling such accusations but also readily accept and repeat them contributes to the sad state of this nation’s public and private political debate in the twenty-first century. It’s time for those involved in the soda tax debate, as well as any other political discussion, to focus on the facts and to stick with logic.

One of the reasons I object to using the tax law to distribute economic benefits to particular individuals and businesses, aside from complexity and inequity, is the failure of most tax break recipients to deliver the benefits that they claim will trickle down to other individuals and businesses. Perhaps the most famous of these giveaways is the “tax cuts for the rich generate jobs for the poor and middle class,” a theory that has consistently fallen short when subjected to practical reality. Another example is the dishing out of tax breaks by one state to take jobs from another state, which does nothing for the economic condition of the country, as I discussed most recently in Economic Civil War Poses No Less of a Threat Than A Shooting Civil War

Now comes news that a company given by Nevada a package of state-funded infrastructure improvements and tax breaks will post a bond to cover the possibility that its planned car factory fails to deliver on its promises. Unfortunately, though the incentives could be as much as $336 million, the company is funding only a $75 million bond. Ideally, if a company claims that a state tax break of $100 will generate $300 in new tax revenues, $300 in economic benefits for the state’s residents, or some combination thereof, the company should post a $100 bond. In other words, the tax break should be a loan. Companies that object to providing what is, in effect, a reimbursement promise, and purchasing a bond to cover that promise, are revealing either a lack of confidence in their plans or a underlying desire to obtain free public money.

Another problem with the arrangement in Nevada is that the company will be released from its bond obligation once it builds the factory and begins selling cars. It ought not be released from the bond obligation until and unless an independent auditor certifies that the promised new tax revenues and economic benefits have been generated.

Last week, in What Gets Taxed If the Goal Is Health Improvement?, I commented on a suggestion that Philadelphia’s re-emerging soda tax proposal should be expanded to include diet soda. The disadvantages of limiting an alleged pro-health tax to only one allegedly unhealthy substance has been a recurring theme in my long parade of commentaries on the soda tax, starting with What Sort of Tax?, and continuing through The Return of the Soda Tax Proposal, Tax As a Hate Crime?, Yes for The Proposed User Fee, No for the Proposed Tax, Philadelphia Soda Tax Proposal Shelved, But Will It Return?, Taxing Symptoms Rather Than Problems, It’s Back! The Philadelphia Soda Tax Proposal Returns, The Broccoli and Brussel Sprouts of Taxation, The Realities of the Soda Tax Policy Debate, Soda Sales Shifting?, Taxes, Consumption, Soda, and Obesity, Is the Soda Tax a Revenue Grab or a Worthwhile Health Benefit?, and Philadelphia’s Latest Soda Tax Proposal: Health or Revenue?.

Now, alerted by a reader, I have become aware of a recent “sugar and fat tax” proposal ready for enactment in Russia. According to this report, the Russian government is about to impose a tax on sugary drinks, palm oil, and probably potato chips, electronic cigarettes, and foods with high levels of fat or sugar. Russian President Vladimir Putin is said to support the tax. Russian officials explain that the tax has a dual purpose, not only to reduce the consumption of sugar and fat, but also to generate revenue.

One of the arguments I offer in rejecting a tax limited to soda or soda and some sweet drinks is that such a limitation is inconsistent with the avowed goal of improving health. I have suggested that these taxes are not much more than an attempt to raise revenue, with lip service paid to issues of health. I have contended that if health improvement is a serious goal, and assuming that a tax would actually change eating habits, the tax needs to reach more than soda, and should extent to include items such as cookies, cakes, donuts, candy bars, and junk food. The Russians appear to be taking the approach I favor, even if they admit that revenue is a motivating factor in the proposal. I doubt, however, that the tax planners and legislators in Russia found inspiration for their proposal in the pages of this blog, though the traffic sources statistics tells me that there are people in Russia reading MauledAgain.

