Friday, March 29, 2019

If Sugar Is Bad And Is Going To Be Taxed, Tax Everything That Contains Sugar 

The debate about the soda tax shows no sign of easing up. I have commented many times on the soda tax, including posts such as What Sort of Tax?, The Return of the Soda Tax Proposal, Tax As a Hate Crime?, Yes for The Proposed User Fee, No for the Proposed Tax, Philadelphia Soda Tax Proposal Shelved, But Will It Return?, Taxing Symptoms Rather Than Problems, It’s Back! The Philadelphia Soda Tax Proposal Returns, The Broccoli and Brussel Sprouts of Taxation, The Realities of the Soda Tax Policy Debate, Soda Sales Shifting?, Taxes, Consumption, Soda, and Obesity, Is the Soda Tax a Revenue Grab or a Worthwhile Health Benefit?, Philadelphia’s Latest Soda Tax Proposal: Health or Revenue?, What Gets Taxed If the Goal Is Health Improvement?, The Russian Sugar and Fat Tax Proposal: Smarter, More Sensible, or Just a Need for More Revenue, Soda Tax Debate Bubbles Up, Can Mischaracterizing an Undesired Tax Backfire?, The Soda Tax Flaw in Automotive Terms, Taxing the Container Instead of the Sugary Beverage: Looking for Revenue in All the Wrong Places, Bait-and-Switch “Sugary Beverage Tax” Tactics, How Unsweet a Tax, When Tax Is Bizarre: Milk Becomes Soda, Gambling With Tax Revenue, Updating Two Tax Cases, When Tax Revenues Are Better Than Expected But Less Than Required, The Imperfections of the Philadelphia Soda Tax, When Tax Revenues Continue to Be Less Than Required, How Much of a Victory for Philadelphia is Its Soda Tax Win in Commonwealth Court?, Is the Soda Tax and Ice Tax?, Putting Funding Burdens on Those Who Pay the Soda Tax, Imagine a Soda Tax Turned into a Health Tax, Another Weak Defense of the Soda Tax, Unintended Consequences in the Soda Tax World, Was the Philadelphia Soda Tax the Product of Revenge?, Did a Revenge Mistake Alter Tax History?, and What’s More Effective? Taxing and Restricting Soda or Educating People About Healthy Lifestyles?.

A few days ago, as reported in this Philadelphia Inquirer article, among others, the American Academy of Pediatrics issued a statement in which it identified “sugar consumption among children and adolescents as a “grave health threat.” My guess is that no mention was made of sugar consumption by adults because adults are not the focus of pediatricians. The Academy also encouraged legislatures to “consider taxes on sugary drinks as a way to reduce consumption.” It praised the Philadelphia soda tax not only because it taxes beverages but also because of the use to which the revenue is put. Yet the statement noted that, “If the tax revenue is allocated to decrease health disparities or provide other services that promote health in these specific groups, the tax ultimately may be progressive.”

There are three aspects of the Academy’s statement that are troublesome. In all fairness, the Academy is not alone in taking illogical positions with respect to the soda tax debate.

If the concern is sugar consumption, then the tax should be on sugar consumption and not just on some items that contain sugar. Though it is true that soda consumption accounts for a substantial source of sugar, the sugar in pies, cookies, cakes, ice cream, candy, and a long list of other foodstuffs is just as dangerous as is the sugar in soda. Worse, as has been pointed out time and again, the Philadelphia sugar tax applies to items that are not a health threat and even essential to good health. Logically, a tax on sugar is different from, and needs to extend beyond, soda.

Using soda tax or sugar tax revenue to educate people about good nutrition and to “decrease health disparities” makes sense. It is consistent with treating a soda tax or sugar tax as a type of user fee. Using soda tax revenue to fund programs that are not connected to these goals is just another example of finding revenue by focusing on the easiest items to tax.

If the concern is about the health of children, to say nothing of people generally, then the focus on sugar distracts from, and even implies acceptance of, the consumption of other items that are unhealthy. Substituting water or vegetable juice for soda in a meal filled with fried foods, red meat, pesticide-infested foods, and all sorts of non-beverage desserts might reduce some health problems in some people, but doesn’t make much of a dent in the obesity and other health epidemics afflicting the nation. There are many people who suffer serious health problems but who don’t, and for years and decades haven’t, consumed soda and other sugary beverages. Fixing nutrition issues requires more than slapping a tax on certain beverages. If the tax were applied more broadly, to all foods and beverages that contribute to health problems, the impact on any particular item would be much lower and less likely to generate opposition.

Wednesday, March 27, 2019

Revenue Problems With A User Fee Solution Crying for Attention 

Sometimes timing is serendipitous. A few days ago, two articles appeared, both dealing with the same highway funding issue, one involving the use of federal fuel tax revenues and the other involving the use of Pennsylvania Turnpike tolls.

