MauledAgain

During the past many years, I have written about some of the tax return preparers who have gotten into trouble because of their misdeeds, in posts such as Tax Fraud Is Not Sacred, More Tax Return Preparation Gone Bad, Another Tax Return Preparation Enterprise Gone Bad, Are They Turning Up the Heat on Tax Return Preparers?, Surely There Is More to This Tax Fraud Indictment, Need a Tax Return Preparer? Don’t Use a Current IRS Employee, Is This How Tax Return Preparation Fraud Can Proliferate?, When Tax Return Preparers Go Bad, Their Customers Can Pay the Price, Tax Return Preparer Fails to Evade the IRS, Fraudulent Tax Return Preparation for Clients and the Preparer, Prison for Tax Return Preparer Who Does Almost Everything Wrong, Tax Return Preparation Indictment: From 44 To Three, When Fraudulent Tax Return Filing Is Part of A Bigger Fraudulent Scheme, Preparers Preparing Fraudulent Returns Need Prepare Not Only for Fines and Prison But Also Injunctions, Sins of the Tax Return Preparer Father Passed on to the Tax Return Preparer Son, Tax Return Preparer Fraud Extends Beyond Tax Returns, When A Tax Return Preparer’s Bad Behavior Extends Beyond Fraud, More Thoughts About Avoiding Tax Return Preparers Gone Bad, Another Tax Return Preparer Fraudulent Loan Application Indictment, Yet Another Way Tax Return Preparers Can Harm Their Clients (and Employees), When Unscrupulous Tax Return Preparers Make It Easy for theblo IRS and DOJ to Find Them, Tax Return Preparers Putting Red Flags on Clients’ Returns, When Language Describing the Impact of Tax Fraud Matters, Injunctions Against Fraudulent Tax Return Preparers Help, But Taxpayers Still Need to Be Vigilant, Will the Re-Introduced Legislation Permitting Tax Return Preparer Regulation Be Enacted, and If So, Would It Make a Difference?, Can Fraudulent Tax Return Preparation Become An Addiction?, Tax Return Preparers Who Fail to File Their Own Returns Beg For IRS Attention, Using a Tax Return Preparer? Take Steps to Verify What Is Filed on Your Behalf, When Dishonest Tax Return Preparers Are Married, There Was Nothing Magical About This Tax Return Preparation Business, Don’t Get Burned By a Tax Return Preparer, Tax Fraud School: When It’s Not Enough to Be a Fraudulent Tax Return Preparer, It’s Not Just Tax Return Preparers Assisting in the Preparation of Fraudulent Tax Returns, and Overused Fraudulent Tax Return Preparation Ploys. I don’t write about all the tax return preparers whose ill-advised actions put them in the news because I would not have time to do anything else. But when a different sort of situation arises and comes to my attention, I try to find time to do some writing.

What caught my eye about the case of JTH TAX, LLC d/b/a Liberty Tax Service v. Stephen A. Gilbert and G-QTS, Inc. was the identity of the party proceeding against the tax return preparer. It was the franchisor, Liberty Tax Service, that sued its franchisee tax return preparer because of actions taken by the franchisee that violated both the franchise agreement and federal law. The principal transgression was the allegation that the franchisee permitted one of his employees to use the franchisee’s PTIN, a violation of federal law and thus by the terms of the franchise agreement a violation of that agreement. The franchisee did not deny allegation. The franchisor accordingly terminated the franchise agreement. The franchisor also sought to enforce a non-compete agreement that barred the franchisee from directly or indirectly preparing or filing income tax returns within the territory of the franchise or within 25 miles of the territory for two years following the termination of the franchise, and an agreement that barred the franchisee from directly or indirectly soliciting any person or entity served in any of the franchisee’s prior offices in the last twelve months of holding the franchise, for the purpose of offering that person or entity income tax preparation or filing or financial services, within the territory or within 25 miles of the territory for two years following the termination of the franchise.

Under the terms of the franchise agreement, the termination of the franchise required the franchisee to surrender to the franchisor the leases on the locations where the franchisee operated the tax return business. The franchisee refused to sign the documents required for the surrender, and changed the locks on the premises. The franchisee notified the franchisor that he intended to continue offering tax preparation services at those locations. The franchisor alleged that the franchisee removed two printers belonging to the franchisor, removed the franchisor’s “Liberty Tax” sign and replaced it with the sign of a competitor, Fast Tax, and operated a competing tax preparation at those locations. The franchisor also alleged that the franchisee took client files and other confidential information.

The franchisor sued the franchisee, claiming breach of the franchise agreements, common-law conversion, and violation of the Defend Trade Secrets Act. The franchisor requested a preliminary injunction stopping the franchisee from operating a tax return preparation service at the former franchise locations until March 5, 2024, from operating competing tax return preparation businesses within 25 miles of the franchise territories until March 5, 2024, requiring the franchisee to assign to the franchisor the leases for the former franchise locations, to refrain from interfering with the franchisor’s right to act as the lawful agency and attorney-in-fact for the franchisee for the purpose of taking necessary action to complete assignment of the leases, stopping the franchisee from causing, or attempting to cause, the changing of locks at any franchise location, stopping the franchisee from removing property from any franchise location, stopping the franchisee from using any of the franchisor’s confidential information, stopping the franchisee from entering onto or otherwise interfering with the operation of the franchisor’s franchise locations, ordering the franchisee to return all franchisor confidential information, including client files, ordering the franchisee to return the franchisor’s equipment, including printers and computers, and other property that was removed from Liberty’s franchise locations, and ordering the franchisee to provide the franchisor with a key for any new locks installed at the former franchise locations.

Put simply, the franchisor prevailed. The franchisee lost.

The lesson is simple. A tax return preparer who fails to comply with applicable law, regulations, and other requirements faces not only action by law enforcement but also by private parties, including not only client taxpayers but franchisors if the preparer is doing business under a franchise.

I must admit I was surprised when I saw the headlines claiming that the pending Inflation Reduction Act of 2022 will increase taxes on all or most taxpayers. The claims are based on a Joint Committee on Taxation Distribution Table of the pending act. Indeed, that table shows increased taxes on taxpayers in every income category, though the total increase on taxpayers with modified adjusted gross income under $400,000 is much less than what some of the headlines claim. Squaring that Table with the Senate Finance Committee’s estimated budget effects” doesn’t seem possible.

The Joint Committee on Taxation Distribution Table does not explain how it computed these estimated increases. It clearly states that it “[d]oes not include indirect effects.” So which tax provisions in the pending legislation cause these increases? Most of the tax provisions increase credits, extend credits, expand credits, or establish new credits. So it can’t be those provisions. Of the five revenue-raising provisions, one clearly does not apply to individuals. That’s the proposed 15 percent alternative tax on corporations with net profits exceeding $1 billion. The second is increased funding for the IRS to improve audit rates, but that provision contains an exception for taxpayer with taxable income under $400,000. The third is denial of low long-term capital gain rates on partnership carried interests. That provision, however, contains an exception that permits partners with modified adjusted gross income under $400,000 to avoid the restriction by holding the interest for three years rather than the five-year period applicable to other taxpayers. How many taxpayers with modified adjusted gross income under $400,000 own partnership carried interests? Some, but not enough to justify claiming that all or most taxpayers with income under $400,000 will be hit with tax increases. The fourth, reinstatement of the Superfund, if it affects low and middle income taxpayers at all, surely affects very few of them. The fifth, extension of the Black Lung Disability Trust Fund tax rate, is another provision that affects few, if any, taxpayers in the lower brackets.

So I’m at a loss trying to identify the provisions in the legislation that increase tax liabilities for taxpayers in the excepted categories, let alone increased by the claimed many tens of billions of dollars that some opponents of the legislation claim. I have not found anything that tags any specific provision or provisions as the cause of the increases that the Joint Committee identifies.

It’s unfortunate that the Joint Committee doesn’t share how it arrived at these numbers. It is important for Americans to know, because it would permit taxpayers, or their advisors, to determine if they are affected. I suspect that very few taxpayers in the low and middle income brackets would be among those facing tax increases. If the increases are caused by the carried interest changes, would it not be helpful to know that, so that the vast majority of low and middle income taxpayers who do not own carried interests can breathe a sigh of relief and realize that their taxes are not going to increase under the legislation?

What does this lack of information do? One consequence is that it permits opponents of the legislation to make all or most Americans think that they will be adversely affected by the legislation, because that helps the opponents drum up support for opposition even if it is based on misplaced apprehension and fear.

Perhaps the information will be forthcoming? But will it arrive in time to dispel the fear and anxiety currently being marketed?