Why would someone want to sell losing lottery tickets? The answer is simple. Those losing tickets have value to someone who wins a lottery, because amounts paid for losing lottery tickets can be deducted from amounts won in a lottery.

So why should someone hesitate to sell losing lottery tickets? The answer is simple. The person buying those tickets and representing that they lost the face value of those tickets would be committing tax fraud. The person selling those tickets very easily could be caught up in conspiracy and other criminal charges.

A reader turned my attention to a story that has popped up in a number of sources. Though almost a year old, it had escaped my notice. According to the story, there are people selling losing lottery tickets on Craigslist, seeking buyers who intend to use them as evidence of gambling losses that can be deducted against their gambling winnings. One of the ads, in which a seller offers losing lottery tickets with a face value of $1,100 for $70, advertises, “Good for tax write-off for your . . . taxes to offset your winnings.” Would-be buyers also place ads, one in particular explaining, “I would like the ones your [sic] tossing in the trash.” According to this story, some people are renting losing lottery tickets to taxpayers who “need” losses to reduce their gambling winnings.

Years ago, someone shared with me one of those urban-legend-like IRS tales about a taxpayer who had done well at the racetrack. He reported net gambling winnings of zero. When audited, and asked by the IRS to substantiate his gambling losses, he produced a pile of losing tickets. His ploy failed when the IRS agent noticed footprints on the tickets. Though some reports of this story on the internet claim that the IRS issued rulings in which it takes the position that tickets with footprints on them are unacceptable as proof of losses, I have not found a ruling that mentions tickets with footprints on them.

Some of the stories about the Craigslist losing lottery ticket sales mention the tribulations of one Henry A. Deneault. For example, in this one, we are told that the former IRS revenue officer, working as a tax accountant, tried to help his client, Phillip Cappella. Cappella had won $2.7 million in the Massachusetts lottery, and wanted to reduce his taxes. Deneault decided to put a $65,000 gambling loss on the return, and needing substantiation for it, paid $500 to a man named William Jenner to rent $200,000 in losing lottery and racetrack tickets. Deneault sent several employees to pick up the tickets, which filled the bed of a pickup truck. The scam failed, the IRS caught on, and both Deneault and Cappella pleaded guilty to tax fraud and went to prison. It’s unclear what happened, if anything, to Jenner.

How much tax could be saved with $65,000 of losses when the taxpayer was looking at a minimum of $2.7 million in gross income? Was it worth it? Apparently not. Yet, we are told by various sources, the practice of selling or leasing losing lottery and racetrack tickets continues to this day.

Here’s the odd twist. Individuals with gambling losses that cannot be used, because of insufficient gambling winnings against which to set them, get in trouble if they sell them to other individuals in need of losses. Yet corporations saddled with losses that cannot be used have a variety of acceptable transactions by which, in effect, they sell those losses to other corporations that can use them.

A reader alerted me to this story. It fits into the “we don’t need to make things up” category that I often mention when posing questions to my students.

A man in Missouri placed an ad on Craigslist. There’s no good way to paraphrase it. Yes, it deserves to be quoted:

WANTED: KIDS TO CLAIM ON INCOME TAXES - $750 (SPRINGFIELD, MO)
IF YOU HAVE SOME KIDS YOU ARENT CLAIMING, I WILL PAY YOU A $750 EACH TO CLAIM THEM ON MY INCOME TAX. IF INTERESTED, REPLY TO THIS AD.

Perhaps surprisingly to some, but not others, the man received replies. On his 2014 federal income tax return, the man listed three dependents by name, social security number, and alleged relationship. One problem was that all three had the same names. Another problem? They had the same social security numbers. Though listed as two sons and one daughter on the 2014 return, on the man’s 2012 and 2013 return they are listed as two daughters and one son.

Not surprisingly to anyone who understands tax law, or even law generally, or perhaps just common sense, the man has been indicted for filing false income tax returns. No word on whether the people who presumably were paid $750 for sharing social security numbers with the man have been, or will be, indicted.