The first article, a Bloomberg report behind a paywall, describes opposition to the use of federal fuel tax revenue to fund public transit and other projects that are not highway repairs or maintenance. How much of the federal fuel tax revenue goes to public transit? A mere 15 percent* of gasoline tax revenue and 12 percent* of diesel tax revenue, but that’s enough to stir up objections. Another one-half of one percent* goes to the Leaking Underground Storage Trust Fund. Members of Congress from rural areas ask why their constituents should fund transit in urban areas. One member who asked this question represents a district that did, in fact, receive more than a million dollars of federal fuel tax revenue to fund local transit. A senior fellow at the Competitive Enterprise Institute claims that funneling funds to public transit causes overbuilding of transit systems, a claim that would surprise people crammed into subway cars or begging for rail lines to be expanded to more distant suburbs. A retired member of Congress, who once chaired the committee charged with overseeing transportation funding, explained that rural areas receive $1.70 for every $1 that their residents pay in federal fuel taxes. That’s so similar to the reality that those who complain the most about federal income taxes live in areas that get back more than they pay in federal income taxes. Don’t let facts get in the way of emotions. Yet another reality is that transit reduces congestion and pollution. And the cleaner air benefits not only those who live where transit is operating, but also those downwind of those areas, which is pretty much the entire country considering that the prevailing winds move from west to east.

On the other hand, putting fuel tax revenues into projects that are not connected in some way with highway use makes no sense and is inconsistent with the nature of a user fee. Should those revenues fund transportation museums? No, the museums need to rely on admission fees, sales of souvenirs, and contributions. Yet some fuel tax revenue has been used for museums. Should fuel tax revenues be used for historic preservation? Only if what is being preserved is a bridge or tunnel or other historic transportation facility that is in use.

The second article, a Philadelphia Inquirer report behind a paywall except for a limited number of free accesses, explores the diversion of Pennsylvania Turnpike toll revenue to other uses. This is a serious issue because the Turnpike Authority is on the verge of “financial collapse.” A significant amount of Turnpike tolls are channeled to repair and maintenance of toll-free roads throughout the state. How did this happen? More than a decade ago, in an effort to deal with the bad condition of I-80, which gets heavy east-west truck use as an alternative to the Turnpike, the legislature proposed using Turnpike funds to repair I-80 and to reimburse the Turnpike with funds raised by making I-80 a toll road. However, federal authorities blocked the imposition of tolls on I-80. That is one reason Turnpike tolls have been increased each year for the past 10 years, after a long period of occasional toll increases. Turnpike tolls also are channeled to public transit, raising the same sort of debate, objections, and responses as have been ongoing with respect to federal fuel tax revenue use. Litigation is underway, filed by an interstate trucking group who object to paying tolls for anything other than Turnpike maintenance. To the extent that public transit in Pennsylvania urban, suburban, and even rural areas removes traffic from the Turnpike, the plaintiffs in the litigation benefit from less congestion. The question is how to measure that benefit in dollar terms. But why should Turnpike users pay for the maintenance of toll-free highways that they are not using?

So what’s the solution? Readers of this blog know what my answer is. I have explained, defended, and advocated for the mileage-based road fees for many years, in posts such as Tax Meets Technology on the Road, Mileage-Based Road Fees, Again, Mileage-Based Road Fees, Yet Again, Change, Tax, Mileage-Based Road Fees, and Secrecy, Pennsylvania State Gasoline Tax Increase: The Last Hurrah?, Making Progress with Mileage-Based Road Fees, Mileage-Based Road Fees Gain More Traction, Looking More Closely at Mileage-Based Road Fees, The Mileage-Based Road Fee Lives On, Is the Mileage-Based Road Fee So Terrible?, Defending the Mileage-Based Road Fee, Liquid Fuels Tax Increases on the Table, Searching For What Already Has Been Found, Tax Style, Highways Are Not Free, Mileage-Based Road Fees: Privatization and Privacy, Is the Mileage-Based Road Fee a Threat to Privacy?, So Who Should Pay for Roads?, Between Theory and Reality is the (Tax) Test, Mileage-Based Road Fee Inching Ahead, Rebutting Arguments Against Mileage-Based Road Fees, On the Mileage-Based Road Fee Highway: Young at (Tax) Heart?, To Test The Mileage-Based Road Fee, There Needs to Be a Test, What Sort of Tax or Fee Will Hawaii Use to Fix Its Highways?, And Now It’s California Facing the Road Funding Tax Issues, If Users Don’t Pay, Who Should?, Taking Responsibility for Funding Highways, Should Tax Increases Reflect Populist Sentiment?, When It Comes to the Mileage-Based Road Fee, Try It, You’ll Like It, Mileage-Based Road Fees: A Positive Trend?, Understanding the Mileage-Based Road Fee, Tax Opposition: A Costly Road to Follow, Progress on the Mileage-Based Road Fee Front?, and Mileage-Based Road Fee Enters Illinois Gubernatorial Campaign. When a reader asked how my support for the mileage-based road fee fit with my preference for a progressive income tax, I answered that question in Is a User-Fee-Based System Incompatible With Progressive Income Taxation?. Why are legislators so reluctant to acknowledge that they have been living in the twenty-first century for two decades and that it’s time to use twenty-first century solutions? Will legislatures act before it is too late?