But perhaps I am missing something. Is there a sixth revenue raising provisions? Do increased and expanded credits cause tax increases? So I invite anyone who has the answer to how taxes on low and middle income taxpayers are increased by the legislation to let me know.

So the Congress appears to be ready to pass a a compromise bill designed, among other things, to combat the impact of inflation on consumers. That dealing with inflation is its primary purpose seems apparent from the title of the proposed legislation: The Inflation Reduction Act of 2022. Whether the provisions in the proposal will reduce inflation is a discussion I leave to others.

If the Congress truly wants to help people dealing with inflation, perhaps it should go through the Internal Revenue Code and provide inflation adjustments for fixed-dollar amounts that currently are not adjusted for inflation. Without trying to doing the work of Congressional staff, here are two examples where adjusting fixed-dollar amounts would help people. One is the limit above which the $25,000 active-management exception to the passive loss limitations phases out. Currently it remains at $100,000 of adjusted gross income, and amount that when it was enacted targeted the taxpayers who were not low-income or middle class. Now, many middle-class families have adjusted gross income above $100,000 and are caught by a phase-out not intended for persons in their position. The other consists of the fixed-dollar amounts used in computing the amount of social security benefits included in gross income. Those amounts were designed to exempt low-income and low-middle-class taxpayers from being taxed on social security. As I pointed out in Taxation of Social Security Benefits: Inexplicable Inconsistency and Hidden Tax Increases, “None of the amounts [in section 86] -- $25,000, $32,000, $34,000, or $44,000 – have changed. They are not indexed to increase with inflation.”

Would adjusting these fixed-dollar amounts reduce income tax revenue? Yes. Would the amount of that reduction pale in comparison to the tax breaks enacted for the wealthy? Yes. Could the amount be offset by tweaking those tax breaks? Yes. Will any of this happen? I’m not holding my breath.

The headline in this morning’s Philadelphia Inquirer caught my eye: "City tax-relief programs cause confusion" Curious, I read the article.

When I went to the newspaper’s web page, I could not find the article by searching for the text of the headline. I finally found the on-line version, which appears to be the same article but for a change in the headline: “Philly officials touted tax relief efforts. But some homeowners stand to lose money.“ Perhaps because web sites don’t have the space limitations that afflict print versions, the headlines are different. Which came first? I don’t know.

The gist of the article rests on the fact that the city of Philadelphia has two programs in place to assist taxpayers in reducing their real property tax bills. Because there is an overlap, some property owners qualify for both programs. But a property owner is permitted to sign up for only one of the programs. One of the programs is a homestead reduction, and because City Council increased that amount from $45,000 to $80,000, some property owners would save more using that program rather than the other program, which reduces tax bills for property owners who have owned their homes for a long time. Fortunately, property owners are permitted to switch programs from year to year, though those who leave the longtime ownership program cannot rejoin unless they satisfy certain requirements. Unfortunately, thousands of them don’t even know that they can do so, or that they are limited to one program, or that due to the recent changes they should be recalculating how much each program saves them in property taxes.

Take a look at the article for examples of how several specifically identified taxpayers have had to cope with the changes. Until this year, the city automatically blocked property owners from enrolling in the longtime property owner program if doing so would save them less money than enrolling in the homestead exemption program. Now, the city no longer does that computation. My guess is that the city realized that selecting between the two programs is not simply a matter of arithmetic. Another factor is what the property owner thinks the property valuation changes would be in the upcoming year and in future years, which requires making an estimate that should reflect the property owner’s degree of optimism or pessimism and intentions with respect to continued ownership. Those are factors unknown to the city and its computers. Another factor is the number of people signing into the longtime ownership program, because as the number of enrollees increases, the tax reduction for all enrollees decreases based on the fixed dollar amount available to the program. That is a factor unknown to the property owner and to the city at the time the “pick one program” decision is being made.

The reporter described the situation as a “web of relief programs” and a “matrix of complex, evolving options.” The reporter pointed out that it would make more sense to stop fiddling with the programs and simply reduce the overall tax rate. Along with others, over the years I have advocated a similar approach to the federal and state income tax systems, arguing that ditching all of the special breaks, lobbyist-engineered incentives, and complex deductions and credits would permit lowering the overall rates to levels that would generate much less fuel for anti-tax groups and much less aggravation for taxpayers.

It’s the headline in the print version that made me smile. “City tax-relief programs cause confusion.” It’s quite similar to another headline, “Water is wet.” The online headline is far more descriptive, considering that every tax-relief provision in federal, state, and local income, property, sales, estate, and inheritance tax programs is confusing. And they need not be, for the simple reason that those provisions would not be needed if all of the clutter were removed and rates were reduced to amounts that did not create the need for tax-relief provisions.

Five years ago, in So Who Should Pay Taxes for Police Protection?, I discussed a proposal by the governor of Pennsylvania that Pennsylvania towns relying on state police for all of the policing in the town pay a $25-per-person tax for those services. That proposal went nowhere. That outcome occurred despite the fact that even legislators opposed to tax increases supported the idea, in part because these towns had reduced local taxes, or avoided increasing them, by eliminating police departments and relying on state police services funded by taxpayers not living in those towns. To finance the increased costs incurred by the state police, Pennsylvania took money from the road and highway safety fund. That also adversely affected taxpayers not living in the towns that shifted to others the costs of benefits their residents receive.

Now for some good news. According to this report, the budget legislation signed last night by the governor will “reestablish the Motor License Fund’s purpose as the main account caring for the state’s roads and bridges.” Funds previously diverted to financing state police protection for towns that eliminated their police departments will now be used to fix transportation infrastructure. In turn, the general fund will be tapped to continue funding that state police protection for those towns.

Of course, though this is good news because more roads and bridges will get the repairs they need, it is bad news because residents of the towns without police departments will continue to get the benefits of police protection by shifting the cost to taxpayers throughout the state. That is wrong. And it is a growing problem. Half of Pennsylvania’s towns have eliminated their police departments, and the number is growing. The proposal made five years ago failed even though the per-resident tax of $25 pales in comparison to the $300 to $400 per-person cost of providing police protection.

Most of these towns are filled with voters who oppose public welfare programs and thus subscribe to the argument that “everyone should pay for what they use,” which is a quote from officials in several of the towns that eliminated police departments because they wanted the benefits but wanted others to pay the cost. Of course, this sort of hypocrisy isn’t limited to the cost of police protection. It’s no secret that some of the counties in this country with the highest rates of dependence on government assistance are also vote in force for politicians who claim to oppose government assistance. Until hypocrisy is removed from the political arena, progress, rather than regress, will continue to elude the nation.

When I saw the story in this morning’s Philadelphia Inquirer, I thought to myself, “If Reader Morris sees this story, and I don’t know if he did, I can guess at the question he would ask if he decided to forward it to me. He would ask, ‘Does she have gross income?’ Or perhaps he would ask a broader question, ‘What are the tax consequences?’”

The story is a tale of catastrophe, sadness, frustration, and finally joy. Six years ago, a tree fell on Linda Smalley’s fence and deck. The tree was growing on an adjacent lot. She tried to contact the owner of the empty lot next door but failed. Beset by injuries from an auto accident, she looked for help by contacting the officials and departments of the city of Philadelphia and the Commonwealth of Pennsylvania. She struck out.

Several weeks ago the Philadelphia Inquirer published a story about her plight. In addition to the flood of emails from readers who were no less frustrated with the inability of public officials to deal with the situation, offers to pay for removal of the tree were received. Some offered to contribute though unable to cover the entire cost. A few offered to take out the tree through their own labor. Eventually, one unidentified woman footed the bill for removal of the tree and repair of the deck. Her response and offer arrived very quickly after the first story was published. Smalley was elated. In addition, a local company is paying for removal of a tree in Smalley’s yard that threatens to fall on its own at a time of its own choosing.

So what are the tax consequences to Smalley? The answer depends on a fact that is not known, that is, whether she took a casualty loss deduction for the damage. If she did, then the tax benefit rule would kick in to the extent the deduction generated a reduction in her tax liability for the year in question. My guess is that she did not take the deduction, but I could be wrong. If she did not take the deduction, the next question is whether she has income. Yes, she has income because the removal of the tree and the repairs have increased the value of her property and thus has increased her economic wealth. But that doesn’t mean she has gross income, because gifts are excluded from gross income and there is no question that the money provided by the unidentified woman arises from detached and disinterested generosity.

So what are the tax consequences to the unidentified woman? Does she get a deduction? No, because Smalley is not a charity and there are no other deductions that are even plausibly relevant.

