Friday, April 30, 2010

Taxes and Priorities 

The tension between demands for reduced taxes or reduced tax increases and demands for government services is escalating. Several recent developments highlight the need to find ways for tax and spending decisions to be prioritized. It is in the setting of priorities that answers are found to the challenge of matching government revenues with government expenditures.

In the first bit of news, opinions were strongly advanced by citizens who attended a public hearing on the budget plan offered by the mayor of Philadelphia. As reported in Nutter's Budget Plan Pummeled at Public Hearing, if anyone likes the plan, they’re not saying much. Not only were the mayor’s proposed soda tax and trash pickup fee blasted, the alternative plan by some members of City Council to raise property taxes also was, sorry, trashed. One taxpayer concluded, “I don’t have any more money for you,” after pointing out her disappointment that tax dollars were used to build sports stadiums and that new construction continues to get a 10-year real property tax break. Other speakers at the hearing claimed that the problem arose from overspending during past years. One person did support raising property taxes to levels equivalent to those in the surrounding suburbs, which are more than three times higher, but that suggestion started a “shouting match” that had to be gaveled down. I shared my views on the soda tax and trash pickup fee ideas in Yes for The Proposed User Fee, No for the Proposed Tax.

In the second bit of news, reported in this article, the Supreme Court of Pennsylvania, in a ruling issued without any explanation, permitted the scheduled vote on abolishing Philadelphia’s Board of Revision of Taxes to go forward. The ruling, however, does not preclude the BRT from challenging the outcome of that vote, if it turns out as expected in favor of eliminating the BRT. My previous commentaries on the saga of the BRT can be found in An Unconstitutional Tax Assessment System, and followed by Property Tax Assessments: Really That Difficult?, Real Property Tax Assessment System: Broken and Begging for Repair, Philadelphia Real Property Taxes: Pay Up or Lose It, How to Fix a Broken Tax System: Speed It Up? , Revising the Board of Revision of Taxes, and How Can Asking Questions Improve Tax and Spending Policies?, This Just Taxes My Brain, Tax Bureaucrats Lose Work, Keep Pay, Testing Tax Bureaucrats Just Part of the Solution, A Citizen Vote on Taxes, Freezing Real Property Tax Reassessments: A Nice Idea, The Tax Price of a Flawed Tax System, and Can Bad Tax Administration Doom the Tax?.

In the third bit of news, according to this Philadelphia Inquirer article, Philadelphia announced that it would not send police officers to deal with minor vehicle accidents, in order to increase the amount of time police can devote to fighting crime. There are roughly 68,000 minor accidents in Philadelphia each year. If the motorists agree to exchange information, no one is injured, and the cars can be driven, the police will not show up. Motorists will need to go to the nearest police station or call in the accident by phone.

In the fourth bit of news, described in this report, the governor of Pennsylvania is calling the legislature back into session to deal with a budget deficit triggered by the Federal Highway Administration’s refusal to approve plans to impose tolls on I-80. The proposed state budget had counted on those tolls to provide funds to fix roads and bridges and to improve mass transit. The governor advocates a gross profits tax on oil companies. Previously he had planned on leasing the Turnpike. Others have suggested increasing gasoline taxes, motor vehicle registration fees, or real estate transfer taxes, and putting tolls on I-95, outsourcing highway maintenance, permitting local governments to impose transportation taxes, and paying for state police from sources other than the Motor License Fund. I shared my views on the I-80 tolling proposal in, among other posts, User Fee Philosophy Vindicated, and I explored the Turnpike lease idea in, among other commentaries, Selling Off Government Revenue Streams: Good Idea or Bad? and in Selling Government Revenue Streams: A Bad Idea That Won't Go Away.

In the fifth bit of news, detailed in this article, high school students in many South Jersey school districts walked out of class to protest the budget cuts proposed by the state’s governor. Students who were interviewed made it clear that they were not looking forward to attending schools that would need to “take away sports and drama and everything else.” The walkout was organized – using facebook—by a college student who graduated last year from one of the schools, and who was concerned about possible elimination of arts programs. The reaction? The Education Commissioner said, “Schools should enforce their attendance policies. They should not be permitting students to walk out of class.” A spokesman for the governor explained, “Students would be better served if they were given a full, impartial understanding of the problems that got us here in the first place and why dramatic action was needed." My latest analysis of the impact of New Jersey’s proposed cuts in education spending can be found in Cut Taxes + Cut Spending = Reduced Education?.

What ties all of these stories together is that they are just a few of the many fronts on which the, sorry, collision between tax resistance and demand for services demonstrates its seriousness. The problem is a bit more complicated, though, than most advocates on either side of the debate seem willing to admit. Sound bites are difficult to create when an issues resists being dumbed down to simplistic themes. For example, the problem in Philadelphia involves not only the question of tax increases and reduced spending, but also the matter of special tax breaks. What would have happened had the moratorium on new construction taxes not been enacted or if it is repealed? What would have happened had particular corporations not received special tax breaks? Would the city’s economic base have shrunk even more? Or would the corporations continued to do business in the city because there were no practical alternatives? Would new construction have ground to a halt? Does one dollar of a special tax break bring, in present value terms, the equivalent of one dollar of tax revenue from other sources? Does the one dollar of a special tax break generate, in present value terms, sufficient additional economic activity that generates not only a dollar of tax revenue but increased after-tax dollars for the city’s residents? Have independent studies been undertaken with respect to the specific special interest tax breaks that Philadelphia enacted? Similar questions can be asked about using public money to fund private sports enterprises that are of interest to some, but surely not all, city taxpayers, who end up footing more of the bill than their counterparts, including fans, living outside the city. Perhaps the investment paid off in higher city tax revenues from transactions into which both residents and nonresidents entered. Without the necessary information, assertions such as those made at the hearing reflect more emotion than rational analysis. I don’t know the answer, but I’m simply suggesting that someone who shows up with an independent auditor’s report on the question will speak words far more authoritative than someone who simply challenges the matter without evidence.

It is noteworthy that the outpouring of tax resistance protestors apparently will be matched by the outpouring of those who object to the consequences of underfunding government. The attractiveness of short-term solutions that ignore long-term planning is exposed for the sham that it is when tomorrow’s voters pour out of their schools to register their displeasure with the short-sighted decisions being made by the friends of the wealthy now in control of New Jersey. Only time will tell how motorists react to the lack of police attention when minor accidents, which in the city of Philadelphia too often escalate into something more serious, increase the aggravation factor. The ballot box will determine if Philadelphia’s voters are as fed up with the BRT as they appear to be, and whether reform will increase real property tax revenue without imposing inequitable levies on property owners. The debate over funding highways, bridges, and mass transit will require the state’s citizens to choose between higher fees or worsening infrastructure.

This clash between those who want government services to be maintained, if not increased, and those who do not want to pay more taxes, is going to rip apart the social fabric of the nation unless someone takes hold of the public debate and uses leadership skills to infuse it with educated, informed, authoritative, and unbiased information. What is required is a process that causes people to realize that even at the individual level they are taking inconsistent positions. The parent who wants the school to provide extracurricular activities for his or her children, but who also objects to paying taxes, needs to think through the implication of this dual position. What it pretty much amounts to is the idea that someone should give something to the children but the person doing so ought not be reasonably compensated. There’s a word for that. The motorist who complains heartily, and understandably, about the miserable condition of many of Pennsylvania’s roads, but who also objects to tolls, increased gasoline taxes, or any other sort of fee, needs to think through the implication of this dual position. What it pretty much amounts to is the idea that the motorist wants something but wants it provided by someone else. There’s a word for that. The city residents who want their trash picked up, their streets plowed, their homes protected from fire and theft, their air to be clean, their water to be flowing, their shopping to be fraud-free, and all the other services they seek, but who object to paying the true cost of these services and continue voting for those who have enabled inefficiencies such as the BRT, need to think through the implication of their dual position. What it pretty much amounts to is the idea that they don’t like what those elected to office are doing but they keep sending them back to do more. There’s a word, a different word, for that.

The ultimate irony of this growing civil discord concerning taxes and spending is the hypocrisy of the unspoken motivation underneath the anti-tax argument. The tax resistance folks ultimately, when pressed, will admit that their principal objection is to the idea of money they pay in taxes being funneled to people “who take more than they give.” Yet careful analysis, corroborated by huge deficits in government budgets at every level, warrants the conclusion that pretty much everyone in this nation is taking more than they give. Most, if not all motorists, impose costs on highway and bridge infrastructure that exceed the tolls, gasoline taxes, and other fees that are paid. Most, if not all parents, through their children past, present, and future, impose costs on the school system that exceed the school taxes that they pay. Most Social Security recipients take out more than they put in. Perhaps it is time to consider that, when it comes to taxes, we have met the enemy and it is us.

Working out of this crisis before it becomes catastrophic requires educated guidance and informed debate, so that people can make sensible decisions about priorities in government services and spending. If a majority wants to reduce government to levels comparable to levels of taxation in the colonial era, and is willing to tolerate the reduction of government services to what existed 234 years ago, so be it. But it wouldn’t surprise me, or anyone else who thinks about these matters carefully and seriously, if those same members of the anti-tax movement were the first to complain about the miserable condition into which their lives had accordingly sunk. What an awful price to pay to learn about giving due consideration to evaluation priorities. I’m suggesting that there is an easier way.

