MauledAgain

In his Tuesday New York Times column, David Brooks criticizes the Obama tax and budget plan with these words:

The U.S. has never been a society riven by class resentment. Yet the Obama budget is predicated on a class divide. The president issued a read-my-lips pledge that no new burdens will fall on 95 percent of the American people. All the costs will be borne by the rich and all benefits redistributed downward.

Brooks laments what he sees as the " polarizing warfare that is sure to flow from Obama’s über-partisan budget." He claims the seemingly high ground of the moderate, bashing both Obama's alleged uncompromising, partisan, transformational liberalism and the "Rush Limbaugh brigades" associated with a Republican Party … currently unfit to wield …politcal power."

Brooks claims that the "U.S. has always been a decentralized nation" but that the Obama budget "concentrates enormous power in Washington." He also claims that the "U. S. has traditionally had a relatively limited central government" but that federal spending will spiral out of control.

Brooks suggests that moderates assert themselves, pushing a previously "politically feckless and intellectually vapid" centrist tendencey into "an influential force." Moderates, he says, need to provide an "alternative vision," one in which "we're all in it together -- in which burdens are shared broadly, rather than simply inflicted upon a small minority." It is wrong, he claims, to try "to build prosperity on a foundation of debt." It is wrong, he says, to put "redistribution first."

No matter how Brooks describes himself, his unhappiness is the credo of the folks who ran Washington for eight years. If it is so important to share burdens broadly, where were his objections when the tax cuts of eight years ago were being doled out to the wealthy, while phaseouts and other gimmicks were saddling the middle class with the highest applicable marginal rates? When a small minority, under the pretext of promising jobs growth that turns out to be job destruction, obtains a tax cut while supporting massive increases in federal spending to finance a war, was the foolishness of racking up debt in order to avoid repealing those senseless tax breaks for the wealthy any less horrible than is taking on debt to solve the disaster caused by the failed tax policy of trickle-down economics? In other words, why is debt acceptable to finance tax cuts for the wealthy when the promised benefits aren't forthcoming but not acceptable when undertaken to fund survival for those crushed by the financial market gambling games played by the wealthy with money generated by their tax breaks?

Similarly, Brooks' concern that enormous power will become concentrated in Washington, supposedly a turning away from tradition for a nation that "always" has been decentralized, is another shift in perspective that reflects the score at the ballot box. The United States may have been a decentralized nation in the century of its existence preceding the flowering of the industrial revolution, but it has been a very centralized nation for the past 75 years. Through the ravages of the Great Depression, a massive global war, efforts to combat poverty and deprivation of civil rights, through a technology-based narrowing of the spaces between cities and towns, the country has functioned with retirement policy, poverty relief, retiree health care, civil rights protection, food and drug approval, broadcast spectrum allocation, and many other significant aspects of life managed by the federal government. To claim that the nation's central government has been "relatively limited," implying that it would be something else under the Obama budget, is a bit too disingenuous. It was fine, apparently, when the federal government told states and localities to ease up on monitoring, regulating, and preventing wild financial excesses by those wallowing in tax break funds, but a very bad idea when the same government wants to lay down the law and take the financial toys away from those who prefer to spend their days playing with derivatives and other toxic concoctions.

The idea put forth by Brooks, that redistribution, or at least putting it first, is a bad idea, is another twist reflecting the outcome of November's elections. For eight years, tax and economic policy reflected the principle that redistributing wealth in favor of the wealthy, on the pretext that doing so was the fastest, best, and most efficient way to enrich the have nots. For Brooks and those who think as he does, putting redistribution first wasn't so horrible at that time. But when redistribution becomes implemented by steering wealth directly toward the poor and struggling middle class, redistribution becomes a terrible thing. It's ironic that the need for the latter redistribution approach was exacerbated by the deprivations caused by the previous redistribution scheme, one in which the gap between the haves and the have-nots, and have-littles, widened.

What is particularly galling about Brooks' commentary is the accusation that Obama has triggered class warfare. To be honest, Brooks isn't alone in this assertion, and almost surely is not the author of its most recent manifestation. The message from the "Rush Limbaugh brigades" flooding the airwaves, the blogs, and the unrequested emails has been unrelenting in this respect. Oh, how cruel, so the complaint goes, to dump the cost of fixing the nation on the rich. Yes, indeed, how cruel it is to dump the cost of fixing a mess on the folks who created it. Rather than thanking the nation's majority for looking forward instead of focusing on recrimination and criminal prosecution of the fraud merchants who undermined the global economy, the spokespersons for the failed fiduciaries of the nation's wealth want their game to continue unchecked. They prefer, I suppose, that the people already reeling under the consequences of Wall Street wizardry clean up the mess.

This particular class war, if that's what it is, began when the wealthy decided to widen the gap between nobility and peasant. Tax cuts for the wealthy dwarfed the few made available to the poor. Jobs were shifted overseas in an effort to maximize profits for the captains of industry. Executive pay skyrocketed, while the inflation-adjusted wages of the typical American fell. Customer service was cut back, replaced by robots in other countries and voicemail menus that played on for longer than one of my MauledAgain posts, while hapless consumers frittered away time "on hold" waiting for the sole remaining customer service employee to get to their calls. Health care and other benefits for the rank-and-file were cut, while the corporations replaced their private aircraft with bigger and more luxurious models. In all fairness, not all corporate executives and not all wealthy individuals sought, argued for, or defended the ravages of the past decade. Some even tried to re-balance the economic status of the nation through a variety of private programs, including charitable endeavors, but their efforts fell short.

When Brooks claims that "The U.S. has never been a society riven by class resentment," he not so subtly tries to suggest that class warfare and even class divide have been strangers to this nation until the current Administration took office. Hah! One need only study American history, something fewer and fewer Americans do, to find the robber baron episodes of the late nineteenth century, the class-based admissions to most Ivy League colleges that predominated higher education until the Second World War, and the 1913-1914 Colorado Coal Field Strike and War, including its Ludlow Massacre, to give but three examples demonstrating that class warfare in this country is nothing new. For example, the Pullman Strike occurred during what one historian called "the most intense period of class warfare in American history," as recounted in Robert D. Sampson's "Fight Like Hell for the Living": A Brief Sketch of Working People's History in Illinois. Not long ago, Warren Buffet, an example of a wealthy individual who disfavors the tax breaks for the rich, sardonically noted "Oh, yes, we have class warfare in America. My class is winning." It is sad, of course, that Brooks is wrong, for if he had been correct in his implication that class warfare and class divide had never afflicted this nation, it is unlikely we'd find ourselves in the mess with which we must now contend and which we must fix or perish.

Brooks makes one observation which is painfully correct. He notes that much of the current Administration's budget and tax planning " emanates from a small group of understaffed experts." Key tax policy positions in the Treasury Department, for example, go unfulfilled. Why is that? In part it's the need to find the almost-perfect appointee, and in part it's the obstructionism rearing up from the defeated, many of whom subscribe to the Rush Limbaugh prayer, "I hope Obama fails." If Obama fails, the outcome won't be Brooks' prediction of a Republican Party re-taking control of the nation. The outcome will be the very real possibility that there won't be a nation to control or worth trying to control.

We wouldn't be in this mess had more reasonable minds succeeded in derailing the radicals who tore apart the economic well-being of the people whose sweat and toil made the nation the great experiment in democracy that it has been. Surely the bad decisions need to be un-done. It is mind-boggling that the people who engineered the economic train wreck want back into the locomotive's cab, and failing that, are busy obstructing the tracks on which the rescue equipment is being brought to the scene. All the while complaining that the rescuers are responsible for creating the wreckage.

In a world that permits just about anybody to publish his or her assertions about any topic, it's not surprising that we've been bombarded with all sorts of statements concerning taxes and taxation, some accurate and some misleading or downright false. In a world drowning in information, it might seem surprising that many people don't know or understand all that they need to grasp with respect to taxes. In many instances, these folks end up paying more in taxes than they are required to pay.

So it's fortunate for these people that S. Kay Bell, who blogs at Don't Mess With Taxes, and who also is a member of the Taxpayer Advocacy Panel, has come out with a book called, "The Truth About Paying Fewer Taxes." The truth is that this book is not a tax protestor tome, as the title might suggest. It's quite the opposite. Kay takes pains to explain why people ought not listen to the siren songs of the "we prefer life without any taxation" crowd, though she doesn't get to that until chapter 46. Instead, she focuses on the basic principles of federal income taxation and on some of its nuances to open people's eyes to the realities of tax law. It's a small book, and because it doesn't focus on taxes other than income taxes or jurisdictions other than the United States, one must wonder if a series of "The Truth About Paying Fewer [insert state name here] Taxes" is contemplated by the publisher.