*Edit (2 April 2019): A reader pointed out that I had misread "cent" for "percent" in the paragraph of the article describing the disposition of the tax revenues. The shift in the article from percent to cents within the same paragraph was not something I expected nor noticed.

Monday, March 25, 2019

An Alternative to Using Tax Law for Non-Tax Purposes 

Readers of MauledAgain know that I am not a fan of using federal tax law to encourage or discourage particular behavior. If Congress wants to influence people’s decisions through monetary benefits, it ought to permit the relevant agency to design the details of a program and to issue checks or make electronic transfers. Yet Congress too often puts the benefit in the form of a tax credit, requiring the IRS to become an expert in things such as alternative fuels, higher education, electric vehicles, orphan drugs, and dozens of other products and services. My guess is that the Congress trusts the IRS more than most of the other agencies, though its members are reluctant to admit this publicly.

Now comes news that the Bureau of Land Management plans to pay $1,000, in two installments, directly to anyone who adopts a wild horse or burro. This initiative is designed to deal with the ever-growing numbers of wild horses and burros, which requires the Bureau to spend money caring for them. They are removed from open ranges and corralled because the ecosystems of the ranges are destroyed if the size of the herds grows too large.

One question that pops into mind is whether the adopter has gross income equal to the fair market value of the animal. I tried to research the value of a wild horse or burro, but the best I could do was to discover some people claiming that the value is negative because the horses and burros impose a monetary burden on the federal and state agencies gathering and fencing the horses, who require food and other care.

Another question that pops into mind is whether the $1,000 is gross income. If the $1,000 is provided as a tax credit, it reduces tax liability without generating gross income. Yet despite this difference, it is simply a matter of arithmetic to determine the equivalence. For example, the tax credit equivalent of a $1,000 gross income payment would be on the order of $750 (though it would be different for each taxpayer). Put another way, a $1,000 item of gross income generates, on average, $250 of tax liability, and thus nets the taxpayer $750. A $750 tax credit would do the same thing. In some respects, though, treating the payment as gross income (and increasing it to account for tax liability, which perhaps the Bureau of Land Management has done) is more exact, because it permits the tax impact to reflect the particular tax position of the recipient.

It is likely that the IRS is delighted that it will not need to add wild horses and burros to the list of non-tax items in which it must develop and maintain expertise. And surely taxpayers and tax return preparers are happy that there will not be a Credit for Adopting Wild Horses and Burros form to add to the ever-growing pile of tax forms.

Don’t get me wrong. Surely the adoption program is necessary for the well-being of the horses and burros and the ecosystems of the open ranges. But it is refreshing to see the program administered by the agency with expertise in the matter and not dumped on the IRS.

Friday, March 22, 2019

A Tax Break That Pays For Itself? 

On several occasions, I have written about wealthy individuals and corporations that line up for financial assistance. A profitable business conjures up arguments for why the public should contribute to an increase in its profits. The sales pitch is a claim that the business benefits the public at large. Omitted from the discussion is the admission that if and when the public benefits the public will patronize the business and generate revenue for the business through cumulative individual decisions rather than through political shenanigans that force all taxpayers to underwrite a business than a majority do not want to support. I wrote about this scheme 15 years ago in Tax Revenues and D.C. Baseball, seven years ago in Putting Tax Money Where the Tax Mouth Is, Taking Tax Money Without Giving Back: Another Reality, and Public Financing of Private Sports Enterprises: Good for the Private, Bad for the Public, four years ago in Taking and Giving Back, three years ago in If You Want a Professional Sports Team, Pay For It Yourselves; Don’t Grab Tax Dollars, and six months ago in More Tax Breaks for Those Who Don’t Need Them.

Now comes news that the developers of an arena to be used by a new National Hockey League franchise in Seattle are about to be the beneficiaries of legislation that permits them to defer almost $100 million in taxes. The bill has passed the Washington House and has been sent to the Washington Senate. At first glance, it appears that if payment of taxes owed on the project is delayed, taxpayers, through higher taxes or increased public debt, are paying the price for that tax break for the duration of the deferral. But according to this story, interest will be paid on the amount of taxes that are being deferred. In other words, the transaction in substance appears to be a loan.