This man would not be in the position he is today had the Congress enacted at least part of the reform proposal I offered more than twenty years ago. In Tax and Marriage: Unhitching the Horse and Carriage, 67 Tax Notes 539 (1995), I suggested “a system based on transferable exemptions,” among other things. Part of my explanation of why I made this proposal anticipated the precise sort of arrangement for which the Missouri man has been indicted:

C. Sales of Unused Exemption Amounts

Individuals with no income, such as the homeless, could benefit by selling their unused exemption amounts to taxpayers, thus putting income redistribution into a private-sector marketplace and removing it from federal bureaucratic inefficiencies. The proceeds would be excludable from income, and the amount paid would not be deductible, for the same reasons the federal income tax is not deductible in computing federal income tax liability. Once sold, the exemption is unavailable even if subsequent audits determine that the individual's income was greater than originally estimated.

This unused exemption amount sale aspect of the proposal is not as mercenary as it initially appears. If unused exemption amounts could not be sold, then tax revenues, or budget deficits, would need to be increased to provide funds for public welfare programs benefitting the impoverished. Permitting impoverished individuals to sell unused exemption amounts transfers to those persons directly the dollars that would otherwise be collected by the federal government and transported through a bureaucratic maze that would reduce the amount reaching those in need by some substantial percentage. In a sense, it would create a 'private market negative income tax.'

To the extent a negative income tax is unattractive because it involves cash grants from the government, the shifting of its incidence to the private sector eliminates direct governmental involvement and casts the exemption sale transactions in a private enterprise light. Though the negative income tax, even in the form of unused exemption amount sales, is considered by some to be a work disincentive, the amount for which the unused exemption amount could be sold would be less than the amount needed for anything more than bare subsistence and would not deter the ambitious or the proud from seeking employment.

Precedent for the sale of governmental benefits can be found in the transfer system permitting businesses to sell or transfer sulfur dioxide pollution allowances. In terms of the policy of permitting transfers, the unused exemption amount is essentially the same as the pollution allowance, because a person without the need for it can sell it to someone who does have such a need. [footnotes omitted]

Of course, the fact that what the Missouri man did would make a good deal of sense had it been permitted under law is no defense to doing something that is impermissible under the law. The man in Missouri surely will end up convicted and punished. It’s too bad Congress cannot be indicted, convicted, and punished for making a mess of the tax system, continuing to make it worse, and refusing to clean it up.

Several days ago, in Philadelphia’s Latest Soda Tax Proposal: Health or Revenue?, I questioned whether the latest soda tax proposal in Philadelphia was more a matter of raising revenue than improving health. My question was triggered by my long-held position that if the goal of a soda tax is to reduce the ingestion of sugar, the tax ought to be a sugar tax imposed on far more than just soda. That’s not to say that a sugar tax is ideal, because sugar is far from the only substance that can cause health problems. It’s simply a matter of logic and consistency, and the unfairness of singling out one sugar-containing item while claiming that a tax on that item reflects the health hazards of sugar.

In reaction to the sugar tax proposal, Will Bunch offers the suggestion that the tax ought to apply not only to regular soda but also to diet soda. His suggestion takes two perspectives. One is that diet soda also is unhealthy. The other is that expanding the base of the tax would permit either increased revenue or a lower tax rate.

Bunch makes a good point. It is not dissimilar to my concern that limiting an allegedly pro-health tax to only one of many substances that contribute to poor health is a bit too disingenuous. Bunch has provided a good service to everyone involved in the soda tax debate, by putting the spotlight on a substance that does not contain sugar but that is similarly unhealthy. For decades, so-called sin taxes have been applied to items perceived as dangerous, yet popular, such as tobacco and alcohol. True, those items pose serious health risks. Tobacco is a health risk, period. Alcohol is a health risk when used to excess, and in some instances is beneficial to health. Sugar, too, poses its risks when consumed in high quantity. Removing all sugar from one’s diet also endangers health. But does the list stop with sugar-containing soda, or diet soda? There’s a long list of items that, if consumed excessively, or even at all, pose health risks. In my last post on the issue, I mentioned French fries, red meat, deep fried cheese sticks, churros, popcorn shrimp, and junk food. Bunch widened my perspective. The question becomes, what other items belong in the list? GMO modified foods? Non-organic food? Water from Flint, Michigan? Governments that truly care about health ought to act consistently with that claim, and not use health as an excuse for taxing certain selected items.

