MauledAgain

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

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

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

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

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

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

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

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

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

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

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

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

Perhaps arguing about taxes is a sport.

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

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

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

Readers of this blog know that I am not a supporter of the soda tax, for all sorts of reasons, particularly because it doesn’t tax most items containing sugar and it taxes some items that are not unhealthy in terms of sugar. I’ve bee writing about the soda tax for almost ten years, in posts such as What Sort of Tax?, The Return of the Soda Tax Proposal, Tax As a Hate Crime?, Yes for The Proposed User Fee, No for the Proposed Tax, Philadelphia Soda Tax Proposal Shelved, But Will It Return?, Taxing Symptoms Rather Than Problems, It’s Back! The Philadelphia Soda Tax Proposal Returns, The Broccoli and Brussel Sprouts of Taxation, The Realities of the Soda Tax Policy Debate, Soda Sales Shifting?, Taxes, Consumption, Soda, and Obesity, Is the Soda Tax a Revenue Grab or a Worthwhile Health Benefit?, Philadelphia’s Latest Soda Tax Proposal: Health or Revenue?, What Gets Taxed If the Goal Is Health Improvement?, The Russian Sugar and Fat Tax Proposal: Smarter, More Sensible, or Just a Need for More Revenue, Soda Tax Debate Bubbles Up, Can Mischaracterizing an Undesired Tax Backfire?, The Soda Tax Flaw in Automotive Terms, Taxing the Container Instead of the Sugary Beverage: Looking for Revenue in All the Wrong Places, Bait-and-Switch “Sugary Beverage Tax” Tactics, How Unsweet a Tax, When Tax Is Bizarre: Milk Becomes Soda, Gambling With Tax Revenue, Updating Two Tax Cases, When Tax Revenues Are Better Than Expected But Less Than Required, The Imperfections of the Philadelphia Soda Tax, When Tax Revenues Continue to Be Less Than Required, and How Much of a Victory for Philadelphia is Its Soda Tax Win in Commonwealth Court?.

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

For almost ten years I have been commenting on the Philadelphia soda tax, from when it was a proposal, through its enactment, and during its rocky track record, as it has failed to raise the predicted revenue and has met legal challenges from opponents. I have shared my thoughts in posts such as What Sort of Tax?, The Return of the Soda Tax Proposal, Tax As a Hate Crime?, Yes for The Proposed User Fee, No for the Proposed Tax, Philadelphia Soda Tax Proposal Shelved, But Will It Return?, Taxing Symptoms Rather Than Problems, It’s Back! The Philadelphia Soda Tax Proposal Returns, The Broccoli and Brussel Sprouts of Taxation, The Realities of the Soda Tax Policy Debate, Soda Sales Shifting?, Taxes, Consumption, Soda, and Obesity, Is the Soda Tax a Revenue Grab or a Worthwhile Health Benefit?, Philadelphia’s Latest Soda Tax Proposal: Health or Revenue?, What Gets Taxed If the Goal Is Health Improvement?, The Russian Sugar and Fat Tax Proposal: Smarter, More Sensible, or Just a Need for More Revenue, Soda Tax Debate Bubbles Up, Can Mischaracterizing an Undesired Tax Backfire?, The Soda Tax Flaw in Automotive Terms, Taxing the Container Instead of the Sugary Beverage: Looking for Revenue in All the Wrong Places, Bait-and-Switch “Sugary Beverage Tax” Tactics, How Unsweet a Tax, When Tax Is Bizarre: Milk Becomes Soda, Gambling With Tax Revenue, Updating Two Tax Cases, When Tax Revenues Are Better Than Expected But Less Than Required, The Imperfections of the Philadelphia Soda Tax, and When Tax Revenues Continue to Be Less Than Required.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