When groundbreaking took place late last year, as described in this report, the developers’ CEO stated, “We’re doing this without the taxpayers having to pay for it.” Is he correct? The answer depends on the interest rate. If the interest rate is market competitive, then he is correct. If the interest rate is less than the market rate, then he is incorrect. According to the legislation, the interest rate must be the rate imposed on delinquent tax payments. Those rates rarely are less than what banks would charge. So one question that I’d like to have someone answer is, why not borrow the money from a bank?

According to this story, there have been previous instances of tax payments being deferred for developers and of other projects, including Boeing, Amazon, CenturyLink Field, and what is now T-Mobile Park. Why did these cash-rich, income-rich, asset-rich owners, entrepreneurs, and developers need tax relief? At least some of the businesses getting these deferrals have paid back some or all of the tax amounts involved. Yet according to an official for the Washington State Public Facilities, which engineered the deferral for what is now T-Mobile Park, the payments of the deferred taxes were made without interest. That’s an instance of tax burden shifting, because the deferral requires either higher taxes on other taxpayers to make up the revenue, or an increase in public debt, or both, to provide for the interest that should be paid.

Perhaps the deal in Seattle for the new NHL arena will become a template for future transactions of this sort. Why developers and owners would be willing to pay the higher interest rate imposed on delinquent taxes rather than borrow from a bank is puzzling, but there probably is some other issue, such as debt load, credit rating, banking regulations, or contractual restrictions. Time will tell.

Wednesday, March 20, 2019

When Partisan Nonsense Muddles the Tax Debate 

Several days ago, a tax-related meme popped up on facebook. I did a bit of research and found it on several web sites, including this one. The meme claims that, “Democrats hate poor people. Michigan’s new Governor Whitmer, a Democrat, is TRIPLING the state’s gas tax, making it the highest gas tax in the United States. This will cost Michiganders $600 -1,200 more per year. This is what we get within the first 6 weeks of a Democrat back in power here.” There follow three sad face emoticons.

I posed the following question to one of the persons who had shared the meme: “So what's your solution to the need to repair and maintain roads and highways? Tolls? (Also regressive) Privatization with even higher tolls (every such attempt in the USA failed, with governments having to take back responsibility for the roads, especially as those private companies are based in Europe)? Higher income taxes on wealthier people so that the "poor people" don't pay additional gasoline taxes? My idea, supported by a number of advocacy groups, is a road use fee based on miles driven and weight of vehicle (heavier vehicles do more damage), and though several states are experimenting with it, it meets much opposition. Note that I am a supporter of use taxes.”

I also noted that, “As for the proposed increase, the governor cannot triple or double or do anything with the tax. It's up to the legislature of Michigan. And the proposal isn't hers, it comes from a bipartisan group: https://www.bridgemi.com/.../bipartisan-ex-legislators...

Finally, dishing out some logic, I explained, “And for a 50 cent per gallon increase to generate another $600 of annual taxes, the person must purchase 1,200 gallons of gasoline. A 25 mpg vehicle needs to go 30,000 miles to use 1,200 gallons. Most people don't drive that much. And as for the $1,200 claim, that's 60,000 miles per year of driving. Very few people do that. It's unfortunate that exaggeration about numbers and claims about non-existing gubernatorial powers befogs the issues. I've been dealing with this for decades as I watch and participate in tax issues.”

And as for proposed increase, I added, “It is 45 cents. But even 50 cents is not a tripling.” As noted in the State Tax Handbook, Michigan’s current gasoline tax is 19 cents per gallon, plus, per the same source, a 6 percent sales tax, which at present adds roughly 10 cents to the tax imposed on gasoline (whereas most states have higher gasoline taxes but don’t impose the sales tax) . Triple 29 cents is 87 cents. An increase of 45 cents doesn’t bring the tax to 87 cents.

What is most disturbing about this meme is that it shifts what should be debate over the appropriate means to fund highway maintenance and repairs to what has become an increasingly frequent and increasingly disruptive focus on political identity, coupled with a pitiful lack of knowledge about how laws are enacted and inability to do simple arithmetic. The combination of ignorance and partisanship is lethal. If left unchecked, it will culminate in global ruin. Not only is education about civics required to stem the ignorance, lessons in civility and logic are necessary to push people away from the “us and them” mentality being marketed throughout the planet by those who benefit from fracturing the human family.

What is almost as disturbing is the reluctance of the meme’s author to include his or her name for attribution. Why publish the nonsense anonymously? The reasons include fear of retribution and criticism, knowledge that the meme is false and dangerously misleading, awareness that linking this propaganda with an identified person would enhance the fear of retribution and criticism to include public shaming or worse, and avoidance of identifying who might be behind the anonymous author.

What also is almost as disturbing is the willingness of people to knee-jerk republication of the nonsense, without stopping to consider whether it is true, accurate, or sensible. Devoid of critical thinking skills, a significant subset of people function as limbic automatons, blindly following the emotional appeals of the manipulators. Considering that this meme was limited to a tax issue and a slightly broader civics issue, one can only imagine the disruption and danger posed by these sorts of rabble-rousing claims being made with respect to all of the other issues getting attention these days. Until and unless the vast majority of people get their critical thinking abilities re-energized, the spiral into authoritarianism and socio-economic collapse will accelerate.

