MauledAgain

A recent Tax Court decision, Gregory v. Comr., 149 T.C. No. 2 (2017), provides an excellent, though long, primer on statutory interpretation and the relevance of legislative history. The issue in the case is easily stated. The taxpayers, shareholders in an S corporation that uses the cash method of accounting, claimed deductions passed through from the S corporation that were claimed under section 468. The IRS disallowed the deductions, concluding that section 468 applies only to accrual method taxpayers. Section 468 allows landfill owners to deduct estimated future reclamation, closure, and post-closure costs.

First, the court examined the word “taxpayer” in section 468, pointing out that the statutory text controlled, and that legislative history would be relevant only if the text was viewed as ambiguous. Noting that section 468 simply states “taxpayer,” the court turned to section 7701(a)(14), which defines a taxpayer as “any person subject to any internal revenue tax.” Because a “person,” as defined in section 7701(a)(1) means and includes an individual, a trust, estate, partnership, association, company or corporation, the taxpayers and their S corporation were within the scope of the term “taxpayer” in section 468, because the taxpayers and the S corporation are subject to various federal taxes even though the S corporation in question is not subject to federal income tax.

Second, noting that the previous definition does not apply if an applicable provision provides a different definition of the term “taxpayer,” the court examined section 468 and concluded that there is no definition of “taxpayer” in that provision. Though there are other timing provisions in the Internal Revenue Code in which Congress used the phrase “accrual method taxpayer” or “taxpayer whose income is computed under an accrual method of accounting,” there is nothing of that sort in section 468.

With that, one would think the analysis was finished. But the IRS paraded a long list of reasons that the word “taxpayer” should be interpreted as “accrual method taxpayer.” The court addressed each one.

First, the IRS pointed to section 461, which includes several exceptions to the general rule that cash method taxpayers cannot claim a deduction before the expense is paid, and noted that section 468 is not in the list. The IRS also pointed to the regulations under section 461, which provide that cash-method taxpayers can deduct some expenses before the expenses are paid, “such as * * * for depreciation, depletion, and losses under sections 167, 611, and 165, respectively.” The IRS argued that because section 468 is not listed, it does not apply to cash method taxpayers. The court buried this argument by explaining that the phrase “such as” signals that the items following it “are examples, not an exclusive list.” The court referred to similar lists in the statute, including one that refers to holidays when schools are closed, “such as Christmas and Easter,” noting that schools are closed for other holidays.

Second, the IRS argued that the term “incurred” is used in section 468, and that because the term “incurred” is used in the context of the accrual method, section 468 applies only to accrual method taxpayers. Though the court agreed that “incurred” usually refers to an expense deductible under the accrual method, it noted that the word was used in section 468 only twice, and that the word “paid,” which usually refers to an expense deductible under the cash method, is used four times in section 468. If the use of another word could be taken as a limitation on the word “taxpayer,” the presence of both “incurred” and “paid” in section 468 does nothing to support the IRS position that the provision is limited to accrual method taxpayers.

Third, the IRS then cited a canon of statutory interpretation known as noscitur a sociis, which is Latin for “it is known by its associates.” Essentially, according to the court, this argument was simply another variation on the “the presence of the word ‘incurred’ means section 468 is limited to accrual method taxpayers” argument that had failed. Though the court then stated, in Latin, that the tax collector was not helped by these arguments, it just as easily and understandably could have written, Ipsi foderunt foveam profundius (“they dug themselves a deeper hole”).

Fourth, the court concluded that the cases cited by the IRS and in which section 468 had been mentioned did not address the question it faced. Those cases involved accrual method taxpayers, and thus the question of whether section 468 was limited to accrual method taxpayers had not needed attention.

Fifth, the IRS cited the principle of ejusdem generis, a Latin phrase that means, in effect, “where general words follow an enumeration of two or more things, they apply only to persons or things of the same general kind or class specifically mentioned.” The problem with this argument is that section 468 does not have a list of things, but merely refers to one word, namely, “taxpayer.” As the court put it, “Without a generis, there is no ejusdem and this canon likewise cannot help us.” Nor did it help the IRS.

Sixth, the IRS argued that because section 468A, which permits deduction of future nuclear decommissioning costs, tracks section 468, its restriction to accrual method taxpayers should also apply to section 468. However, as the court explained, the regulations under section 461 do not limit section 468A to accrual method taxpayers, nor does section 468A do so. Moreover, even though the regulations under section 468A provide that “eligible taxpayers” may make deduction elections under section 468A, they define “eligible taxpayer” as a taxpayer with a qualifying interest in a nuclear power plant.

The court then turned to legislative history even though it had not unearthed any ambiguity in section 468. The court did so “out of a supersized abundance of caution.” It made clear that it was not doing so in response to the IRS claim that by jumping from section 468 to section 7701 to define taxpayer the court had conceded the word “taxpayer” was ambiguous. The court’s discussion of the legislative history is extensive, and enlightening, but in the end nothing was dug up to support the IRS conclusion.

The court’s description of how section 468 came into being, together with the discussion in Judge Lauber’s concurring opinion, is a marvelous exhibition of why legislative drafting often is compared to sausage manufacturing. It most likely is, as Judge Lauber noted, a “last-minute drafting glitch” that caused the word “taxpayer” to be used in section 468 without any sort of language limiting the section to accrual method taxpayers. Considering the twists and turns that the legislation endured on its way to becoming law, it is not surprising that the statute did not emerge as quite the provision that was intended. The remedy, of course, sits with the Congress. Though it is possible, it is not probable under current circumstances, that the outcome in this case will generate any sort of technical correction amendment in the near future.

Readers of MauledAgain know that I consider chocolate to be medicinal, and in many respects, essential. Of course, like any food item, it ought to be consumed in moderation.

Recently, the San Francisco School District has decided to prohibit elementary and middle school students from drinking chocolate milk. According to this report, and others, the school board has grouped chocolate milk with candy, cookies, and soda on its list of “foods bad for children.”

Eight years ago, in Tax-Free Beverages: Let Them Drink Chocolate?, and More on Tax-Free Beverages: Let Them Drink Chocolate, I explored the reactions to a proposal that chocolate milk be substituted for soda in school cafeterias, and shared a reminder sent to me that chocolate milk, like all chocolate, has medicinal properties beyond calcium, vitamin D, and other nutrients. The concern of those who advocate chocolate milk bans is the additional sugar in chocolate milk. The concern of those who oppose these bans is the evidence that when chocolate milk is prohibited, milk consumption by school children drops significantly, depriving them of calcium, vitamin D, and other nutrients present in milk. According to this commentary, “Several studies have examined the effects of drinking milk (flavored and white) on sugar and calorie intake. Two studies published in the Journal of the American Dietetic Association in 2002 and 2008 found that those who drank milk (flavored or plain) got in more nutrients like calcium, vitamin A, phosphorus and potassium and didn’t consume more sugar or calories than non-milk drinkers.” Perhaps the sugar from the chocolate milk offsets the desire to chomp down on a chocolate candy bar after drinking plain milk.

Fortunately, a solution has emerged. It is possible to purchase chocolate milk to which no additional sugar has been added. It’s an easy online search. Because milk contains natural sugar, it’s unclear why sugar needs to be added when cocoa powder is added, but perhaps it has something to do with the efficacy of the sugar industry lobby.

In any event, it appears that many school districts that banned chocolate milk eventually reversed course. It isn’t clear if they introduced no-sugar-added chocolate milk or reverted to the sugar-added variety.