And what about the company paying to take down the tree in Smalley’s yard? Technically, the company is paying its landscaper to do the work. It’s unclear if the landscaper is an employee or an independent third party. If an employee, then the company would simply continue to deduct the employee’s salary. If an independent contractor, arguably the expenditure qualifies as advertising for the company because it already is getting positive publicity for its actions.

The study of law, including tax law, changes how law students and lawyers look at the world. After sitting through my first-year Torts class, I began to notice potential and actual tort litigation every which way I turned. Conversations with other students and over the years with other attorneys assured me that I am far from alone in this reaction. And, of course, after sitting through my first tax course, and probably even sooner considering that I learned a good chunk of tax law before I entered law school, I do see tax issues in many of the activities and transactions I observe or encounter in my reading. Reader Morris, like many others, surely has the same reaction. And it’s not just that tax law is everywhere. Law is everywhere, even when it’s not noticed.

The President has proposed a three-month federal liquid fuel tax holiday, and has encouraged states to do the same. According to the White House fact sheet on the proposal. He wants the Congress to enact this cutback in liquid fuel tax revenue “without taking any money away from the Highway Trust Fund.” That would be accomplished by “using other revenues” to reimburse the Highway Trust Fund for the estimated $10 billion in lost revenue that the proposal would cause if enacted. According to the fact sheet, the President “understands that a gas tax holiday alone will not, on its own, relieve” the impact of the cost of liquid fuels. Of course it won’t.

Apparently the President and his aides have not read my explanation, in Suspending the Federal Gasoline Tax Won’t Blunt Inflation And Will Harm Some People, of why reducing or suspending gasoline and other fuel taxes is an unwise idea. I explained that doing so would cause delays in road, bridge, and tunnel maintenance and repair, in turn generating more accidents, property damage, personal injuries, and deaths when vehicles hit potholes or other unrepaired structural elements. But perhaps the President and his aides did read my explanation and decided to include in the proposal a shift of revenues from other sources into the Highway Trust Fund (and presumably similar actions by state governments) so that my prediction of increased “bills for new tires, repaired suspensions, refurbished wheels, medical care, and funeral expenses” would not come to fruition. Yet the proposal to replace the missing Highway Trust Fund revenue means that the price will be paid by those who face cutbacks in programs whose revenues have been diverted. Will $10 billion be taken from health care for the poor? From food and nutrition services for the poor? From FEMA disaster relief?

In a follow-up to my commentary in In Suspending the Federal Gasoline Tax Won’t Blunt Inflation And Will Harm Some People. the not-surprisingly titled Yet Another Reason Fuel Tax Suspensions and Reductions Are Unwise, I seconded Saket Sundria’s observation in Costly Gasoline Spurs Tax Cuts That May Delay Demand Destruction that liquid fuel tax holidays will discourage people from taking steps to reduce demand for gasoline. Demand is one of the three major factors driving up liquid fuel prices. The other two are, of course, supply and transportation problems along with extraordinary increases in the profits of companies in the liquid fuel supply chain.

I learned of the President’s proposal today while listening to a news station on the radio while driving from Rhode Island back to Pennsylvania. Tellingly, as I listened I continued to observe two distinctly different driver reactions to the liquid fuel price increases about which so many people are complaining. I observed a handful of drivers lowering their speed to 15 to 20 miles per hour below the posted speed limit of 55, 65, or 70 miles per hour in order to increase fuel economy, of course, while driving not only in the right lane but in the center and left lanes. The sweet spot for ideal fuel economy is about 55 miles per hour, so there isn’t much benefit to driving at 35 or 40 miles per hour on a 55-mile-per-hour highway, or at 45 to 50 miles per hour on a 65-mile-per-hour highway. Worse, the impact of driving at such an inefficient speed causes other drivers to slow down to get a chance to pass and then to accelerate to return to a sensible speed, actions that are fuel inefficient. But I also observed that most vehicles were being driven in excess of the speed limit, often 15 to 30 miles per hour higher. There must be a lot of people who don’t care about what they are paying for gasoline, or who don’t understand that doing 80 or 90 miles per hour is the equivalent of paying an extra 75 cents per gallon, an amount much higher than the President’s proposed measly 15 cent-per-gallon temporary reduction. Perhaps the President’s efforts would be better spent getting the Department of Education, in collaboration with the Department of Energy, to do some educating.

In Suspending the Federal Gasoline Tax Won’t Blunt Inflation And Will Harm Some People, I noted that suspending a tax that would save people less than $100 in a full year “is like using a garden hose to fight a forest fire.” I characterized these fuel tax suspensions as “window dressing,” simply “a maneuver designed to help as elections approach,” with a “ ‘look what I did for you’ boast rest[ing] on a $97 savings,” offset by whatever reductions in payments or services that people suffer as funds are taken from the programs on which they rely in order to replenish the Highway Trust Fund.

After hearing about the proposal on the news, I thought about how I might put together something that would explain the situation in a style that might catch people’s attention and help them understand the shallowness of tossing a few dollars at a problem to soften the symptom of a much bigger problem. When I sat down to write this post and looked at previous commentary, I discovered that I had done that more than 11 years ago, in Motor Fuels Tax Holiday Déjà Vu. I share it here because it definitely is déjà vu all over again:

Richard: “Hey, Monica, did you hear the good news?”

Monica: “No, what?”

Richard: “Legislators in New York have introduced a bill to suspend the gasoline and other fuel taxes for Memorial Day weekend, Independence Day weekend, and Labor Day weekend.”

Monica: “That’s great. I’ve been paying a lot for gasoline. Maybe they'll do that in every state.”

Grady: “Can’t help but overhear. I think it’s a bad idea.”

Richard: “Why? How can something that reduces what we pay for gasoline be a bad idea?”

Grady: “Whatever the state doesn’t collect in fuel taxes means that much less it has to spend on fixing roads and bridges.”

Monica: “So what? The state has lots of money.”

Richard: “Well, THAT’S not true. The state is in financial difficulty.”

Grady: “Exactly. Less fuels tax revenue, less road repair.”

Monica: “We don’t need new roads. That just encourages people to drive.”

Grady: “I’m not talking about new roads. I’m talking about all those potholes.”

Richard: “Yeah, they’re all over the place. Why are they so slow in fixing them?”

Grady: “It costs money to fix potholes. There’s not enough fuels tax revenue as it is, and a so-called tax holiday means that there’s less money.”

Monica: “So what’s the big deal about potholes?”

Richard: “Well, if you hit one, it can be bad.”

Grady: “Exactly. Worse case, you lose control of the car, perhaps die, kill someone, injure somebody. But even without that sort of tragedy, it knocks the front end out of alignment.”

Monica: “The what?”

Richard: “The way the tires are set matters, and a jolt can make the various parts holding them in the correct angles go awry.”

Monica: “So?”

Grady: “It wears out the tires faster, and causes the car to burn more fuel per mile.”

Monica: “Can it be fixed?”

Grady: “Sure, but it will cost way more than the few pennies you saved from the gas tax holiday.”

Richard: “So you’re saying that saving a few pennies on gasoline in the short-term is a long-run bad idea?”

Grady: “Absolutely. The gas holiday takes people’s attention away from the clash between growing demand for fossil fuel and diminishing supply.”

Monica: “But I HAVE TO HAVE my gasoline!”

Richard: “So what do we do?”

Grady: “Perhaps it would help if people drove in a manner that reflected their awareness of how precious and expensive gasoline really is.”

Monica: “What do you mean?”

Grady: “Here’s an example. Last week I was driving on a road with a 55 mile-per-hour speed limit. I was speeding, doing about 62. EVERY CAR on that road passed me. I passed no one except an old truck.”

Monica: “So? You’re holding up traffic.”

Grady: “They passed me like rocket ships. Imagine if they slowed down, if not to 55, perhaps to 60 or 65, instead of the 75, 80, 85, 90 that many of them are driving. They’d reduce their gasoline consumption by 10, 20, 30 percent. They could drive the same distance on 10, 20, 30 percent less gasoline. That’s the equivalent of cutting 40 cents, 80 cents, even $1.20 off the cost of a gallon of gasoline. Much more than three weekends of knocking 20 or 30 cents off the cost of a gallon of gasoline.”

Monica: “Oh.”

Richard: “So if people really cared about the cost of gasoline they wouldn’t waste it?”

Grady: “Exactly. Actions speak louder than words. When I see fewer people driving at 80 on roads posted for 55 miles-per-hour, when I see fewer people driving children to school while school buses are half empty, when I see people bundling their errands into fewer trips, when I see people keeping their tires inflated to the proper level, then I’ll believe that these high gasoline prices really matter.”

Richard: “You should explain this to everyone.”