Monday, March 18, 2019

What The Wealthy Can Do With Tax Breaks: A New Form of Trickle-Down? 

In recent days, news of the college admission scandal has been difficult to miss, no matter where a person looks for news. Tales of bribes, fake photographs, and other criminal activity and other unsavory behavior. The people who engaged in this behavior weren’t low or middle income workers struggling to find ways to finance their children’s education. The people buying admission for their children were wealthy, and in some instances very wealthy. One of the many reports about this story that seem to be everywhere one turns is this one from Forbes.

The details are disappointing for a nation that claims to offer opportunity for all and to have disdained the rule of George III and his wealthy aristocrats. Wealthy parents, concerned or keenly aware that their children would not or could not obtain admission to top colleges, paid William Rick Singer to help them create fake admission examination scores, and to provide fake student-athlete identities for their children, few of whom were close to having college-level athletic skills. Unsatisfied with this con game, these folks with money to spare for financing unwarranted college admissions decided to create, or to accept Singer’s offer to create, fraudulent tax deductions for the amounts they shelled out. Singer created an organization, made it appear to be a qualified charity, and had the organization issue receipts that included, among other lies, the statement that the payments were not in exchange for goods or services.

The list of those charged provides a glimpse into the membership lists of the wealthy as well as a peek at those not so economically well off who succumbed to money temptation. The latter group includes coaches and athletic directors at various universities and officials of testing agencies. The wealthy parents include CEOs and other top corporate executives, entrepreneurs, a lawyer at a top New York City law firm, Hollywood celebrities, private equity firm owners and executives, Wall Street financial tycoons, and a dental school professor. These people paid as much as $75,000 for a fake test result, and amounts exceeding $1 million to portray their child as someone the child wasn’t. When Singer got wind of the investigation into the scheme, he alerted some of the parents and encouraged them to “take steps to thwart its progress.”

Though some might want to toss this aside as an aberration, I think it is the tip of the iceberg. Not only is it possible that this particular investigation will cast an even wider net, it is not unlikely that there are other advantages that people rolling in money have purchased for themselves, their families, and their friends that should not be the subject of purchase. How many wealthy have bought their way out of criminal charges? How many wealthy have purchased votes in Congress? How many wealthy have bought favorable rulings from government agencies?

Over the years, as I listened to the wealthy scream for more and more tax breaks, tossing out unfulfilled promises of job creation, I wondered why someone drowning in money needed more. Even eating high priced food, how much can a person eat? What does one need with another 100,000 square feet of residence other than to show off? How many $10,000 suits can a person wear? It dawned on me that some sort of addiction probably is at work. So I concluded that perhaps the wealthy simply want more money for the sake of having more money. And of course I knew that some wealthy individuals were, in fact, buying “favors” and votes from politicians. But now it appears that having money to spare to pay for unmerited advantages is something that drowning in money permits someone to do. These aren’t the actions of the poor and the struggling middle class. No wonder the wealthy want more tax cuts.

On top of this criminal activity, these wrongdoers claimed tax deductions. Disguising a bribe as a charitable contribution deduction is flat out fraudulent. Misuse of wealth is far more likely when there is excess wealth than when what little money a person has must be used for food, shelter, clothing, and medical care. Wealth and income inequality not only fuels wealth misuse, it strengthens the temptation for those much lower on the economic scale to accept bribes from the wealthy. Most of those coaches and test officials surely were nowhere near the bribe makers when it comes to income and wealth. This is not how wealth should trickle down. The solution, of course, is to restore the progressive income tax system the dismantling of which initiated the downward economic spiral into which the nation has tumbled.

When U.S. Attorney Andrew Lelling declared, “There will not be a separate admissions system for the wealthy, and there will not be a separate criminal justice system either,” one needs to hope that the convictions will be followed by sentences that are no less severe than those imposed on poor people who are sent to prison for offering a police officer a few bucks in an attempt to avoid a traffic ticket. This nation does have a separate criminal justice system for the wealthy, as the Paul Manafort sentences demonstrate. For whatever damage is being done by petty criminals, street killers, and bank robbers, the damage being done by the oligarchy poses much more of a risk to this nation’s survival as a democratic republic.

Friday, March 15, 2019

What To Do With Excess Tax Revenue 

Though it doesn’t happen all that often, sometimes tax revenue dedicated to specified purposes exceeds projections and exceeds the cost of the specified purposes. According to this article, the city of Steamboat Springs, Colorado, is facing this issue.