Wednesday, April 28, 2010

Is Public Truly Getting IRS-Congress Distinction? 

David Cay Johnston’s latest Tax Notes commentary, What Polls Tell Us About the Public's View of Taxes, republished by Paul Caron’s TaxProf Blog, addresses one of my favorite topics. In his commentary, Johnston calls attention to the adverse impact on the tax policy debate of the huge amounts of misinformation being delivered by news organizations, politicians, and the tea party movement. Some of what Johnston concludes matches what I’ve been writing for the past few years. On one point, he reaches a conclusion that reflects an outlook much more optimistic than the perspective I have had, and it remains to be seen whether he is correct. I hope he is.

Johnston complains that the “well-rounded discussion” that the nation needs with respect to tax policy is not well served by the “often fact-free observations” delivered by talk show hosts and guests and the recycled nonsense, sometimes “mixed with hard facts and thoughtful reporting” broadcast by news shows. About a month ago, in IRS Ought Not Be the Health Care Enforcement Administrator, I complained about “the use of “anti-IRS” sound bites by certain politicians” which find their way into public consumption as though they were statements of truth. More than two years ago, in What’s in a Tax Label, I lamented “The nation's addiction to sound bites, and dislike of thorough analysis.” By giving in to the inability of most Americans to endure more than twenty seconds of discourse on any one issue, those taking on the responsibility of educating the American public are falling short. As Johnston notes, they not only fail in this effort, they tag themselves with slogans that suggest that they have been, and will continue to be, successful.

Johnston explains that though the people identifying themselves as members of, or supportive of, the tea party movement, though “engaged as citizens and venting their frustration,” are “being used by wealthy interests known for backroom deals and campaign contributions aimed at shifting their tax burdens onto the hoi polloi.” This is a concern that troubles me deeply. I continue to wonder why those on the lower end of the economic array continue to fight against their own interests as they take positions that benefit only the wealthy. More than five years ago, in Consumed by Consumption Taxes, I suggested that one reason that those not counted among the wealthy argue against their own interest might be that “they're fairly confident they can break into the upper class (the wealthy, super wealthy, hyper wealthy, etc.).” I returned to this theme about a month ago, in Tax Lessons from New Jersey, where, after asking “why are people voting for a philosophy that benefits the wealthy and jeopardizes the poor and middle class?” I answered my own question:
Some of the staunchest defenders of low taxes for the wealthy do not come from the ranks of the wealthy but from those who face increased burdens – in the form of higher taxes, increased government debt, or reduced government services – in order to pay the price of those low taxes for the wealthy. I suspect that most people see themselves as being wealthy some day and want to make certain that the tax-comfortable environment now in place remains in place when they arrive. Unfortunately, so few will attain that status that it’s the equivalent of using lottery-playing rationale to determine tax policy.
The anomaly becomes even easier to understand when one considers who owns, and who can afford to buy time on or influence what takes place on, major media outlets.

That brings Johnston to yet another troubling aspect of the tea party movement, which Johnston sees not as the problem but as a victim of “the inchoate comments on tax by its leading speakers.” Because the media loves sound bites, and because the sound bites spewed by the tea party movement instigators are so deeply erroneous, we end up with, according to Johnston, “tax misinformation that gets attention all out of proportion to its audience or its significance.” Less than a week ago, in Tax Education is Not Just for Tax Professionals, I wondered, “isn’t it time to counteract the deliberate misinformation campaigns and the foolish repetition of nonsense by the ignorant by stepping up public education, not only in schools but in workplaces, civic associations, and community centers?” It’s no coincidence that tea party movement members are being duped into fighting taxes used to pay for public education. An educated public is the worst enemy that the wealthy elite can imagine.

Johnston then focuses on Sarah Palin’s Boston speech to illustrate “how nonsensical and contradictory the comments of Palin and some other prominent tea party speakers are.” Palin, though calling for tax cuts, then complained that “47 percent of households pay no federal income tax.” This would fit nicely into the tea party movement’s ostensible philosophy if the 47 percent that pay no tax were the wealthiest 47 percent. But careful analysis of the information – which takes time to do and time to explain – reveals that most of the households paying no federal income tax are those headed up by the unemployed and the elderly, two thirds of whom have annual income under $20,000. Only 14 percent of households paying no taxes were headed up by someone of working age and making more than $20,000, of whom most probably are parents with children who claim the child tax credit. Lastly, the $400 income tax credit that Obama persuaded the Congress to enact pushed millions of Americans in the bottom 75 percent of the income array from a low tax liability status into a no tax liability status. So is Palin suggesting that the elderly, the poor, and workers should be paying more taxes? Johnston concludes that Palin “either opposes tax cuts for people with jobs or she has no idea what she is talking about” and goes for the latter. Perhaps. Or perhaps she very well knows what she is up to, and didn’t realize that some of us are sufficiently blessed with brains and educated with knowledge and understanding of tax law to see through her sound bite rhetoric. Unfortunately, as Johnston notes, the applause she garnered from those in attendance “indicates how they failed to connect rather obvious contradictory dots.”

But it gets better. Palin’s entry into the public spotlight has brought her a flood of income, putting her in a category greater than 99.99 percent of all taxpayers. But because she has so little capital gains taxed at special low rates, she had discovered that most of her income will be taxed in the top bracket. Is it any wonder that she doesn’t like the idea that “47 percent of households pay no federal income tax.” Translated, she is complaining that she would pay less tax if those households – the elderly and the working poor – paid more tax. What Palin doesn’t mention is that when the Obama $400 tax credit expires and as the economy improves, the percentage of households paying no income tax will drop to 45 percent in 2010, into the high 30 percent range within an few years, and by 2020, into the low 30 percent range. Johnston points out that Palin refuses to permit herself to be questioned about this, or any other, analysis that she trumpets, and so opening up a dialogue with her is impossible. Surely she understands the risk of debating the point, because it is tantamount to a risk of exposing her game to the people she exploits as she moves into an income bracket that has nothing in common with the people she has duped into supporting her positions.

Johnston finds hope in some poll numbers that he dug up from some Fox News polls and a CBS poll. These polls measured favorability ratings, and Johnston selected the results for Sarah Palin, President Obama, several members of Congress, and the IRS. In last place, at 12 percent, is House Minority Leader John Boehner, edged out by Senate Majority Leader Harry Reid at 16 percent. Next, with fewer than one in four viewing her favorably, is Sarah Palin. House speaker Nancy Pelosi is at 29 percent, The tea party movement has a 36 percent favorability rating. The IRS comes in at 49 percent, just one percentage point below the President.

Johnston derives several conclusions from these numbers. He argues that they tell us “that sound tax policies . . . can be attained.” He concludes that, “The public evidently gets that the IRS is only the tax police, enforcing the law Congress makes.” He suggests that this reality, certainly understood by most tax professionals “is starting to seep into the mind-set of the rest of America.” I’ve been hammering home the IRS – Congress distinction for years. Several years ago, for example, in A Holiday “Gift” from the Congress, I asked “The public has a negative view of the IRS, but can it not come to understand that the IRS is a creation of the Congress and that in this instance IRS employees are going above and beyond the call of duty to fix yet another mess created by the Congress?” Earlier this month, in Can Bad Tax Administration Doom the Tax?, I noted, “Most of the people who are upset with the complexity of the federal income tax law, and who object to the loopholes and special interest provisions found in it, direct the bulk of their anger at the IRS. At the same time, there is a growing aggregation of individuals who object, not to the administrative agency, but to taxation itself. What harmonizes these seemingly discordant approaches is the tendency of people to lay blame in the wrong place. Congress, not the IRS, is responsible for the complexity and loophole corrosion of the federal income tax.” Perhaps more people are reading MauledAgain than I realize.

It is Johnston’s suggestion that “the poll shows the body politic is not completely infected by demagoguery when it comes to taxes and the IRS” that causes me to hesitate. If he is correct, I’m glad. But I wonder if the timing of the poll had an impact on the outcome. The poll was taken at a time when many people were receiving refund checks or deposits into their bank accounts. Would this not cause at least some people to think of the IRS in less harsh terms than they usually report? I don’t know. I do know that people keep sending back to Washington the same members of Congress, or their clones, that has brought us thirty years of bad tax policies. I do know that all those people flocking to the tea party banner continue to remind me of sheep being led unwittingly to the slaughter.

Even Johnston understands that the poll numbers don’t suggest that America has woken up to what has been going on during the past decade. He asks, “Can we get a broad swath of the public to recognize how oligarchs who are undermining our democracy are stealthily financing tea party events and exploiting those who show up so they can continue to shift their tax burdens onto the rest of us, including tea party supporters?” I don’t know the answer. I do know that without more, rather than less, public education on matters of taxation, tax policy, and public finance, the answer will be “no.” In other words, I don’t know if we can get a broad swath of the public to recognize how important it is to fund and encourage education, at all levels, with respect to taxation, tax policy, and public finance so that the oligarchs can no longer continue to undermine our democracy through stealth financing and exploitation of the ignorant. If what I explained on Monday in Cut Taxes + Cut Spending = Reduced Education?, exploring the lessons to be learned from the school budget vote in New Jersey, tells us anything, it’s that the effort to fix the problem is going to be challenging, heated, time consuming, and infected with sound bite lies and nonsense.