As expected, the Philadelphia soda tax continues to be controversial. Controversy has accompanied it since its proposal, as I’ve described in posts such as What Sort of Tax?, The Return of the Soda Tax Proposal, Tax As a Hate Crime?, Yes for The Proposed User Fee, No for the Proposed Tax, Philadelphia Soda Tax Proposal Shelved, But Will It Return?, Taxing Symptoms Rather Than Problems, It’s Back! The Philadelphia Soda Tax Proposal Returns, The Broccoli and Brussel Sprouts of Taxation, The Realities of the Soda Tax Policy Debate, Soda Sales Shifting?, Taxes, Consumption, Soda, and Obesity, Is the Soda Tax a Revenue Grab or a Worthwhile Health Benefit?, Philadelphia’s Latest Soda Tax Proposal: Health or Revenue?, What Gets Taxed If the Goal Is Health Improvement?, The Russian Sugar and Fat Tax Proposal: Smarter, More Sensible, or Just a Need for More Revenue, Soda Tax Debate Bubbles Up, Can Mischaracterizing an Undesired Tax Backfire?, The Soda Tax Flaw in Automotive Terms, Taxing the Container Instead of the Sugary Beverage: Looking for Revenue in All the Wrong Places, Bait-and-Switch “Sugary Beverage Tax” Tactics, How Unsweet a Tax, When Tax Is Bizarre: Milk Becomes Soda, Gambling With Tax Revenue, Updating Two Tax Cases, When Tax Revenues Are Better Than Expected But Less Than Required, The Imperfections of the Philadelphia Soda Tax, and When Tax Revenues Continue to Be Less Than Required.

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

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

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

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

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

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

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

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

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

When students express concerns about enrolling in a basic tax course, usually because they are “afraid of” or “cannot do” math, those of us who teach the course reassure them that the course, although requiring some basic arithmetic skills, is mostly about issues that are not numerical. Today I have found another example that my teaching colleagues can use to relieve student anxiety and that people who think tax “is simply a numbers thing” can use to adjust their perspective.

According to this story, the Australian Taxation Office has revealed it has terminated its attempt to provide a definition of “salad” for purposes of the goods and services tax. That tax is very similar to a sales tax.

Under current law, Australia does not subject fresh salads to the 10 percent goods and services tax. On the other hand, the tax applies to pre-prepared meals. One need not be a math whiz or an arithmetic genius to see the problem. Food retailers asked for guidance, and in March the Taxation Office disclosed it was initiating a process to determine whether existing guidelines were sufficient to deal with the “very rapidly moving nature of salads.” Last week, when asked about the plan, a representative of the Taxation Office explained that it had abandoned the effort. The reason, the representative explained, was that retailers and others in the food industry, reacting to a draft of the guideline revision, decided it wasn’t going to be helpful.

Two months ago, when asked specifically about salads, the Taxation Office representative replied, “It depends on what you define a salad as. Some may define it as a bowl of lettuce, some may define it as a BBQ chicken shredded up with three grains of rice on it. I'm not trying to be facetious... there [are] a range of products that are very, very different that are marketed as salads." The legislator who asked about the salad guidelines noted, "Adding [the goods and services tax] to fresh salads would hurt household budgets. The chief medical officer advised that it could also discourage people from making healthy choices and see more Australians eating junk food." Surely a salad isn’t “anything that isn’t junk food.”

The arithmetic is easy. The definition is challenging. What is a salad? Must lettuce or spinach be in the mixture of foods in order for it to be a salad? Is egg salad a salad? Is chicken salad a salad? Is taco salad a salad? Is fruit salad a salad? If the exemption for salads is designed to promote healthy nutrition, what is the response to those who tag egg salad, for example, as unhealthy because of the cholesterol in eggs and the fat in mayonnaise? If putting the word “salad” into the name of what is being sold, then what of candy salad? Yes, there is such a thing, something I discovered while writing this commentary and deciding, on a whim, to google the phrase “candy salad.”

On my first day as a law student, the professor started my first class by walking into the room and asking, “So, what is property?” It is tempting to walk into a basic tax class and ask, “So, what is a salad?” Though I would not do that, I can imagine the reaction would be fun, especially when the phrase “candy salad” was, sorry, tossed into the discussion.

Readers of this blog are familiar with my claim that it is cheaper, in the long run, to increase taxes and user fees dedicated to highway, bridge, and tunnel maintenance and repairs than to wait until the invoice for new tires, repaired suspensions, and refurbished wheels arrives. I have written about the challenges posed by this particular American short-sightedness in posts such as Potholes: Poster Children for Why Tax Increases Save Money, When Tax Cuts Matter More Than Pothole Repair, Funding Pothole Repairs With Spending Cuts? Really?, Battle Over Highway Infrastructure Taxation Heats Up in Alabama, When Tax and User Fee Increases Cost Less Than Tax Cuts and Tax Freezes, and Road Taxes and User Fees as a Form of Pothole Insurance .