The tax in question is an accommodations tax. When enacted pursuant to a ballot initiative in 1986, the revenue from the tax was to be used for "improvements and amenities in Steamboat Springs, which will promote tourism and enhance the vitality of Steamboat Springs." After using the revenue for several projects, including a music tent, a tennis center, and improvements to a golf course, a committee was formed to advise the city on how to use future revenues. Two projects, one to make improvements to one street’s neighborhood in the city and the other to improve and expand trails, were put on a ballot initiative and were approved by voters, with a ten-year expiration date. Under the initiative, $660,000 of tax revenue was allocated to the two projects. That amount on the ballot reflected the lowest amount of revenue that had been collected annually over the years, a year during which the economy was in recession. Now the city is collecting more than $1 million in revenue from the tax.

So the City Council needs to decide what to do with the more than $500,000 that exceeds the $660,000 of revenue designated for trails (the neighborhood project having been completed). In the meantime, some of the excess funds have been used for projects that were not on the voter-approved ballot initiative. Accumulated remaining funds are close to $1.2 million. Council is considering allocating the funds beyond tourist-related projects, letting voters add tourist-related projects to the list of approved expenditures, making their own decision about that list, setting up a committee, or finding some other way to decide how to spend the money.

I have a suggestion. Reduce the accommodations tax rate so that the amount of revenue is reduced to what is needed. Set a variable rate so that no less than $660,000 is raised each year. There is no reason to feel bound to spend every dollar of revenue that is collected.

Wednesday, March 13, 2019

Effective Tax Rate: It’s What Matters 

Recently I was talking with someone about the person’s tax return. The person was trying to compare their 2017 tax situation with their 2018 situation. Because income had changed, it was not enough simply to compare total tax liability. Instead, what mattered was the person’s effective tax rate in each year. What’s an effective rate? It’s the total tax liability divided by total income.

So it was more than interesting to read a Philadelphia Inquirer article by Joel Naroff, in which he commented on a study by the Institute on Taxation and Economic Policy (ITEP). Setting up his observations, Naroff shared some background, which those familiar with taxation already know but which is important for those just getting started with tax analysis to understand. He explained that there are all sorts of state and local taxes, including income, property, and sales. He explained the different between progressive taxation, in which rates increase as income increases, and regressive taxation, in which rates decrease as income increases. He observed that creating a “fair” tax system is difficult because different families, or individuals, are affected differently and thus view their tax burdens differently depending on their own particular circumstances.

Naroff put his commentary in the context of the phrases “high tax state” and “low tax state.” The ITEP study focused on state and local taxes. Looking at the nation as a whole, the lowest 20 percent income group faced an 11.4 percent state and local effective tax rate. The top one percent’s state and local effective tax rate was only 7.4 percent. To anyone familiar with state and local taxation, the study’s conclusion that state and local taxes are regressive is not a surprise.

Because he was writing for a Philadelphia area newspaper, Naroff looked more closely at the situation in the three states parts of which are in the Philadelphia metropolitan area. Pennsylvania, considered to be a “low tax” state by many, has its lowest 20 percent income group facing a state and local effective tax rate of 13.8 percent, above the national average, and its top one percent facing a state and local effective tax rate of 6 percent, below the national average. Delaware has its lowest 20 percent income group facing a state and local effective tax rate of 5.5 percent, and its top one percent facing a state and local effective tax rate of 6.5 percent. New Jersey, considered to be a “high tax” state by many, has its lowest 20 percent income group facing a state and local effective tax rate of 8.7 percent, below the national average, and its top one percent facing a state and local effective tax rate of 9.8 percent.

It turns out that most of the states considered to be “high tax” states have “modestly regressive state and local taxes” whereas two of the states considered to be “low tax” states, Florida and Texas, are among the states with the most regressive taxes. The lowest 20 percent income group in Texas faces a state and local effective tax rate of 13 percent, and in Florida, it’s 12.7 percent. So, in other words, the top one percent have a very different sense of which states are “high tax” and “low tax,” and unfortunately, not only does the perception of the very wealthy end up as the perceived characteristic generally, it also causes people taxed at low rates in what the wealthy consider to be a “high tax” state to conclude that their tax burden is high, while people in lower income brackets who think they would face lower taxes if they move to a “low tax” state end up, if they do move, being taxed more steeply than they were in the state they departed.

But what caught my eye, and should worry any American concerned about their own economic future, was this point. As Naroff puts it, “Finally, there is one result that should open the eyes of all middle-income households. In all but four states, the middle 60 percent pay higher effective tax rates than upper-income households.” Of course, those who have been paying attention know that for all the hype about the top federal income rate, when it comes to federal income tax effective rates, the secretaries are facing a higher rate than are the oligarchs.

Naroff concludes, “I suspect if that result were known, there just might be a national movement to change the way services are funded and taxes are collected at state and local levels.” Indeed. And it also would address the way services are funded and taxes are collected at the federal level.