According to several reports, including this one, New Jersey is considering repealing its estate tax as part of a larger proposal to increase and decrease assorted taxes. New Jersey also has an inheritance tax. Maryland is the only other state to have both an estate tax and an inheritance tax. There is a federal estate tax but no federal inheritance tax.

An estate tax is imposed on the passing of property by a decedent’s estate to the heirs. An inheritance tax is imposed on the receipt of property by an heir from a decedent. In other words, the same transaction is being taxed twice. Yes, there are exemptions and exceptions that limit the scope of the double application but, nonetheless, the dual taxation invites examination of how property passing at death should be taxed.

Generally, the inheritance tax, which is far more prevalent, has a larger reach than the estate tax which, where it exists, usually is limited to larger estates. In terms of curtailing income and wealth inequality, the estate tax does a better job than does the inheritance tax. Inheritance tax exemptions tend to favor transfers to blood relatives. For example, in New Jersey, transfers to children and grandchildren are exempt from the inheritance tax, but transfers to the spouses and domestic partners of children and grandchildren are not. What other purpose could there be for this sort of tax differentiation than the preservation of dynastic wealth?

Those who oppose the estate tax claim that even in the absence of an inheritance tax, it constitutes double taxation. That is true to the extent that funds generated by transactions subject to the income tax are subject to the estate tax. Yet a substantial portion of funds subject to estate taxes are not generated by transactions subject to the income tax because for both federal and state income tax purposes, the unrealized appreciation in property is never subject to the estate tax. I’ve long advocated dismantling the estate tax provided unrealized appreciation is subjected to the income tax. Appropriate provisions for spreading payment of the tax over time can be designed to resemble those that already exist for property such as qualified farms.

So, in other words, the answer to the question, in an ideal tax system, would be “neither.” Instead, the huge unrealized appreciation tax loophole, which has contributed quite a bit to income and wealth inequality, would be eliminated.

It was more than seven years ago when I first wrote about the soda tax, in What Sort of Tax?. Since then I have revisited the issue at least eleven times, in The Return of the Soda Tax Proposal, Tax As a Hate Crime?, Yes for The Proposed User Fee, No for the Proposed Tax, Philadelphia Soda Tax Proposal Shelved, But Will It Return?, Taxing Symptoms Rather Than Problems, It’s Back! The Philadelphia Soda Tax Proposal Returns, The Broccoli and Brussel Sprouts of Taxation, The Realities of the Soda Tax Policy Debate, Soda Sales Shifting?, Taxes, Consumption, Soda, and Obesity, and Is the Soda Tax a Revenue Grab or a Worthwhile Health Benefit?. The soda tax is on my “top ten most visited topics” list because it has more lives than the proverbial cat.

Philadelphia’s previous mayor proposed a soda tax several times. It failed each time. Among those in City Council voting against the soda tax was the city’s current mayor. Now, according to this story, the city’s current mayor is proposing a soda tax. What would account for the turn-around? The answer appears to be quite simple. The new mayor has discovered that his spending proposals, such as universal pre-kindergarten, community schools, park and recreation center upgrades, and similar projects, require revenue. Rather than raising any existing taxes, he has turned to a tax on certain sugary drinks.