Monday, April 26, 2010

Cut Taxes + Cut Spending = Reduced Education? 

In Tax Lessons from New Jersey, I described the battle over taxes that has enveloped the state of New Jersey. In the latest chapter in this ongoing drama, as reported in this Philadelphia Inquirer article, voters in 59 percent of school districts rejected the budgets proposed by their respective school boards. This is the highest rejection rate since 1976. New Jersey has an interesting arrangement, which requires proposed school district budgets to stand for approval in an election. If a budget is not approved, the town council or commission, depending on the locality, must come up with revised budgets, though the degree to which they can reduce the proposed budget is limited. They are not required, however, to cut the budget. If the school board does not like the outcome, it can appeal to the State Department of Education, but the state’s governor surely isn’t going to sympathize with the school districts.

The mixed outcome in New Jersey highlights the competing pressures that have come to bear on the issue. In the 19 districts in which teachers agreed to give up contract rights and let their pay be frozen, among other economic disadvantages, only 13 budgets were approved. Six were rejected despite the concessions by the teachers. If those concessions aren’t enough to bring approval of the proposed budgets, what else do these voters want? Teachers who work for free?

What is amazing is that only 27 percent of eligible voters turned out for the election. Still, that’s more than the usual 15 percent. Why do so many people sit out these critical votes? In several districts, the number of voters rejecting the proposed budget exceeded the number of voters supporting it by one. Yes, one. If one ever needs proof that every vote counts, it can be found in these ballot box dramas that will have lifetime effects on hundreds of children. Studies indicate that when turnout increases, as it did this year, budget rejections increase. The implication is that a small group of anti-tax voters, constituting perhaps 10 percent of eligible voters, manage to put school boards and localities in a position that requires them to cut programs and education efforts. In a few instances, perennial rejection of proposed budgets has nothing to do with taxes but is a manifestation of voter unhappiness with school district realignments.

When the local governments deal with the rejected budgets, they are required to determine what the tax rate will be. In effect, they determine the total budget amount, and even if they compute that amount by doing line-by-line chopping, the school board need not follow those cuts but must come up with some combination that fits within the amount generated by the tax rate approved by the local government.

So what’s going to be cut? What voters apparently did not understand is that all sorts of cuts already had been made before the proposed budgets were released. The governor, who campaigned on a promise of reduced spending, cut state aid to education by more than $800 million for the year beginning July 1, 2010, a reduction that follows a $475 million reduction in the year ending June 30, 2010. At the same time, the amount spent by the governor for operating his office has increased, though the extent to which it has increased has been the subject of charges and countercharges between the governor’s office and journalists. In the meantime, the governor told voters to reject proposed budgets in districts where teachers had not agreed to economic concessions. By cutting state aid, the governor forced school districts to propose budgets requiring tax increases to make up for the lost state aid, permitting the governor to direct voter anger at school districts. All of this transpired while the governor resists maintaining an income tax increase put in place last year for millionaires, as I discussed in Tax Lessons from New Jersey.

To illustrate the effect of these reductions that are already in place, school districts already have eliminated positions, which translates in many instances to elimination of programs. The Cherry Hill School District has already cut 89 positions. Its proposed budget, which would have increased taxes by 4 percent, was rejected, so unless the town government ignores the outcome of the vote, even more jobs and, in all likelihood, entire programs will be axed. The Cinnaminson School District had already mapped out 27 job cuts before tackling the budget issues. It appears that class size will increase, even though increased class size usually translates into reduced learning by students because of unavoidable reduction in time for one-on-one assistance.

Despite the adverse effect of reduced state aid and opposition to taxes on education, New Jersey’s governor called the vote “a watershed moment.” Indeed it is. Years from now, when people look back to see when the deterioration of education quality in New Jersey’s public schools began to accelerate, compounded by the effects of people moving their children into private schools if they could afford to do so or leaving the state, they will look back at this vote as the beginning of what Christie called “significant change.” Significant, but definitely in a disadvantageous way.

The irony in all of this, aside from the overwhelming majority who didn’t bother to let their voices be heard in the matter, is the high likelihood that few of those voting have any idea of what is in the proposed budgets. It is no less likely that when the additional cuts are announced, many of those voting for those cuts will be leading the parade of parents offended by the cuts. Parents of children in football will protest the cuts in that program and yell for cuts in advanced placement math classes. Parents of children in those classes will propose leaving those classes intact while cutting the amount of money invested in the spring musical. And so on. People without children in the schools will continue to complain about taxes and clamor for cuts in everything, arguing that they don’t benefit because they have no children in the school, forgetting that when they were in school plenty of taxpayers without children in the schools contributed to their own education and forgetting that while their own children were in school others without children, now long gone, were pitching in. And they’re clueless when it comes to identifying the indirect benefits they receive by living in a nation with an educated citizenry and workforce that contributes to the high standard of living they’ve had the opportunity to attain, in comparison to most other places on the planet. These folks are expertise in the “taxes are good when they benefit me but otherwise are evil” approach and in the “I like to take but hate to give” philosophy of life.

Fortunately, in a few school districts, voters approved the budgets. In one instance the tax increase is 9 percent, thanks to Christie’s cutting of state aid in order to revive tax cuts for millionaires, but the voters understood that they were voting for the preservation of high quality education. What’s missing, unless it’s out there and I haven’t found it, is a study that correlates the percentage of residents and percentage of voters with the vote outcome in each school district. Surely there is something to be said for the idea that those who have less education might put much less value on education and are thus more likely to vote against spending for education. And with less education, these folks are more susceptible to the simplistic sound bite arguments tossed about by those who want to cut services in order to fund tax cuts for the wealthy.

Perhaps there should be added to the curriculum, not only in public schools but also in community colleges and adult evening education programs, a course in public school education budgeting. It would be interesting to dissect a school district budget and to see where the money goes. Are the people voting for reduced expenditures ready to say goodbye to school sports? To extracurricular activities? To bus rides for children living within 2 miles of the school? To the special programs in place for the disciplinary problems? What about the cost of lawsuits brought by parents who seek special treatment for their children? Ought the parents who impose these costs on the system be permitted to vote against taxes, thus requiring that the fees paid by the school district to defend these lawsuits be taken out of education of other children? It brings the analysis full circle to my discussion of these issues in Tying Tax Revenue to Voter Responsibility, in which I concluded, “Ultimately, when complaints about high taxes circulate, the response, ‘You voted for it,’ should either dampen the griping or inspire people to reconsider, and cut back, their government services wish list.”

One thing that could be done to reduce the cost of education in New Jersey without impairing its quality is to combine the small school districts to achieve economy of scale. Yet every time this is proposed, voters shoot it down. Why? Because they like the small-town feel of a school system with hundreds rather than multiple thousands of students. There’s no question that smaller is better in many respects, but if that’s what voters want, then they need to pay for it. Perhaps the ballot next time should be a choice between (A) higher taxes and retention of the very small school districts or (B) lower taxes and consolidation. Now that’s an election that would be very interesting to watch.

Friday, April 23, 2010

Tax Education is Not Just For Tax Professionals 

The other day I received an email from a reader who described having attending a local government meeting, at which a local resident introduced two visitors who were bringing “ideas.” The local resident enthusiastically supported the propositions that these visitors were sharing. The first visitor, it seemed, did nothing more than complain about income taxes. That’s not surprising, considering that this visitor was a campaign worker for a gubernatorial candidate with some sort of affiliation with the Tea Party. The other visitor explained that after God and people, sheriffs are the most important enforcers of law in this country. This visitor suggested that if a federal official tries to force a person to do something that infringes on the person’s rights, the person should call the sheriff. The two visitors claimed that the IRS would be taking money from people’s personal bank accounts to pay for an individual’s mandatory health insurance.

To ask how such nonsense gets started achieves nothing. This nonsense gets started either when someone lacking education, analytical skills, and common sense makes a proclamation to one or more other persons or when someone who should know better deliberately plants a falsehood, often using AM talk radio. The more important question is how this nonsense spreads and comes to be believed by millions of people. Certainly someone standing on a street corner, foaming at the mouth, and proclaiming that squirrels are robbing a bank would get very little attention from just about everyone other than a few curious stares and perhaps an attempt to get the person into some sort of treatment center. Yet somehow, equally implausible assertions acquire a following among far too many Americans. Part of the answer is that almost everyone knows that squirrels cannot rob banks, but very few people know that the IRS does not, and will not, have power to levy on people’s bank accounts to collect the tax imposed on those who do not have health insurance coverage. Anyone who bothered to read the health care legislation, or a professional explanation, such as the one I provided in Health Care: Enlarging the Code and Stressing the IRS, would know that the claim of IRS power to take money out of people’s bank accounts to pay for an individual’s mandatory health insurance is about as believable as the ranting of a foamy-mouthed squirrel-obsessed lunatic on the street corner.

It’s obvious that too few Americans have read the health care legislation or an explanation from a reputable source. It’s obvious that too few Americans understand enough about tax law or finances. It’s also obvious that one of the reasons is that insufficient funds are provided to educate the nation’s children about these things as they move through its school systems. As I commented to the reader who had emailed me about the two visitors, “Perhaps people sympathetic to the first guy have succeeded in tax resistance so effectively that there were insufficient funds to educate the second guy.” If the nation continues to resist paying for quality education of its children, it will soon become a nation of the ignorant.