"The Truth About Paying Fewer Taxes" is divided into 52 chapters, grouped into 11 parts. Each part focuses on a particular area of life, and is captioned "The Truth About …." The topics are Filing Requirements, Taxable income, Credits and Deductions, Taxes and Your Family, Taxes and Your Employment, Taxes and Your Home, Investment Taxes, Retirement Taxes, Tax Compliance, Audits, and Special Tax Situations. Some parts have as few as two chapters, and one has as many as ten. Each chapter zeroes in on a specific transaction or issue, and explains in plain English what the implications are for federal income taxation. Both compliance concerns and planning tips are sprinkled throughout the text. The book is up to date, including, for example, the real property tax standard deduction enacted by the Congress less than a year ago. I could not find any errors, though if I were to nit-pick I could find points on which to disagree. For example, in the chapter, "Not Everyone Has to File," Kay spells out the rules that are set forth in the tax law with respect to filing requirements. She points out that people who are not required to file may want to do so if they're entitled to a refund. What she doesn't mention is something I explain to my basic tax law students, and that is, once a person has filed, the person ought to continue filing, even if not required, in order to avoid having the IRS conclude that the absence of a return means that the person died, left the country, or turned to the dark side of refusing to file tax returns for tax protest or other reasons. But because not everyone agrees with those of us who advocate the "once filed, always file" approach, Kay's omission of that issue is not a matter of inaccuracy but a concession to the seeming goal of keeping the book manageable in size and comprehensible by the ordinary reader.

"The Truth About Paying Fewer Taxes" is not for the tax professional. Anyone claiming to be a tax professional who does not know what Kay explains in the book ought not be claiming that distinction. On the other hand, people who enter into the tax return preparation field when January rolls around, and who haven't been keeping on top of tax law changes, should pick up this book and read. So, too, should people who do their own tax returns and, yes, they exist. I personally know a few individuals in that category. Even if the self-prepared return is put together with the assistance of tax software, it doesn't hurt at all to take in the view that Kay provides. Most people who prepare their own returns tend to follow the previous year's pattern, and if they have a question, turn to the software's help feature or IRS instructions or publications to obtain clarification. Unless the person has been tracking the dozens if not hundreds of tax law changes that have occurred since the previous year's filing, he or she may not even think to consider a new credit or deduction, or some other feature, that has been inserted into the Internal Revenue Code or that otherwise has modified the tax law. Tax law changes listed on the front of the Form 1040 instructions or in some other IRS or private sector software summary often do not include the changes that are likely to affect only a few people. Kay's work has things organized by transaction, and not by tax law outline, so that a person can turn to a particular part and eyeball the possibilities.

This book also should be considered by people who are entering the workforce for the first time. This includes 16-year-olds taking on a part-time job and college graduates bringing home their first full-time paycheck. Chapter 24, "Getting your withholding right" should be required reading for new employees. It probably should be explored by people who haven't modified their W-4 forms for several or more years. Chapter 22, "When a child has to file" is a good read for the teenager who starts baby-sitting, mowing lawns, or shoveling snow. Even the people who are looking for jobs without having yet found one can benefit from chapters such as "Writing off job-hunting costs," "Tax help in paying work-related moving costs," and "Self-employment tax considerations."

If I were teaching a tax policy course in an undergraduate school, I could make use of "The Truth About Paying Fewer Taxes" by having the students react to the wisdom of the tax rules that are explained by Kay in a way that an undergraduate can understand. Even high school students would learn quite a bit of useful information about the nation in which they live and the facts of tax life that they will encounter after graduation if they were assigned the book. Tax ignorance, and by that I mean total lack of knowledge and not inability to zip around the tax law as do tax experts, is inexcusable. Kay's book would do much to dispel the tax ignorance so prevalent among high school and college students, and likewise would function as a good remedial device to bring young adults, and even older folks, up to speed with respect to taxes.

The book's price would pay for several cups of expensive coffee. In other words, for what it delivers, it's a bargain. It's published by Financial Times Press, and the person to contact is Julie Phifer (julie.phifer@pearson.com).

My top ten tax blogs are now on Blogs.com. No, they're not ranked. They're the ones I visit most often, but I don't log my tax blog web surfing so I doubt I could be accurate trying to generate a ranking in that manner. To my tax-blogging colleagues, thanks for the material, the comments, the links, and the inspiration.

Just as a foolish idea is about to fade away from the tax law, the new Administration seeks to bring it back in an even more perverse form. I'm talking about tax increases masquerading as phaseouts. Many years ago, some clever but manipulative members of Congress decided that they could fool the American public into thinking that they did not raise taxes if they found a way to raise tax revenue without raising rates. Their thinking was that by leaving tax rates alone they could argue that they had not raised taxes. What they did was to reduce itemized deductions and the deduction for personal and dependency exemptions by a percentage or amount reflecting the extent to which the taxpayer's adjusted gross income exceeded a defined threshhold. The result was an increase in taxes without an increase in rates. To call this deceptive is to be too kind.

It took years to persuade the Congress to rid the Internal Revenue Code of these provisions, which have taken on the names Pease and PEP. The former is a unwarranted memorial to the member of Congress who shared this confidence game technique with the rest of the legislature. PEP is an acronym for personal exemption phaseout. It's technically inaccurate, but generates something that can be pronounced even though it hardly adds any energy to anything. What it does, along with its analogous Pease of junk, is to sap the energy of taxpayers trying to prepare returns, students and citizens trying to learn the tax law, and teachers trying to explain something that imposes a ten-fold time requirement on what was once a fairly simple tax topic.

As can be seen from page 123 of the President's Budget Proposal, the Administration wants to "reinstate the personal exemption phaseout and limitation on itemized deductions." Why? If the goal is to raise revenue, and I cannot think that the goal is anything but to raise revenue, why fall back to a failed mechanism? Why not have the courage to raise tax rates? Aside from the absurd complexity of Pease and PEP, it imposes a higher marginal rate on taxpayers with incomes just above the threshhold than it does on the megamillionaires who ought to be bearing the brunt of the revenue increases. I wrote about the problem in Getting Hamr'd: Highest Applicable Marginal Rates That Nail Unsuspecting Taxpayers, 53 Tax Notes 1423 (1991). I suppose if Congress is going to bring Pease and PEP back to life, I may need to put my pen to work and produce an updated version of that article. And then find a way to persuade members of Congress, the President, and his staff to read it and get a free education.

Worse, the Budget Proposal contains an even more complicated rate phaseout mechanism, designed to "limit the tax rate at which itemized deductions reduce tax liability," as summarized on page 128 of the proposal. As explained on page 29 of the proposal, the revenue raised from this mechanism would go into a reserve fund to be used for health care purposes. I can guarantee that the tax computation form on which this mechanism is worked out will be even more complicated than the one on which the special low tax rate on capital gains and dividends is computed. It is an extremely inefficient way in which to raise revenue. For example, why not convert itemized deductions into a credit equal to 28% of the amount otherwise qualifying for a deduction? That accomplishes the same goal, and actually benefits some taxpayers in the lower tax brackets.

What's missing from the proposal is any sort of forward-looking change in the way tax policy is developed and implemented. Pulling a failed idea from the trash heap is unwise. Why are taxpayers earning $500,000 a year treated in the same manner as those earning more than $5,000,000 a year? Why not a progressive rate structure that increases the rate by 1 or 2 percentage points for every $1 million or $2 million increase in taxable income? Why not total elimination of the special low rates on capital gains and dividends? Why not termination of depreciation for property that does not go down in value? Would not streamlining the tax law do more for lubricating the national economic engine than fooling around with mudflaps and exhaust pipes?

How did this happen? The answer is fairly easy. There still has not been anyone nominated and confirmed to serve as Assistant Secretary of the Treasury for Tax Policy. It is unlikely that the Secretary of the Treasury paid any attention to these matters, and even if he did, it's unlikely he has any clue as to what's going on, considering he cannot do his own tax return properly. One would think he'd be an advocate for simplification, not for more megacomplexity. My guess is that these ideas were tossed in by some young, eager staff at the White House and/or the Office of Management and Budget, perhaps influenced by some old-timers who remember the "good old days" when they were able to infect the tax law with gimmicks more reminiscent of toxic derivatives manufacturing rather than wholesome economic productivity. I'm confident none of these folks has any sort of worthwhile experience with tax compliance, tax return preparation, business planning, or even tax policy, other than having some conceptual and theoretical notions that do not translate very well from the world of philosophy to the world of real life.

It's likely that the response to my advocacy for increased rates scaled throughout the upper income ranges, rejection of complex gimmicks such as Pease and PEP, and repeal of the special low rates for capital gains and dividends is that these things are not "politically" feasible. So what? The nation, the President, the Administration, and the Congress should be doing what is right and necessary for the economic survival of the nation, and not what sells politically. Politics has become nothing more than a series of manuevers in which office holders engage in order to grab and hold power. For a moment, it appeared as though the current President wanted to rise above politics, spurn partisanship, and read the riot act where and when it needs to be read. What is emerging has too much "let's not ruffle the feathers of the powerful" and too little "let's listen to the American citizen who voted for change and step forward with those folks behind us."

Let's face it. The days of using Pease and PEP to hide tax increases are long gone. Everyone knows the score. Aside from the impropriety of raising taxes using clandestine gimmicks, there's no need to do so. There's no genuine impediment to doing what needs to be done in the way it needs to be done. The bleating from the privileged few that taking away their capital gains break or their special dividend rate will destroy the economy should fall on deaf ears. The special interest groups have cried wolf too many times.

Change is defined as "a transformation," as "novelty," as "the passing from one … form .. to another," as "the supplanting of one thing by another." To change is defined as "to transform." It is time for transformation with novel approaches, as the tax law passes from its current and past form into one that is suitable for the challenges of the twenty-first century. Running on a tax treadmill is not change. Turning back to the failed policies of Pease and PEP is no better than turning back to the failed policies of tax cuts, as I described on Friday. President Obama, you're an advocate of change. You and your crew can do better than to breathe new life into a stale, unwise, and inefficient idea. And you know that. Change means scaled progressive rates, no more special rates for capital gains and dividends, itemized deductions replaced by credits or eliminated, no more depreciation on property not going down in value. Don't back down in the face of the bullies. Don't be reluctant to propose and fight for the tax law changes that need to be made. Some wealthy folks and some powerful politicians may be unhappy, but the overwhelming majority of Americans who take the time to study and understand the realities of the current crisis will appreciate your decision and applaud your determination.