If the concern is health, as soda tax advocates claim, and if a significant cause of health problems is sugar, as soda tax advocates claim, and as research tends to demonstrate, then why not a sugar tax? Why not a tax not only on sweetened drinks, but also on cakes, cookies, pies, donuts, sugared coffee, ice cream, and candy? When soda tax advocates single out certain beverages and label them as “empty calories,” they make two mistakes. One is that something like sweetened ice tea contains more than just emptiness, as tea has been shown to provide health benefits. The other is that some of the sugary items they exempt from the tax are just as lacking in nutrients. Donuts, for example, which are fried and loaded with fat, are no more healthy, and in some ways even less healthy, than soda. For those who are curious, I have not consumed soda for more than two decades and over the past thirty years I may have eaten two donuts and I’m not even sure of that. Nor do I drink iced tea. So a soda tax, as proposed, has no impact on my personal nutrition or wallet.

Research has demonstrated that about 10 percent of deaths related to obesity and diabetes under age 45 can be attributed to consumption of sugary beverages. Surely consumption of cake, pies, donuts, cookies, candy, and carbohydrates generally have something to do with diabetes and obesity at any age. So when the soda tax advocates point to the “10 percent of deaths” study, they overlook the other 90 percent, particularly the portion caused by other items. Why the reluctance to tax sugar generally?

Research into the effects of Mexico’s soda tax indicates that soda consumption dropped when the tax was enacted. That’s not a surprise. But two questions remain. First, did people simply substitute other sugary items, including fruit drinks, which have been exempted from almost all, if not all, soda tax proposals. Second, did the reduction in soda consumption generate any health benefits? As pointed out in Is the Soda Tax a Revenue Grab or a Worthwhile Health Benefit?, it will take years to determine the answer to that question. If people are substituting another sugary item for soda, the best guess is that there would be little, if any, health improvement.

From a tactical perspective, if Philadelphia enacts a soda tax, it will not have the revenue or health effects that are predicted. Philadelphians will simply make their purchases outside of the city, just as thousands of Pennsylvanians avoid the sales tax by driving to Delaware. That journey, by the way, is for most Pennsylvanians a longer trip than the ones Philadelphians would need to make to purchase sweetened beverages outside of the city. Several individuals interviewed by the writer of the news story promised that they would be making these out-of-the-city shopping expeditions. Because the tax would not apply to drinks to which consumers add sugar, such as hot tea and coffee, perhaps the manufacturers of sugary drinks will being selling them without the sugar so that consumers can add sugar as they do to hot coffee and tea. What we have here is a proposal that has not been thought through to its logical conclusion.

Would it not be easier to discuss the advantages and disadvantages of a soda tax if the mayor simply stated, “Look, I opposed the soda tax when the previous mayor, a member of the same political party to which I belong, tried to persuade City Council to enact one. Now that I am mayor, and have plans to spend more money, I need revenue, so that’s why I’ve changed my position on the soda tax.” The fact that the tax would be spent for a variety of programs, and would not be limited to health improvement efforts, makes the “we’re doing this to improve health” argument much easier to dismiss as pretext.

If health was the driving force, why not a tax on French fries, red meat, deep fried cheese sticks, churros, popcorn shrimp, and junk food? But health apparently is not the driving force this time around.

It was with a reaction of “huh?” that I read the news of Mitt Romney criticizing Donald Trump, Marco Rubio, and Ted Cruz for not releasing their tax returns. According to this report, Romney explained that, “I think we have a good reason to believe that there’s a bombshell in Donald Trump’s taxes. I think there’s something there. Either he’s not anywhere near as wealthy as he says he is or he hasn’t been paying the kind of taxes we would expect him to pay, or perhaps he hasn’t been giving money to the vets or to the disabled like he’s been telling us he’s doing.”

It seems ridiculous that a former Presidential candidate whose tax returns highlighted the inequity of the federal income tax system and its enablement of wealth and income inequality would be criticizing another candidate for not “paying the kind of taxes we would expect him to pay.” Did Romney pay the kind of taxes we would expect him to pay?