Grady: “Someone already has. Five years ago, the guy that writes MauledAgain, in A Tax Trifecta: Gas, Enforcement, and Special Interests, explained why it makes no sense to reduce gasoline taxes. A year later, in Raise, Don’t Lower, Gasoline Taxes, he explained again why gasoline tax reductions and holidays make no sense in the long term. Three years after that, he wrote, in Tax Holidays, “Going on a tax holiday is one of the worst things that this nation could do. That would be the equivalent of spending hours in a tanning booth before going out into the sun without sunscreen.”

Monica: “Never heard of the guy. Never read his stuff.”

Grady: “You and most other people.”

Richard: “And if they did, they wouldn’t like what they read.”

Grady: “No kidding. I guess he’s not running for office or looking for votes.”

Monica: “If he did, he’d lose.”

The message didn’t get through 11 years ago when complaints about high gasoline prices were no less vociferous as they are today, and I suspect the message won’t get through now. If I were to use the ratio of excessive speeders to the rest of the drivers as a benchmark, it seems to me that most American drivers are either not disadvantaged by today’s liquid fuel prices or are oblivious to the fact they are contributing to their own pain. Sadly, the tendency of Americans to contribute to the agonies of which they complain has become a feature of today’s culture. So sad.

An announcement by New Jersey’s governor and legislative leaders that they plan to expand and revamp the state’s current Homestead Benefit Program caught my eye because it explained that refundable income tax credits to offset property taxes would be made available to homeowners and renters. Renters do not pay property taxes so why would they be getting refundable credits? The answer is rather simple.

The existing program provides tax relief to homeowners but not renters. There is an unfairness in that omission because renters pay property taxes because they pay rent to the landlord, which in turn is used by the landlord to pay for a variety of expenses including property taxes. The existing program denies the tax relief to landlords because only homeowners qualify, and homeowners are defined as individuals who own and occupy their homes.

The proposed expansion would include renters. It would not include landlords. That makes sense because if the tax relief were to be extended to landlords rather than renters, a complex procedural and administrative enforcement structure would be needed to make certain that landlords used the tax relief to refund rents paid by tenants rather than reaping a windfall.

The proposal also includes changes in the amount of the tax relief and increases in the income caps on eligibility. Those changes are the focus of partisan debate but do not bear on the landlord-tenant aspect of the proposal.

A few days ago, reader Morris pointed me to this story about the use of “Friends Of” organizations to circumvent the denial of charitable contribution deductions for donations to foreign entities. What caught the eye of reader Morris was the article’s background explanation of the charitable contribution deduction: “The value of donations to qualified U.S. charities can be deducted from your gross taxable income.” What, asked reader Morris, is “gross taxable income”? He noted that he had never seen that term in the Internal Revenue Code. Nor had I. But perhaps I missed something.

So I did a bit of research. I looked at the text of the Internal Revenue Code to see if the term “gross taxable income” was in it. It turns out that the search function returned results from the entire law.cornell.edu site, so I narrowed the search to the U.S. Code, and the outcome was, as expected, zero.

Curious, I then widened the search to include state statutes and eight results popped up. So if the term is used, surely it must be defined? I poked around a bit. I could not find anything from the law.cornell.edu search so I turned to google. What an eye opener.

When I entered the term “gross taxable income” into google, it returned 53,800 results. Not having the time or the desire to look at all of them, I did some spot-checking and learned that the term is used in the tax systems of some foreign countries, including the Philippines, Finland, India, and Australia. For purposes of understanding why someone would use the term “gross taxable income” when explaining the United States federal income tax system, I did not need to examine the use of the term in the tax systems of other countries.

I then looked more closely and noticed that several American states use the term “gross taxable income” in various instructions to their tax forms. Pennsylvania even used the term “federal gross taxable income” in its 2017 Instructions to its Form PA-40 in describing how to handle amounts on a Form 1099-R. More on that in a few paragraphs.

That gave me an idea. I googled the term “federal gross taxable income” and got 63 results. The first result was a link to the text of proposed legislation in Montana. Proposed section 28 refers to “federal gross taxable income as defined in section 1” but when I examined section 1 I discovered there was no definition of that term. My first thought? Sloppy drafting. I looked at more of the proposed legislation Section 34 refers to “federal adjusted gross taxable income” but doesn’t even give a cross-reference let alone a definition. Leave out the word “taxable” and it makes sense, but that’s not the case.

Further research showed that the term “federal gross taxable income” was used in some state judicial opinions. Did the courts get that term from the briefs submitted by the parties? I didn’t see any references to statutes. So perhaps they were borrowing the term from revenue department instructions or commentaries written by those who are confused about federal tax terminology.

Then I got another idea. I went back to the law.cornell.edu web site and searched the Code of Federal Regulations. I wasn’t expecting anything but to my surprise there was one result. In an example in section 1.6041-1(f) of the regulations the term appears:

(f) Amount to be reported when fees, expenses or commissions are deducted -

(1) In general. The amount to be reported as paid to a payee is the amount includible in the gross income of the payee (which in many cases will be the gross amount of the payment or payments before fees, commissions, expenses, or other amounts owed by the payee to another person have been deducted), whether the payment is made jointly or separately to the payee and another person. The Commissioner may, by guidance published in the Internal Revenue Bulletin, illustrate the circumstances under which the gross amount or less than the gross amount may be reported.

(2) Examples. The provisions of this paragraph (f) are illustrated by the following examples:

EXAMPLE 1.

Attorney P represents client Q in a breach of contract action for lost profits against defendant R. R settles the case for $100,000 damages and $40,000 for attorney fees. Under applicable law, the full $140,000 is includible in Q's gross taxable income. R issues a check payable to P and Q in the amount of $140,000. R is required to make an information return reporting a payment to Q in the amount of $140,000. For the rules with respect to R's obligation to report the payment to P, see section 6045(f) and the regulations thereunder. (emphasis added by me)

How could this be? My guess: The drafter made an error and used the phrase “includible in Q’s taxable income.” A reviewer marked up the draft by inserting “gross” and using strike-through for “taxable” but something in the formatting went haywire, a not unusual event when multiple people work on one document. And no one caught the result, which was the addition of “gross” and the non-removal of “taxable.” Nowhere else in the Code of Federal Regulations did the term appear. Nor was any definition provided. The example was picked up verbatim in Chief Counsel Memo 20133501F.

I shared my findings with reader Morris. He, too, is curious, and he soon replied to tell me that he searched google scholar federal courts and found 163 results. Like me, he didn’t have time to read all of the cases but selected a few to examine. Though he found the term “gross taxable income” being used, he did not find a definition. In some instances the court was simply repeating the use of the term as appearing in arguments made by the parties, and in at least some instances the courts used the term “gross income” when reacting to the parties’ arguments. In other instances it appears courts were paraphrasing stipulations without correcting the language of the parties.

He did share an observation, that many of the cases dealt with transactions before the enactment of the Internal Revenue Code of 1954. He asked if it was possible that the term was used before being abandoned in the 1954 statute. Good question. I tried to answer the question, and I failed to discover any use of the term “gross taxable income” in earlier statutes.

After I shared that with reader Morris, he then referred me to an article that offers a sort of definition of “gross taxable income.” The article, titled “Gross vs. Net Income in the United States” explains:

Understanding Taxable Income

It’s vital to understand these differences between gross vs net income when it comes to doing your taxes.

While you start off calculating the taxes you owe or are owed by the IRS with your gross income minus your deductibles, it’s important to remember your gross income is not the same as your taxable income.

Not all income streams that make up your gross income are taxable, for example. Things like inheritance, gifts, and life insurance payments aren’t taxable.

Gross taxable income is instead called adjusted gross income (AGI) after you’ve subtracted tax deductibles like Child, Education or Earned Income Tax Credits.

When you are working out your AGI, the IRS gives you the option of taking the standard deduction based on your family status (single, married, or head of household) or you can itemize your tax-deductibles. Itemizing your tax-deductibles might reduce your tax bill more.

In the end, your gross income might be far less than your taxable income or AGI.

My goodness! If this were an exam answer in a basic federal income tax course it might earn a D because a few concepts seem to come through the misuse of terminology, for example, the warning that “it’s important to remember your gross income is not the same as your taxable income.” But it’s “deductions” not “deductibles.” But to claim that not all income that make up gross income are taxable is to assume that income goes into gross income. The point of an exclusion is that the excluded item is not included in gross income. Then comes the whopper. “Gross taxable income is instead called adjusted gross income.” What? Where does the author get this nugget of misinformation? Worse, the author claims that adjusted gross income is “after you’ve subtracted deductibles like Child, Education or Earned Income Tax Credits.” That is so wrong. Credits are NOT deducted in computing adjusted gross income or in computing taxable income. Credits are not “deductibles” nor are they deductions. And if that’s not sufficiently erroneous, try the mathematically impossible “your gross income might be far less than your taxable income or AGI.” How? How can one go from a particular amount of gross income to a larger amount of adjusted gross income or taxable income? What would be added? So, no, this article does not provide any insight into the origin of the term “gross taxable income.”