Surely, it was just coincidence – or perhaps not – that earlier in the same day I had come across an article about How Pennsylvania is Addressing Financial Illiteracy. In the article, Mike Armstrong noted that after he had written about the nation’s lack of financial literacy, his readers had responded with pointers to other surveys demonstrating the widespread nature of the problem. After explaining that “It would be understandable if there were a lack of resources on personal finance. But it’s bewildering given all the shelves of books in libraries and bookstores, as well as the many Web sites, magazines, TV shows and newspaper columns devoted to the topic,” Armstrong asked a good question, “As financial illiterates, are we drowning in a river of too much information, or parched because we don’t have sense enough to drink?” He thinks it’s “a little of both.”

In the article, Armstrong recounts information from Pennsylvania’s Office of Financial Education, a division of the Banking Department. The OFE “has trained 2,000 teachers in personal finance since 2005 and estimates 400,000 students have benefited from that knowledge transfer.” Yet a survey by the OFE shows that only “44 of the 584 schools contacted in 2009 by Penn State’s Survey Research Center reported requiring a stand-alone course in personal finance for graduation.” Other schools have elective courses but “less than 50 percent of graduates” enroll in it. An official at the OFE suggests that children learned about personal finance from parents, but that as the financial sector has become more complicated, parents are less confident about what to teach their children. If children are learning about taxation and mandatory health care from their parents, one must hope that their parents are not as misinformed as the visitors who showed up at the township meeting. Unfortunately, I suspect that it’s far more likely the nation’s children are being taught nonsense than are being taught reality, considering the speed with which the tax misinformation virus has infected the population.

My concern about education gaps with respect to taxes, finance, and civics is not a new one. A year and a half ago, in Does It Matter Who or What is to Blame?, I wrote:
And more than three years ago, in Economically Depressing?, I referred to "my expressed desire that K-12 education be revamped so that high school graduates enter society with the survival tools needed for life in the 21st century." According to the 2005 report of the National Council on Economic Education, the latest I could find, only seven states require personal financial education as a high school graduation requirement, one requires high schools to offer a course in the subject though it is not a required course, and one state requires that it be taught in middle school. There are 50 states in the union, plus the District of Columbia and some overseas possessions. Surely personal finance is no less important than other subjects being taught in middle school and high school.
Two years ago, in Preventing Foreclosure Through the Tax Law? Not This Time, describing the The Foreclosure Prevention Act of 2008, I commented, “Interestingly, this provision also requires the Department of Defense to counsel members of the military with respect to financial difficulties. Why not require financial education for all Americans?” Indeed, isn’t it time to counteract the deliberate misinformation campaigns and the foolish repetition of nonsense by the ignorant by stepping up public education, not only in schools but in workplaces, civic associations, and community centers? Isn’t it time to fight the darkness by turning on the light? If not now, when?

Wednesday, April 21, 2010

Does Tax Break for Volunteering Makes Volunteers Mercenaries? 

When, in Tax Law Going to the Dogs in a Fishy Proposal, I commented on the proposal to allow deductions for pet care expenses, I thought I had seen one of the most unwise tax ideas suggested for addition to the tax law. But now another idea has come along that is just as unwise. In Re-envisioning the Charitable Deduction to Legislate Compassion and Civility: Reclaiming Our Collective and Individual Humanity Through Sustained Volunteerism, 19 Kan. J.L. & Pub. Pol'y 269 (2010) (hat tip: Paul Caron’s TaxProf blog), Professor Alice M. Thomas argues that a tax deduction should be added to the Internal Revenue Code for “volunteerism.” In other words, taxpayers would be permitted to deduct some amount representing the value, or some presumed value, of the services they provide when they volunteer. The disadvantages of this proposal are numerous.

First, unless some arbitrary per-hour amount is prescribed for all taxpayers, the proposal, if enacted, would burden taxpayers and the tax return preparation system with the task of determining the value of the volunteer work provided by the taxpayer. If a physician does two hours of carpentry work for Habitat for Humanity, should the deduction reflect the hourly rate charged by carpenters or by physicians? If the quality of the carpentry isn’t of good quality and needs to be redone by someone else, does the taxpayer still get the deduction?

Second, who monitors whether the volunteer has done something of value? How does one administer a deduction that reflects volunteer work without determining if any work was done?

Third, who keeps track of the hours donated by volunteers? If the organization does not do so, almost every taxpayer in the country will claim to have volunteered. If the organization must keep track of volunteer hours, is that not a diversion of its resources away from its primary mission?

Fourth, does it make any sense to allow a deduction, or even a credit, for something in which the taxpayer has no basis? Unfortunately, some taxpayers are permitted, under certain circumstances, to claim a deduction for the fair market value of donated property even though they have not included in gross income the appreciation in that property. This is an atrocious tax rule, has been nominated for repeal on numerous occasions, and very well may not survive the next focus by Congress on available revenue sources to deal with the federal deficit. But its existence ought not be used to sell another atrocious idea as palatable.

Fifth, accepting the premise that encouraging volunteerism is a good thing, why use the tax code to accomplish that goal? Brushing and flossing one’s teeth is also a good thing, but there is no deduction for doing so, and hopefully no one proposes that there be one. There are all sorts of good things, but the tax law ought not be the driving force behind those good things.

Sixth, if a deduction for volunteerism in fact does increase the amount of volunteerism, is it going to bring into the soup kitchen, into the houses being rebuilt, into the hospitals the sort of people who truly understand what volunteering means and who can function other than as someone serving out their time in order to get a tax break? What genuine volunteer wants to be working alongside a mercenary?

Seventh, is a person “volunteering” if the person is doing something because there is an economic benefit, namely, a tax break, to be gained by engaging in the activity? When someone obtains an economic benefit from doing work, we call that a job.

This sort of proposal speaks volumes about two major trends in the disintegration of American culture. First, it is yet another theoretical idea that sounds good but when subjected to the realities of the tax practice world falls apart, and when subjected to the realities of tax policy comes up short. Professor Thomas makes a great case for why volunteerism is a good thing but fails to explain why the tax law is a better device to encourage more volunteerism than are the other means more readily available to society. Second, if it takes a bribe in the form of a tax break to get people to step up and help out, that’s a sad statement about the this country’s current cultural condition. Perhaps too many children have been successful with “I’ll do chores if you pay me” arguments presented to their parents, thus causing the “I won’t do anything without an economic benefit” mentality to permeate, and increasingly erode, the nation’s foundational value system.

If can be proven that it’s unavoidably necessary to use the tax code to fix yet another deep social problem, perhaps it makes better sense to have a special tax deduction for contributing to a program designed to educate parents on how to instill caring about others – rather than caring about self – in their children. I prefer not to use the tax code at all, but using the tax code to mask symptoms rather than getting to the root of the problem is even more foolish than using the tax code to deal with social, psychological, and cultural issues.

Unfortunately, this sort of proposal will appeal to some office-seeking candidate who would support it for the sole purpose of winning votes from people easily fooled into thinking that supporting this type of idea makes the person better suited for influencing the nation’s policies than are the people actually doing volunteer work for the right reason. The past several decades have demonstrated that the Congress has no qualms about cluttering the tax code, enacting bad legislation, and catering to whomever needs to be mollified in order to get, and hold on to, power. It is dangerous, and unwise, to put bad ideas into the heads of politicians. There are enough bad ideas already residing in the collective political brain, and it’s time to dislodge them with good ideas. What Professor Thomas has advanced does not qualify for that purpose.

Monday, April 19, 2010

The IRS as Health Care Political Pawn 

The challenges posed by having the IRS enforce and regulate the newly-enacted provisions in the health care legislation requiring individuals to purchase health insurance and requiring certain employers to provide it to their employees are growing by the day.

In IRS Ought Not Be the Health Care Enforcement Administrator, I explained why health insurance regulation and enforcement belongs somewhere in the federal government other than the IRS. In Health Care: Enlarging the Code and Stressing the IRS, I expressed concern about the impact on the IRS and tax law administration of relying on the wrong agency to handle the reporting and insurance purchase requirements. In More Challenges of IRS Health Care Oversight, I shared a reader’s description of practical problems with the limited enforcement powers available to the IRS, which will encourage people to delay purchasing health care insurance until after they need the coverage. In effect, the enforcement mechanisms in the legislation are so lacking in teeth that they are pretty much useless.

Now comes yet another challenge, one that was expected. With great glee, Representative J. Randy Forbes of Virginia has introduced legislation to prohibit the IRS from doing anything with respect to the health care legislation. The proposed statute is sufficiently brief that it’s worth presenting in its entirety:

To prohibit the Internal Revenue Service from hiring new employees to enforce the Federal Government's invasion into the health care lives of American citizens.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

This Act may be cited as the ‘‘Prevent IRS Overreach Act of 2010’’.