Apparently when it comes to tax policy, certain things are acceptable if they're done by one group but not by another. In his reply to the President's economic speech on Tuesday, Governor Jindal of Louisiana, explained to the nation:

Democratic leaders say their legislation will grow the economy. What it will do is grow the government, increase our taxes down the line, and saddle future generations with debt. Who among us would ask our children for a loan, so we could spend money we do not have, on things we do not need? That is precisely what the Democrats in Congress just did. It's irresponsible. And it's no way to strengthen our economy, create jobs, or build a prosperous future for our children.

But is this not what was done for the past eight years? Did not the debt of the national government increase from roughly $5.7 trillion at the end of 2000 to roughly $10.7 trillion at the end of 2008? Why is it acceptable to impose a huge debt on our descendants in order to fight a war but not acceptable to do the same in order to rebuild infrastructure, develop means of eliminating dependence on foreign energy, improve health care, and retool the education system so that our descendants have an opportunity to develop marketable skills that will generate national income to be used to repay the debt? Is it not possible that one of the significant factors in the current economic meltdown is the reduction, rather than increase, in taxes during wartime and the "it's ok to borrow beyond one's means" message that this unwise decision sent to the nation's consumers?

The solution is more of the same. Louisiana's governor then proposed the solution:

To solve our current problems, Washington must lead. But the way to lead is not to raise taxes and not to just put more money and power in hands of Washington politicians. The way to lead is by empowering you, the American people. Because we believe that Americans can do anything. That is why Republicans put forward plans to create jobs by lowering income tax rates for working families, cutting taxes for small businesses, strengthening incentives for businesses to invest in new equipment and hire new workers, and stabilizing home values by creating a new tax credit for home-buyers. These plans would cost less and create more jobs.

In other words, more of the same failed tax and economic policies of the past eight years. The deficit-generating tax breaks for the wealthy were defended as job-creating propositions. In February of 2009, the question is, where are the jobs that these tax breaks created?

The answer is in something I wrote three and a half years ago. In Government Budget Math: $1 + $1 + $1 = $1 + $1, I explained:

I'm not going to regurgitate all the arguments of why the [federal budget] deficit poses a long-term threat. Most of those arguments are economic. I will emphasize a different one. The deficit threatens our national security. When the deficit is increased, the government must borrow money. From whom does it borrow? From people and institutions with dollars. Who has this sort of money? China. Yes, China. For a President trying to make his mark as a defender of national freedom and independence, it strikes me as short-sighted to let another nation, and one with visions of military glory at that, own this one.

* * * * *

The defense of deficit spending, namely, that it is necessary when there is an emergency, is one that I can accept. Had there been no deficit spending during World War Two, when revenue was close to being maxed out, the outcome of that conflict could have been different or perhaps achieved at a greater cost in human life. The current difficulty, though, is that the existence of the Katrina emergency, which standing alone might justify deficit spending, comes at a time when the budget deficit already is out of control because of imbalances caused by non-emergency decisions. The huge capital-gains tax cut and the dividend tax rate reduction might be defensible in a time of peace and quiet on the military and weather fronts. But this is not such a time. Incidentally, the taxes that would have been paid by the investor community don't appear to have been channeled into projects such as energy independence, but appear instead to be chasing oil, gasoline and other energy futures. In other words, gambling. And we've seen how one great gamble, ignoring the improvement of the Louisiana levee system, brought the wrong sort of jackpot.

As the current President noted on Tuesday, the "day of reckoning has arrived." After years of neglecting the care of the nation's infrastructure, after years of handing out no-bid government contracts, after years of handing out tax breaks to wealthy individuals who gambled with derivatives, Ponzi schemes, and other non-productive wastes of money, the folks who created the mess now purport to claim high ground in the debate over how to clean it up. They had their chance. They failed. In sports, they'd be benched. In the world outside of politics, they'd be fired. They'd do a great service to the nation by stepping forward, admitting that they made a mistake, thanking those who have stepped in to rebuild the nation for undertaking such a herculean task, and doing their best to stay out of the way. Who was it that said, "If you're not part of the solution, you're part of the problem"? We're told by Inspirational Words of Wisdom that it's an African proverb. The nation does not need more tax credits, more first-year expensing, and more tax breaks for the wealthy. It's too bad that the American Recovery and Reinvestment Act is saddled with too many of these things, as I noted, for example, in So How Does This Tax Provision Stimulate the Economy?, and considering that the unwise tax break provisions were a bone tossed to an unpersuaded faction, it is absurd that they cry for more of what they ought not to have received in the first place. So much for bipartisanship. The elevation of party affiliation above the national good isn't very well disguised, as is evident from threats made by certain partisan groups against those who voted conscience rather than party allegiance.

It is disappointing to watch the nation's economic survival, and perhaps its very survival, fall hostage to partisan politics. It's as frustrating as listening to a drunk driver who has caused an accident tell the tow truck driver that the best way to clean up the accident site is to let the drunk driver get back behind the wheel to take the wrecked car home. Some people, it seems, are incapable of learning from their tax policy mistakes. Unfortunately, some of them remain in a position to wreak more havoc.

The current Administration emphasized "change" as a core component of its intended philosophy in governing the nation. A message and spirit of can-do permeated the campaign and the speeches that have been given. So what's going on with the quick and early dismissal of mileage-based road fees as the future of federal highway funding?

According to this CNN report, the Transportation Departement has announced that "The policy of taxing motorists based on how many miles they have traveled is not and will not be Obama administration policy" This announcement came shortly after an interview with Ray LaHood, Secretary of Transportation, in which he said "We should look at the vehicular miles program where people are actually clocked on the number of miles that they traveled."

I am a fan of mileage-based road fees. As explained in Whatever a Tax Increase is Called, Someone Needs to Sell It, the National Commission on Surface Transportation Infrastructure Financing (NCSTIF), though recommending a 50% increase in the federal gasoline tax to provide funding for road construction and repair, selected the mileage-based road fee system as its choice for a long-term revenue mechanism to deal with the maintenance of highways. I first explored this concept in Tax Meets Technology on the Road, examined the concept further in Mileage-Based Road Fees, Again, and early this year took an even closer look in Mileage-Based Road Fees, Yet Again. A few months ago, as reported in Introducing Mileage-Based Road Fees to the Pennsylvania Legislature, I wrote to Dwight Evans, Chairman of the Pennsylvania House Appropriations Committee, pointing out to him the existence of these fee concept and suggesting that it provided a way out of the road maintenance funding challenges facing the state. Reports out of Oregon, whose experimentation with the fee triggered my attention to the issue, are that the experiment was a success. It works. That may be why Massachusetts has joined the list of states looking at this approach, which concedes that modest increases in the state gasoline tax will not provide the necessary funds.

The system permits increasing rates for drivers who enter congested areas during peak travel times. It also can be adjusted for the fuel efficiency of the vehicle, a point missed by one critic, a columnist for Popular Mechanics, who claims that "A mileage tax, presumably, doesn't care whether you're driving a Prius or a Hummer, giving no incentive to save." That "presumably" is an invitation to dig into the Oregon experience, which, incidentally, also found that the other claimed flaw in the system, invasion of privacy, is overstated.

When CNN tried to contact the Secretary of the Treasury after the Department issued its announcement, it was told he was unavailable. The spokesperson for the Department, when asked about the announcement, claimed to be unable to elaborate.

So what's going on? Why are we not being told the reasoning that led to the Transportation Department's announcement? Why are citizens not being asked for input? Why have there not been hearings on the matter? Why has a decision been made so summarily and abruptly? What's the secret?

My guess is that someone in the Administration doesn't like the idea of mileage-based road fees. Somehow, that person has exiled the proposal into a black hole, perhaps afraid of what might happen if the idea were to get a full public examination. Does the person, or persons, lack confidence their position would triumph? Are they more secure in their power to issue back-room commands than in their power to persuade in a public forum? Considering that the report of the NCSTIF has not yet been formally presented, is it sensible to reject its recommendations before people have a chance to educate themselves with respect to mileage-based road fees? I also will guess that opposition to the concept comes not from those genuinely interested in privacy, because that concern has been declawed by the Oregon experiment, but from whomever would stand to lose if the system were put in place. Who might that be? Certainly not the manufacturers of the units that track mileage or the folks who would obtain jobs installing them in existing vehicles. Certainly not the people who would be programming the units and operating the equivalent of a networked EZ-Pass. Honestly, I see a win-win proposition that benefits everyone involved in highway use, and I cannot determine what would be fueling (sorry) opposition. This is why it is essential to find out what underlies the announcement by the Transporation Department.

It was one of those tax questions that doesn't require much more than a paragraph to put forth. It was posted recently on the ABA-TAX listserve:

Client moved to Colorado from Maryland in 2007. They were not able to sell their home in Maryland, so turned it into a rental. They receive rent, but it doesn't even come close to mortgage interest and taxes expenses. Instructions for Maryland income tax returns specify that gross rents from property situated in Maryland must be reported. Gross rents exceed the level of income required for filing, but, of course, there's a large loss, so no tax will be due.