Of course there is a tax angle to this. How long will it be before chocolate milk gets lumped with soda for purposes of the soda tax? Before the details of the soda tax were designed, I predicted, in Tax-Free Beverages: Let Them Drink Chocolate?:

Ultimately, several big decisions loom if a tax on sugar-laden foods moves forward. If chocolate milk is subjected to such a tax because it contains sugar, ought not white milk also be taxed? Granted, many fruits contain sugar, but I expect a “fruit exception” to be drafted into “sugar tax” legislation. If an exception is made for white milk, logic would dictate that combining exempt white milk with exempt strawberries should create tax-free pink milk. As for the chocolate milk, full use should be made of the vegetable exception. Chocolate is a vegetable, is it not?

What happened? As I noted in When Tax Is Bizarre: Milk Becomes Soda, the Philadelphia soda tax applies to almond, rice, and cashew “milk.” If chocolate milk gets added to that list, it will be yet one more reason soda taxes are not a sensible pathway to improving Americans’ dietary habits. As I noted in Gambling With Tax Revenue, “Taxing almond milk but not doughnuts belies the claim that the soda tax is designed to, and will improve, health.”

According to a recent news report, Setti Warren, mayor of Newton, Massachusetts, was slightly injured when he was thrown from his bike after hitting a pothole in the town of Stow, Massachusetts. Warren also is a candidate for the governorship of the Commonwealth. Fortunately, though transported to a hospital out of an abundance of caution, he was released and told to rest. He intends to resume his bicycling as soon as possible.

It could have been worse. He could have suffered broken bones, a concussion, lacerations, or some combination. Under some admittedly less common circumstances, he could have been killed. If he had been thrown in front of an oncoming vehicle, death would not be an impossibility.

This news came to my attention thanks to a facebook post. The comments were interesting. Several people noted that their vehicles had been damaged after hitting potholes. One person told the story of someone who was marching in a parade and fell when stepping into a pothole. I’m guessing that if the person must look ahead and cannot look down, it’s a wonder no one else fell. I also wonder why the parade route wasn’t inspected ahead of time.

One comment struck me as particularly harsh. The commenter explained, “wondering what he is going to do in the state when he could not fix his city.” Warren is the mayor of Newton. He hit a pothole in Stow, 24 miles from his town. He is not the mayor of Stow. So much for facts. The commenter then continued, “Looks like publicity stunt to get name recognition.” Really? Though that is a possibility, it is a highly improbable one. There are far safer and cheaper ways to pull stunts to get name recognition.

The pothole problem is not an isolated concern in one Massachusetts town. It is an epidemic. I have written about the pothole problem in posts such as Potholes: Poster Children for Why Tax Increases Save Money, When Tax Cuts Matter More Than Pothole Repair, Funding Pothole Repairs With Spending Cuts? Really?, Battle Over Highway Infrastructure Taxation Heats Up in Alabama, When Tax and User Fee Increases Cost Less Than Tax Cuts and Tax Freezes, Road Taxes and User Fees as a Form of Pothole Insurance , and Death as a Price for Taxes and User Fees.

Another person’s comment highlighted the tendency of most people to wait until it’s too late. This person noted, “not sure why an accident or an issue has to occur before anything does get fixed.” For centuries, people have figured they can “cross that bridge when they come to it,” but they forget that it is possible the bridge won’t be there. Readers of this blog are familiar with my claim that it is cheaper, in the long run, to increase taxes and user fees dedicated to highway, bridge, and tunnel maintenance and repairs than to wait until the invoice for new tires, repaired suspensions, and refurbished wheels arrives.

Would it be surprising to discover, in the future, that Warren begins or accelerates a pothole repair program in Newton? Or that officials in Stow do the same? Or that Warren puts prevention of damage, death, and injury from highway and infrastructure deficiencies on his gubernatorial platform? No. It appears to me that when people encounter a problem first-hand, their attitudes almost always change, often from one of hostility or disregard to one of acceptance or action. Problems are someone else’s concern until they become one’s own. That is why it is so easy for a person who has not had an unfortunate encounter with a pothole to dismiss the idea of taxes and user fees to prevent and repair potholes as “socialism,” or “careless spending.” Their tune changes quickly, just as it usually does when an addiction or other disease afflicting “other” people strikes a family member.

Indeed, it is sad that such a high price must be paid on account of delayed or insufficient prevention before the sensible path is chosen. Short-sightedness is no less a danger to this nation as is narrow-mindedness. Both seem to be proliferating. There is a vaccine for both conditions. It’s called education. But too many people run from education with the speed they use to distance themselves from any sort of long-term prevention program.

There is such a flood of television court shows that there is no way I get to see all of them. Fortunately, a reader passed along a link to an episode that I had missed, and of course, it involved taxes. Readers of MauledAgain know that those shows are reliable sources of material for this blog, including posts such as Judge Judy and Tax Law, Judge Judy and Tax Law Part II, TV Judge Gets Tax Observation Correct, The (Tax) Fraud Epidemic, Tax Re-Visits Judge Judy, Foolish Tax Filing Decisions Disclosed to Judge Judy, So Does Anyone Pay Taxes?, Learning About Tax from the Judge. Judy, That Is, Tax Fraud in the People’s Court, More Tax Fraud, This Time in Judge Judy’s Court, You Mean That Tax Refund Isn’t for Me? Really?, Law and Genealogy Meeting In An Interesting Way, How Is This Not Tax Fraud?, A Court Case in Which All of Them Miss The Tax Point, Judge Judy Almost Eliminates the National Debt, Judge Judy Tells Litigant to Contact the IRS, People’s Court: So Who Did the Tax Cheating?, and “I’ll Pay You (Back) When I Get My Tax Refund”.

The reader directed my attention to an episode of Judge Faith, and this most recent show to come to my attention does not disappoint. At its heart, it is another one of those “gift or loan” disputes, but in the context of taxation.

The plaintiff and defendant had known each other since 1968. They dated during high school, and then went their own ways. About twelve years ago, they got back in touch. The plaintiff alleged they were friends, the defendant disagreed and claimed that they dated off and on throughout the twelve years. The defendant explained that they helped each other out and did things for each other. He even claimed that seven years ago the plaintiff moved from where she had been living to where he was living and bought a house there because they were in a dating relationship. Though the plaintiff initially denied that she and the defendant had date, she eventually conceded that their relationship was more than friendship.

The plaintiff claimed that from a financial perspective the relationship was one-sided. She helped the defendant because he often was unemployed and in need of money. The defendant disagreed, stating that he “stands on his own,” has a job as a truck driver, and was unemployed only a few times for short periods. He also pointed out that he did work to repair and improve the plaintiff’s house.

A few years ago, the plaintiff loaned money to the defendant. He paid back most of it, so she let it go at that point because she “was satisfied with that.” She explained it was difficult getting defendant to repay, but the defendant disagreed. The plaintiff then produced text messages corroborated her version, proving that she had to repeat several times her request for repayment.

Judge Faith asked the defendant if he had ever loaned money to the plaintiff. He replied, “No.” Judge Faith then turned to the dispute before the court. According to the plaintiff, when it came time to do tax returns, the defendant told the plaintiff he did his online, but because he was on the road and could not get a good internet connection he needed to have someone do his tax return. So the plaintiff’s prepare did both the plaintiff’s and the defendant’s tax returns. When the two of them went to sign and file the returns, the plaintiff paid both fees, and claimed that the defendant promised to repay her his fee that she had paid on his behalf. The defendant said that plaintiff’s paying the preparer fee was a gift, that the payment was just another of the things they were always doing for each other, and that he did not know plaintiff wanted to be reimbursed until he received notice of the lawsuit. The plaintiff the provided another text message, one in which she had asked defendant when he planned to reimburse her for the tax preparation fee she paid on his behalf and that she had sent before she filed suit.

Judge Faith held in favor of the plaintiff. She explained that she believed the plaintiff. She noted that there was a history of the defendant borrowing money from the plaintiff.