And it gets worse. Reader Morris directed me to a case study in its VITA program materials. In that case study, which is simply an example, the material states that “The formula for calculating the allowable portion of a deduction is: (Gross taxable income subject to U.S. tax / Gross income from all sources) x Deduction = Allowable portion of deduction.” Curious, I used google to see if the term “gross taxable income” appeared elsewhere in the VITA program material. It appears one other time, in the summary of the lesson preceding the case study:

Summary
This lesson showed how to:
Identify the correct standard deduction
Determine when to allocate the standard deduction
Calculate the allowable portion of a taxpayer's standard deduction
For Puerto Rican taxpayers who do not itemize, the standard deduction must be allocated based on total gross income from all sources (including Puerto Rico source income).
To calculate the allowable portion of a taxpayer's standard deduction, use:
The Worksheet for Puerto Rico Filers with Exempt Income under Section 933 Who Do Not Itemize Deductions, or
(Gross taxable income /gross income from all sources) x standard deduction = Allowable portion of the standard deduction

Aside from the fact that the term “gross taxable income” is not used in the lesson until it reaches the summary, the term is used in the formula even though the formula does not reflect the prefatory language. That language states that the standard deduction is allocated using gross income. Yet the formula uses the term “gross taxable income” though that term is nowhere else defined or used except in the case study example that follows.

Reader Morris then directed me to a recent article that uses the term (once). The sentence reads, “The term "gross income" has been interpreted for this purpose to mean ‘gross taxable income,’ specifically excluding tax-exempt income, which separates this from the legal concept of fiduciary accounting income.” Interpreted by whom? Curious, I looked to see if perhaps I had missed something in the trust tax area. So I looked for “trust’s gross taxable income.” In this commentary, the following sentence appears: ”When calculating the income distribution deduction, DNI is computed only with items of income and allowable deductions included in the trust's gross taxable income (Secs. 651(b) and 661(c)).” Aha, a clue. Perhaps the term is in the cited Code sections. No, it is not. The text of section 651(b): “(b)Limitation on deduction. If the amount of income required to be distributed currently exceeds the distributable net income of the trust for the taxable year, the deduction shall be limited to the amount of the distributable net income. For this purpose, the computation of distributable net income shall not include items of income which are not included in the gross income of the trust and the deductions allocable thereto.” No mention of “gross taxable income.” How about section 661(c)? Here’s the text: “(c)Limitation on deduction. No deduction shall be allowed under subsection (a) in respect of any portion of the amount allowed as a deduction under that subsection (without regard to this subsection) which is treated under subsection (b) as consisting of any item of distributable net income which is not included in the gross income of the estate or trust.” Again, no mention of “gross taxable income.” The same sentence with the citations to sections 651(b) and 661(c) also appears in this article.

Reader Morris then directed me to this web site, which in two places stated that “The 1099 Form will reflect gross taxable income. . .” So off I went to see if I could find the term “gross taxable income” on a Form 1099. I found a variety of commentaries that used the term in connection with a Form 1099, but in most instances claiming that a particular amount on the Form must be reported in gross taxable income even though that term was not on the form. For example, this commentary, in describing a Form 1099-SA, states in several places that the taxpayer would need to “include [an amount] in gross taxable income.” Yet the Form 1099-SA does not include the term “gross taxable income.” Perhaps the confusion arises because the Form 1099-R has an entry for “Gross distribution” and a separate entry for “Taxable amount.”

Perhaps the confusion arises from the sort of sentence found on this web site. It states, “Section 61(a) of the Internal Revenue Code provides that gross (taxable) income includes ‘all income from whatever source derived.’” Actually, section 61(a) defines gross income. It does not define something called “gross (taxable) income.”

Precision matters. When drafting legal documents, whether statutes, regulations, judicial opinions, contracts, wills, or any other writing, and a word or phrase is used that does not exist in the language or that is being used other than in its common meaning, definitions are required. Otherwise, confusion abounds, mistakes are made, litigation ensues, and unhappiness and frustration afflict people. Has anyone using the term “gross taxable income” in the federal income tax context provided a citation to its statutory or regulatory definition?

I sat down planning to write another Memorial Day essay. I had some ideas in my head, but before putting finger to keyboard – pen to paper having become more of an historical concept though I still do that from time to time – I looked at what I wrote last year (The Price of Freedom Is Much More Than Taxes). I realized that what was in my head now was pretty much what had been in my head last year when I sat down to write (or should I say, sat down to type, even though that, too, has become a reference to an old technology).

During the past 48 hours or so, I have seen on social media and news outlets the claim that those we honor today paid the ultimate price for freedom. That is true. What matters, though, is what is meant by that freedom. What does it mean to be free? And that takes me to what I wrote last year, which in turn incorporated some of what I had written in even earlier Memorial Day essays. Here is what I wrote:

On Memorial Day ten years ago, in Free, Freedom, Fees, and Taxes, I examined the extent to which Americans understand the meaning of the oft-heard and oft-written sentiment that those we are honoring today served to protect the freedom of the nation. I wrote:

Americans surely understand the word “free,” for it shows up frequently in the phrase “free market” and in the slogan “free to do what I want.” Yet when asked to pay for freedom, too many Americans balk, even when the cost facing them is far less than their time, their physical well-being, and their life. The notion that freedom is free is becoming ever more omnipresent in the culture.

I focused on a New Jersey Sea Grant Consortium contest in which beaches that did not charge a user fee emerged as the winner, even as other reports explained that even beach communities charging a fee were struggling to provide the services demanded by visitors, perhaps in part because the fees were nominal. The towns with free beaches were facing even steeper financial challenges. I suggested that these towns charge fees, even though officials worry about the risk of visitors not returning if fees are imposed but also threatening to stay away if services are diminished in quantity or quality. These same officials are aware that most visitors don’t care about the fiscal woes of the town they are visiting, and that their only interest is in having fun. The notion of “let’s have fun but let someone else pay for the things we get for free” is pernicious. I then shared these observations:

In order for a person to have something for free, someone else must pay. * * *

The question of who pays the bills to use a free beach would be irrelevant but for the fact that this nation exists, has beaches, and has a citizenry that is free to go to the beach. In some countries, people aren’t free even to travel outside their home village, let alone jump in a car, train, or plane to head for some resort. There are people who paid for that freedom with something far more than suitcases full of cash, namely, with their lives, and they deserve recognition and thanks on this Memorial Day. Paying taxes or beach fees pales in comparison to paying the price that has been paid by the veterans whom we cannot thank in person. The best we can do is to honor their memory. And the best way to do that is to respect freedom and to acknowledge that freedom is not free.

Though in that essay I centered my attention on the fiscal aspect of freedom, it is important to understand that the cost of freedom is not only the lives of those who have fought to defend it and the taxes and fees paid by those who enjoy it, but also other costs, costs too often ignored or at least noted without any reference to the impact on freedom.

Consider those who think that freedom means “free to do what I want.” This is the perception often heard from those making the transition from childhood to maturity, a transition that unfortunately does not happen for everyone. When someone making that proclamation is asked to describe what happens when encountering someone who makes the same proclamation but who wants to do something that interferes with the first person’s desires, the back-and-forth eventually results in what can best be described as a philosophy of “I am free to do what I want, and that means I am free to prevent others from doing what they want.” It is the essence of selfishness, self-centeredness, and immaturity. And it has been increasingly going viral.

Consider two examples. The person who claims that they are free to drive at whatever speed they select, regardless of speed limits, can end up imposing the cost of that “freedom” on the people they kill and injure when they learn, too late, that there are reasons a person should not, and cannot, drive at whatever speed they select at any time, in any place, and under any conditions. The person who claims that they are free to go maskless and unvaccinated can end up imposing the cost of that “freedom” on the people they sicken and even kill who are unable to be vaccinated or wear masks. It is no comfort that the person claiming the right to be free might also end up paying the price of injury, sickness, or death.