There is a meme that has been floating around for some years now in various forms. The gist of the message is simple. The rich have convinced the middle class that the poor are the reason that the middle class is suffering. It ought to be clear from the ITEP study that it’s not the poor, saddled with the highest effective tax rates, who are putting the burden on the middle class, because it’s not the middle class that benefits from the lowest effective tax rates. Put another way, those “low tax” states that seem so appealing are low tax states for the wealthy, an outcome financed with reduced services, weaker education, and higher effective tax rates on the poor and middle class.

Monday, March 11, 2019

Will Private Ownership of Public Necessities Work? 

If there is anything on which almost everyone, no matter which side of the aisle they inhabit, concurs, it is the need to repair, improve, and maintain the nation’s transportation infrastructure. Stories of closed bridges, collapsing roadways, potholes, traffic congestion, and travel delays are not only easy to find but also pop up every which way we turn.

Some states have already raised fuel taxes to fund highway repairs and maintenance. Proposals are pending in most other states. And, not surprisingly, proposals to raise the federal fuel taxes are again being introduced in Congress. Some are simply designed to make up the deficits caused by failure to adjust the existing tax for inflation. Others would increase the tax even more.

It also is not surprising that the anti-tax movement is rising up yet again to oppose any tax increases. The latest condemnation comes from Americans for Prosperity in this statement. This group makes four points.

First, raising the gasoline tax would offset roughly one-fourth of the benefits of the 2017 tax legislation. Whether this is true isn’t the issue. What matters is that a gasoline tax would affect lower-income Americans more severely than it would affect the oligarchy, noting that the former “already pay a larger portion of their income to cover basic needs like food and fuel.” The Americans for Prosperity statement uses this fact as a justification for opposing the tax increase. The solution, of course, is to make certain that lower-income individuals have sufficient after-tax income to pay for basic needs. Income inequality comes at a price.

Second, “The better way to modernize and repair our nation’s roads and bridges is to target federal gas tax dollars toward the construction and maintenance of critical national priorities.” What Americans for Prosperity is saying is that it thinks federal gasoline tax funds “are being diverted to projects that have nothing to do with roads and bridges, or which are inherently local in nature.” If the funds are being used, for example, to fund public transportation in order to reduce stress on roads and bridges and reduce the cost of maintenance and repairs, there isn’t anything wrong with that use of the funds. On the other hand, if the gasoline tax revenues are being used to finance sports arenas, libraries, or ski resorts, the diversion is very wrong. As for funds being used for “inherently local” roads and bridges, in a twenty-first-century world it is important to understand that those local roads and bridges are part of a national network.

Third, “The better way to modernize and repair our nation’s roads and bridges is to . . . allow state’s greater flexibility to address their needs.” In its statement, Americans for Tax Prosperity argues for the elimination of laws and regulations that it claims increase the cost of projects. It argues that costs can be reduced if wages of those working on infrastructure are reduced. Those workers, of course, need income to pay for “basic needs,” something that would be more difficult when bringing home reduced income.

Fourth, “The better way to modernize and repair our nation’s roads and bridges is to . . . unleash private investment.” When I read the headline of the statement, “Better Ways to Address Roads and Bridges than Punishing Tax Hikes,” I knew this was the point of the statement. Of course, the anti-tax movement wants privatization of everything. Why? It permits private equity companies, hedge funds, and other enterprises, insulated from the ballot box, to take over basic and other needs, to set whatever prices they wish – as evidenced by their continued opposition to antitrust laws – and eventually to charge tolls for every road that will make the proposed gasoline tax increases look like petty cash. That is why I am not persuaded by the “higher gasoline taxes hurt lower-income people” argument if the alternative is privatization, because privatization means even higher tolls that hurt lower-income people even more severely.

Readers of this blog know that I am no fan of privatization, because privatization does not work, and these private enterprises have a goal, maximization of the bottom line at all costs, that is inconsistent with the goal of maintaining and improving the public welfare. Why privatization does not work is something I discussed in Are Private Tolls More Efficient Than Public Tolls?, When Privatization Fails: Yet Another Example, How Privatization Works: It Fails the Taxpayers and Benefits the Private Sector, Privatization is Not the Answer to Toll Bridge Problems, and When Potholes Meet Privatization. As I noted in So Guess Who Pays for the Senate’s Tax Cuts for Corporations and Wealthy Americans?, the anti-tax/privatization movement is part of a “plan to eliminate or privatize Medicare, Social Security, national defense, and everything else so that eventually the oligarchy owns everything.”