The lesson from this case is simple, and it’s not new. When transferring money to a person, or making a payment on a person’s behalf, be clear to one’s self what the transaction entails. If it is a loan, document it. Make it clear that it is a loan, and specify the repayment provisions. Preserve the documentation in a manner that makes proving a case, if it gets to that point, easy to do. Though it is easy for banks and other third-party strangers to act in a commercial manner when lending money, it isn’t easy in most instances when the transaction is among family members or friends. Yet that is what makes it even more imperative to document a loan, because it is much easier for a friend or family member to claim a transaction is a gift than it is for someone who borrows from a bank to claim in all seriousness that the transfer of money by the bank is a gift. In an era when almost everyone is carrying a device that can record conversations, it should be fairly easy to agree to record, and to record, the conversation in which the money transfer or payment is discussed.

Those television court shows would be a steady source of material for MauledAgain if I watched them on a regular basis. But even though I get to see them sporadically, they still provide an occasional tax-related dispute. Among the posts inspired by these shows are Judge Judy and Tax Law, Judge Judy and Tax Law Part II, TV Judge Gets Tax Observation Correct, The (Tax) Fraud Epidemic, Tax Re-Visits Judge Judy, Foolish Tax Filing Decisions Disclosed to Judge Judy, So Does Anyone Pay Taxes?, Learning About Tax from the Judge. Judy, That Is, Tax Fraud in the People’s Court, More Tax Fraud, This Time in Judge Judy’s Court, You Mean That Tax Refund Isn’t for Me? Really?, Law and Genealogy Meeting In An Interesting Way, How Is This Not Tax Fraud?, A Court Case in Which All of Them Miss The Tax Point, Judge Judy Almost Eliminates the National Debt, Judge Judy Tells Litigant to Contact the IRS, and People’s Court: So Who Did the Tax Cheating?

This time, it was a case involving a transfer of money from the plaintiff to the defendant. The plaintiff argued that it was a loan, and she wanted to be repaid. The defendant argued that it was a gift. The plaintiff explained that she loaned the money to the defendant when he asked for help in buying a car, because he did not have funds for the down payment. The plaintiff testified that she told the defendant she had some money and could lend him $1,800. She also testified that the defendant said that he would repay her from his income tax refund.

Judge Judy reminded the litigants that the transaction occurred in May, and wondered why the defendant would be expecting a tax refund in May. The plaintiff responded that the defendant said he was still waiting for the refund. Perhaps the defendant had filed his tax return at the deadline. When asked by Judge Judy, the defendant denied promising to repay, denied saying he expected a tax refund, denied expecting a tax refund, and denied receiving a tax refund. The parties also responded to Judge Judy’s questions about their income and households. Both earned about $1,800 per month, both had a child, but only the plaintiff’s child lived with her. The defendant’s child did not live with him.

Judge Judy then simply concluded that the defendant owed the plaintiff the amount in question. She gave no explanation. My guess is that, similar to other cases, she did not think that the plaintiff, who did not have greater income than the defendant and who also was maintaining a household for a child, was in a position to, and would have decided to, give money to the defendant.

Though Judge Judy’s decision resolved that particular problem, the question from the problem prevention angle is how to deal with people who promise to make payments from anticipated tax refunds. As several television court show judges have mentioned, it’s rather common for people to ask for money or purchase something from a private individual and to promise payment or repayment from an anticipated tax refund. What should the seller or lender do?

In a commercial setting, when a person wants to borrow money or to make a purchase on credit, the lender or seller undertakes due diligence. The scope of the due diligence depends on the amount of money, but usually includes, among other things, a credit check, income verification, asset confirmation, and background checks. When someone in a private transaction encounters the promise of payment or repayment from an anticipated tax refund, what should the person do? I suggest that the person ask for a copy of the return showing the anticipated refund, proof that the return has been filed, proof, if any, that an electronically filed return has been accepted by the relevant tax agency, and a signed promissory note for the amount in question, with the amount, due date, interest rate, and other terms clearly specified.

I know, I know, people will react by exclaiming, “You sound like a lawyer,” or “You’re being such a nitpicker.” Indeed. In the long run, a few minutes or even an hour, and perhaps a few dollars, are an investment well worth making when the alternative is frustration, desperation, litigation, and friendship termination.

One of the arguments used by the anti-tax crowd is a simple one. Taxes should be cut, they argue, and can be cut, because there exists government spending that ought to be cut. That argument is logical. If there is government spending that ought to be cut, that should permit the cutting of taxes, assuming, of course, that there is no deficit from past years to be offset. In many states and localities, deficits are prohibited, and thus spending cuts can generate tax cuts. Of course, the sticking point is identifying “government spending that ought to be cut.”

Eric Boehm of Reason has shared another example of the inconsistency in positions taken by anti-tax, anti-government-spending politicians and lobbyists. As readers of MauledAgain know, I am not a fan of spending taxpayer public sector dollars on private sector sports facilities owned and operated by individuals and corporations awash in wealth and far from incapable of paying for their own projects. I have written about wealthy sports franchise owners going after taxpayer funds in posts such as Tax Revenues and D.C. Baseball, Public Financing of Private Sports Enterprises: Good for the Private, Bad for the Public, Taking and Giving Back, If You Want a Professional Sports Team, Pay For It Yourselves; Don’t Grab Tax Dollars, and St. Louis Voters Say “No” to Proposed Tax Increase to Fund Private-Sector Proposal.

In his report, Boehm describes the inconsistency between Corey Stewart’s gubernatorial campaign statements and his actions as chair of the Prince William County Board of Supervisors. When running for governor, Stewart promised to veto tax increases, cut government spending, and refuse to yield to special interests. Stewart attacked “phony conservatives,” alleging that, "At campaign time phony conservatives promise not to raise taxes, but they quickly betray their promises when the special interests come calling.”

Though Stewart lost his attempt to win nomination for the governorship, he continued to serve as chair of the Prince William County Board of Supervisors. One of the issues facing the board is the request by the Potomac Nationals, a single-A professional baseball franchise affiliated with the Washington Nationals, for $35 million of taxpayer funds to help finance a stadium near Woodbridge, Virginia. Based on his campaign statements, one would expect Stewart to say, “No. It violates everything for which I claimed to stand.” However, Stewart has supported spending taxpayer dollars for a private sector business since the project was first proposed. Citizens sought a referendum on the issue, but Stewart and the Board blocked that request. That’s not a surprise, because they, like most others, surely suspect that the referendum outcome would be, “No free money for wealthy people.”

Supporters of the deal, consisting mostly of the owner of the franchise and hired help, claim that it would enrich the taxpayers. The promises of job creation and increased tax revenue are the same sales pitches used by every other taxpayer-dollar-seeking wealthy sports franchise owner. Even though the promised jobs and revenue increases don’t materialize, those sales pitches are used time and again, because those who understand the reality often, like the dismissed referendum seekers in Virginia, are brushed aside and blocked from participating.

Opponent of the deal have suggested that they would support it if the owner of the franchise guaranteed the revenue benefits that are promised. But the owner doesn’t want to do that. It isn’t difficult to determine why. It puts the risk where it ought to be, on the private sector wealthy sports franchise owner.

Boehm describes what would be the largest public subsidy for a minor league baseball stadium in the nation’s history as amounting “to a massive government-funded giveaway to a privately owned baseball team, the sort gubernatorial candidate Corey Stewart would have railed against.” He suggests, “It remains to be seen whether county supervisor Stewart has the will to keep the taxpayers' best interest in mind.” But we know the answer. Like so many other politicians who have long track records of breaking campaign promises every time one blinks, Stewart is well on the way to not doing what he says. It isn’t difficult to figure out what Stewart and his sort mean by “cutting spending.” They leave out the adjective “certain” and they avoid defining that word. Actions though, in the long run, speak more loudly than do words.