There are others who are making the same call for tax return release, and many of them pay taxes at effective rates higher than those paid by the wealthy. Thus, the fact Romney’s focus on the issue gets the headline ought not detract from the basic question. Should candidates – for any office, not just for the Presidency – be required to release their tax returns? Those in favor of such a requirement argue that voters should have an opportunity to “see whether there are any issues, noting they will give voters a sense of whether the candidates have been telling the truth about themselves.” If determining whether candidates have been telling the truth, about themselves or anyone or anything else, it’s not just tax returns that provide the necessary information. Would it not be helpful to see the candidates’ emails? Transcripts of their meetings with campaign funding donors and with lobbyists? Recordings of their telephone calls with officials and donors? If, as Romney and others claim, voters need the truth before selecting a nominee or deciding which candidate gets elected, then we need the whole truth and nothing but the truth. Tax returns would be a good start.

So long as tax return release is not required, but happens only on account of political pressure, the question of whether a particular candidate should release his or her returns distracts voters from the real issues. So long as candidates, former candidates, and others speculate about what might or might be on another candidate’s returns – and it is nothing more than speculation – time and attention will be wasted on phantom disputes rather than being devoted to figuring out why the nation is in such an economic, social, and political mess and what needs to be done to clean it up.

Those who argue that mandating tax return release by political candidates will discourage qualified individuals from running for office apparently do not agree that the current practice of not mandating tax return release has not exactly brought us a top-of-the-line outstanding array of candidates. Perhaps the nation would be better off with candidates whose tax returns are boring. And perhaps the nation would be even better off with candidates who not only offer boring tax returns but emails and telephone calls free of influence from moneyed interests and puppet-master donors.

So should candidates be required to release tax returns? Yes, along with everything else that permits voters to see the truth rather than the hype and twisted nonsense that is so freely available.

One of my readers read and article and sent it to me, along with a question. After reading the article, I understand why it caught his attention. It describes a rather uncommon living arrangement. Though the article is from almost ten years ago, it’s one of those many things that we were far less likely to see until the internet made distant events almost as close as our next-door neighbors. According to the article, a forty-five-year-old highway superintendent lives, or at least was living at the time, in a tree house on his parents’ property. The house, more than forty feet above ground, has a shower, a heater, and a ground-level outhouse. The article doesn’t mention a kitchen, but if there is water for a shower there surely is water for a kitchen.

My reader, who, like some of us, often has “tax on the brain,” quickly saw tax issues, and sent some to me. The questions are simple. It arises from thinking, “Suppose the person living in the tree house had a home office? Or rented it out?” The reader asked, “Can a tree house qualify under the Section 280A rules? Can a tree house be depreciated?” Though there’s no direct authority, careful reading of the applicable statute provides an answer.

The section 280A rules apply to dwelling units. Section 280A(f)(1)(A) provides that “The term ‘dwelling unit’ includes a house, apartment, condominium, mobile home, boat, or similar property, and all structures or other property appurtenant to such dwelling unit.” If a house boat is a house, a tree house is a house. It does not matter whether the house is on the water, on the ground, on wheels, or in a tree. To the extent the requirements for depreciation are satisfied, the cost of the tree house is depreciable, no less than the cost of a house boat or mobile home used for a trade or business or in a for-profit activity.

Proposed Treasury Regulation section 1.280A-1 (c)(1) provides that a dwelling unit includes a "house, apartment, condominium, mobile home, boat, or similar property, which provides basic living accommodations such as sleeping space, toilet and cooking facilities." From the facts discerned from the article, if the taxpayer used a portion of that particular tree house as a home office, for example, it would be subject to section 280A. That’s not to say all tree houses would be so treated, because most tree houses do not have running water, cooking facilities, and the other features of a dwelling unit.