Too often, those who claim that this unregulated “freedom” is sacrosanct point to the arrival of Puritans in what is now Massachusetts. They are idolized as seekers of freedom, trying to escape religious and political persecution. Yet when they arrived in the Massachusetts Bay Colony, they immediately started acting in the same manner as had their tormenters, in turn suppressing those whose religious beliefs or political positions conflicted with those set down by the Puritans. The contrast with Pennsylvania, also settled by victims of religious persecution, but where those of diverse origins and religions were welcomed, is startling. I didn’t learn this in school because it isn’t taught in this manner, nor is this lesson noted. I learned this when I did the research to write the biography of Thomas Maule of Salem, reading not only his works and those of others, both in his day and thereafter, but also studying the social and cultural environment in which his fellow citizens, of a different religious persuasion, acquitted him of the seditious libel charges brought by Puritan authorities who resented being tagged as hypocrites. And they truly were. Seem familiar?

The question at the moment is what sort of “freedom” will this nation embrace? To ignore this question is to dishonor those who fought and died for freedom, because answering the question incorrectly makes the price they paid a price paid in vain. Will the model be the “freedom” to escape torment and persecution only to torment and persecute others? Or will the model be the “freedom” to welcome those with different perspectives while refusing to adopt the methods of those from whom freedom was sought?

Indeed, freedom is not free. It comes with a cost. The cost is more than monetary. The cost can be the reduction of speed, the stopping at a red light or stop sign, the obedience to the yield sign, the wearing of a mask, the ceasing of the 1 a.m. fireworks, the toning down of the party noise at 2 a.m., the picking up of the pet’s poop, the use of a trash or recycling container rather than the gutter when disposing of trash, the extinguishing of the cigarette when in a closed space or close to others, the use of words rather than weapons when in a disagreement, telling the truth, and learning to think critically.

Freedom is not free. It disappears when the cost, whether in lives, taxes, or proper behavior, no longer is paid. Memorial Day means little if the freedom for which the fallen fought is disregarded, abused, or limited to fewer than everyone. The cost of freedom is much more than taxes.

As I re-read last year’s commentary, I developed a deeper appreciation for those who chose to enact laws and regulations that require stopping at red lights and stop signs, limiting noise in the wee hours of the morning, using trash and recycle containers rather than the neighbor’s law to dispose of unwanted material, prohibiting smoking in certain areas. Surely there was opposition to those sorts of rules, most likely from the handful of people who wanted to be “free to do whatever they wanted wherever they wanted.” Their howls of protest gave way to the common sense of the populace. It took rational, critical thinking to figure out how to balance freedom to breathe clean air with the freedom to smoke, the freedom to drive without stopping with the freedom to drive without being killed, the freedom to party with the freedom to sleep. It took courage to act despite the objections of the selfish few. Now, however, the selfish few have grown in number, emboldened and empowered by funding from shadowy people and places, common sense is far less common, and critical thinking continues to take a pounding from the emotional manifestations of greed, insecurity, and trauma. And now, the price for the "freedom" to behave in greedy, selfish, and immature ways is being paid by people who ought not be paying a price for that sort of "freedom." Worse, the decision to make people pay that price is being made by self-centered individuals rather than by those who hold have been charged with the resposibility of enacting and enforcing rules that balance and protect everyone's freedom, including the freedom to be free from the actions of greedy, selfish, and immature individuals who have no respect for anyone else's freedom. So what is the freedom for which those we honor today paid the ultimate price?

The headline to this story caught my eye. It read, “Some PS Plus Players Are Seemingly Getting Hit With A Giant Upgrade Tax. Perhaps there was some sort of unexpected tax increase, or the reclassification of something from exempt to taxable, or the enactment of a new tax.

So I read the article. It describes the roll-out of a PlayStation upgrade, for which players are required to pay a fee. The fee equals the fee for the upgraded service minus the amount paid by a player for existing service. Many players obtained their existing service at a discount, so the upgrade fee is the difference between the new fee, which is not discounted, and what the player paid, rather than the difference between the new fee and the pre-discount fee for the existing service. The article quotes a social media post in which someone explained, “For example, If you purchased 1 year plus for 25% off, which is $45,[t[o update to extra plan, you need to pay 100 - 45 = 55$, not 100-60=40$” To clarify this explanation, a player who paid $45 rather than $60 for existing service because of a discount must now pay $55 to get the upgrade. For some reason, there are players who think the upgrade should only cost them $40 to get them from $60 to $100. Though I can see merit in that position, because paying $55 amounts to a de facto revocation of the original discount, I will leave that discussion to others.

What puzzles me is why the headline writer refers to the $55 amount or the $40 amount or the increased $15 amount as a “tax.” Nowhere in the article does the word “tax” appear. So it is unclear if someone called one of those amounts a “tax” or if someone simply put the word “tax” in the headline. Perhaps there is some sort of sales or transaction tax on the payment required to acquire the upgrade but that is not mentioned in the article. A tax is an amount imposed by a governmental authority, even though the word gets misused as it is, for example, in Major League Baseball’s collective bargaining agreement, which imposes a “competitive balance tax” on teams paying more in salary than a specified amount. Why the word “tax” rather than a more appropriate term such as “fee” or “charge” was used is a question for which I do not have the answer. It probably has something to with the fact that the word “tax” generates more fear and resentment than do the words “fee” or “charge.”

I have previously written about the use and misuse of the terms “tax” and “fee,” in commentaries such as Please, It’s Not a Tax, So Is It a Tax or a Fee?, Tax versus Fee: Barely a Difference?, Tax versus Fee: The Difference Can Matter, When is a “Tax” Not a Tax?, When Use of the Word “Tax” Gets Even More Confusing, Sometimes It Doesn’t Matter If It Is a Fee or a Tax, It’s Not Necessarily a “Tax” Just Because It’s an Economic Charge You Don’t Like, Court of Appeals for the First Circuit: Tolls Are Fees, Not Taxes, The “Tax or Fee” Discussion Gets a New Twist, Is It a Tax? Is It a Fee? Does It Make Sense?, Can the Proper Use of the Terms “Tax” and “Fee” Be Compelled?, and It’s Not a Tax, It’s Not a Fee, It’s a . . . Yeah, OK.. And it cuts both ways. Often, the word “tax” is used for things that are not taxes. But words such as “fee” and “surcharge” have been used to describe what actually is a tax, by people who are trying to raise taxes while giving the appearance of complying with a claimed opposition to tax increases.

There are instances in which precision matters. Whether it’s a matter of words, measurements, or movement, using the wrong word, measurement, or movement, no matter how closely it appears to resemble the correct version can cause all sorts of damage. The damage can range from the adverse consequences of misinformation to injury and death. Though some might dismiss adherence to precision as “nit picking” or some similar term, when precision matters, it matters. It is possible to debate whether in a particular instance precision matters, but clearly using the word “tax” to describe what is essentially a price charged by a seller for upgrading a service can mislead people into thinking they are being hit with a tax. That isn’t what’s happening.

There are all sorts of reasons that taxes are increased. A taxing authority encounters increased costs for the services it provides. A taxing authority, at the direction of its citizens or a court, increases or expands the services that it provides. A natural disaster causes losses to taxing authority property that aren’t reimbursed by insurance. These and similar reasons are situations in which the taxpayers get something, directly or indirectly, for the taxes that are paid.

That’s not what happened when the small town of Corsica, in Jefferson County, Pennsylvania, was compelled to double its property tax rate. According to this story, the town did so because the town secretary embezzled so much money over a eight-year period that the town was unable to maintain a children’s playground or fix its deteriorating roads. The town went so far as t borrow money from its mayor so that its government did not shut down. The scale of the embezzlement is evident from two facts. The town secretary stole $306,000. There are 319 people living in the town. After being caught and indicted, the embezzler repaid about $41.000 of the embezzled funds.

The secretary’s modus operandi wasn’t all that unusual. She issued checks from the town’s bank account and from the state’s Local Government investment Trust to herself, her husband, and her father. To do this, she forged the name of the vice-president of the town’s council. She also made electronic transfer payments from town accounts. She used that money to pay bills. She used the town’s account at a store to purchase a camera, an iPad, and other things for herself. To hide this activity, she prepared and submitted false bank records to the town council and to state auditors.

Rejecting a request for probation, the judge sentenced her to 21 months of prison and also ordered her to repay the other $265,000 that she had embezzled. Though the secretary, her lawyer, family members, and friends cited health problems in asking for probation, the judge concluded that the secretary’s actions were motivated by greed and that a prison sentence was consistent with the sentences handed down to other embezzlers. Perhaps the judge was also influenced by the fact that after being indicted and released on bond, the secretary was arrested on multiple counts of retail theft for five separate incidents at another retail store.

It is difficult to imagine the impact on the taxpayers of this small town when they are told that their property taxes will double in order to make up the losses incurred by the town on account of one person’s inappropriate behavior. Perhaps if she makes full restitution, an outcome that is far from certain, the town will be able to reduce its tax rate and provide credits to its taxpayers. That, of course, could get complicated as some of the residents hit with the tax increase die, move away, or sell their properties, and new property owners arrive. I wonder if some sort of conditional adjustment will be made at settlement when properties are transferred.