No position within the Internal Revenue Service may be filled, by transfer or any other appointment taking effect on or after the date of enactment of this Act, if the duties and responsibilities of such position include the enforcement of any provision of, or amendment made by, the Patient Protection and Affordable Care Act or the Health Care and Education Reconciliation Act of 2010.
That’s it. The translation is simple: “Even though opponents of health care reform and health care for those without health insurance lost in their attempt to maintain the status quo, they intend to prevent implementation of the legislation so that there is no health care reform and so that those without health insurance coverage continue to suffer.” If the concern of Representative Forbes and his allies was mine, namely, that the IRS is not the appropriate agency to enforce the legislation, the proposed legislation would contain a section 3 that shifted the responsibility to some other federal department or agency. The lack of any such provision makes it clear what Forbes wants to do. His approach is not unlike that of a basketball coach who, after his team loses a game, ignores the meaning of the final buzzer, and tries to prevent the officials from sending the score to the league office.

This tactic is worse than what happens when Congress imposes an obligation or duty on the states but fails to provide funding to the states to pay for implementation. That tactic causes the debate to be one of who pays for enforcement rather than whether the program in question should be undertaken. The Forbes tactic is one in which the losers try to replay the game because they don’t know how to accept decisions made by a majority of legislators elected to the Congress.

Forbes justifies his actions by arguing that “The simple truth is that spending $10 billion for the government to force federally mandated healthcare on families and businesses will not initiate business growth or create lasting career opportunities for Americans. By prohibiting the funding of those new IRS employees, we will allow American taxpayers to keep their money and begin to draw a line in the sand on matters of unnecessary growth in government.” He also argues, “Americans remember an era of IRS overreach and abuse and don’t want that time back. Whether preventing 1,000 new IRS agents or 16,000 new agents as some have predicted, this bill is intended to stem the growth in big government’s control and authority in the lives of American citizens.” How much of this makes sense?

First, there is nothing to support the claim that it will cost $10 billion for the government to enforce the health care legislation. Forbes himself admits that there could be “1,000 new IRS agents or 16,000 new agents.” Surely the overall cost could be anywhere between some amount and sixteen times that amount, though the latter outcome is highly unlikely because the IRS has asserted it will not need 16,000 new agents. Maybe it will cost $500 million (which would permit hiring as many as 4,000 agents), maybe it will cost $1 billion, but $10 billion appears to be more of a number drawn out of thin air to add drama to the issue than it is the product of a cost accountant’s detailed research and analysis. Even if half the $10 billion were used for things other than the cost of paying salary and benefits to health insurance verification form clerks, the other $5 billion would pay for as many as 50,000 employees. That’s triple the extremely high number at the top end of Forbes’ “estimate.”

Second, however many people are hired by the IRS, or any other federal agency, to administer the new legislation, those will be new jobs. Those jobs will take people off the unemployment line and off unemployment benefits. Those jobs will reduce government spending on unemployment benefits. How can Representative Forbes not understand, and like, that outcome? His claim that there will be no career opportunities is unfounded.

Third, the insurance companies will need to hire people to assist them in complying with the legislation. Perhaps they will cut the salaries of their employees who earn more than $1 million a year to find funding sources. No matter how they pay for the new employees, they will be creating more jobs. That’s even more people taken off unemployment or other public benefits, and thus there will be even more reduction in government spending. Representative Forbes’ claim that the legislation “will not initiate business growth” is nonsense.

Fourth, the private sector having had decades to establish a health care marketplace that works for all Americans, does growth in government required to assist those who need health care fall into the category of “unnecessary” or “necessary”? Perhaps it is not necessary to do something about people who go without medical care because they have no health insurance and no independent source of funds to pay for care. All of this presumes that the health care legislation will cause government to grow, when it is quite likely that by making preventative care available to everyone, there will be a huge reduction in the number of people who need far more expensive care at some later date because a disease was not caught in its early stages and who, if uninsured, would require government outlays far in excess of the cost of paying for universal preventative care. One wonders who has the vested interest in the current system. As for the expected argument that people without health care would not be in that situation had they not lost jobs, and that reducing the size of government protects and creates jobs, one need only point to what happened while those opposed to health care reform were calling the shots. Perhaps they would like to put on center stage the reduced regulation of banks, mortgage lenders, and other financial institutions, which permitted reduction in size of certain regulatory agencies, and then explain how the misfeasance and malfeasance of individuals within those industries had nothing to do with people losing their jobs and, concomitantly, their health insurance. Isn’t it amazing how the kids who spill milk start getting so critical of the way in which the parents trying to clean up the milk are going about their remedial efforts?

Fifth, when Forbes refers to “an era of IRS overreach,” is he referring to an IRS that was doing more than it was authorized to do under law? If so, perhaps he ought to check the political party affiliation of the President who ordered the IRS to engage in those activities. When he refers to “abuse,” is he trying to re-open the now-discredited Congressional hearings, brought to the nation courtesy of the same group, that pretty much failed, in the long run, to demonstrate abuse? Is he trying once again to shift onto the IRS blame for the tax complexity and tax compliance nightmares that torment so many people, when in fact these are gifts to the nation from the very Congress in which Forbes sits? This sort of spin might do well in the media, but it falls apart when careful and thoughtful reasoning is brought to bear on the matter.

Sixth, when Forbes decries “growth in big government’s control and authority in the lives of American citizens,” has he considered why the government has needed to become involved in matters such as health care? If the private sector, operating in the so-called free market, was doing a top-notch job with health care, there would not be such a mess in American health care. There would not need to be government intervention if those treating the word “free” in the phrase “free market” to mean “free to do what we want to do” had not made such a mess of so much of the lives of American citizens. Every time something that needs to be regulated is deregulated, calamity befalls Americans, and when attempts are made to repair the damage, the folks who brought us the deregulation jump up and bewail the very thought of restoring some sort of order through government regulation or intervention. As I learned as a child, if you don’t want a poor grade, do what you need to do to learn how to do it properly, and if you don’t want to be reprimanded, do what you should be doing and do it properly.

It is highly unlikely that the legislation introduced by Forbes will be enacted. It is highly likely that he knows this. So why invest time in drafting and introducing the bill? The answer is simple. It will earn Forbes votes. It will bring him votes from people who, because of inadequate education attributable in part to the refusal of some communities to invest in their children’s futures, are unable to understand the reality and are susceptible to catchy-sounding but deeply erroneous, and dangerous, platitudes. Forbes, however, does not lack the ability to understand this. So, though I disagree with the voters who flock to his side, I am sympathetic to their plight. But my disagreement with Forbes is not tempered by any such sympathy. He holds a position of public trust and he should know better.

Friday, April 16, 2010

What Would YOU Cut Off to Avoid a Tax? 

On Wednesday I learned a new phrase. The phrase is “crop club.” I learned this word from Jeffrey Kacirk's 2010 Forgotten English 365-Day Tear-Off Calendar. Regular readers of MauledAgain may recall that twice during 2009, I shared tax-related words that were brought to my attention courtesy of Jeffrey Kacirk’s 2009 Forgotten English 365-Day Tear-Off Calendar. As I explained in It Could Be Worse Than Taxation, Worse Than Stimulus, “[n]ear the end of [2008], my pre-eminent friend, a librarian who shares my enthusiasm for the study of language and words, bought me a gift. It was the 2009 Forgotten English 365-Day Tear-Off Calendar.” It was a hit. My friend knows that because each morning, another word or phrase of forgotten English appears, and thanks to the wonders of email, I share almost immediately. So it was not really a surprise when at the end of 2009, my friend bestowed on me the 2010 Forgotten English 365-Day Tear-Off Calendar. And on Wednesday, the phrase of the day was “crop club.”

Like the previous two words that I shared on MauledAgain, “crop club” has a tax-related meaning. Lest they be forgotten, the previous two tax-related forgotten English words were flat-cap, which I discussed in in It Could Be Worse Than Taxation, Worse Than Stimulus, and catchpole, which was highlighted in Tax Day Trivia. Considering that catchpole showed up about tax filing day last year, I don’t think it’s an accident that a tax-related word showed up on Wednesday. Sure, it was two days early, but with my blog writing schedule, the timing was ideal.

So what’s a crop club? Is it an association of farmers who grow things? Is it a special device used by golfers? Is it, oh, never mind. According to Trench Johnson’s Phrases and Names: Their Origins and Meanings, 1906, the answer to both questions is, “No.” The word crop has more meanings than simply things that farmers grow. In the context of “crop club,” the word “crop” isn’t derived from its use as a noun. It reflects the use of “crop” as a verb.

The calendar brings a bit of trivia to accompany each day’s word or phrase. According to the calendar, on April 13, 1795, The Times of London carried this item: “A club has been formed in Lambeth called the Crop Club, every member of which is obliged to have his hair docked for the purpose of opposing – or rather evading – the tax on powdered heads.” As soon as I read the trivia, I had a flashback. Surely I had written about this on MauledAgain. Thanks to the efficiencies of google, I did a search for “powder AND wigs” and sure enough, there it was. In May of 2009, in Fashionably Powerful Taxation, I explored the lessons to be learned from the one-guinea tax imposed by Parliament on wig powder in the late eighteenth century. On that occasion, the inspiration came from Michael Quinion’s Gallimaufry: A Hodgepodge of Our Vanishing Vocabulary.