A reader sent me a link to an article describing a San Francisco program designed to encourage people to save money by paying them cash if they meet specified savings standards. The reader asked, “taxable income or a gift”? Whether it is taxable income depends on the recipient’s deductions, credits, and other tax attributes, so that part of the question cannot be answered. The broader question is whether the payment must be included in gross income. The answer is yes unless there is an applicable exclusion.

Analysis of the payment requires an understanding the program under which the payment is made. The city is “recruiting” 1,000 people to join the program. Under the program, a participant who saves $20 each month for six months is paid $60. The city keeps track of the participant’s monetary activity through an electronic link between the participant’s bank and the city. Anyone age 18 or older Is eligible to join, though the city’s goal is to reach participants who live in the city’s “poorest households.” It is unclear whether the city will select participants based on income, or on a first-come, first-serve basis. It appears as though once 1,000 people join, the program is closed. The money being paid to participants comes from a non-profit “micro-savings” organization funded by private donations.

The reader pointed to an exclusion that, at first glance, appears to be relevant. Is it a gift? I do not think it is. The payment is transferred with the intent of causing the recipient to behave in a certain manner desired by the city of San Francisco. In some respects, it resembles compensation. Though services are not performed directly for the city, the city hopes that by encouraging people to save, they will be less likely to be evicted, and thus less likely to be part of the financial instability that imposes costs on the city and its taxpayers.

Although there are dozens of exclusions in the Internal Revenue Code, almost all of the others, by their terms, do not apply. The payments are not scholarships. They are not made on account of personal injury. They are not inheritances. They are not employee achievement awards. They are not qualified fringe benefits.

Are the payments prizes? No, they are not prizes as defined by the Internal Revenue Code for purposes of the exclusion for prizes and awards. The payments are not made in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement. The participants are not selected without any action on their part to enter the program. Nor is the payment transferred to a governmental unit or charity.

Do the payments fit within the general welfare exclusion, an administrative rather than statutory provision? I do not think so. The payments are not limited to low-income individuals, at least as the program has been described. Nor are they paid from a state or local government’s general welfare fund. Some guidance might be found from Revenue Ruling 76-131, in which the IRS concluded that payments under the Alaska Longevity Bonus Act were includable in gross income. The payments were made to persons who had attained the age of 65 years and had maintained continuous domicile in Alaska for 26 years. The IRS explained that the payments were made regardless of the recipient’s financial condition, health, education, or unemployment status. A similar conclusion was reached in Technical Advice Memorandum 9717007, dealing with payments of gaming revenue by Native American tribes to their members. Though there are differences, the Alaska program resembles the San Francisco program to the extent that a government is using cash payments to encourage its citizens to behave in a certain manner.

Those theoretical questions lead to practical ones. Will the City of San Francisco, or the non-profit organization funding the program, issue Forms 1099 to the recipients? Will the recipients, particularly if no Form 1099s are issued, report the $50 as gross income? Would the $60,000 in total potential gross income, spread over 1,000 recipients, at least some of whom would have no tax liability even if the $60 is included in gross income, generate sufficient tax revenue to justify triggering return examinations and audits?

Several days ago, Tom Giovanetti, of the Institute for Policy Innovation, shared his rationale for supporting the repeal of the federal income tax deduction of state and local taxes. Giovanetti argues that the deduction encourages “higher state taxes through the federal tax code by allowing the deductibility of state taxes from federal income taxes.” He explains that, “The deduction of state taxes partially insulates taxpayers who otherwise might resist higher taxes or flee to a lower-tax state,” and that, “The high taxes in these states are essentially subsidized through the federal tax code by taxpayers from low tax states.”

Giovanetti provides empirical evidence for his position, courtesy of the Tax Foundation. He writes, “California alone is responsible for 19.6 percent of the national tax cost of the state tax deduction, with New York second at 13.3 percent, New Jersey at 5.9 percent and Illinois at 5 percent. Adjusting for population, New York is #1, New Jersey is #2, Connecticut is #3, California is #4, and Maryland is #5.”

Giovanetti argues that “federal policy should be neutral toward state taxes, rather than subsidizing higher taxes through the federal tax code. And it certainly doesn’t make sense for taxpayers in low-tax states like Texas and Florida to be subsidizing high-tax states like California and New York.”

Though I agree with Giovanetti that the deduction for state and local taxes ought to be repealed as part of a genuine reform of federal income taxation, I do not agree that the subsidy aspect is a defensible justification. For me, simplification is a key element of sensible tax reform, and eliminating the deduction for state and local taxes contributes to simplification without undermining the basic principles of an income tax.

If, as Giovanetti argues, it is wrong for residents of one state to subsidize those of another, then an anti-subsidization policy should remove all federal laws that enable this sort of subsidization. The same Tax Foundation that provided the subsidy information on which Giovanetti relies also provided an analysis of state dependency on federal subsidies. The states with the highest percentage of federal aid as a percentage of state general revenue are, for the most part, states with lower state and local taxes. It’s easy to keep state and local taxes low if federal funding, financed by states with much lower percentage of state general revenue funded by federal subsidies, makes up the difference.

So what would happen if all of these subsidies, not just the state and local tax deduction subsidy, were removed? From which states would people flee? In which states would people’s economic well-being worsen?

Every political entity, whether federal, state, county, township, city, village, or other subdivision, that has jurisdiction over highways, roads, streets, and similar thoroughfares must find ways to fund the repair, maintenance, and replacement of those avenues. Most states impose fuel taxes and vehicle registration fees which are used to care for state highways, and often are shared with local governments to use in maintaining local roads. Some jurisdictions use money from their general funds, which hold receipts from property, sales, and other taxes.

According to this report, the city of La Habra Heights in Los Angeles County, California, is struggling to find a way to fund repair of its roads. The city has been using special property tax assessments to raise money when a road repair was necessary. Five years ago, voters rejected a proposed road tax to replace the property tax assessment system. Now the city is considering a “utility users tax” that would add 3 or 4 percent to utility bills paid by residents. The city has commissioned a survey to ascertain residents’ reaction to the proposal. Other suggestions include diverting trash franchise fees or oil taxes from the general fund to pay for road repairs.

The city was formed in 1978 when it was set up as a separate jurisdiction. A city official explained that when the city was incorporated, “there was no consideration given to repair and maintenance of roads.” That’s the sort of tax planning that promises future chaos. When the city was incorporated, the streets existed, and were repaired by the jurisdiction from which the city was carved out. It’s not unlike the child who leaves home but doesn’t understand that those things that appeared to be free – heat, water, food, vehicle insurance – were costs borne by the parents that would now be the responsibility of the child. Did anyone involved in cutting La Habra Heights loose think about the overall budget, including the expenses of being a city? The answer is yes. According to the incorporation ballot, one of the arguments about independence for the city was this brilliant-in-hindsight observation: “The proponents of incorporation have understated the cost of operating a city and overstated the revenues to be received.” Though nothing specific about road maintenance was mentioned, other concerns suggesting that some people were aware that operating multiple small jurisdictions increases costs because economy-of-scale is minimized or lost.

Though throughout the country a variety of mechanisms are used to fund local road repairs, California law probably limits what is available to La Habra Heights officials. An easy solution, though probably pre-empted by the state, would be a vehicle use fee imposed on all vehicles registered in the city. The ideal solution, a mileage-based road fee, would be difficult to set up in so small of an area. A street or road tax makes sense, but residents rejected that idea by a 2-to-1 margin, perhaps thinking that road repair should pay for itself. It doesn’t. A road tax is cheaper than paying for new wheels, new tires, front end alignments, and suspension repairs. I suppose people figure someone else will hit that negative lottery. Pictures of the roads in that city suggest that eventually almost everyone driving their vehicles daily on those streets will be paying, one way or another.