Recently, according to this report, legislators in Arkansas have been grappling with the challenges posed by highways and bridges that are disintegrating. Attempts to raise revenue to pay for vitally needed work have repeatedly failed. Two years ago, a legislator proposed moving money from the general fund into the transportation fund, but objections persuaded him to withdraw his proposal. Recently, the same legislator proposed a referendum asking Arkansans to approve a bond issue, the proceeds of which would be used to fix state transportation infrastructure, and which would be paid through a 6.5 percent sales tax on wholesale fuel sales. The legislature rejected the idea.

Several legislators focused on what they hear from constituents. People complain about the deteriorating roads and bridges, but objected to transferring money from the general fund because that would mean cuts in other programs. People reject the idea of new or increased taxes, but then complain that the condition of the roads continues to worsen. Advocates of road repair are considering the use of an initiative, which would put the question on next year’s ballot if sufficient signatures are obtained.

At the state’s Economic Development Commission’s Arkansas Rural Development Conference, two legislators opined that nothing would be done to address the problem until bridges collapsed and major accidents occurred. As one put it, “When we start having bridges collapse and people killed, then we’ll start funding highways.” It’s so sad, and so indicative of what has happened to this nation, that death has become the price for obviously necessary taxes and user fees.

It is no secret that I object to the use of public funds to support private enterprises that are not in need of financial assistance. For some reason, some of the strongest opponents of “taking from the rich to pay the poor” seem to have no problem with “taking from the poor to pay the rich.” One area in which this feeding at the public money spigot has run amok is the grabbing of tax dollars by wealthy professional sports franchise owners. I have written about this problem in more than a few posts, including Tax Revenues and D.C. Baseball, Taking Tax Money Without Giving Back: Another Reality, Public Financing of Private Sports Enterprises: Good for the Private, Bad for the Public, Taking and Giving Back, If You Want a Professional Sports Team, Pay For It Yourselves; Don’t Grab Tax Dollars, and, most recently in connection with Cleveland’s professional teams, Running Out of Sin Taxes.

Now comes news that Detroit’s professional sports teams are getting in on the action. Actually, this has been underway for quite some time but it’s not a story that has had my attention until now. The Detroit Pistons want to relocate from suburban Auburn Hills to downtown Detroit, after having done that move in reverse several decades ago. The Pistons are in line for an additional $36 million in tax incentives from the Michigan Strategic Fund, which is part of the public-private Michigan Economic Development Corporation. Three years ago, the Fund dished out $250 million in tax-exempt bonds to construct a new arena for the Detroit Red Wings. Now the Fund wants to issue more bonds to help the Pistons move, which means that roughly 40 percent of the private development will be financed by taxpayers who have no say in the matter.

So who pays back the bonds? Will the principal and interest be paid from revenues collected by the professional teams? No. Will the principal and interest be paid by the wealthy owners of the teams? No. Will the principal and interest be paid from sales and other tax revenues imposed on activities in the arena and associated development? No. So who pays back the bonds? The bonds that have already been issued are being repaid with school property taxes paid on properties located in downtown Detroit. And they wonder why Detroit is such a mess. They wonder why education opportunities for Detroit children and youth are so inadequate. The next time I see one of those internet memes that attribute Detroit’s downfall to tax and spending policies designed to help those who are less fortunate, I will share with them this post about the tax and spending policies that divert funds intended to educate the children and youth of Detroit to those already more than fortunate. Sadly, this is just a tiny slice of a growing movement to shift what little is owned by the poor into the coffers of those who fortunes far exceed their needs. Of course policies to assist the poor aren’t going to work if they are constantly being undermined. Put another way, “tax and spend” seems perfectly fine when it means “tax the poor and spend on the wealthy.”

As I wrote in If You Want a Professional Sports Team, Pay For It Yourselves; Don’t Grab Tax Dollars:

The wealthy continue to line up for financial assistance. A profitable business conjures up arguments for why the public should contribute to an increase in its profits. The sales pitch is a claim that the business benefits the public at large. Omitted from the discussion is the admission that if and when the public benefits the public will patronize the business and generate revenue for the business through cumulative individual decisions rather than through political shenanigans that force all taxpayers to underwrite a business than a majority do not want to support.

Taxing and spending for the benefit of the wealthy at the expense of the poor must end.