The goal of the wig powder tax was not only to raise revenue to pay for military expenses but also to reduce the use of flour in wig dusting because of a shortage in bread and other foodstuffs requiring flour as an ingredient. These were, of course, conflicting goals. The more successful the tax was in curtailing the use of flour as wig dust, the less revenue would be raised to defray military expenses. In the event, wigs went out of fashion. It seems that unpowdered wigs were not a fashionable alternative to powdered wigs. In Fashionably Powerful Taxation, I noted the effect of the powder tax on wig use but did not explore its further effect on hair length. Not only did people stop wearing wigs, they also cut their hair. Why? Apparently natural hair also was powdered, presumably because of length. Short hair did not require powder, though whether that was the case because of fashion reasons or hygienic reasons isn’t something I’ve been able to figure out.

Not surprisingly, not everyone abandoned their wigs, or, I suppose, long hair. The trivia in the April 13 entry in Jeffrey Kacirk's 2010 Forgotten English 365-Day Tear-Off Calendar explains that reaction to the tax “polariz[ed] the English into wearers and nonwearers -- the former being punningly described as ‘guinea-pigs.’” Apparently the tendency to work tax words into puns is not a recent one.

So in the late eighteenth and the early nineteenth centuries, most of the people of England cut off their hair rather than pay a tax on powder made from flour. What would taxpayers today be willing to cut off in order to avoid a tax? What would YOU cut off to avoid a tax?

Wednesday, April 14, 2010

First Ready Return, Next Ready Vote? 

On Saturday, April 10, several of my comments shared during an interview with reporter Julie Small were aired on National Public Radio’s Marketplace, in a discussion of California’s Ready Return program and the possibility of something very similar to it being adopted at the federal level. With April 15 just a few days away, attention turns, as it does every year, to the aggravation that filing income tax returns causes for so many people. The aggravation is rooted, of course, not in the concept of filing a return, but in the unjustifiably complicated maze of rules bestowed on the nation by a Congress more concerned with appeasing special interest groups than with crafting an income tax law that best suits the people.

The idea that the income tax would somehow become less aggravating if the government prepared returns for taxpayers is one of those “sounds good” proposals that has gathered support but that, after careful analysis, does nothing more than mask the underlying problems, making it less likely that public pressure would encourage legislatures to fix the tax law. It’s not surprising that California, which proudly or not so proudly owns the most complicated state income tax law in the country, jumped at the idea and presented the Ready Return program. Only three percent of taxpayers eligible to have the state of California prepare their return took advantage of the opportunity. Only 60,000 people out of 2,000,000 were willing to put their tax fortunes in the hands of an anonymous revenue department bureaucrat or its computer. That speaks volumes, even though Ready Return advocates dig up every excuse imaginable to explain what doesn’t really need to be explained. People often vote with their feet, or, in this case, with their pens and keyboards.

Ready Return has been the subject of more than a few MauledAgain posts. In the most recent, Federal Ready Return: Theoretically Attractive, Pragmatically Unworkable, I summarized my previous analysis:
The idea of Ready Return is one of those dangerously great-sounding ideas that just won’t hold up when closely examined.

The notion of having the IRS take an approach similar to the California “Ready Return” experiment is alarming. When the California version was instituted, I criticized it, in in Hi, I'm from the Government and I'm Here to Help You ..... Do Your Tax Return and in ReadyReturn Not a Ready Answer. In those two justifiably long analyses of the defects of the program, I pointed out that conflict of interest permeates the arrangement, noted that the track record of government employees in these sorts of situations is too far from ideal, explained how the idea opens the door to fraud, poses logistical problems, tricks millions of taxpayers into thinking that complicated tax laws are not their problem even though they continue to pose a threat to the national well-being, and puts taxpayer privacy at risk. Joined by many other critics, I tried to explain to the advocates of Ready Return why it was the typical "good idea in theory" that falls apart in the real world of tax practice. Some months later, in Ready It Was Not: The Demise of California's Government-Prepared Tax Return Experiment, I commented on the decision by the California Franchise Tax Board to terminate the Ready Return program. Yet, its opponents continued to lobby against the program, which in As Halloween Looms, Making Sure Dead Tax Ideas Stay Dead, I suggested was the consequence of a fear that it would be resurrected. And, indeed, as I discussed in Oh, No! This Tax Idea Isn't Ready for Its Coffin, I reacted to the restoration of the program, warts and all. What was particularly disturbing was the fact that state administrators restored the program even though the legislature had cut off funding and authorization.

The advocates of Ready Return, both in California and at the federal level, point to the “high praise” received from taxpayers using the program. Stross joins this chorus. But, as I pointed out, few, if any, of those taxpayers knew or know if their returns are correct. In Getting Ready for More Tax Errors of the Ominous Kind, I discussed the revelations in The Report of the Treasury Inspector General for Tax Administration, Ensuring the Quality Assurance Processes Are Consistently Followed Remains a Significant Challenge for the Volunteer Program concerning the high level of errors made by the IRS in dealing with taxpayer’s returns, computing tax, and determining refunds.

I have previously asked who audits the returns prepared by the California Department of Revenue. The Department itself? Who would audit returns prepared by the IRS? Taxpayers would end up taking these “tentative” returns to tax return preparers or using software to see what results it generated, so the alleged efficiencies of a federal “Ready Return” is another theoretical construct that falls apart when put to the test in the practical world. Only the most trusting, and naïve, of taxpayers would do anything less but prepare their own return, or pay an independent third party to do so, even if the IRS had put a proposal on the table. It’s not as though eye-balling a proposed return from the IRS is as simple as determining if the sales tax on a store receipt makes sense. The federal income tax law is way too complicated, even for the taxpayers who supposedly have “simple” returns. There is no such thing as a simple federal income tax return.
The same can be said about California’s tax returns, which might qualify as even more complicated than federal income tax returns.

The opinions I shared during the NPR interview brought one comment, from Alice Abreu, who teaches tax a few miles away at Temple University. She claims:
Jim Maule is just flat wrong in saying that ReadyReturn doesn't save people time, and the taxpayers in CA who love it are proof of that. Even if the return wasn't completely done, just having the form filled in with all of the W-2 information the government already has would be a tremendous time saver. Indeed, that is where the attention on the federal level has moved. If that information was filled in, returns could be done more quickly, and that would be a time and moneysave. Think about it: checking the information against what you have on your W-2 has to be faster than typing it in and then checking it.
Unfortunately, I must disagree with Alice. Checking to see if someone else has done something properly is never a time saver. There's a reason "it's faster if I do it myself," "it would have been faster had I done it myself," or some variant is heard so often, not only in tax return preparation but in other areas of law and life. Banking on a state or federal computer system getting it right is risky, especially when one takes into account all the information that has been released concerning the antiquated state of most government tax computing systems, programming errors, data entry errors, data transfer errors, and a variety of other glitches. Think about the error rates in advice obtained from telephone calls to the IRS. Think about all the mistakes on the information return reporting letters, which are based on the same systems that would be generating these "government prepared" tax returns.

There’s a reason that a cash-strapped government like California is so eager to prepare tax returns for taxpayers. It certainly isn’t a case of doing penance for the state having inflicted taxpayers with a patchwork income tax system that begs for true reform. Nor is it a desire to have taxpayers save money, because the response of California and the advocates of Ready Return to concerns about errors is that taxpayers are free to consult with independent tax return preparers. In other words, taxpayers would still face expenses, and even though they would be called tax return review fees rather than tax return preparation fees they still would require the taxpayer to reach into his or her pocket. So if taxpayers would be going to independent professionals, why is the state bothering to divert resources into preparing Ready Returns? The answer must be that the state is banking on taxpayers who receive a Ready Return, consider it official because it came from the government, sign it, and do nothing more. Unfortunately, there are taxpayers who will react in that manner. Whether from ignorance, laziness, unjustified trust in government, fear, confusion, or some other distraction, if enough mistakes are made on their returns and go undiscovered, the revenue flow to the state increases. The people who profess that they “love” Ready Return are saving time only because they are putting themselves at the mercy of the California state government, blindly accepting whatever they’re being told, and exposing themselves to risk if California later decides that the returns filed by the state on behalf of these folks are, in fact, erroneous. I wonder when that love will become love lost.

If a government truly cared about the mental health of its citizens during tax return preparation season, it would do the right thing and simplify the tax. For most other taxes paid by individuals, it’s much easier to notice if something is wrong. Ready Return opens the door to making these other taxes more complicated. Too much chicanery can hide behind complicated tax systems. Changes can be made that would slip by taxpayers because they’re no longer working through, or having tax professionals guide them through, what’s going on with their tax returns.

It shocks me how much confidence people have in government when it comes to having the government do a person's taxes. According to this study, "The percentage of Americans who trust the government in Washington plunged from 76 percent in 1964 to 25 percent in 1996." A May 2006 poll indicates that 63% of the people do not trust government. In California itself, according to this recent survey, 29% of those polled "say they trust the government to do what is right just about always or most of the time." And somehow it’s acceptable to put one’s tax life into the hands of government?

In a nation where governance is built on a Constitutional system of checks and balances, there is much to be said about the checks and balances arising from citizens doing their own tax returns and seeing with their own eyes what the legislative and executive branches are doing. Surrendering what is, in effect, a citizen oversight function is too dangerous a step to surrender of control and participation in governance. What’s next, Ready Vote, where the government sends a filled-in ballot to voters?