For more than a few years, I have tried to persuade advocates of federal and state ReadyReturn programs that one of the major impediments to implementing a well-intentioned but doomed idea is the failure of the IRS and state revenue departments to handle data with sufficient reliability to avoid the disastrous consequences of data management errors. For those interested, my commentaries on the flaws of Ready Return include Hi, I'm from the Government and I'm Here to Help You ..... Do Your Tax Return, ReadyReturn Not a Ready Answer, Ready It Was Not: The Demise of California’s Government-Prepared Tax Return Experiment, As Halloween Looms, Making Sure Dead Tax Ideas Stay Dead, Oh, No! This Tax Idea Isn’t Ready for Its Coffin, Getting Ready for More Tax Errors of the Ominous Kind, Federal Ready Return: Theoretically Attractive, Pragmatically Unworkable, First Ready Return, Next Ready Vote?, 14-part series, Simplifying theTax Return Process, Surely This Does Not Boost Confidence In The ReadyReturn Proposal, Imagine ReadyReturn Afflicted with This Sort of IRS Error, and Debating the ReadyReturn Proposal, In Writing. I also published a 14-part series on the concept’s shortcomings, with an index, and engaged in a published debate, Perspectives on Two Proposals for Tax Filing Simplification, with Prof. Joseph Bankman, one of the most vigorous advocates for the idea.

My concerns about shortcomings in data management reliability, and the dangers they pose to a Ready Return system, were reinforced when, a little more than two years ago, the IRS attempted to impose income tax on gifts excluded from gross income by section 102 of the Internal Revenue Code, as described in Surely This Does Not Boost Confidence In The ReadyReturn Proposal. My concerns were further reinforced when, almost a year ago, we learned that the IRS sent a tremendous number of Failure to Deposit Notices to employers who had not failed to deposit, as I discussed in Imagine ReadyReturn Afflicted with This Sort of IRS Error. If these sorts of errors were to occur with something like ReadyReturn, on a scale orders of magnitude larger than those two sets of errors, the chaos would be horrendous, for taxpayers and governments alike.

And now comes a report by the Treasury Inspector General for Tax Administration that the IRS mishandled fake Forms W-2 in ways that adversely affected hundreds of thousands of individual taxpayers. The report focused on a sliver of identity theft and similar problems, namely, those that arise when identity thieves use someone else’s tax identification information when applying for, and obtaining, employment. The report outlines a long list of problems, some of which involve data tracking gaps and some of which involve inadequate notification to taxpayers, particularly when their identifying information is connected to Forms W-2 that have nothing to do with the taxpayers. It seems to me that after reading this report, most people would react by asking, “Do we want this outfit creating our tax returns that are presumptively correct?”

It is unclear whether the IRS has these problems because it is underfunded, because its employees are confused, because different parts of the tax return processing systems are disconnected, because employee turnover is high, or for some other reason. My guess is that many of the problems are due to the underfunding by a Congress that wants to eliminate taxes and the IRS. Putting yet another burden, and one that is rather substantial, on the IRS is nothing more than a recipe for failure. As I noted in Imagine ReadyReturn Afflicted with This Sort of IRS Error, “Because [this error] is only one of tens of millions of possible errors, any sort of arrangement that accelerates the spread or widens the scope of an error ought not be implemented until and unless it is ironclad secure. The IRS, the nation, and its taxpayers are not ready for a federal ReadyReturn or any sort of equivalent.”

When someone claims that tax law isn’t “really law” because it’s “just numbers,” I have a list of tax issues that don’t require computations nor drown a person in numbers. For example, earlier this month, in Tax Question: What Is a Salad?, I described the challenges facing tax professionals in Australia who need to decide what is, and is not, a salad.

Now, according to numerous sources, including this one, the European Court of Justice is taking on the question of “what is a sport?’ for purposes of applying the value-added tax on competition entry fees. The value-added tax does not apply to fees paid to enter sports competitions. The English Bridge Union paid the tax on tournament entry fees, and sought a refund. British tax authorities refused, arguing that bridge is not a sport. So the dispute has reached the European Court of Justice, whose top advisor concluded that bridge indeed is a sport. Though not binding, the opinions of the advisor usually are followed by the court.

There is no definition of “sport” in European Union law other than excluding games of chance from being so classified. To obtain an exemption from the value-added tax as a sport under European Union law, a competition must be one in which there are benefits to physical or mental well being. Tax authorities in some countries, such as Austria, Belgium, Denmark, France, and the Netherlands, treat bridge as a sport, but other countries, such as Ireland and Sweden, do not. The advisor to the European Court of Justice concluded bridge is a sport because it required mental effort as part of the challenge.

It’s not a numbers thing, is it? About a year ago, Newsweek published an article focusing on the definition of sport, in the context of the Olympics, and coverage of activities by ESPN, an acronym that includes “S” for “Sports.” As one might expect, people disagreed on whether particular activities qualified as a sport. Among those described as generating controversy were auto racing, cheerleading, cheese-rolling, chess, cup-stacking, ferret-legging, golf, hot dog eating, poker, spelling bees, video games (“esports”), and wife-carrying.

Perhaps arguing about taxes is a sport.

On more than a few occasions I have discussed the failure of supply-side, trickle-down economic theory as it played out in Kansas. In posts such as A Tax Policy Turn-Around?, A New Play in the Make-the-Rich-Richer Game Plan, When a Tax Theory Fails: Own Up or Make Excuses?, Do Tax Cuts for the Wealthy Create Jobs?, Kansas Trickle-Down Failures Continue to Flood the State, The Kansas Trickle-Down Tax Theory Failure Has Consequences, Who Pays the Price for Trickle-Down Tax Policy Failures?, Kansas As a Role Model for Tax Policy?, and Will Congress Pay Attention to the Kansas Tax Model?, I described the problems created by the enactment of tax cuts for the wealthy in Kansas, the outcry over the outcome, and the efforts, finally successful in part, to reverse the tax cuts.

Now comes news that in Oklahoma, another state that bought into the tax-cuts-for-the-wealthy-means-more-money-for-everyone-else nonsense, steps are being taken to repair the damage. Reacting to the Republican governor’s threat to veto the budget if it did not include a tax increase, the legislature increased taxes and fees on a variety of items, and repealed another pending income tax cut. Though it has taken time, people in Oklahoma have learned that tax cuts for the wealthy don’t pay for themselves, and surely don’t enrich everyone else. In fact, because of the spending cuts necessitated by making the wealthy wealthier, everyone else faces the economic consequences of those spending cuts.

Usually, people learn from watching another person’s experience. When someone sees a person do something foolish with adverse consequences, that person usually refrains from imitating the behavior. Sadly, though, in too many instances, such as seeing the consequences of texting while driving, operating a vehicle while intoxicated, or enacted tax legislation based on disproved economic theory, people seem to have some sort of desire to try it themselves even though the disadvantageous outcome ought to be obvious. The looming question is whether the Congress will learn by observing the outcomes of these state experiments or will plow ahead in deference to its funding sources and subject the entire nation to a Kansas and Oklahoma experience.

Readers of this blog know that I am not a supporter of the soda tax, for all sorts of reasons, particularly because it doesn’t tax most items containing sugar and it taxes some items that are not unhealthy in terms of sugar. I’ve bee writing about the soda tax for almost ten years, in posts such as What Sort of Tax?, 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?, The Russian Sugar and Fat Tax Proposal: Smarter, More Sensible, or Just a Need for More Revenue, Soda Tax Debate Bubbles Up, Can Mischaracterizing an Undesired Tax Backfire?, The Soda Tax Flaw in Automotive Terms, Taxing the Container Instead of the Sugary Beverage: Looking for Revenue in All the Wrong Places, Bait-and-Switch “Sugary Beverage Tax” Tactics, How Unsweet a Tax, When Tax Is Bizarre: Milk Becomes Soda, Gambling With Tax Revenue, Updating Two Tax Cases, When Tax Revenues Are Better Than Expected But Less Than Required, The Imperfections of the Philadelphia Soda Tax, When Tax Revenues Continue to Be Less Than Required, and How Much of a Victory for Philadelphia is Its Soda Tax Win in Commonwealth Court?.