In Pennsylvania, state law prohibits localities and school districts from subjecting billboards, wind turbines, amusement park rides, and silos used to store animal feed to the real property tax. Why these structures and not, for example, buildings and cell phone towers? It’s all about the lobbying.

Local tax officials are not fans of these exemptions. According to this report, the attorney for two school districts tried to work around the statutory restriction by crafting a “creative” approach. The attempt makes sense, because billboards populate both districts. The argument made by the attorney rested on the idea that the existence of the billboards increased the value of the land on which they sit, and because the land is not exempt from the property tax, the revenue that could have been generated by taxing the value of the billboards can be recovered by taxing the increase in the value of the land caused by the existence of the billboards. The owners of the billboard companies objected, and after the Board of Assessment and Appeals agreed with them, the school districts appealed to the Court of Common Pleas. They lost.

There is no question, as one of the attorneys for the billboard companies pointed out, that the school districts were “trying to circumvent clear legislative statutory language.” The attorney for the school district defended his argument by explaining, “If I own a piece of ground and I’m renting it to a billboard company for $2,000 a month, why shouldn’t I have to pay tax on the ground as if I can rent it for $2,000 a month?” There are two flaws in this rhetorical question. First, in addition to income, replacement cost and comparable sales are factors in determining the value of property. Second, the presence of the billboard increases the value of the property, but that doesn’t mean that it increases the value of the land. For example, assume that the small plot of land is worth $10,000. Assume that a billboard is constructed and that it has a value of $40,000. The property is now worth $50,000. The school district’s “creative” argument is that the land is now worth more than $10,000. But because the property continues to be worth $50,000, assigning a value of, for example, $30,000, to the land means that the billboard is being treated as worth $20,000. I would not use the word “creative” for this outcome. If the billboard is removed, the land continues to be the same $10,000 piece of land that it was before the billboard was installed (assuming that the land was not otherwise damaged or improved, which is most likely the case). In other words, the issue is a matter of determining how much of the property value to allocate to the land. The land’s value does not change when an improvement is made. What changes is the value of the property. Those are two different things.

It is understandable that school districts populated with billboards rather than cell towers are “envious” of nearby districts that face no restriction against taxing the value of the cell towers. Whether billboards or cell towers proliferate in a district is a matter of geography, terrain, highway location, and other factors. Some of these are within the control of the district. Most aren’t. Does it make sense to treat billboards and wind turbines differently from cell towers? The response from the legislative record, according to one state legislator, is that “cellphone towers were taxed because they are permanent structures, whereas billboards can be taken apart, moved from location to location.” What nonsense. Cellphone towers can be taken apart and moved, probably more easily than taking apart and moving a wind turbine. It’s all about the lobbying. Now, if someone could engineer and end to private interests paying money to supersede public worth, that would be creative.

Last week, a reader asked me if I was aware of a tax proposal in Oregon. I was not. The tax, proposed in Oregon House Bill 2877 would have been imposed on motor vehicles 20 years old or older, at the rate of $1,000 every five years. Called an “impact tax,” nothing in the bill described with any specificity what sort of impact was being taxed, though a good guess would be the presumed impact on the environment of older vehicles lacking the most up-to-date clean emissions technology. An exception was provided for vehicles registered as antique vehicles. Revenue from the tax would have been used for highway and bridge repairs.

I replied to my reader, explaining that I had not been aware of the proposed tax. I suggested that the only three groups of people with old cars are collectors of classic cars and trucks, people too poor to buy new cars, and people who use their cars infrequently. Because the proposal exempts the first group, the tax would be imposed on poor people and people, usually older and often poor people, who do not have or no longer have jobs and thus drive very little.

I suggested that if the goal of the tax is to remove vehicles with less than adequate emissions systems from the roads, that can be done by imposing a tax or fee on specific vehicles, namely, those that fail annual inspections requiring compliance with specified emissions standards. Surely these older vehicles do not cause more wear and tear on highways than newer vehicles. I also suggested that if the goal of the statute is to remove older vehicles from the highways on the premise that older cars are more dangerous because they’re more worn out, then the solution is to deal with that issue through annual state safety inspections of vehicles. If a car is well maintained, it’s much less of a safety threat. Most accidents are caused by human errors, and not vehicle failures. I noted that sometimes people hold onto vehicles in the hope that they will eventually become classics. In other words, some older vehicles are held as investments. I know several people who have done, and are doing, just that. Finally, I wondered if the automobile manufacturers were involved in this legislation, because certainly the prospect of paying this tax might tip the “hold or replace” choice in favor of a new vehicle purchase.