Right now I have classified the rental property as MD sourced. My clients don't want to file a MD return for just that.

The responses were almost unanimous in concluding that the Maryland return should be filed. One response put it succinctly: "Of course, your client must file a MD ret. the fact that he doesn't like it doesn't change the law, not [sic] does [the] fact that he has offsetting expenses." Another respondent gave a good reason for complying with the law: "If for no other reason than to establish the existence of the rental loss, which presumably would end up in some sort of carry over status, thus available for offset some day down the line when the property may be sold at a gain." This reasoning was echoed by yet another list participant. Three more reasons came from different participant: "… software makes it easy to do so. Besides the fact that most states require that you file such a return it also had the advantage of starting the running of the statute of limitations. Also the preparing of the return may be cheaper than having to respond to the state later when Maryland sends a letter asking why no return was filed." As for the client's unwillingness to file, this advice makes sense: "I'd prepare the return according to the rules. If they don't mail it in, it's their issue."

The implications of a the requirement that a nonresident who transacts business or engages in an activity in the state must file a return with that state become quite complicated when the nonresident's business or other activities touch multiple states. The cope of the complexity is illustrated by this inquiry which followed up the original question:

Related to this situation, what happens when K-1 activities are allocated to multiple states? I have one client that is invested in a private equity fund that allocates income across 32 states. In some states the income is as low as $5 and some of the states show losses.

I know that technically we should be filing in all of the states, but I don't think that is practical at all. And while I understand that technicalities should trump practicalities, there must be a feasible way to do this.

The first response to this question tried to soften the impact of multi-jurisdictional activity on tax compliance:

Just because income was allocated across 32 states does not mean that the client has a filing requirement in each of those states. It is likely that in many of those states the income threshold was not met and thus no return need be filed.

As someone else pointed out a while ago ( I'm not sure if it was here or elsewhere) the client is the one that made the investment decision. All we can do is advise them of the law.

If I know a return is required, it is my current practice to prepare one ( of course a client can instruct me not to prepare a particular
return). Once prepared it is up to them whether or not to file it.

That is when I jumped in with this observation:

This is a reason that some states permit the entity to withhold and pay taxes on behalf of the shareholder/partner/member. When I worked on the Model S Corporation State Income Tax Act, the drafters adopted this concept.

Unfortunately, many states do not provide for this mechanism, some make it optional, and some make it available for certain types of entities and not others.

As states begin to figure out what some of us already know, that mandatory withholding of income taxes by the entity on behalf of nonresident shareholders/partners/members will increase state revenue, we'll begin seeing this approach take hold across the country.

In the meantime, different states pursue nonresident shareholders/partners/members with varying degrees of intensity. New York is quite aggressive. Other states lack enforcement resources.

Withholding on behalf of nonresident shareholders and partners is a sensible solution but it also provides challenges.

The concept of withholding on behalf of nonresident shareholders and partners is simple. An entity that engages in activities in a particular state applies a specified rate to each of its nonresident owners' distributive shares of its income, and pays that amount to the state on behalf of the nonresident owners. At this point, application of the concept becomes more complicated. Some states provide for withholding on behalf of resident owners, even though the resident owner must file an income tax return with the state in any event. Other states do not. Some states make withholding on behalf of nonresident owners mandatory, while others make it an option. Some states do not provide for withholding on behalf of nonresident owners.

In an extended form, the concept evolved into the composite return. The amount paid by the entity to the state, rather than being treated as withholding claimed by the nonresident owner on the owner's state income tax return, is treated as payment of the state income tax on behalf of the nonresident owner, who is then absolved of any requirement to file an income tax return with the state. Even this concept can become more complicated, because some states permit the nonresident shareholder to file a return, report the income, and treat the payment as a credit, if the nonresident chooses to do so. Why would the nonresident choose to do so? If the nonresident also owns an interest in another entity with activities in the state but that incurs a loss, the nonresident would prefer to file a return on which both the income and loss are reported, with the loss offsetting the income and thus eliminating the tax liability. Whether a refund could be obtained depends on the precise language of the state's statute.

The drafters of the Model S Corporation Income Tax Act, and I must disclose that I was among them, agreed on the use of composite returns rather than simple withholding. Although not every state has adopted this model act, some have, even though some of the states that have adopted it did not include the composite return provision or modified it to some extent. On the positive side, the endorsement of the Model Act by the Multistate Tax Commission gave impetus to many states to focus on this issue, not simply for S corporations but also for partnerships and other pass-through entities. Progress, it seems, often is made one step, or one state, at a time.

One of the reasons for choosing the composite return approach is to avoid a federal income tax issue that arises for S corporations under the withholding approach. Many S corporation shareholders focus on after-tax returns, and seek to guarantee that each share of stock ends up with the same after-tax income. The problem with this approach is that under a withholding system as in place in some states, a nonresident and a resident shareholder are treated differently. Thus, if the corporation pays state income tax on behalf of one shareholder and does not pay it on behalf of another, the effect could be a difference in deemed distributions, causing there to be more than one class of stock. If the corporation complies with Regs. section 1.1361-1(l)(2)(ii), it can avoid being disqualified as an S corporation for having a second class of stock. But if it doesn't comply with that provision, the consequences could be quite disadvantageous.

Until all of the states and localities with income taxes adopt a uniform composite return approach to the issue, the aggravation of having to file multiple state income tax returns, perhaps several dozen of them, will continue to exist for persons who own interests in entities that engage in multistate operations. The independent taxing authority of each state, and if one wants to be precise, each locality within a state, is a political feature of the nation's governance system that imposes a transaction cost on doing business. Only the most local of businesses can avoid multistate taxation. And only a few can afford to ignore the increasing globalization of most types of businesses.

None of this, of course, addresses the further complications arising from differences in how each state or locality defines taxable income. Amounts deductible in one state may be disallowed in another. Even if the state or locality uses federal taxable income as a starting point in computing state taxable income, as most do, all sorts of adjustments are required, and those vary from state to state. Worse, something that may not need to be separately stated for purposes of one state's income tax may need to be separately stated for purposes of another state's income tax because the latter state may have a credit related to certain types of expenditures for which the first state makes no provision.

When I tell students in the Partnership Taxation course that we are ignoring more of the issues than we are addressing, they nonetheless conclude that the topic is brutally complex. It is. Though the course focuses on federal income taxation, from time to time I ask them to envision the issues that the transaction presents for state income tax purposes. And if that's not sufficient to help them understand the extent to which the course is "watered down," I remind them that many partnerships and S corporations engage not only in multistate activities but in multinational activities. Recession or no recession, someone needs to figure out how the partnership or entity fills out the many returns it must file. And going back to the original question, the folks who own rental properties in multiple states either need to sit down and do a handful or more of returns on their own, or stimulate the economy by paying tax return preparers to do so for them. It's no wonder that one preparer's client balked at the expense. But as the participants in the discussion demonstrated, that client has no realistic choice. The option of not filing the state income tax return isn't a viable one in the long term.

Last Friday, in Don't They Ever Learn? They're At It Again, I lamented the continued persistence of the Delaware River Port Authority (DRPA) in its plans to use toll revenue for purposes other than repair, maintenance, and protection of the bridges and rail line that generate the tolls. On Thursday, in Legislators eye limits on DRPA spending, Paul Nussbaum examined the issue, explaining what would be required to amend the DRPA charter so that its use of toll revenues for unrelated projects would come to an end. He interviewed Pennsylvania State Representative Paul Clymer, who noted that while costs for motorists were "ballooning," the DRPA was using toll revenues for "special pet projects" of politicians. He's in favor of amending the charter. A member of the New Jersey Assembly noted that there was interest in doing this but that it wasn't a priority. The American Automobile Association Mid-Atlantic club has come out in favor of a change. The people who emailed me, called me, and spoke with me after having seen my comments quoted by Paul in the article unanimously agree.

Paul's exploration of the issue revealed that when the DRPA charter was changed in 1992, it was resisted by some New Jersey members of the DRPA because "they feared that toll revenues would be diverted from bridge maintenance." It's unfortunate how the warnings of the prescient too often are ignored. Since the DRPA's foray into projects other than bridge and rail line stewardship began, its debt increased from roughly $250 million to $1.2 billion, with an further increase to $1.5 billion expected. Bridge tolls have soared from $1.80 to $4, and will increase to $5 in 2010.

The DRPA defends its largesse to stadiums and other projects by claiming "We are confident that the authority's investment in these projects will generate increased toll and transit revenues for years to come." C'mon. Money has been poured into these projects by the DRPA for more than a decade and if toll revenues had grown as predicted there wouldn't be a need to throw two consecutive annual increases of 33% and 25% at motorists. The DRPA also claims that "even if every penny of the remaining $35 million in bond proceeds were diverted to the capital program [for bridge repairs and other improvements], it would not reduce the size of the bond issue needed to fund the program, nor would it reduce or eliminate the need for the toll increases that are being implemented to fund it." Simple accounting tells us that if the $35 million is used for repairs and improvements to the bridges and rail line, that's $35 million fewer dollars that need to be borrowed or $35 million fewer dollars that need to be collected in tolls.