Monday, April 12, 2010

Philadelphia Real Property Tax Solutions: Land Tax? Realty Transfer Tax Credit? 

The conflict between Philadelphia’s mayor and City Council, on the one hand, and the city’s Board of Revision of Taxes, on the other, continues to escalate. According to this Philadelphia Inquirer report, the mayor already has directed his administration to take control of the BRT’s funds other than those earmarked for payroll and a bill has been introduced in City Council to reduce the pay of the BRT members. In Friday’s post, Can Bad Tax Administration Doom the Tax?, I described how the attempt to remove political patronage influence from administration of the real property tax has become a battle between the reformers and those unwilling to step aside so that competence and efficiency can take over the process. Like most battles, the highest casualty rates will be among the bystanders, in this case the tax-paying property owners of Philadelphia. But at least they should get their chance at the ballot box next month, unless somehow the BRT persuades the courts to let the BRT members continue business as usual.

The primary flow in the BRT’s administration of the property tax is its inability to assess properties in a manner that complies with state law, that generates comparable values, that is timely, and that is free of political influence and favors. On Friday, in a letter to the editor of the Inquirer, Bernard J. Nearey suggested that the solution would be a real estate tax based on the size of the lot. He argues that it would be very easy to determine the tax base for each property, and that the only reason for a BRT would be “to send a person out with a tape measure to check the size of your lot if you disputed it.” He also argues that “[t]he idea that your property-tax assessment should turn on the condition of your brickwork, your windows, or how many bathrooms you have is absurd.”

In a comment to the letter, Joshua911, despite agreeing with the idea that “buildings should not be taxed,” noted that “taxing on the size of the lot is illegal in this state and any other state” and that “[t]axes must be assessed on the value.” He points out that similarly sized lots in Francisville – a section of the city that has deteriorated – and in Society Hill – a section that is very upscale – ought not be taxed at the same amount.

Joshua911 is correct, at least to the extent he refers to Pennsylvania. I don’t know what the law in all of the other states provides, and he very well may be correct, but that doesn’t matter all that much to Philadelphia’s problems, because Philadelphia is part of Pennsylvania. Yes, it would violate Pennsylvania law to base the real property tax on the size of the lots. Aside from the legal question, and that’s a big aside, Joshua911’s point about value not correlating to size is important. Basing value on size might make for easy computations but they would be computations irrelevant to the underlying law.

On the other hand, the notion that buildings should not be taxed is much more problematic. Buildings constitute real property, and thus a real property tax must include the value of buildings, and all other items of real property. One might Mr. Nearey’s idea a step further and argue that even if the tax cannot be limited to the land, when it comes to buildings, it should be calculated based on square footage. Yet again, though, the notion that size is all that matters runs into reality. One of the most notable examples of the BRT’s failures was the absurdly low assessment on Vincent Fumo’s residence, as discussed in How to Fix a Broken Tax System: Speed It Up?. It wasn’t just a matter of Fumo’s mansion being of large size in terms of square footage. It was also a matter of the high value features included in the property.

So long as there is a real property tax, limiting the tax to land degrades the tax, and that is one of many reasons I consistently object to real property tax breaks handed out by the city to corporations. Yet, there is a movement afoot to replace the real property tax with a land value tax, as described by the Henry George Foundation that supports the idea. Though there are good arguments for shifting to a land value tax, there also are good arguments for not doing so. Should a corporation that owns a 10,000 square foot parcel in the downtown business district pay only five times the tax paid by the owner of a 2,000 square foot residential property a few blocks away? Contending that the value of the 10,000 square foot parcel would be much more than five times the value of the 2,000 square foot lot isn’t the answer, because taking into account the value of the building that is or could be built on the parcel would be bringing the value of the building into the computation in violation of the principles of a land value tax.

The underlying problem is that taxes based on value lack the precision that characterizes taxes based on sales price, number of bags of trash put out for collection, or number of axles on a vehicle. Granted, there may be other reasons to reject a particular tax that happens to be precise, but lack of precision is not one of them. The income tax suffers from this imprecision when it comes to determining income based, for example, on the value of property received as compensation, but it avoids imprecision when it measures income based on cash wages or a deduction based on the amount paid. User fees, in contrast, when properly designed, are based on the cost of the service provided by the government, and thus rest on cost accounting concepts that are more precise.

In terms of precision, the real property transfer tax is orders of magnitude better than the real property tax. The transfer tax is simply a percentage of the sales price, though when the transfer is in exchange for something other than cash, valuation problems again complicate the matter. The problem with the real property transfer tax, especially if used as a replacement for the real property tax and thus requiring much higher rates, is that it comes at one time and cuts into the net sales proceeds. It also is avoidable by those who can afford sophisticated planning advice.

So I wonder if there is some sort of compromise that can compensate for the valuation errors inherent even in a well-administered real property tax. Consider this idea. Increase the real property transfer tax rate. Then allow a credit equal to a percentage of the real property taxes paid during the ownership period of the seller and any previous owners whose transfers were not taxed when the property was transferred to the seller or the seller’s transferor, and so on. If the real property tax was too high or too low, as measured by the sales price, the credit would compensate, at least in part, for that discrepancy. Consider two property owners who own similar properties but who, as often is the case in Philadelphia, pay varying amounts of real property taxes. Assume that over a five-year period of ownership, A pays $1,000 each year and over an eight-year period of ownership B pays $3,000 each year. A and B each sell their properties, each for a sales price of $100,000. For ease of computation, assume that the transfer tax is $5,000, an amount higher than current law to allow for the credit mechanism to be an adjustment device rather than a revenue loser. For argument’s sake, let’s set the credit equal to 5 percent of the real property taxes paid by the owners. A would be entitled to a credit of $250 against the $5,000 transfer tax, whereas B would be entitled to a credit of $1,200 against the $5,000 transfer tax. It’s not a precise equalizer but it dampens the effect of assessment errors. Whether, and how, the credit should be shared between seller and buyer is open to discussion, though the better position would be to limit the credit to the seller, because the buyer’s real property tax assessment presumably would be more accurate because of the sales price information and presumed re-assessment.

Had it not been for Mr. Neary’s letter and Joshua911’s comment, I very well could have ended up not thinking about the idea of a real property transfer tax credit. For sharing their thoughts, I thank them.

Friday, April 09, 2010

Can Bad Tax Administration Doom the Tax? 

The tax world is interesting. Most of the people who are upset with the complexity of the federal income tax law, and who object to the loopholes and special interest provisions found in it, direct the bulk of their anger at the IRS. At the same time, there is a growing aggregation of individuals who object, not to the administrative agency, but to taxation itself. What harmonizes these seemingly discordant approaches is the tendency of people to lay blame in the wrong place. Congress, not the IRS, is responsible for the complexity and loophole corrosion of the federal income tax. In other instances, however, the governmental institution charged with administering a tax indeed deserves to be the object of taxpayer frustration, and yet too often the agencies deficiencies are conflated with analysis of the tax itself.

When it is time to hand out awards for Most Brazen Tax Administrative Agency, there will be more than a few people ready to nominate Philadelphia’s Board of Revision of Taxes. My commentaries on the flawed property tax assessment system go back almost ten years, beginning with An Unconstitutional Tax Assessment System, and followed by Property Tax Assessments: Really That Difficult?, Real Property Tax Assessment System: Broken and Begging for Repair, Philadelphia Real Property Taxes: Pay Up or Lose It, How to Fix a Broken Tax System: Speed It Up? , Revising the Board of Revision of Taxes, and How Can Asking Questions Improve Tax and Spending Policies?, This Just Taxes My Brain, Tax Bureaucrats Lose Work, Keep Pay, Testing Tax Bureaucrats Just Part of the Solution, A Citizen Vote on Taxes, Freezing Real Property Tax Reassessments: A Nice Idea, and The Tax Price of a Flawed Tax System. As I easily predicted in the last of those, my commentaries “momentarily” ended. The story continues.

The tale of the BRT has become one of a chess game. After City Council decided to put to the voters a proposal to replace the BRT with two separate agencies, and the Mayor persuaded the BRT to relinquish its property valuation duties and restrict itself to hearing assessment appeals, five members of the BRT sued the City, as reported in this Philadelphia Inquirer story from several weeks ago. This news broke while City Council, the Mayor, and others debate how best to deal with the city’s budget gap. Thus, I wrote:
five board members of the Bureau of Revision of Taxes have sued the City of Philadelphia in an effort to derail the reforms that are underway to give the city the opportunity to fix the real estate tax. The board is trying to remove from the May 18 primary ballot the referendum question that asks city voters to decide if the BRT should be replaced with two new entities. If the board succeeds, the current property tax inequities and inaccuracies will continue. In an atmosphere of political bickering and litigious self-interest disguised as, at best, questionable concerns, what are the chances that the city can fix its tax system so that mayors and city councils need not dabble in soda taxes?