Several hours later, the same reader shared with me the news that the legislature would not consider the bill. To my surprise, the writer of the article suggested that, “The theory behind the bill apparently was that these older vehicles inflict a disproportionate amount of wear and tear on the state's transportation infrastructure.” That was the very last thing I thought had motivated the author of the proposed legislation. Really? An older 3,000 pound vehicle causes more wear and tear than a brand-new 5,500 pound large SUV? Really? Seriously, if wear and tear is a concern, then taxes and fees based on mileage and weight would be in order. Now, doesn’t that idea seem familiar to readers of this blog? Of course.

The writer of the article also pointed out that farm vehicles would be within the scope of the proposed tax. The writer informed us that many farm vehicles, at least in Oregon, are in good working order but are more than 20 years old. I had not realized that. Considering that farm vehicles are on public roads for a very tiny fraction of the time they are on private farm property, the proposed “old vehicle” tax makes even less sense. The writer also made note of the same concerns I expressed, specifically, the adverse impact of the proposed tax on Oregonians whose economic struggles cause them to drive older, less expensive vehicles.

The writer of the article warned that “the ease by which legislative proposals thought dead can be resurrected as [a legislative] session wears on” should be remembered. Most horror movies make use of the plot development in which monsters thought dead turn out to be quite alive. Let’s hope this silly tax idea stays buried. There are much better alternatives. If the legislators in Oregon need some advice, I’m just a phone call or email away.

A few months ago, in If You Want a Professional Sports Team, Pay For It Yourselves; Don’t Grab Tax Dollars, I criticized a major league soccer ownership group for trying to get taxpayers in St. Louis and in Missouri to foot part of the bill for the construction of a soccer stadium. This was not the first time I pointed out the greed of multimillionaire and billionaire professional sports franchise owners trying to get other people to provide free funding for their assets. Aside from the foolishness of asking the poor and middle class to funnel even more money into the pockets of the wealthy, these deals trigger a stream of tax funding requests to keep these arenas and playing fields in good condition.

Cuyahoga County is now dealing with the consequences of having agreed to funnel tax dollars into Cleveland’s professional sports teams. According to this report, the teams want repairs and major renovations to Progressive Field and Quicken Loans Arena. County officials explained, however, that they cannot sell bonds to provide financing because sin tax revenue, which secures these sorts of bonds, is insufficient to meet the demands of the teams. What sin tax money is available under the current arrangement is far short of what the teams want. A contributing factor is the use of a sizeable portion of sin tax revenue to service interest and principal payments on bonds issued last time the teams came begging at the public tax well. The well has run dry.

The Cleveland Indians “want $8.5 million to replace all the seats.” The Cleveland Cavaliers “want $17.7 million to replace the heating, cooling and ventilation systems.” The lists of requests from the three teams are long, and can be found in the report cited in the previous paragraph. The lists are long, and the dollar amounts attached to the desired items are far from trivial.

The solution is simple. The teams can pay for their wish-list items by using their own funds. If they don’t have enough funds, they can raise ticket prices and negotiate better television deals. They can reduce player salaries, which are absurdly high, orders of magnitude beyond what is earned by the working folks who not only shell out dollars for tickets and as part of the purchase price of products advertised on sports programs to fund those television contracts, but who also are paying taxes. If none of that works, then shut down the team. That’s what business owners do when their revenues dry up or expenses soar, particularly when technology and culture change. The reality is that the owners don’t want to dip into their multi-million dollar and billion dollar reserves. To paraphrase what I said a few months ago, if you want to upgrade your professional sports team or the facilities in which it plays and practices, pay for it yourselves, and don’t go grabbing tax dollars from people who are orders of magnitude less economically situated than you are.

Sometimes people decide to do something nice, in a monetary way, and then discover that there is no tax benefit for doing so. If there is a tax benefit, it exists for the recipient of the gesture. For example, a person who makes a gift to a friend or relative is not permitted to deduct the gift for income tax purposes, and thus does not obtain any tax benefit. The donee, however, escapes paying tax on the increase in economic wealth because section 102 excludes gifts from gross income. Those are basic principles of federal income taxation with which any diligent student in the introductory federal income tax course is familiar.