A little more than three months ago, in The Fallacy of “Job Creating” Tax Breaks, Yet Again, I shared the news that recent studies demonstrated the inefficiencies of state tax breaks for companies promising to create new jobs in the state. It turns out that the out-of-state companies moving operations into the state and thus getting the tax breaks create one percent of the jobs, while in-state companies managing to get the breaks create 19 percent of the jobs and start-up businesses account for 80 percent of the new employment. I had previously explored the reasons these so-called job-generating tax breaks are unwise, starting with When the Poor Need Help, Give Tax Dollars to the Rich, and continuing through Fighting Over Pie or Baking Pie?, Why Do Those Who Dislike Government Spending Continue to Support Government Spenders?, When Those Who Hate Takers Take Tax Revenue, and Where Do the Poor and Middle Class Line Up for This Tax Break Parade?.

In Fighting Over Pie or Baking Pie?, I described the practice of states persuading companies to relocate from other states through the use of tax breaks was, “from a national perspective, nothing more than a zero sum game.” I added, “States fight over pieces of the private sector by using tax dollars to increase the size of the economic pie that they can grab, while the small business entrepreneurs who actually bake pie struggle because they cannot afford to put huge campaign contributions in the pockets of the politicians using tax dollars to enhance their power.” I predicted, “If state governors and legislators continue down this path, eventually there won’t be any pie for them to fight over.”

In Another Sales Tax Exemption Taking Off as the Economy Continues to Sink, I criticized the developing pattern of states enacting sales tax exemption exemptions intended to lure businesses away from the state, which in turn encouraged enactment of similar exemptions as a revenue defense, which then triggered escalation of exemptions by the other states, in an accelerating trend of sales tax erosion. I concluded my commentary by pointing out the dangers of this pattern of legislative behavior: “Rather than generating new business, states are intent on stealing from each other. Fought with tax policy rather than guns, this modern civil war among the states shows the fundamental flaws of federalism. Constant poaching does nothing beneficial for the national economy.”

There were those who considered my description of this pattern as a "civil war," offering the usual disapproving evaluation of my characterizations, as excessively exaggerated. But now comes more evidence that, in fact, the states indeed are engaging in economic warfare. According to this report, the New Jersey Chamber of Commerce, advocating retention of the various tax breaks enacted by the state, has told a legislative committee, "There's an economic war going on out there." Yes, those were the words: economic war. Not dispute. Not argument. Not disagreement. Not conflict. War. On the other side, opponents of the tax breaks claim that the ultimate cost of those economic weapons is paid with public workers’ pension benefits. Some opponents claim that the cost also is being borne by those who use deteriorating infrastructure and those who have lost mental health care services.

In so many ways, this fight over the national economic pie resembles a shooting war, and is just as deadly in the long run. War often is fought over limited resources, and that is in part what is happening as states grab jobs from each other. War often is funded, not by those who benefit from the war, but from those who are dragged involuntarily into its turmoil, often losing financially as well as psychically. What difference is there, in terms of practical effect, between people suffering from the ravages of war and suffering from the loss of promised retirement benefits? What difference is there, in terms of practical effect, between people suffering from the consequences of bombed-out roads and bridges and the consequences of roads and bridges falling apart because of underfunded and unfunded maintenance?

And when the war ends, albeit usually for just some relatively short period of time, what’s the outcome? A few wealthier people and companies, hordes of dead and impoverished individuals, and no permanent solution to whatever it is that triggered the conflict. Until and unless the underlying causes of economic inequilibrium that has hurled the states into this fight for economic survival, having been identified, are corrected, the pattern will continue, will accelerate, and will intensify. In the long run, no one wins a war, whether it is fought with guns or tax and economic policies. In the long run, all that might remain is rubble.

One of the basic principles that students in the basic tax course must learn and understand is that damages for personal physical injuries and sickness are excluded from gross income but damages for emotional distress are not. That’s what section 104 specifically provides.