Update: This isn't the first time this has happened! Thanks to reader Morris who dug up this gem from a long time ago, though the impact wasn't quite as bad as a doubling of taxes, it was bad enough.

When the email from the Institute for Policy Innovation arrived, the headline caused me to think that I had missed a Supreme Court tax opinion. The headline to the commentary stated, “Supreme Court Correctly Rules on . . . SALT Deduction.” Upon closer examination, the headline was referring to an event that I had already noticed, that is, the Supreme Court’s denial of certiorari in a case challenging the $10,000 limitation on the deduction for state and local taxes. A denial of certiorari is not a ruling. It is not an affirmance of the decision from which the petition for certiorari is taken. It simply means that the Court does not want to decide the issue, perhaps at the moment, perhaps forever.

Despite the headline, I read the commentary. It turned out that the headline was the least of my concerns.

In the commentary, Tom Giovanetti praised the Supreme Court’s decision not to hear the challenge. He pointed out that the four states bringing the challenge – Connecticut, Maryland, New Jersey, and New York – are “four solid ‘blue,’ high-tax states.” He explained that before the limitation was enacted, “the federal tax code essentially subsidized high-tax blue states.” He asked, “Why care about your state’s high taxes if you can just deduct them all from your federal taxes?” The answer to his question is easy. If a person in facing a marginal 35 percent federal income tax rate is hit with a $1,000 increase in state taxes, it’s not as though the person’s federal income tax liability is reduced by $1,000. If it were, then it would be true that the person would not care about the increase. Rather, the $1,000 increase means that the person would be $650 out of pocket. Most people would care about that.

Worse, though, is the jab at high-tax “blue” states getting federal subsidization of state and local taxes and the implicit praise for the $10,000 limitation. Yet that is only a small piece of federal subsidization of states. A careful analysis of the relationship between federal and state taxes and subsidies tells a different story. As recently disclosed by various reports, including Wallet Hub, Money Geek, and Forbes, the overall picture is different. It’s a pattern that reaches back many years, as indicated, for example, in 2004 by the Tax Foundation as summarized in this TaxProf blog post. The most recent analyses disclose that eight of the ten states most dependent on federal government funding are red states. Of the nine states that sent more to the federal government in taxes than they received from the federal governent, seven were blue states, which also had higher per-capita GDPs than many of the red states near the top of the federal subsidy list. The eight states receiving the highest child tax credit per capita are red states. Attempts to dismiss these findings, such as this Hill commentary by an ALEC member muddies the analysis by pointing out that the top ten federally dependent states are not all red, that two red states are actually blue states, and that it makes sense for red states to be subsidized by blue states because blue states have higher per-capita GDPs and red states are most in need. The latter observation is, to me, an indictment of how the classic red-state low-tax, low-service (and less pervasive education) approach shortchanges its citizens.

Giovannetti does make an important point. He notes that the $10,000 limitation should be indexed for inflation. He is correct. He then proposes that both the limitation and “capital gains taxes” be indexed for inflation. I’m not sure whether he means that the tax liability on capital gains should be indexed or if capital gains should be indexed, but perhaps he means that taxpayers’ adjusted bases in capital assets should be indexed. If that is what he means, I agree. However, if capital asset adjusted basis is indexed then the justification for low rates on capital gains (and the limitation on the deduction of capital losses) disappears. The latter were enacted as admittedly rough solutions to the capital asset inflation problem. Pick one. Keeping both is excessive.

One of the articles I haven’t yet written, and perhaps never will, is one that rests on a list of dollar amounts in the Internal Revenue Code that are indexed for inflation and those that are not. Both lists are long, both keep growing, and I’ve not yet found or made the time to once again read the entire Internal Revenue Code to identify each provision in the two lists. Perhaps someone has done this sort of comprehensive survey with respect to the Internal Revenue Code as it exists for 2022; J.K. Lasser has a long list of some of the limitations not adjusted for inflation. Of course, some limitations not indexed for inflation immediately jump to mind even without looking at the list, such as the $250,000 and $500,000 limitations on the exclusion for gains from the sale of a personal residence, the base amounts and adjusted base amounts used in computing the portion of social security benefits included in gross income, the $25 deduction for business gifts, and the $5,250 exclusion for employer-provided education assistance. If the $10,000 limitation on the deduction for state and local taxes and the adjusted bases of capital assets are to be indexed, then so, too, should all of the other fixed dollar amounts in the Internal Revenue Code. That would advance the notion of tax fairness by helping not only the well-to-do who pay higher state and local income taxes and enjoy the ownership and sale of capital assets, but also the social security recipients with lower income and home sellers facing very high amounts of gain because of a housing market bubble but who otherwise have modest amounts of income.

When Giovannetti proposed increasing those two limitations, he asked, “Any takers?” If he included all fixed dollar amounts and not just those two, and agreed to dispose of the low capital gains rate and capital loss limitation band-aids, then I’m on board. For that idea, there isn’t any red or blue.

About a week ago, reader Morris directed me to story about a proposed tax. Thanks to being busy with other things, it’s just now that I can elaborate on my reply to reader Morris. My response to him was brief, and included this sentence: “It is a stupid idea.” Now I have time for the longer response.

The proposal, made by a member of Pittsburgh’s city council, would impose a one percent tax on college and technical school tuitions and medical bills in the city. Would the proceeds be used to help pay tuition for students from economically deprived backgrounds? No. Would the proceeds be used to help defray medical costs incurred by low-income individuals? No. The proceeds would be used to fund infrastructure. The tax would apply to the amount of medical bills before reduction by insurance payments.

Now, funding infrastructure is not a stupid idea. It’s necessary, and as readers of this blog know, I support increased in infrastructure funding because if infrastructure fails, people die, people are injured, the economy suffers, and the nations spirals even faster into disaster.

The question is who should pay for infrastructure? The answer is simple. It should be funded by those who use it and those who benefit from it. Of course, everyone benefits from infrastructure, so the challenge is figuring out how to apportion the cost of infrastructure among the population. Singling out two groups of people, many of whom are not in a position to handle a one percent increase in their living costs, is the stupid part of the idea. The outrageous part of the idea is imposing a one percent tax on someone’s $100,000 cancer treatment invoice even though insurance covers the entire $100,000.

One critic of the bill, Pittsburgh’s city controller, suggests that the proposal should be ditched and replaced with some sort of tax or user fee on non-profit medical facilities and higher-education institutions. If infrastructure in the city is funded with a tax from which those institutions are exempt, the controller’s idea has validity. But what about other non-profit institutions in the city? Why not include them? Why focus on institutions providing two of the most essential services required by people, that is, education and health? Why exempt non-profit institutions that are providing other essential services such as environmental protection? And why exempt non-profit institutions providing services that aren’t as essential as health?

Another critic suggested that the proposal was unworthy of support but at least served as a conversation starter. In all fairness, perhaps that was the goal of the council member who introduced the bill, though there are better ways to start conversations. At least now that council member has a way to ease out of the predicament in which he finds himself.

On top of the policy and fairness question, there is the not-so-slight legal obstacle. The tax is in the form of a sales tax, and a second-class city in Pennsylvania, which is how Pittsburgh is characterized by the legislature, has not been given authority to enact a sales tax.

Back to the drawing board they must go. It will be interesting to see what the next proposal turns out to be.

In previous commentaries, I have explained that suspending liquid fuel taxes in an effort to compensate for market fluctuations is a bad idea. I have explained why it is dangerous and foolish to reduce or suspend fuel taxes when gasoline or diesel prices rise 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, Suspending the Federal Gasoline Tax Won’t Blunt Inflation And Will Harm Some People, Suspending a State Gasoline Tax Sticks It to the Dealers, and Fuel Tax Reductions and Suspensions: Negative Impacts Even Wider Than Previously Discussed. Though the focus generally was on the federal gasoline tax, the same arguments apply to state taxes on gasoline and diesel fuel.

Now a candidate for governor of Pennsylvania, Bill McSwain, has promised to permanently cut the state’s gasoline tax by 50 percent. Two of the first questions that popped into my head, and that hopefully pop into the heads of every Pennsylvanian past the age of ten, is this: Does this mean cutting in half funding for the repair and maintenance of state highways, bridges, and tunnels? Does it mean eliminating the payment of state fuel tax revenue to the state police to fund police protection for towns whose residents are unwilling to pay for those services and prefer that the state’s motorists do so?