On Wednesday, the Philadelphia Inquirer invited two public officials to opine on the question. In Should DRPA fund President’s House? No. Agency should stay on mission, Jack Wagner, Pennsylvania's auditor general, presented arguments similar to those set out by those opposed to the diversion of toll revenues. He explained that as a member of the DRPA he had voted against its contribution of $10 million to construction of a soccer stadium and intended to vote against the latest round of projects that brought the issue to the forefront once again during the past two weeks. In all fairness, I ought to stop painting the DRPA with a broad brush, as the decision to spend toll money on unrelated matters hasn't been a unanimous one. He points out that the projects to which tolls have been diverted won't fall apart without the DRPA money. That makes good sense. The analysis ought to be "we build and maintain bridges so that people can get to where they want to go" and not "we use toll money to fund projects so that people will want to use our bridges."

Taking the other position was Pennsylvania's Governor. In Should DRPA fund President’s House? Yes. Growth is a key part of the agency's role, Ed Rendell argued that the DRPA must make strategic investments as part of its "critical role in fostering growth throughout the greater Philadelphia region." Since when does an agency created to care for bridges and a rail line become the engine of economic growth for the region? What's next, the DRPA building public housing, collecting trash, and plowing Philadelphia's streets? Rendell makes a strong case for the quality of the projects, a conclusion with which I do not disagree and a conclusion with which few others disagree. Instead, as I pointed out in my comments quoted in Legislators eye limits on DRPA spending, "public anger with DRPA had less to do with the projects that are being funded than with the way the agency does it. These aren't bad projects. They're not funding the importation of illegal drugs or something [like that]. But the user fees are being used for purposes totally unrelated to what users are paying for." Something more than the project being worthwhile is required for the funding to come out of bridge tolls rather than from some other source. Otherwise, there would be no limit to what the DRPA would fund. That would be wrong, because the DRPA is not a general fund government but an agency charged with bridge and rail line stewardship.

Rendell's justification rests on this rather revealing argument: "Seventeen years ago, elected leaders in New Jersey and Pennsylvania recognized that the DRPA was uniquely situated to support economic development." Uniquely situated? The DRPA is as uniquely situated as is any unregulated monopoly. It's in a position to collect tolls from motorists who, as I pointed out in Legislators eye limits on DRPA spending, "don't have another way to cross the river, and … don't have a way to vote against DRPA board members." Rendell's argument is not unlike the "we're in a position to take the money, so we will" approach that was embraced by certain business entrepreneurs, investment bankers, brokers dealing in toxic derivatives, boiler room sales forces, and others who abused the so-called "free" market to the point this disregard for the obligations of holding a position of stewardship significantly contributed to the current economic downturn. Just because it's possible to gouge the motorist or the customer or the client doesn't mean it ought to be done.

Rendell points out that "They amended the agency's charter to make that one of its essential functions. The amendments were reviewed and approved by the Pennsylvania and New Jersey legislatures, Congress, and the president." That might make the DRPA's actions legal, but it doesn't make them wise or responsive to the electorate. Did any of these officials tell the voters while they were campaigning for office, "We're going to raise bridge tolls to finance the Army-Navy game, the Kimmel Center, and other projects that the DRPA happens to take a liking to"? Why is it that the DRPA hasn't funneled toll revenues to feeding the region's hungry or financing scholarships for the underprivileged? Expanding the DRPA's mission to include improvements to feeder highways, to improve access to the bridges, though beyond the technical boundaries of the bridges, is defensible, even to the point of probably getting my support.

Rendell does make a good point that the DRPA has painted itself into a corner. Some of the money that it is about to disburse was committed some time ago. According to Rendell, the DRPA "must honor those commitments." I'm sure he's right. I'm sure there are contractual obligations in place such that if the DRPA does not cut the check, it will be sued, successfully, by the designated recipients. That's too bad. It may be too late to back out of those expenditures just as it's too late to back out of hundreds of thousands of ill-advised mortgage loans.

Rendell then asks, "Does anyone seriously dispute that this will generate significantly more trips across our bridges and on our trains?" Yes, Ed, I do. Where are the surveys? How many motorists would answer "No" to the following questions: "Would you have crossed this bridge if the DRPA's refusal to put $250,000 into the Army-Navy game caused it to be moved to some other city or cancelled? Would you have crossed this bridge if the DRPA had not contributed to the funding of the Kimmel Center? Would you have crossed this bridge if the DRPA had not funded some of the cost of the President House project?" How many people in New Jersey are saying to each other, "Hey, Sam, they managed to get the soccer stadium built with help from the DRPA, so let's cross the bridge without eliminating any of our existing bridge crossings"? Yes, there are some motorists who might make a crossing that they otherwise would not have made, without cutting back on existing trips, to see something that arguably would not exist but for DRPA funding, but there's nothing to demonstrate that there's enough of them to "generate significantly more trips across" the bridges. The burden of proof is on the supporters of this spending spree. To date, they haven't generated the evidence.

Legislators in Oregon are considering a bill that would increase the per-barrel excise tax on beer producers from $2.60 per barrel to $49.61 per barrel, with the revenue to be used for alcohol and drug abuse, treatment, and recovery programs. That's a whopping increase. Why?

According to the legislation, the rationale for the propsal is as follows:

Whereas Oregon ranks 49th among states in its malt beverage
taxation rate; and

Whereas Oregon's malt beverage tax has not been raised in 32 years; and

Whereas Oregon's untreated substance abuse costs $4.15 billion in lost earnings, $8.13 million for health care and $967 million for enforcement and social services for a total cost of $5.13 billion each year; and

Whereas 'addiction' is defined as a chronic, relapsing brain disease that is both preventable and treatable; and

Whereas treatment capacity is so low that less than 25 percent of Oregon adults and only two percent of Oregon youth who need substance abuse services receive the help they need; and

Whereas research, the Governor's Statewide Leadership Team for Alcohol-Free Kids and the Governor's Council on Alcohol and Drug Abuse Programs show that increasing alcohol taxes reduces access to and availability of alcohol to underage drinkers; and

Whereas underage drinkers consumed an estimated 15.3 percent of all alcohol sold in Oregon in 2005, totaling an estimated $278 million in sales and estimated profits of $135 million to the alcohol industry; and

Whereas alcohol use by Oregon's eighth graders is 76 percent higher than the national average; and

Whereas on average, half of the students in every 11th grade classroom in Oregon drink; and

Whereas raising the malt beverage tax and indexing those taxes to the Consumer Price Index to keep pace with inflation is imperative to protecting Oregon's citizens;

How accurate are these assertions?

According to Draft Magazine, Oregon does have a low beer tax compared to the rest of the country. It does appear that the excise tax in question was last raised in 1967. Studies indicate that untreated substance abuse imposes economic costs to the state of Oregon in an order of magnitude roughly approximating the cited amounts. Underage drinking is an acknowledged problem in Oregon just as it is throughout the country. Whether it is worse there is a debatable question, even if the number of eight graders who are drinking suggest that Oregon youngsters are getting a head start.

The tax and user fee policy question is whether increasing the excise tax on beer production will cut underage drinking by reducing the availability of alcohol to underage drinkers. The editor at Draft Magazine suggest that the answer is no. He notes that commonly referenced studies indicate the alcoholic drink of choice for underage drinkers is liquor and wine. Studies such as the two summarized in this report correlate that position. Though using revenue from an increased beer excise tax to educate youngsters with respect to the dangers and costs of underage drinking, to increase enforcement of laws prohibiting underage drinking, and to encourage underage individuals from drinking should have a positive result, if done effectively, the question is why increase the excise tax on beer production while not imposing a user fee or tax on the production of the alcoholic beverages that underage persons are more likely to drink?

A related question is whether increasing the tax and user fee on all alcoholic beverages would cause a decline in underage drinking. Is there a correlation between the current low excise tax rate in Oregon and the higher level of underage drinking in Oregon? At first glance, the answer would seem to be less. But perhaps there is more to the analysis than a simple correlation. According to Draft Magazine, Oregon has "one of the most robust beer industries in the nation" and "a plethora of breweries." Surely the state's low excise tax on beer production has encouraged breweries to set up operations in Oregon. Does that translate to a cultural condition in which underage drinking gets more "winks" than in other states? According to this National Survey on Drug Use and Health Report, the answer appears to be that underage drinking in Oregon puts the state in the middle of the pack.

Nor is underage drinking the only substance abuse behavior that needs to be prevented and treated. The producers of beer are not responsible for underage individuals' use of illegal drugs, abuse of prescription medications, or addition to household chemicals and other items such as glue. If revenue from a beer production excise tax flows into rehab centers, it is unlikely that those specific dollars will be restricted to dealing with problems arising from beer consumption.

Justification for taxes or user fees on the production or use of alcoholic beverages ought to be based on the same considerations that apply to other user fees, namely, shifting to the producer or user the costs imposed on society by that production or use. What seems to be missing are empirical studies that measure that impact. Presumably, it is difficult to separate the cost imposed by underage use of beer from underage use of other substances, especially because in some instances multiple abuse exists. The goal of those introducing the legislation in question is admirable. The scope of the legislation is deficient, and its impact threatens legitimate businesses who produce beer for consumption by those legally entitled to use it. The legislation would be improved by the addition of provisions focusing on identifying and shutting down the pathways by which beer, other alcoholic beverages, and other abused substances find their way into the hands of underage drinkers. Perhaps adults who leave alcohol in unlocked cabinets ought to be treated in the same manner as adults who fail to put their guns and bullets in secure places.