Within the past few days I’ve become aware of another flaw in this sort of tax. When reading this commentary objecting to Chicago’s march into the soda tax world, I learned that people who request ice in fountain drinks will end up paying tax on the ice. Why? According to supporters of the one-cent-per-ounce tax, the inclusion of ice is discretionary and the amount is not easily measured. Thus, the tax on a 20-ounce drink will be computed based on 20 ounces, even if a portion of the cup is filled with ice. One can argue that the tax is not technically a tax on the ice. The tax is computed based on 20 ounces, but it is applied to the soda put into the cup. If ice is in the cup, then there is less than 20 ounces of soda in the cup. By imposing a tax of 20 cents on, for example, 10 ounces of soda, the city is imposing a tax at the rate of two cents per ounce. Surely there is a violation of some Illinois law when two similarly situated consumers are charged a tax at two different rates on the same product. I doubt, though, that this problem will stop the Chicago soda tax from going into effect next week. Why would it? None of the other flaws have caused the designers of the tax to stop and think logically about the problems they claim to be solving and the way in which they are going about it.

For almost ten years I have been commenting on the Philadelphia soda tax, from when it was a proposal, through its enactment, and during its rocky track record, as it has failed to raise the predicted revenue and has met legal challenges from opponents. I have shared my thoughts in posts such as What Sort of Tax?, 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?, The Russian Sugar and Fat Tax Proposal: Smarter, More Sensible, or Just a Need for More Revenue, Soda Tax Debate Bubbles Up, Can Mischaracterizing an Undesired Tax Backfire?, The Soda Tax Flaw in Automotive Terms, Taxing the Container Instead of the Sugary Beverage: Looking for Revenue in All the Wrong Places, Bait-and-Switch “Sugary Beverage Tax” Tactics, How Unsweet a Tax, When Tax Is Bizarre: Milk Becomes Soda, Gambling With Tax Revenue, Updating Two Tax Cases, When Tax Revenues Are Better Than Expected But Less Than Required, The Imperfections of the Philadelphia Soda Tax, and When Tax Revenues Continue to Be Less Than Required.

Within a 24-hour period, two developments concerning the Philadelphia soda tax surfaced. One brought bad news to the supporters of the tax, and the other brought good news.

First, news broke that the city planned to lower its estimate for soda tax revenue for the fiscal year. In an announcement that surprised no one, except perhaps the die-hards who claimed that revenues would surge in time to offset the previous shortfalls, the city finally admitted that it would not meet its $46.2 million projection for the fiscal year ending at the end of this month. Why? Through the end of April, only $25.6 million had been raised, and the likelihood of raising more than $10 million in each of May and June was pretty much zero. That conclusion reflects reality, considering that in its best month, the tax generated $7 million, short of the average monthly amount required to meet the city’s revenue projection. Yet, stubborn optimists that they are, city officials decided not to reduce its estimate for soda tax revenues during the fiscal year ending June 30, 2018. Why? A spokesperson explained that the tax has been around for only four months and that the city continues to be “working out the kinks.” It would be enlightening to know what those kinks are, and how “working [them] out” would double the revenue from the tax. Perhaps a travel ban on people leaving the city to make their purchases elsewhere? In the meantime, the City Controller, pointing out an issue I previously raised, suggested that the shortfall in soda tax revenue presented the very real possibility of a “multimillion-dollar burden” for taxpayers. Why? The city has committed to spending money that it anticipated receiving but that hasn’t been flowing into its coffers.

Second, the following day, as reported in this story, Pennsylvania Commonwealth Court upheld a lower court decision that rejected arguments against the legality of the tax. Opponents of the tax plan to appeal. In a split decision, Commonwealth Court concluded that the tax was not a double sales tax even though the burden of both the sales tax and the soda tax fell on the retail purchaser. In its opinion, the court explained that the tax “is not imposed on the ownership of the sugar-sweetened beverages or on their sale; rather, it is only imposed if the beverages are supplied, acquired, delivered, or transported for purposes of holding them out for retail sale in the city.” Does that not appear to be a conclusion that the tax is an inventory or property tax? Commonwealth Court, however, concluded that the tax is not a duplicative property tax violating the state Constitution’s uniformity clause because it is a fixed amount per ounce rather than a percentage of the beverage value, and because the tax is “imposed only when the supply, acquisition, delivery or transport is for the purpose of the dealer’s holding out for retail sale within the City the sugar-sweetened beverage or any beverage produced therefrom.” Is that an inventory tax? If so, is Philadelphia authorized to enact an inventory tax? The court did not address those questions because they had not been raised.

The city’s victory in Commonwealth Court not only is temporary, considering the possibility of reversal by the state Supreme Court, but also is pyrrhic. The city, anticipating Supreme Court affirmance, sees a clear path to collection of a tax that is bringing in far less revenue that the city has committed to spending. That leaves the city with three choices, namely, cut back on those programs, cut back on city services, or enact or increase another tax. Prevailing in a legal battle over a pragmatically failed tax won’t make selecting one or more of those three choices a reason to rejoice.

A reader directed my attention to an online retailer selling chocolate band-aids. The reader asked, I think half in jest, if the purchase price was a possible medical expense, a possible child care expense, a possible business expense, or a possible home office expense. After examining the product, my conclusions are mixed. Why? It’s not really a band-aid, just as the annual IRS 1040 Chocolate Bar isn’t a tax form.

Even if the novelty item could be used as a band-aid, its cost would not qualify as a medical expense deduction. The deduction does not apply to over-the-counter items such as band-aids. [Edit: With thanks to reader Bob Kamman, a solo tax practitioner in Phoenix, Arizona, who noticed my error, I stand corrected. If the chocolate band-aid was, in fact, a band-aid and could be used as a band-aid, its cost WOULD qualify as a medical expense deduction, as there are some over-the-counter items the cost of which can qualify as a medical expense.]

The price of the chocolate band-aid is not a child and dependent care expense for purposes of the child and dependent care credit. Why? Because it is food, and food costs don’t qualify.

Because the home office deduction reflects a portion of the costs of operating the home in which the office is located, the cost of a chocolate band-aid would not be part of the computation.

In contrast, the cost of chocolate band-aids might qualify as a trade or business expense if the business purchases them as items to be given to customers, clients, or patients. At less than $1 per band-aid, there’s little risk that that annual $25 per-person business gift deduction limitation would be exceeded. Years ago, and perhaps to some extent even now, barbers and eye doctors gave their young customers and patients lollipops. I’m guessing that practice is fading, in part because of increasing efforts to reduce sugar consumption. But, because chocolate is medicinal, it isn’t quite the same as non-chocolate candy.

It’s a good thing these chocolate band-aids are not intended for, nor adaptable, to actual use. Why? Because if they were, it would bring an entirely new perception to the phrase licking one’s wounds.

On at least three previous occasions, I have explored the difference between a tax and a fee. I did so in Please, It’s Not a Tax, So Is It a Tax or a Fee?, and Tax versus Fee: Barely a Difference?. In the last of those commentaries, at a reader’s request, I provide my definition of each:

Though a variety of definitions and distinctions have been suggested over the years, I distinguish a fee from a tax by identifying a fee as an amount paid in exchange for a service provided by a government directly to the person making the payment. Thus, for example, the amount charged by a township for trash pick-up is a fee. The amount charged by a state government or agency for the use of a toll highway is a fee. The amount charged by a local government for filing a zoning variation application is a fee. On the other hand, amounts paid to a government that bring indirect benefits, such as an income tax, is not a fee. A portion of what is paid in federal income tax funds national defense, which in turn provides a benefit to citizens, but there is no one-on-one relationship between the amount of tax paid that ends up financing national defense and the value of military protection afforded to a particular individual or business. Sometimes the line is blurred. The township in which I live charges a storm water fee, but it is a flat amount regardless of the size of the lot or the amount of storm water discharged from the property into the storm sewer system. Is it truly a fee? Yes, in the sense that the township provides a system for removing storm water back into the creeks. No, in the sense that a person who diverts most storm water into on-site tanks nonetheless pays the fee, which makes it more difficult to describe the payment as one made for a direct service.