A recent case, Barbato v. Comr., T.C. Memo 2016-23, drives this point home. The taxpayer worked for the United States Postal Service (USPS) as a letter carrier. In 1987, she was injured in a vehicle accident while on the job. Because of the ensuing physical limitations from the injuries, the USPS reassigned the taxpayer, with her consent, from carrying mail to working in the post office staffing the counter and doing various administrative tasks. When a new manager was appointed, the taxpayer was reassigned to carrying mail, which caused her to suffer more pain. The manager, and other employees, scrutinized her work more closely than that of other employees, retaliating because of her request for medical accommodations, and creating a hostile work environment. This caused the taxpayer to experience severe stress and emotional difficulties.

The taxpayer filed a complaint against the USPS with the Equal Employment Opportunity Commission (EEOC). The EEOC issued a decision, specifying that the taxpayer was “entitled to non-pecuniary damages in the amount of $70,000, for the emotional distress which . . . [she] established was proximately caused by the discrimination” of USPS employees. The EEOC also specifically determined that the taxpayer’s physical pain was not caused by the discriminatory actions of the USPS, explaining that “It is also clear that . . . [the taxpayer] experienced significant physical distress and pain as the result of actions which have not been found here to be discriminatory, and that . . . [her] conditions were exacerbated by non-discriminatory actions which occurred during the same time period that the discriminatory actions were also taking place.” The EEOC noted that “[h]ad all of the physical and emotional distress experienced by . . . [the taxpayer] been caused by . . . discriminatory actions, . . . [she] would have been entitled to $100,000 in non-pecuniary compensatory damages.”

The taxpayer and her husband filed a joint return and excluded the $70,000 from gross income. The taxpayer explained that she considered the award not taxable because her emotional distress was related to her previous physical injury. The IRS examined the return, and issued a notice of deficiency increasing the gross income by $70,000, and adding a substantial understatement penalty. The Tax Court upheld the deficiency, holding that damages received for emotional distress are not excluded from gross income under section 104. However, without explanation, the Tax Court did not sustain the substantial understatement penalty.

These sorts of cases, even though appearing to be crystal clear, do pose challenges for taxpayers. In many instances, the determination of the adjudicator awarding damages does not clearly delineate the split between damages for physical injuries and damages for emotional distress. The distinction came into the tax law at a time when science did not understand as deeply as it does now that emotional distress is caused by biological and chemical changes in the brain. If chemical damage to a person’s skin is a physical injury, why is chemical damage to a person’s brain not a physical injury? It is time for the distinction to be eliminated, but until and unless that happens, taxpayers are caught by it and must file their returns in compliance with what section 104 provides.

Louisiana faces a huge budget deficit. Though I could explore how it ended up with a deficit that threatens cutbacks in essential services, that is something to explore another day. In many ways, it’s not unlike what happened in other states that enacted tax cuts for those who promised that tax cuts would generate robust economies.

The new governor of Louisiana has proposed a variety of tax increases. Among the proposals are increases in the state sales tax, increases in the tobacco tax, and increases in the alcohol tax. Members of the legislature have reacted as one might expect, some supporting the idea of raising taxes, and others determined to oppose tax increases and wield the spending-cut axe. Some legislators and some citizens have provided different responses depending on the tax. As the president of the Louisiana Senate put it, “The sales tax seems to be the one causing the most grief. The sin taxes have more support.”

So why would lawmakers and taxpayers be less opposed to sin tax increases than sales tax increases? The answer, I think, is easy. People tend to examine tax proposals by asking, “How does this affect me?” Almost everyone would look at a sales tax increase proposal as having a negative effect on their finances, at least in the short-term. Many people look at tobacco and alcohol taxes and conclude that because they do not purchase, or purchase relatively little, tobacco or alcohol products, increases in those taxes are no big deal.

There are risks in basing tax policy decisions on how one perceives the effect of changes on one’s particular position at a particular time. What happens when an activity not currently considered a “sin” worthy of taxation becomes the target of tax increase proposals? Societal and cultural norms change. There was a time when tobacco use and alcohol use were pervasive, and those who did not drink or smoke were somewhat out of the mainstream. What mainstream activities of the past several decades will be the basis of “sin taxes” a decade or two from now?