I describe the proposed increase as one that amounts to 1808%. I computed this number by subtracting the current rate of $2.60 per barrel from the proposed rate of $49.61 per barrel, which provided an increase of $47.01, and then by dividing $47.01 by $2.60. According to Draft Magazine, the increase is 2008%, the same increase described in posts on this Sporting News blog. According to the CNN report that steered me to this story, the increase is 1900%. The Oregon Brewers' Guild describes it as an increase of "over 1900%," as does the Examiner. The only reported percentage increase that I can explain is the 1800% increase reported by Oregon Live and by Boston Multimedia, because that reflects simple rounding. I'll resist the temptation to offer explanations for how a simple arithmetic computation based on two numbers can generate so many different answers, other than to note that it's not unlike giving the same facts to several dozen professional tax return preparers and getting several dozen different tax liabilities.

Section 1008 of the American Recovery and Reinvestment Act of 2009 as passed by the House-Senate Conference allows purchasers of qualified motor vehicles to deduct the sales taxes paid on the purchase of a qualified motor vehicle. Only the sales tax paid on the first $49,500 of the purchase price qualify. The deduction is phased out if the taxpayer's modified adjusted gross income exceeds $125,000, and is fully phased out once it exceeds $135,000. A qualified motor vehicle is a passenger automobile, a light truck treated as a passenger automobile for purposes of the Clean Air Act provided it does not weigh more than 8,500 pounds, a motorcycle that does not weigh more than 8,500 pounds, and a motor home. The original use of the vehicle must begin with the taxpayer. The deduction is available both to those who itemize and those who claim the standard deduction, because the deduction is added to what would otherwise be the standard deduction. The deduction is not available to taxpayers who elect to deduct state sales taxes in lieu of state income taxes, almost always a decision made by taxpayers in states without income taxes, because these taxpayers already are deducting the sales tax in question. The provision is effective for purchases made on or after date of enactment in taxable years ending after the date of enactment but does not include purchases made after December 31, 2009.

The question is how does this deduction stimulate the economy. There are two elements to this inquiry. First, there is the assumption that an increase in the number of people purchasing new vehicles during 2009 stimulates the economy, presumably by creating jobs in the auto industry and in the secondary industries that derive business from the auto industry. Second, there is the assumption that the tax savings from deducting the sales tax on the purchase of a new vehicle will cause more people to purchase vehicles than otherwise would have purchased vehicles.

Whether an increase in the number of people purchasing new vehicles during 2009 will stimulate the economy is a debatable point, but at least it is a plausible proposition. This is not the aspect of the question that generates the greatest concern.

It is highly questionable that the tax savings from deducting the sales tax on the purchase of a new vehicle will increase the number of people purchasing new vehicles during 2009 by more than an insignificant few, when compared to the number of people who would have purchased new vehicles in the absence of the deduction. The reason for this conclusion is that the efficacy of the deduction is weak.

Consider that most people who purchase new vehicles do so by trading in their currently owned vehicle. In many states, the sales tax is imposed on the amount paid net of trade-in allowance. Also consider that the people permitted to claim this deduction are most likely to be purchasing vehicles in the lower end of the automobile retail price range. When these two factors are combined, the amount of sales tax paid by someone could be as little as several hundred dollars or perhaps as much as $2,000. The tax savings to someone in the 10%, 15% or 25% marginal tax bracket ranges from as little as $30 to at most $500.

For how many people is $30, $100, $300, or even $500 the critical factor in deciding to purchase a $15,000, $20,000, or $30,000 vehicle? If a person does not have the financial werewithal to make the purchase absent the tax savings, it is highly unlikely that this small tax savings, most likely showing up in early 2010 in the form of a larger refund or smaller tax due remittance, will trigger an automobile purchase in 2009. For people without jobs, the question of a new car purchase is a non-starter. For people fearing loss of an existing job, the focus is on saving up a nest egg in case the pink slip arrives, and a new vehicle purchase is not on the to-do list. For people trying to deal with increased living expenses while facing pay freezes or pay cuts, undertaking a transaction that increases monthly outlays isn't going to happen. For those in dire need of a vehicle because the existing vehicle has reached the end of its days, or because life without a vehicle has become impossible, the most efficient path is to acquire a used vehicle, something for which the deduction is not available.

Folks who were planning on purchasing a new car during 2009 receive a windfall. They will be getting a small tax savings for doing something that they would have been doing in any event. What will they do with the tax savings? Everything else being equal, presumably they will save it. This stimulates the economy only to the extent that the bank in which they deposit the money chooses to lend it, in turn, to someone who will use the borrowed funds to engage in economically stimulative behavior. That's a fairly inefficient way to move stimulus payments payments into the economy.

When I teach the basic tax course, though I have no time to examine credits in any detail and am constrained to dealing only with the general nature of a credit, I do manage to squeeze in an example of the tax policy issue that questions the effectiveness, let alone efficiency, of using tax credits to influence behavior. My favorite is the adoption credit. I tell my students I can imagine a couple sitting around and deciding, "Hey, we get a $10,000 credit for adopting a child. Let's go get one." The point is that $10,000 isn't worth the decision if the couple doesn't have the prospect of a good chunk of income over the next 18 or more years to support the child. Again, the $10,000 is hardly the make-or-break tipping point of the adoption decision.

Though the notion that federal spending, either of tax revenue or borrowed money, will stimulate the economy, that notion ought not support the contention that any infusion of money into the economy is fiscally stimulative. It would make much more sense, for example, to invest the money in assets, such as infrastructure, schools, homeless shelters, prisons, and energy facilities, because the outlay would be matched, at least to some extent, by the production of an asset owned by the government and because there would be no doubt that the outlay would create and preserve jobs. It is difficult to imagine that whoever lobbied for this qualified vehicle sales tax deduction made that sort of strong case that it would rev up the engines of the automakers' production facilities.

The key to climbing out of the economic downturn is to restore confidence in the economy and the infrastructure of the economy. So long as people don't trust banks, so long as people think that the manufacturer of the automobile they purchase might be out of business the following week, so long as people wonder if the store from which they buy an appliance might close its doors next month, so long as people worry that their next paycheck might be their last, they're not going to buy cars, or much else other than what is needed to get by from day to day.

About the only thing this deduction will stimulate, other than the writing of blog posts, is more tax complexity that generates more work for tax return preparers and the programmers re-tooling tax return preparation software. That simply isn't the way to get America's productive, intellectual, and creative capacity back to humming along.

ADDENDUM: It seems that the Tax Policy Center has similar views, though the C- it awards to the provision is far more generous than the F it earns from me. It thinks that the provision "would increase sales of qualifying vehicles but would disproportionately benefit middle- and high-income households." I disagree. As I've explained, there's no reason to think any sort of meaningful increase in vehicle purchases will occur, nor is there any reason that there would be a flood of car buying by taxpayers with modified adjusted gross incomes below the cut-off threshhold.

Almost a year ago, in Soccer Franchise Socks It to Bridge Users, I questioned why bridge tolls were being used to fund a professional soccer franchise rather than to maintain and repair bridges under the care of the Delaware River Port Authority (DRPA). I suggested that the DRPA charter be amended so that it could spend bridge tolls only on bridge maintenance and repair, and not on handouts to "Lincoln Financial Field, the Kimmel Center, the New Jersey Aquarium, and dozens of other projects that surely are not bridges." A week later, in Bridge Users Easy Mark for Inflated User Fees, I criticized the failure of the governors of Pennsylvania and New Jersey to veto the inappropriate use of bridge toll revenues by the DRPA, a power that each governor has and can exercise independently. I explained that "[t]he governor's attorney revealed that [New Jersey Governor] Corzine perceived the $10 million hand-out to developers of restaurants and businesses to be 'a legitimate alternative use.'" I also explained that the real reason was his concern that if he vetoed projects in Pennsylvania, the Pennsylvania governor would veto projects in New Jersey. A few months later, in Restricting Bridge Tolls to Bridge Care, I noted that the DRPA determined it need to raise bridge tolls and PATCO rail line fares, and that at the two days of public hearings held by the DRPA on these proposes, "motorists and others showed up and blasted the DRPA for its mismanagement of revenues."

In Bridge Users Easy Mark for Inflated User Fees, I predicted that "in the not too near future, expect to see the DRPA raise tolls yet again, to finance perhaps a private shopping mall in New Jersey, there being such a shortage of them, he says sarcastically, or some other private venture whose owners think it's a legitimate business plan to get taxpayers to pay for their enterprises." So what has happened?

According to this Philadelphia Inquirer report, the DRPA now plans to spend $9.5 million on a President's House memorial in Philadelphia, a restaurant in Philadelphia, the Lights of Liberty show, a proposed medical school in Camden, and the demolition of the Parkade Building near Philadelphia's City Hall. It also plans to spend $1.5 million for improvements to Admiral Wilson Boulevard in New Jersey "to aid expansion of the Campbell Soup Co." The American Automobile Club has requested that the DRPA cancel the first set of projects, noting that the planned highway improvements "could be considered transportation-related." AAA made the same point that I and many unhappy toll payers have made: "Toll revenues from motorists should not be used for economic development projects, especially at a time when our roads and bridges need money."