The reader also asked, “Does it matter?” I noted that although some commentators, for example, Lawrence Reed, distinguish taxes and fees by characterizing fees as charges that one can escape, I did not agree, because there are fees that cannot be escaped and taxes that one can avoid.

In this era of tax hatred, it has become commonplace for legislators, lobbyists, and other advocates to use the label that sells. Thus, in Please, It’s Not a Tax, I criticized the use of the term “tax” by opponents of a fee, who clearly were trying to ride the anti-tax wave to prevent enactment. And in So Is It a Tax or a Fee?, I criticized the use of the term “fee” by proponents of a fee that they had earlier labeled a “tax,” because calling something a fee doesn’t get the attention of the anti-tax crowd to the extent a tax does.

In Tax versus Fee: Barely a Difference?, I concluded by suggesting, “Ultimately, whatever it is called, it ought to be measured sensibly, imposed only after appropriate public notice, hearings, and legislative action, and paid if the legal obligation to do so exists.” So, unsurprisingly, along comes news that the “tax or fee” debate is at the root of a controversy in Oklahoma.

Oklahoma has enacted a new $1.50 per-pack “fee” on cigarettes. This action comes on the heels of four previous failures to increase the state per-pack cigarette tax by $1.50. Opponents have sued, asking the Oklahoma Supreme Court to invalidate the legislation. They argue that the fee originated in the state Senate, thus violating the requirement in the state Constitution that revenue-raising legislation originate in the state House. The opponents also argue that enactment of the legislation during the last week of the legislative session violated the state Constitution’s requirement that revenue-raising legislation not be enacted during the last five days of a legislative session. The opponents also argue that proponents of the $1.50 charge were trying to characterize the legislation as not revenue-raising by labeling it a fee. The opponents explain that the fee “simply reincarnated the earlier cigarette tax bills under a new name.”

Though I’m no expert in Oklahoma constitutional law, it seems to me that the fee raises revenue, and thus has been enacted in revenue-raising legislation. Accordingly, the process by which it was enacted appears to have violated the Oklahoma Constitution. If, for some reason, the Oklahoma Supreme Court determines that the provisions in the constitution applies to taxes but not fees, then deciding whether the $1.50 charge is a tax or fee would be determinative. The label alone should not resolve the question. The state is not selling cigarettes to people, nor is it selling licenses to use tobacco, and thus it is difficult to characterize the charge as a fee. It would not be surprising if the Oklahoma Supreme Court, if it were to limit the requirements in the state Constitution to taxes, decided that this particular charge was a tax. It will be interesting to see what the court decides, probably sometime later this year.

One of the arguments in favor of states’ rights in a federal system is the opportunity for states to serve as experimental laboratories, providing a smaller-scale examination of the effects, benefits, and disadvantages of particular policies. A good example supporting this argument is what I call the Kansas Tax Model. Kansas enacted trickle-down supply-side tax cuts, an approach that many, including myself, identified as misguided. In A Tax Policy Turn-Around?, I explained how the Kansas 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. In A New Play in the Make-the-Rich-Richer Game Plan, I described how Kansas politicians have been struggling to find a way to undo the damage caused by those ill-advised tax cuts for the wealthy. In When a Tax Theory Fails: Own Up or Make Excuses?, I pointed out that the Kansas experienced removed all doubt that the theory is shameful. In Do Tax Cuts for the Wealthy Create Jobs?, I described recent data showing that the rate of job creation in Kansas was one-fifth the rate in Missouri, a state that did not subscribe to the outlandish tax cuts for the wealthy that Kansas legislators had embraced. In Kansas Trickle-Down Failures Continue to Flood the State and The Kansas Trickle-Down Tax Theory Failure Has Consequences, I described how large decreases in tax revenue, the opposite of what is promised by the supply-side theorists, triggered cuts in public education, and in turn stoked the fires of voter frustration. The voter reaction, however, did not push out of office enough supply-side supporters. In Who Pays the Price for Trickle-Down Tax Policy Failures?, I described how the governor of Kansas, who claimed that tax cuts for the wealthy would generate increased revenues, proposed to deal with the resulting revenue shortfall by cutting spending for essential services. In Kansas As a Role Model for Tax Policy?, I noted that the chief advocate in Kansas for the failed tax policy, its governor, urged that the Congress do what had been done in Kansas, even though signs of the policy’s failure were becoming increasingly visible.

Now comes news that the Kansas legislature, by significant margins, has voted to override the governor’s veto of tax increases enacted to repair, at least in part, the damage caused by the unsurprising consequences of cutting taxes for the wealthy. The legislation does not fully repeal the original tax cuts but it offsets a portion of those cuts. The governor called the legislation “bad for Kansas” but neglected to point out how “bad for Kansas” his trickle-down, supply-side tax policy has been.

The Kansas experience is not the first in which the flaws of trickle-down, supply-side tax policy have required subsequent adjustments. The ballyhooed 1981 Reagan tax cuts required subsequent corrective legislation. The Bush tax cuts contributed significantly to the economic woes of the late 2000s, and required subsequent corrective legislation. The trickle-down tax legislation in Minnesota generated a budget crisis that was solved through corrective legislation that eliminated a budget deficit and stimulated the state’s economy to a degree unmatched by the trickle-down, supply-side approach.

The idea of using the Kansas tax-cut policy as a model for federal tax reform, as urged by the governor of Kansas, and as reported in this article, caused me to ask, in Kansas As a Role Model for Tax Policy?, “Does it make sense to take reading lessons from illiterate people?”

As I also pointed out in Kansas As a Role Model for Tax Policy?, “Kansas indeed is a role model for national tax policy, but it’s not the lesson Brownback wants to teach. What the Congress needs to understand from the Kansas fiasco is that supply-side trickle-down tax and economic policies do not work.” I noted that in Kansas, the failures of extremist tax policies had carved a divide between centrist Republicans and the extremists in the party. The best prospects for effective tax policy are found in cooperation between centrists of both parties, and not on the either extreme edge.

I repeat the advice I shared in Kansas As a Role Model for Tax Policy?. “If Congress wants to learn what works, it can examine states where demand-side policies have been enacted and have worked. Otherwise, as a Republican legislator warned, economic failure makes voters angry, and when voters get angry, they ‘go to the polls and get rid of you.’ That, too, is a lesson.” Moderate Republican legislators in Kansas appeared to have learned both lessons. It remains to be seen what happens in the nation’s capital.

Readers of this blog know that I watch television court shows, not only because of my interest in law generally, but because from time to time tax issues pop up in the cases. Over the years, these shows have provided material for posts such as Judge Judy and Tax Law, Judge Judy and Tax Law Part II, TV Judge Gets Tax Observation Correct, The (Tax) Fraud Epidemic, Tax Re-Visits Judge Judy, Foolish Tax Filing Decisions Disclosed to Judge Judy, So Does Anyone Pay Taxes?, Learning About Tax from the Judge. Judy, That Is, Tax Fraud in the People’s Court, More Tax Fraud, This Time in Judge Judy’s Court, You Mean That Tax Refund Isn’t for Me? Really?, Law and Genealogy Meeting In An Interesting Way, How Is This Not Tax Fraud?, A Court Case in Which All of Them Miss The Tax Point, Judge Judy Almost Eliminates the National Debt, and Judge Judy Tells Litigant to Contact the IRS.