What happens, however, when someone makes a monetary transfer that is difficult for many people to view as a gift, but that is not a transfer the person is obligated to make? An excellent example is one that recently popped up again, and was the subject of the Tax Court’s decision in Bulakites v. Comr., T.C. Memo 2017-79. The taxpayer and his wife legally separated and, a year later, divorced. Under the separation agreement, the taxpayer was required to pay his former wife $2,000 per month for spousal support until their home was sold. At that point payments would increase to $8,000 per month. Because the real estate market was moribund, the house stayed on the market, and eventually its value dropped to less than the mortgage balance. The taxpayer testified that in order to do “the right thing,” he agreed with his former wife to increase his payments to $5,000 per month. They did not amend the written separation agreement. Though the taxpayer didn’t always send $5,000 each month to his former wife, he did send her more than the required $2,000 per month.

The taxpayer deducted as alimony the total amount he paid his former wife. The IRS disallowed the portion of the deduction that exceeded $24,000. The dispute ended up in the Tax Court, which held in favor of the IRS. The court pointed out that in order to be deductible, alimony must be paid under a divorce or separation agreement, which is defined by the Internal Revenue Code as a decree of divorce or separate maintenance or a written instrument incident to that decree, a written separation agreement, or a decree requiring a spouse to make the payments. An oral modification does not qualify because it is oral and not written. The kindness of the taxpayer had no value for tax purposes.

The only silver lining in this unhappy outcome for the taxpayer is that his former wife is not required to pay tax on the additional amounts the taxpayer paid to her. The court did not mention this aspect of the arrangement, because the former wife was not a party to the litigation. It is unknown whether she reported the entire amount she received or only $24,000, though my guess is that she reported only the $24,000. If she did report more, and happens to learn of her former husband’s tax outcome, she should move quickly to amend her return.

The additional payments are very much like a gift, and the tax consequences match those applicable to gifts, but it would be a bit awkward to refer to the payments as gifts. It is unlikely that the taxpayer was acting with “detached and disinterested generosity,” the benchmark usually applied to the determination that a transfer constitutes a gift. Though he was trying to do “the right thing,” it would not be surprising to learn that he was also concerned about his former wife challenging him with respect to the delay in the sale of the property and that he concluded making additional payments would buy some time.

It is unclear why the taxpayer and his former wife did not execute a written amendment to their separation agreement. Perhaps she did not want to report additional income. But what is more likely is that the two of them simply didn’t see the need to write anything down. The failure to put oral agreements into writing has been the pitfall of more litigants than one can easily count.

It isn’t all that terrible, I suppose, that the tax law doesn’t always award someone for being nice, despite the existence of the charitable contribution deduction. One hopes that people would be nice for reasons other than a tax incentive to do so. The monetization of kindness is an unkind quality.

If my blog post from last Friday, Taxes, Strip Clubs, and Creativity had been a podcast, I’d now be saying, “I had to go and open my big mouth.” But instead, I’ll simply settle for mentioning my irrepressible keyboard.

On Friday, I commented on a story shared with me by a reader, in which a strip club in New York unsuccessfully, at least so far, tried to avoid the sales tax on revenue collected from customers, by arguing that its dancers were therapists, bringing its services within the therapy exception to the sales tax. I noted that in earlier posts I had described the partially successful attempt by another New York strip club to escape the sales tax by branding its services as “a dramatic or musical arts performance.” I observed that the lawyers representing these clubs were quite creative, and suggested that perhaps they would work their way through the sales tax exemption list. I asked, “How long until the strip clubs argue that they are offering educational services?”

About an hour after the post appeared, the same reader pointed me to another story. Granted, it wasn’t an attempt to escape the sales tax, but it did involve taxes, education, and strip clubs. I suppose I would have found this story had I pursued a google search for those terms. As restrained as I tried to be, sometimes the inevitable is inevitable. According to this story from seven years ago, “Lap dances just got more educational.” According to the report, dancers from yet another New York strip club rallied at the courthouse in support of a pole tax to fund local schools. The club intended to start charging an entry fee which it planned to send to the state revenue department. According to one of the dancers, “We just want to give back to our communities.” Incidentally, the dancers were supporting a pole tax, not a poll tax, which is an entirely different sort of tax, one that when applied to voting has been outlawed, though I am confident there are some people who would dance with delight if it were revived, though it would take an amendment to the Constitution to do that.