The DRPA claims it can spend the money despite having promised at the previously-mentioned hearings that it would use the revenue from the toll increases only for "transportation-related expenses." It argues that the proposed new spending is acceptable because it comes from previous borrowing. As I explained in Bridge Users Easy Mark for Inflated User Fees, "the DRPA has been handing out so much money to unrelated development projects that it has racked up more than a billion dollars in debt. To service this debt, almost half of the tolls that it collects is used to pay interest and principal on these loans." So the DRPA proposes to use borrowed funds for these new non-bridge projects and to repay the loans wth toll revenue. Why not, instead of using the borrowed money on these non-bridge projects, use the money to pay down the debt? Has the DRPA board not been reading about the dangers of being in debt?

There is something very wrong with how the DRPA operates. As I explained in Bridge Users Easy Mark for Inflated User Fees, "Members of the DRPA are appointed and do not run for their positions, so they simply are not accountable to the people on whom they impose bridge tolls." The only vote that the motorists have is with respect to the election of the governors, but there are so many other issues affecting gubernatorial election campaigns that this misuse of bridge toll revenue is too easily shoved out of the spotlight. As I asked in that previous post, "Where's the democracy in this system?"

So in addition to proposing that the DRPA's charter be amended to prohibit use of its revenues for other than building, repairing, maintaining, and patrolling its bridges and rail line, I also suggest that the members of the DRPA be elected, say, four from each state, with the ninth selected by the eight who are elected. Apparently, this is the only practical way to bring accountability to bear on the DRPA. Insulated from the ballot box, impervious to citizen input, oblivious to the realities of a new economy, unaware of the dangers of debt, unschooled in the tax policy considerations applicable to the use of user fees, and dead-set on plowing other people's money into pet projects unrelated to the stewardship of bridges and a rail line, the DRPA board needs to be replaced. Its charter must be reformed and rewritten.

The DRPA has been told, in no uncertain terms, by everyone except those who are feeding at the toll trough, to stop spending money on matters not related to the building, repair, maintenance, and patrolling of the bridges and the rail line. The DRPA has given lip service to the idea, but has turned a deaf ear to the message. What does the DRPA not understand about a simple directive? Its thinking, I suppose, is that it does not answer to the motorists, the citizens, and the taxpayers. It's time for some changes that will ring through loud and clear. Someone needs to turn up the lights and explain that the party is over.

So what does a city do when its projected revenues are revised to turn what was planned as a break-even situation into one promising a $2 billion deficit? Aside from cutting expenditures, which carries its own risks, a city could raise revenue. It could raise rates on existing taxes. It could postpone scheduled decreases in existing taxes. And it could propose a new tax.

A new tax is precisely what two members of Philadelphia City Council are planning to do. According to this Philadelphia Inquirer story, Council members Frank DiCicco and Jim Kenney introduced legislation to impose a 35-cent-per-barrel tax on petroleum refined in the city. As a practical matter, this would be a tax on the Sunoco refinery in South Philadelphia, which is the only refinery in the city. The proposed tax would raise $20 million. That is a drop in the bucket, or should I say, a drop in the barrel, when compared to a $2 billion revenue shortfall.

In a news release, DiCicco explained, "Oil companies saw huge profits in 2008 and the City of Philadelphia continues to struggle to meet service demands. With these considerations on top of the industry's impact on our environment and the health of our constituents, I think it's appropriate that the oil industry contributes more." Would not the city gross receipts and business income taxes paid by Sunoco increase if its refinery gross receipts and refinery profits have increased?

Does it make sense to create a new tax when the cost of setting up a system for administering the tax will itself cost money? Will there not be a need for the city to spend money auditing the oil flows at the refinery to determine if the correct amount of tax has been paid?

But there is a bigger glitch. The city has no authority to enact this sort of tax. Only the Commonwealth of Pennsylvania is permitted to do so. The City of Philadelphia had a 5-cent-per-barrel tax on petroleum processing for the fiscal year July 1, 1976 through June 30, 1977, but that was a one-time provision enacted under special circumstances. The City has no authority to levy taxes without the express authorization of the state legislature. A summary of the state statutes presently in effect that permit the city to impose taxes is set forth in Taxation in the City and School District of Philadelphia. There does not exist any authority to impose a tax on the production of an oil refinery.
A legislative aide to DiCicco claims that the proposal would simply re-enact the provision that was in effect for fiscal year 1977, but state authority for that exaction does not exist. In fact the aide admitted that the city probably is barred from enacting the tax. He added, "It's at least worth a conversation in tough times, and the oil industry is one of the few that is still making money." Ought not conversation be directed toward actions that the city is authorized to take? What is the sense in debating whether to do something that cannot be done? Kenney provided the answer to that question. Apparently his approach is to do what he wants to do and to let the legal issues work themselves out later. According to this KYW News Radio report, he explained, "That's why they have courts of law and lawyers, to determine which is the right course. And we're going to do our best in this time, when the city is struggling to provide services and maintain revenues; everybody's got to pitch in."

So if this miniscule idea goes forward, where will the city find the funds to pay the attorneys it will need to retain to present its case as the matter works its way through the judicial system? And if it loses, as it very likely will, how will the proponents of the proposal defend the outcome if the net impact on the city's finances is to increase, rather than reduce, the deficit that it faces? It would make more sense for the proponents to think again about the idea, and to refine their budget-fixing plans by turning to some other remedy.

It's time for a short break from the world of nominees with tax difficulties, economic recovery legislation, and stimulus packages. It's time for a return visit to the world of substantive tax law, in particular the land of a state "meals and rooms tax."

Under section 9241 of title 32 of its statutes, Vermont imposes a 9 percent tax on "the sale of each taxable meal." Under section 9202(10) a taxable meal is defined as

(A) Any food or beverage furnished within the state by a restaurant for which a charge is made, including admission and minimum charges, whether furnished for consumption on or off the premises.

(B) Where furnished by other than a restaurant, any nonprepackaged food or beverage furnished within the state and for which a charge is made, including admission and minimum charges, whether furnished for consumption on or off the premises. Fruits, vegetables, candy, flour, nuts, coffee beans and similar unprepared grocery items sold self-serve for take-out from bulk containers are not subject to tax under this subdivision.

(C) Regardless where sold and whether or not prepackaged:

(i) sandwiches of any kind except frozen;

(ii) food or beverage furnished from a salad bar;

(iii) heated food or beverage.

Under section 9202(10)(D), taxable meals do not include the following:

(i) Food or beverage, other than that taxable under subdivision (10)(C) of this section, that is a grocery-type item furnished for take-out: whole pies or cakes, loaves of bread; single-serving bakery items sold in quantities of three or more; delicatessen and nonprepackaged candy sales by weight or measure, except party platters; whole uncooked pizzas; pint or larger closed containers of ice cream or frozen confection; eight ounce or larger containers of salad dressings or sauces; maple syrup; quart or larger containers of cider or milk.

(ii) Food or beverage, including that described in subdivision (10)(C) of this section:

(I) served or furnished on the premises of a nonprofit corporation or association organized and operated exclusively for religious or charitable purposes, in furtherance of any of the purposes for which it was organized; with the net proceeds of said food or beverage to be used exclusively for the purposes of the corporation or association;

(II) served or furnished on the premises of a school as defined herein;

(III) served or furnished on the premises of any institution of the state, political subdivision thereof or of the United States to inmates and employees of said institutions;

(IV) prepared by the employees thereof and served in any hospital licensed under chapter 43 of Title 18, or a sanitorium, convalescent home, nursing home or home for the aged;

(V) furnished by any person while transporting passengers for hire by train, bus or airplane if furnished on any train, bus or airplane;

(VI) furnished by any person while operating a summer camp for children, in such camp;

(VII) sold by nonprofit organizations at bazaars, fairs, picnics, church suppers, or similar events to the extent of four such events of a day's duration, held during any calendar year; provided, however, where sales are made at such events by an organization required to have a meals and rooms registration license or otherwise required to have a license because its selling events are in excess of the number permitted, the sale of such food or beverage shall constitute sales made in the regular course of business and are not exempted from the Vermont meals and rooms gross receipts tax;

(VIII) furnished to any employee of an operator as remuneration for his employment;

(IX) provided to the elderly pursuant to the Older Americans Act, 42 U.S.C. chapter 35, subchapter VII;

(X) purchased with food stamps;

(XI) served or furnished on the premises of a continuing care retirement community certified under chapter 151 of Title 8.

Vermont's Commissioner of Taxes audited a movie theater and determined that it failed to collect and pay the meals-and-rooms tax on sales of popcorn and nachos. When the taxpayer appealed, the Superior Court affirmed the Commissioner's decision, and the taxpayer again appealed. Thus, the Supreme Court of Vermont faced the issue of whether popcorn and nachos served by a movie theater are taxable meals. See Eurowest Cinemas LLC v. Vermont Department of Taxes (13 Jan 2009), which is not yet on the court's web site but might be found here.

When the theater sold popcorn to its patrons, its employees heated the popcorn and, if asked, added hot, melted butter to it. When it sold nachos, the employees added warm, melted cheese. The Department of Taxes concluded that the popcorn and nachos were taxable meals because section 9202(10)(C)(iii) includes all heated food and beverages in the definition. Because the exceptions in section 9202(10)(D) do not apply, and the taxpayer did not so argue, it would appear to be an easy case. But it wasn't.