Though it might appear that I am glued to the television, the reality is that with so many other things on my to-do lists, I only see television court shows when I happen to turn on the television. In other words, I don’t make any effort to see every episode of every show. I’m not sure that’s even possible without giving up sleep for the next five years. But, to my rescue comes a reader, who pointed me in the direction of a People’s Court episode from late last month that I had not seen. Of course, it involved a tax issue.

The defendant in the case is the biological aunt of the plaintiff, who raised the plaintiff. During the time in question, the plaintiff lived in the defendant’s home and used the defendant’s automobile. The plaintiff testified that she needed help doing her taxes, so she asked her aunt to prepare her return. The plaintiff claimed that the defendant put the defendant’s daughters on the plaintiff’s return as dependents, and selected head of household filing status. The plaintiff also asserted that the federal and tax refunds were deposited into the defendant’s bank account.

The defendant, in turn, claimed that the plaintiff did her own tax return. She admitted that she did not file tax returns for the year in question. She admitted that the refunds went into her bank account but did not know that happened until notified at a later time. In response to the judge’s question of how the plaintiff would have the necessary information to direct the refund deposit into the defendant’s bank account, the defendant said that the plaintiff, by living in the defendant’s house, had access to the bank information. The defendant counterclaimed for alleged unpaid rent and automobile repair expenses.

The judge concluded that there was no dispute that the defendant owed the amount of the tax refunds to the plaintiff. That amount was offset by the automobile expenses but, for failure of proof, not for unpaid rent.

Unlike Judge Judy, who in a previous case, advised a litigant to contact the IRS, the judge in this case made no such suggestion. Perhaps it’s because she could not figure out which party committed the fraud. Did the defendant prepare the plaintiff’s return and put her own children on the return as plaintiff’s dependents because she had no use for those deductions? Or did the plaintiff prepare her own return and claim the defendant’s children because she knew the defendant was not filing a return? Why did the defendant not file returns? Why would the plaintiff direct that the refunds be deposited into the defendant’s bank account? Did the plaintiff and defendant act in concert, and then have a falling out that triggered the dispute? Do IRS employees watch television court shows? Do they collectively manage to do what I haven’t done, which is to watch all of the episodes looking for tax issues?

As expected, the Philadelphia soda tax continues to be controversial. Controversy has accompanied it since its proposal, as I’ve described in posts such as What Sort of Tax?, 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?, The Russian Sugar and Fat Tax Proposal: Smarter, More Sensible, or Just a Need for More Revenue, Soda Tax Debate Bubbles Up, Can Mischaracterizing an Undesired Tax Backfire?, The Soda Tax Flaw in Automotive Terms, Taxing the Container Instead of the Sugary Beverage: Looking for Revenue in All the Wrong Places, Bait-and-Switch “Sugary Beverage Tax” Tactics, How Unsweet a Tax, When Tax Is Bizarre: Milk Becomes Soda, Gambling With Tax Revenue, Updating Two Tax Cases, When Tax Revenues Are Better Than Expected But Less Than Required, The Imperfections of the Philadelphia Soda Tax, and When Tax Revenues Continue to Be Less Than Required.

In my last commentary, I shared some revenue data with respect to the soda tax. In January, the tax generated $5.7 million in revenue. In February, the tax generated $6.4 million. Additional information has been provided. In March, according to this report, revenues reached $7 million, but in April, according to this recent report, revenues fell to $6.5 million. Thus, for the first four months of the year, the city collected $25.6 million in revenue. At that rate, total revenue for 2017 will reach $76.8 million. That’s woefully short of the $91 million that the city has already committed to spending from soda tax revenues. A bit of arithmetic reveals that to reach $91 million for the year, revenue for the remaining eight months – including May, for which figures have not been released –needs to be $65.4 million. That amounts to $8.175 million per month, an amount more than $1 million higher than the city’s best month to date, and almost $2.5 million higher than its worst month. It is $1.775 million per month higher than what the city has averaged during the first four months of the year. It’s difficult to construct scenarios under which revenues will reach an average of $8.175 million per month.

There is one silver lining in this mess. Philadelphia’s experience, along with those of other states and cities, demonstrate why local and state approaches to transaction taxation needs serious reform. When the nation was far less populous, greater distances separated towns and villages, mail order and internet shopping weren’t even dreams in their inventors’ eyes (because they had not yet been born), a state or town could establish a tax policy without too much concern about the tax policies in other places. Now states and towns engage in tax credit battles with each other, and technology, including the automobile, coupled with the population growth in the spaces once separating localities makes it easy for people to escape most types of transaction taxes. Tax policy in a global age needs to be something more unified than the disparate decisions of tens of thousands of states, counties, cities, towns, school districts, sewer authorities, and other revenue entities that reflect the long-gone environment of centuries ago.

In the meantime, one can wonder where the first blink will occur. Will it be the repeal of the Philadelphia soda tax, or the rejection of colonial era approaches in favor of twenty-first century tax policy reality? My guess is that another of my soda tax commentaries will show up before either of those two thing happen.

One of the many reasons taxpayers should pay attention to whatever is being done when someone else computes their tax liabilities is that people make mistakes. As I describe in Federal Ready Return, Part Three: Income Tax Return Accuracy, the risk of government employees and computer programmers making errors is one of many reasons I do not favor the Ready Return concept. For those interested, all of those reasons can be found using the index to my analyses of Ready Return.

The simpler the tax, the fewer objections I have to the computation being performed initially by someone other than the taxpayer, because the simpler the tax, the easier it is to spot mistakes. One of the examples I use is the sales tax. Taxpayers do not compute the sales tax (though they are responsible to compute the accompanying use tax). Merchants, and more specifically nowadays, the computer programmers who put algorithms into check-out devices, compute the sales tax. Some consumers would take quick notice if they were charged a $60 sales tax on a $100 purchase in a jurisdiction with a 6 percent sales tax (though, sadly, some would be oblivious). Sharp-eyed consumers would spot much smaller errors, not only in arithmetic but in identification of taxable items.

According to this report, a woman living near Pittsburgh, Pennsylvania, Mary Bach, sued Kmart in magisterial court because the store charged her sales tax on toilet paper, which is exempt from sales taxation in Pennsylvania. The over-charge happened at the Kmart store in North Versailles. According to Bach, it also happened on a previous visits, and on toilet paper purchases at five other Kmart stores scattered throughout the state.

When Bach pointed out the error to the cashiers, they did not reimburse her for the improperly charged tax. Bach noted that “When a merchant is charging sales tax on non-taxable merchandise, somebody has to hold them accountable.” So how would the IRS be held accountable if it made errors on a Ready Return?

This was at least the third time Bach sued Kmart on the same issue. She prevailed in 2007 and in 2009. This time, the judge awarded her $100 plus court costs. Bach, who describes herself as a “consumer advocate and careful shopper” might be one of the few who would catch a Ready Return error. One wonders how many sales tax dollars were collected by Kmart on exempt items, and whether those dollars ended up with the Department of Revenue or with Kmart. Kmart’s attorney described the matter as unintentional, “a mistake at the store level,” but it seems to me that a problem occurring at multiple stores over a ten-year period is a computer programming error that should have been fixed a decade ago.

If something as simple as a sales tax computation can be so easily miscalculated, what happens with “we’ll do it for you” government-prepared income tax returns? Perhaps Ready Return legislation should contain a provision for $100 judgments in favor of careful taxpayers for each Ready Return error that they spot. The tax return preparation industry that Ready Return is designed to eliminate might simply switch to Ready Return error checking, and at $100 a goof, they will continue to be flush with cash. And who would pay those $100 judgments? Taxpayers, of course.