Cutting funding for road repair and maintenance in half is foolish, for all the reasons I have explained in previous commentaries. If you think there are too may potholes in Pennsylvania now, wait until funds for fixing them get axed. Perhaps McSwain has some plan to cut funding for some other important state service, because he claims he would be cutting, not raising, taxes. Nothing in his has press release explains how he would deal with the issue. According to this report, he did hint that he would make up the revenue shortfall by using American Rescue Plan money. Whether that is possible is debatable, and even if it were possible, what happens when the finite amount of ARP money is exhausted? Would kicking the can down the road simply create substantially higher taxes in the future that causes no concern for a present-day politician who thinks only in the moment?

On the other hand, cutting funding for police protection provided to an ever-growing list of towns whose residents want others to pay for their protection makes sense. Of course, a candidate for governor would risk losing tens of thousands, or more, votes if this plan were to be revealed before an election. And, of course, it would mean that these localities would need to raise taxes, which would leave people in those towns paying as much, if not more, taxes than they were paying before the reduction in state liquid fuel taxes. Not that such an outcome is a bad thing, because the residents of these towns ought not be getting free police protection at the expense of motorists throughout the state, but surely these folks ought to know the price they would be paying if they latch onto a promise of reduced fuel taxes.

Promises to cut taxes should be accompanied by explanations of collateral consequences. What spending will be cut? What other taxes or fees will be imposed? Of course, the “cutting taxes raises revenues through economic growth,” the classic and failed supply-side “trickle down” nonsense has failed time and again, and doesn’t even mesh well with the cutting of a tax such as the liquid fuel tax. Pothole-filled roads, collapsing bridges, and defective traffic lights are the exact opposite of what a growing economy needs.

When something is too good to be true, such as the joy of gasoline taxes being halved, there always is a catch. Whether it’s the free weekend at a resort, the free installation of some home improvement, or some other free item, there is some offsetting disadvantage. Sometimes it’s hidden in the fine print. Some times it isn’t even disclosed. Will Bill McSwain share the catch in his promise?

I’ve yet to read or see or hear anything that causes me to change my position that suspending liquid fuel taxes in an effort to compensate for market fluctuations is a bad idea. I have explained why it is dangerous and foolish to reduce or suspend fuel taxes when gasoline or diesel prices rise 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, Suspending the Federal Gasoline Tax Won’t Blunt Inflation And Will Harm Some People, and Suspending a State Gasoline Tax Sticks It to the Dealers. Though the focus generally was on the federal gasoline tax, the same arguments apply to state taxes on gasoline and diesel fuel.

Reader Morris has again happened upon another story offering yet another reason why suspending or reducing gasoline taxes has consequences that are overlooked even though they perhaps should be anticipated. This time, he alerted me to this story, that explains how suspending New York State’s fuel taxes would cost the New York City Metropolitan Transportation Authority as much as $400 million in funding if the taxes were suspended for a year. Perhaps I, too, failed to consider this sort of impact from reducing or suspending fuel taxes, because part of Pennsylvania’s fuel taxes is used to fund the state police. I addressed that issue in So Who Should Pay Taxes for Police Protection?, but did not consider what happens to state police funding if fuel tax revenue shrinks or dries up.

When asked about alternative sources of funding if the New York State gasoline tax is suspended, the chairperson of the MTA acknowledged that there were no other sources of which he was aware. I don’t think anyone has asked the Pennsylvania State Police what that department would do if Pennsylvania fuel taxes were suspended or reduced, but I suspect that the outcome very well would be continuation of its funding while the cuts would be made in the other activity supported by the tax, namely, repair and maintenance of roads and bridges. Of course, if that happens, the same people complaining about increases in the cost of gasoline and diesel, which are not caused by increases in the tax, most likely will be the same people complaining about increased deterioration in the state’s highways and bridges.

Dealing with the impact of significantly increased fuel taxes requires complex analysis. Most legislators do not have the sort of education and experience in economics, tax policy, engineering, corporate finance, and similar disciplines to craft solutions that work both long-term and without disadvantageous collateral consequences. Instead, they rely on lobbyists from various sectors, each of whom is advocating for a solution beneficial to their interests rather than the best interests of the general community. Similarly, lobbyists and campaign contributors steer legislators away from examining particular ingredients of inflation, such as business profits rising at rates far exceeding the rate at which the cost of products and services sold by businesses. To that disarray is added the misinformation spread by those who want the complaint spotlight to shine elsewhere, misinformation that causes substantial numbers of Americans to think that the President somehow caused gasoline prices to increase, and who do not give any attention to the fact gasoline prices have increase worldwide. That, of course, brings us back to the world of ignorance, and provides even yet another example of how ignorance is the most dangerous affliction for a species that calls itself sapiens sapiens.

When considering a decision, decision makers need to ask, “What happens if we do this?” The immediate impact is almost always easy to see. It’s the secondary effects, the collateral consequences, and the unintended and often harmful outcomes that get overlooked. The price paid for failing to “think it through,” a technique I continuously encourage law students to make part of their analytical toolbox, can be much more than a few dollars at a fuel pump. One way of doing this is to bounce ideas off other people, which is why I appreciate reader Morris having pointed out to me a collateral consequence, namely, the impact on other activities funded by fuel taxes, that I had previously analyzed but had not put into my list of reasons why reducing or suspending fuel taxes in reaction to market price fluctuations is a dangerous and foolish idea.

Over the years I have explained why suspending liquid fuel taxes in an effort to compensate for market fluctuations is a bad idea. I have done so 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, and Suspending the Federal Gasoline Tax Won’t Blunt Inflation And Will Harm Some People. Though the focus generally was on the federal gasoline tax, the same arguments apply to state taxes on gasoline and diesel fuel.

Thanks to reader Morris, who directed me to this story, it turns out that suspending the gasoline tax can have unintended disadvantageous consequences for fuel dealers. Understanding the problem requires a bit of background. Though in some instances fuel taxes are paid by customers at the pump and then remitted by the dealer to the appropriate jurisdiction, in Connecticut the fuel tax is paid by the dealer when they get a delivery of fuel from the wholesaler, who then remits the tax to Connecticut. So when the state announced a tax “holiday” the customers expected prices to drop immediately by the amount of the tax. If dealers do that, they are selling the gasoline for less than what they paid because they are unable to recoup the tax that they have already paid to Connecticut through the wholesaler. Dealers who delay reducing the price of gasoline until they have sold the gasoline on which they have already paid the tax are then accused of price gouging. The Attorney General of Connecticut is threatening to fine the dealers for not immediately reducing prices by the amount of the tax. It’s not a small matter, as estimates suggest about $3.5 million in taxes have been paid by dealers on fuel sitting in their storage tanks waiting to be sold to customers. In the meantime, the governor announced that people probably will need to wait for “days” before seeing the benefit of the tax holiday.

Statements from the Connecticut Attorney General suggest to me that he does not understand cost accounting. He claimed, “You cannot in any way shape or form levy the 25 cent-per-gallon tax. You can’t back-date it, you can’t forward-date it and you can’t hedge your inventory.” In other words, he is telling the dealers, “You paid the tax, we are giving a tax holiday to your customers, so you can’t collect the tax from them.” What does this do? It causes the dealers to lose money when they sell the gasoline in their storage tanks. The Attorney General also claimed that “gas stations retailers were trying to make money from the gas tax holiday,” and asked the public to report any dealer who did not drop prices by the 25-cent-per-gallon tax. He doesn’t seem to understand that attempting to avoid losing money because of a sunk cost is not price gouging. Considering that gasoline dealers make a profit of a few pennies per gallon, not being able to recoup a 25-cent-per-gallon tax already paid will put dealers into dire financial straits, perhaps put some into bankruptcy, and possibly lead to enough station closures to create panic buying and shortages.

Dealers are asking the state to refund the roughly $3.5 million paid on gasoline sitting in storage tanks waiting to be sold. That would eliminate the losses faced by the dealers if they sell the gasoline after reducing the per-gallon price by 25 cents. Though some legislators agreed, the proposal was not enacted. According to the dealers, when a similar situation arose in Maryland, the state issued credits as a way of offsetting the already-paid tax.

There now is another reason to add to the list of reasons gasoline tax reductions, suspensions, and “holidays” are unwise ideas. These grandstanding gimmicks cause delays in road, bridge, and tunnel maintenance and repair, in turn generating more accidents, property damage, personal injuries, and deaths when vehicles hit potholes or other unrepaired structural elements. They encourage increased demand, which in turn increases prices. And they put dealers in Connecticut, and perhaps other states, into financial distress.

Too often, legislators fail to “think it all the way through” when they rush to enact attention-grabbing, vote-collecting gimmicks. The short-term benefits end up being wiped out, and then some, by the long-term damage.