Ideally, the city would fix its property tax system, and then adjust rates as part of the process of balancing a budget. However, so much time was lost with political nonsense while attempts were being made to fix the property tax system that the city has run out of time. Its choices are terrible. Either it magnifies the shortcomings of the real property tax system, or it turns to an unwise, administratively inefficient, and possibly legally flawed tax on sugared beverages. It faces this brutal choice thanks to decades of political patronage run amok. Ultimately, failure to design and properly maintain one tax system has opened the door to another that might be impossible to design and maintain, properly or otherwise. Other jurisdictions, including the federal government, ought to heed this lesson, because the tax price of a flawed tax system is orders of magnitude higher than the cost of fixing the flawed system before it fails.
It’s no wonder that objections to raising the real property tax rate as an alternative to other proposals, such as the soda tax, the trash pick-up fee, and changes in the business privilege tax, on which I commented a few days ago in Don’t Like This Tax? How About That Tax?. Why expand something that isn’t working well? The city is between a rock and a hard place, and in no small measure due to the antics of the BRT.

Not satisfied with suing the city to prevent the reform plans from moving forward, the BRT chose to let its agreement with the Mayor to relinquish its property valuation duties expire. According to this story, in what was described as a “surprise,” the BRT decided to take back control of the property assessment process, while continuing to hear assessment appeals. The Mayor’s office claims that there had been a “verbal agreement to extend the memorandum of understanding” that had been signed six months ago. From the Mayor’s perspective, the BRT members acted to preserve the $70,000 salaries they receive for their part-time jobs. This is where the chess game analogy provides some guidance. It has been suggested that if the BRT continued to acquiesce in letting Richard Negrin, a mayoral appointee, run the assessment process, it would weaken its position in the lawsuit, because entering into and continuing to abide by the memorandum of understanding would make it easier for the city to argue that the BRT should be estopped from arguing that its existence is essential to administration of the property tax system, and from arguing that the city has no power to interfere with the BRT. But even if the BRT loses its lawsuit, until the reforms are approved by voters and put into place, the BRT could cause all sorts of problems. For example, it could reverse the freeze on property assessments that Negrin had declared shortly after taking over supervision of the assessment process. The BRT, however, seems unfazed by the fact that the judge who is involved in appointing people to the board, and the City Council member who is leading the effort to increase property taxes in lieu of trash pick-up fees, both roundly criticized its decision. It also appears that, because Negrin chose not to continue supervising day-to-day operations considering the BRT’s action, the BRT has no one exercising managerial control over its employees. Negrin noted that the BRT’s action undercut the progress he had made in getting BRT employees to “embrace” the change he was trying to bring to the “culture and performance of the agency.” According to Negrin, the BRT is “paralyzed now.”

Of course, these antics by the BRT brought a response from the mayor. According to a Philadelphia Inquirer story two days ago, the mayor announced that “he and City Council would immediately attempt to slash their salaries and seize control of their budgeting authority.” That the mayor is angry is apparent from his choice of words. He called the BRT “a rogue board,” and likened them to “pirates.” Claiming that the BRT “appears to be out of control,” and that it is exhibiting “behavior [that ] is bizarre, … irresponsible, … irrational,” and that “undermines our reform efforts,” the mayor is requesting that those $70,000 salaries be reduced to the state law minimum of $18,000. The mayor has other plans, which he did not disclose, to try to convince the BRT to renew the memorandum of understanding. The member of City Council who sponsored the legislation that put the BRT’s future in the hands of the voters has promised to “assist the mayor in reminding [the BRT] that it is City Council and the mayor that make the rules, and the BRT that follows them.”

When a tax agency behaves as does the BRT, not only butchering its responsibilities to assess properties fairly and sensibly, but also plays all sorts of games trying to hang onto power that arises from political patronage, it is difficult for those who defend the existence of taxes to justify calls for compliance when the administrative agency performs and behaves so badly. This is an instance where, however one views the property tax in terms of where it fits on the spectrum of efficient and fair taxation, the flaws arise from the BRT’s inability and refusal to do what the law commands it to do. The backlash among voters against the BRT can too easily become a backlash against taxation. Though the mayor and City Council finally are dealing with the problem, it comes very late in the game, decades and decades after the seeds of inefficiency, irregularities, and incompetence were sown. Legislatures not only need to produce tax laws that are efficient and fair, they also need to set up tax administration that is efficient and fair. One without the other is a recipe for disaster. Just as a bad tax can doom administration of the tax, bad tax administration can doom a tax. Philadelphia has become an object lesson for this proposition.

Wednesday, April 07, 2010

Don’t Like This Tax? How About That Tax? 

Philadelphia’s struggles with finding the best way to raise revenue have become even more complicated as another possibility has been tossed onto the table. Several weeks ago, in Picking a Tax Not So Easy, I described the challenges raised by a City Council member’s proposal to raise property taxes rather than enact the so-called soda tax and the proposed trash pick-up fee. Now, according to this Philadelphia Inquirer report, two other City Council members floated a proposal to revamp the city’s business privilege tax. Details are scant, so it’s unclear precisely what the proponents plan to suggest.

The business privilege tax is a strange sort of tax, unfamiliar to most taxpayers other than those doing business in Philadelphia or any other location that has a similar or identical levy. One must wonder, with cities like Philadelphia trumpeting the need to encourage businesses to locate within their boundaries because they bring jobs, why a government would tax a business for the “privilege” of bringing to the government what the government wants and needs. The business privilege tax, at least in Philadelphia, is computed in a manner that suggest the business is being charged for the opportunity regardless of how it turns out. The Philadelphia business privilege tax equals the sum of two amounts. The first equals 0.14 percent of gross receipts. The second equals 6.45 percent of profits. Thus, a business that fails to make money nonetheless is taxed. A business with high gross receipts and high cost of goods sold, thus incurring a low gross profit percentage and profits that are a small fraction of sales, pays a disproportionately higher tax, when compared to profits, than does a business with a high profit margin. For example, a grocery store that has $100 of sales receipts, $95 of cost of goods sold, and $4 of operating expenses, thus making $1 of profit, would pay a business privilege tax of 20.45 cents (0.14 percent of $100 plus 6.45 percent of $1). A law firm with $100 of sales receipts and $60 of operating expenses, would pay a business privilege tax of $2.72 (0.14 percent of $100 plus 6.45 percent of $40). As a percentage of profits, the grocery store’s business privilege tax is 20.45 percent (20.45 cents out of the $1 profit). For the law firm, it is 6.8 percent ($2.72 out of $40). Something’s not quite right when the business with 40 times as much profit pays at a rate that is less than 1/3 the rate paid by the other business. Is it any wonder there are few grocery or similar stores in Philadelphia?

The proposal to change the business privilege tax is to repeal the net income component and to increase the gross receipts component. Though it’s unclear by how much the gross receipts percentage would need to be raised to offset the loss of the business profits component and to raise the additional revenue that the city needs, let’s take a wild guess and assume it would need to be raised to 1 percent. What does that do to the grocery store and the law firm? Both would face a tax of $1. For the law firm, this would reduce its business profits tax from $2.72 to $1, and reduce the tax as a percentage of its $40 profit from 6.8 percent to 2.5 percent. For the grocery store, it would increase its business profits tax from 14 cents to $1, and would increase the tax as a percentage of its $1 profit from 20.45 percent to 100 percent. The proposed change would drive every business with a low gross profit margin out of the city. I wonder what that would do to tax revenue.

Conventional wisdom, we are told, is that the gross receipts component of the business privilege tax curtails or eliminates job creation. Of course it does, because when those low-gross-profit-margin enterprises leave, they take their jobs with them. The City Council members advocating the change claim that their idea would “help small businesses, since the majority of their tax liability is on the net-income side.” If by small business, they mean those with low levels of sales, but high profit margins, they may be correct. I wonder, though, how many businesses with low levels of sales, particularly during this economic downturn, have high profit margins. I suspect that the businesses standing to gain from the proposal are those with very high net profit margins, many of which are unlikely to be found among small businesses.

All of this may be moot, because it would be a major challenge to rewrite the business privilege tax law in time for adoption of a budget. That obstacle, though, assumes a budget adopted in time. One must also wonder whether that will come to pass.

Every proposal that has been advanced has been criticized, opposed, and attacked by one or more constituencies, organizations, special interest groups, or commentators. The soda tax proposal has been ripped apart by almost everyone despite a few supporters hanging on to the idea. I joined in lambasting the idea, both on this blog, in Yes for The Proposed User Fee, No for the Proposed Tax, and in a Philadelphia Inquirer editorial. Administration of Philadelphia’s property tax, including property valuation, is in such disarray that even those who propose raising the property tax rate concede that it’s a far from ideal solution. The trash pick-up fee, which I endorsed in Yes for The Proposed User Fee, No for the Proposed Tax, has just about no support in City Council, even though a few people continue to explain the economic, environmental, and political benefits of a per-bag user fee.

If nothing else, perhaps Philadelphia could invite economists, college students, people living in other parts of the nation, members of Congress, tax lawyers, lobbyists, and anyone else interested in, or having a need to learn about, tax policy to come watch City Council debate the revenue issue. Perhaps City Council could charge an admission fee. At $10, it would be worth it for attendees, for it would provide an insight into tax policy development in a real world setting rather than in an isolated and theoretical think tank seminar room. To make it worthwhile for the city, the focus would need to be on high volume attendance, not unlike how those grocery stores and similar establishments try to make money when the gross profit percentage is so low. The odds of City Council going this route are lower than those low gross profit percentages. The odds of City Council coming up with a tax or fee, or some combination, that does not upset a majority of the city’s population, are even lower. Zero, perhaps.

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