The taxpayer relied on Tax Department Regulation 1.9232.8(D), which excludes popcorn and nachos from the definition of taxable meal. The regulation, adopted in 1969, provides that "popcorn, potato chips . . . and other similar products" are "[e]xamples of items considered to be candy and confectionary not subject to the [meals-and-rooms] tax." The Court noted that even though popcorn is in the list of excluded items, in context it is included in a list of packaged items and thus does not include popcorn prepared by the taxpayer in individual, ready-to-eat portions. The Court also noted that Regulation 1.9232.8(A) subjects to the tax "all prepared meals, [and] snacks . . . sold in individual portions and ready to eat … served [by] … an 'eating and drinking establishment.'"

The theater was an eating and drinking establishment because, under regulation 1.9232.8(B), "'Eating and [d]rinking [e]stablishments' shall include every … place where food . . . [is] served." The taxpayer, however, argued that its snack bar was not an eating and drinking establishment because, under the regulation, an eating and drinking establishment does not "include any portion of an operator's premises which is devoted to the sale of packaged food or candy." According to the taxpayer, its "snack bar is not an 'eating and drinking establishment' subject to tax, because it is a 'portion of any operator's premises which is devoted to the sale of … candy' under [section] (C), where candy is defined by [section] (D) to include 'popcorn, potato chips, crackerjacks, and other similar products.'"

The taxpayer also relied on regulation 1.9232.8(C), which excludes from the definition of eating and drinking establishment "ordinary retail food stores where packaged food products and/or candy and confectionary are sold." That provision also excludes any portion of a business premises devoted to the sale of "packaged food or candy."

The court concluded that the taxpayer misconstrued regulation 1.9232.8(C). It explained that the regulation allows a restaurant, for example, to sell mints or chewing gum at its register without collecting tax on those items. It does not preclude the imposition of the tax on prepared meals simply because a taxpayer's premises includes both sales of prepared items and pre-packaged items.

The court further reasoned that even if the taxpayer's interpretation of regulation 1.9232.8(C) was correct, and even if its contention that the popcorn and nachos were within the definition of "candy," the theater's snack bar was not "devoted" to the sale of candy. In addition to selling popcorn, nachos, Sno-Caps, and Milk Duds, the theater sold, and collected meals-and-rooms tax on, non-bottled beverages, soft pretzels, and hot dogs.

Thus, the court reached the question of "whether the operator-prepared, ready-to-eat popcorn and nachos offered for sale at taxpayer's snack bar are better characterized under the regulation as 'prepared … snacks … sold in individual portions and ready to eat' or 'candy.' It decided that the "popcorn, potato chips … and other similar products" described in the definition of candy are not prepared for sale by the operator and are pre-packaged. Thus, they are not subject to the meals-and-rooms tax no matter where they are sold. But, the court continued, "the unpackaged popcorn and nachos, as prepared and sold by taxpayer at its snack bar, are operator-prepared snacks sold by an 'eating and drinking establishment' and subject to meals-and-rooms tax."

The case illustrates why there are limits to simplification of tax laws. As soon as the legislature decided to impose a tax on "taxable meals," it had to define "taxable meal." Thus, we get the lengthy statutes previously quoted. Would it have been simpler to tax "meals"? No. When I take students in the basic tax class through the exclusion from gross income of meals and lodging provided by an employer, they encounter an issue best summarized by the question, "Are groceries meals?" The IRS says yes, and the Third Circuit says no. What is required is a definition of a meal. Ask the next ten people you meet, what is a meal? It would not be surprising to hear ten different definitions, not simply in terms of the words chosen to express the concept but in terms of the concept. Or, as one student once claimed, "HoHos can be a meal."

Once the Department of Taxes decided to define candy and to include popcorn in the list, it created a need to distinguish between popcorn that qualified for exemption and popcorn that did not. That left the court in the position of asking, "What is candy?" Ask those same ten people, or another group of ten people, to define candy. Is something candy if it does not include sugar? Is something necessarily candy if it does include sugar? These are not simply tax law questions. Someone who adheres to a belief system that includes the giving up of something for Lent would encounter the same questions if he or she decides to give up candy for Lent. Would they argue, as did the theater, that popcorn and nachos purchased at the movies were not within the self-imposed restriction?

Some might argue that the easiest answer is to repeal the tax, but that simply shifts the definitional challenge to another type of tax. Others might argue that the easiest approach is to tax all meals, with no exceptions whatsoever, although that still raises the question of what is a meal. Still others might argue that the tax could be imposed on food, but there are people who eat things that other people would not consider to be food. This question brings back memories of the pumpkin nonsense described in Halloween Brings Out the Lunacy. That's the story of Iowa revenue officials declaring that pumpkins are not food.

So to those advocating the flat tax, the FAIR tax, the VAT, consumption taxes, and all other sorts of replacements for the income tax, there is a lesson to be learned. There is no escaping the need to determine what is in the base. What is income? What is within the VAT? What constitutes consumption? And, of course, the one to which I refused to give an answer: "Are HoHos a meal?"

Timing is everything, I suppose. At about the same time that my musings on the tax troubles of several of President Obama's nominees, in Tax Problem or Tax Symptom?, entered the blogosphere, the Washington Post, in Victims of the Tax Code? Not So Fast took the position that even though the tax law is complicated, the nominees' troubles were preventable. Several experts, including colleagues in the tax law professorship business, explained that these were not the most complex issues that taxpayers can encounter, that the complexity of the code is not an excuse for the errors on their tax returns, and that they should have known what was going on. Yet one practitioner, Kenneth Brier, a tax lawyer in Boston, noted, "What this is telling us is that even people who should know better somehow don't. People who should be able to hire good tax help still don't get it right."

So why aren't they getting it right? Back in 1997, Money Magazine (March 1997 issue, page 80), in what appears to be the last test of this sort that it conducted, asked 45 tax return preparers to do the tax return for a hypothetical family. There were 45different results. None were correct. Fewer than one-fourth were within $1,000 of the correct answer. The tax liabilities that were computed ranged from $36,322 to $94,438. So why didn't these 45 experts get it right? Should we expect any better of a performance today, with eleven years of additional provisions, exceptions, definitional refinements, and other technical changes added to the tax law?

If it's not the unmanageable complexity of the tax code, then is it necessarily the incompetence of the preparers? Congress has created a tax system that is groaning under the weight of its own absurdity, teetering on the edge of a collapse no less striking than the track record of the economy during the past six months.

Consider the issues that created the problem. Geithner failed to enter into a particular Turbotax entry box his income from the International Monetary Fund. According to this report an accountant told him that he did not owe self-employment taxes on that income. According to this report the IMF provides its employees with information concerning their taxes, and that it provides assistance to employees who request it, though Geithner apparently did not do so. On the other hand, the same report observed that "Tax professionals noted that even trained preparers sometimes miss the subtleties involved in taxation of employees of international organizations." What Geithner did was sloppy, careless, and at worst, negligent. He didn't try to hide income. He didn't stash money in an off-shore trust. He didn't buy into some tax shelter deal. He didn't skim cash from the cash register. In other words, he didn't commit tax fraud.

The same can be said of Daschle's problems. He received a Form 1099 and handed it to the accountant who prepared his return. The Form 1099 was wrong. That's not Daschle's fault. Should he have audited the payor? How many taxpayers add up the interest credited by the bank to their checking or savings account to determine if the Form 1099 sent by the bank is correct? Should they be expected to do so? The Form 1099 was off by $80,000 but that was just a small fraction of the amount being reported. Had the error been one of several orders of magnitude, then it would have been much more obvious. It's not fraudulent to rely on a Form 1099 that is prepared by an independent third party. Daschle also failed to report the use of an automobile and driver provided by an employer. When Daschle was in the Senate, he received the use of a vehicle and driver for security reasons, and under the tax law the value therefore is excluded from gross income as a working condition fringe benefit. Only the astute tax practitioner understands the subtle distinction that causes a different result for the vehicle and driver provided to Daschle in his post-Senate enterprise. Again, he almost certainly thought he was doing the correct thing, probably because he was doing the same thing that had been done in the past, that is, not reporting any income on account of the vehicle and driver. No one knows if the accountant asked questions about the vehicle and driver. Unless taxpayers are required to review the substantive law analyses performed by their preparers, they should be held accountable for unpaid taxes, interest, and penalties, but they ought not be characterized as perpetrators of fraud or as deadbeats as this commentary concluded.

There is no doubt that the taxpayer and professional tax return preparer error rate would decrease if the tax law were not so complicated. When Kenneth Brier tells us, "What this is telling us is that even people who should know better somehow don't," we should understand that the "somehow" is the inability of Congress to put a sound tax policy ahead of special interest lobbying. My suggestion that Congress might come to understand this point if its members were required to do their own tax returns, submit them for review, scoring, and repair before filing, and to publish their scores inspired Mary O'Keefe to embellish the suggestion. In Professor Maule's prescription for "tax law disease" --and mine she proposes:

All members of Congress who serve on the House Ways and Means Committee or the Senate Finance Committee as well as the Commissioner of Internal Revenue and the Secretary of the Treasury should annually take and pass the VITA volunteer tax preparer certification test and then volunteer a few hours each year at a VITA site preparing and explaining tax returns to a random cross-section of low-income working families and senior citizens.

Hooray! Yes, I'll vote for that idea. But I'd extend it to every member of Congress. Let them walk in taxpayer shoes for a while. Perhaps then they'll think twice about continuing to overload the Code.