As for the highway, bridge, and tunnel funding challenge, there is a twenty-first century solution. I have explained, defended, and advocated for the mileage-based road fees for many years, in posts such as Tax Meets Technology on the Road, Mileage-Based Road Fees, Again, Mileage-Based Road Fees, Yet Again, Change, Tax, Mileage-Based Road Fees, and Secrecy, Pennsylvania State Gasoline Tax Increase: The Last Hurrah?, Making Progress with Mileage-Based Road Fees, Mileage-Based Road Fees Gain More Traction, Looking More Closely at Mileage-Based Road Fees, The Mileage-Based Road Fee Lives On, Is the Mileage-Based Road Fee So Terrible?, Defending the Mileage-Based Road Fee, Liquid Fuels Tax Increases on the Table, Searching For What Already Has Been Found, Tax Style, Highways Are Not Free, Mileage-Based Road Fees: Privatization and Privacy, Is the Mileage-Based Road Fee a Threat to Privacy?, So Who Should Pay for Roads?, Between Theory and Reality is the (Tax) Test, Mileage-Based Road Fee Inching Ahead, Rebutting Arguments Against Mileage-Based Road Fees, On the Mileage-Based Road Fee Highway: Young at (Tax) Heart?, To Test The Mileage-Based Road Fee, There Needs to Be a Test, What Sort of Tax or Fee Will Hawaii Use to Fix Its Highways?, And Now It’s California Facing the Road Funding Tax Issues, If Users Don’t Pay, Who Should?, Taking Responsibility for Funding Highways, Should Tax Increases Reflect Populist Sentiment?, When It Comes to the Mileage-Based Road Fee, Try It, You’ll Like It, Mileage-Based Road Fees: A Positive Trend?, Understanding the Mileage-Based Road Fee, Tax Opposition: A Costly Road to Follow, Progress on the Mileage-Based Road Fee Front?, and Mileage-Based Road Fee Enters Illinois Gubernatorial Campaign. When a reader asked how my support for the mileage-based road fee fit with my preference for a progressive income tax, I answered that question in Is a User-Fee-Based System Incompatible With Progressive Income Taxation?.

As companies merge, as hedge funds and private equity funds purchase companies, strip them of assets, and toss them aside, as local businesses are overwhelmed by national and global chains that give little regard to local concerns, as consumer choices are reduced because the number of providers from which to select decreases every year, and as private industry that cannot be held responsible at the voting booth becomes the replacement for government, the foundations of democracy will erode and the republic eventually will collapse. Given the choice of paying taxes for services that can be shaped by people elected in voting booths or paying tolls, fees, and other charges to a faceless private oligarchy operating in a market free for the wealthy, those who can look into the future unfettered by limbic systems surely would understand and accept the need for liquid fuel taxes or even better, mileage-based road fees, that keep pace with reality.

Friday, March 08, 2019

What’s the Impact of a Tax Proposal? Run Some Numbers, and Guess 

A few days ago, as reported in this article, Michigan’s governor Gretchen Whitmer has proposed expanding the 6 percent corporate income tax to include S corporations and LLCs. Under current law, the income of those entities is taxed to their owners. Individual owners are taxed at a 4.25 percent rate. Whitmer’s goal is to raise revenue that would permit the repeal of the income tax on pensions. Under the proposal, owners would not be taxed on the income of these entities, and entities with less than $50,000 of income would not be subject to the corporate income tax and their income would be taxed to their owners, as under current law.

A bit of history helps. Before 2011, Michigan had a business tax, the effect of which was to tax both S corporations and LLCs and their owners on the entities’ incomes. It was a double taxation that some thought was hurting Michigan’s economy. In 2011 the business tax was repealed, but for some exceptions not relevant to the current debate. At the same time, pensions, which had been exempt from the income tax, were made subject to it. So while business owners were gleeful, pensioners fumed.

Depending on one’s point of view, reaction to Whitmer’s proposal was surprising or not surprising. Groups representing small businesses objected, claiming that the proposal would reintroduce double taxation of small business income. That’s not how I read the proposal.

A former Lieutenant Governor noted that the tax on the income of S corporations and LLCs would increase by 41 percent. That’s about right, as a 6 percent tax is 1.75 percentage points higher than a 4.25 percent tax, and 1.75 percentage points is roughly 41 percent of 4.25 percent. He also noted that these entities would need to file an additional tax return. That makes no sense to me, as these entities need to file a return in order to disclose the amount of income and other items being passed through to their owners. So his claim that these entities would face increased tax return preparation expenses runs very shallow.

Others claim that the proposal amounts to a tax on small businesses. Yet with the exclusion of the first $50,000 of income from the proposal, roughly 40 percent of small business S corporations and LLCs would not face additional tax. Truly small business operations would be unaffected.

Still others claim the proposal is a job killer, but that assumes the businesses would cut employees and does not take into account the impact of pensioners who, as customers with more after-tax dollars, could boost the revenue of those businesses. Similarly, those who claim the proposed increase would “divert money away from economy” fail to take into account that the money flowing out of the economy into the Treasury would be offset by the money no longer sent to the Treasury by pensioners. In other words, it’s at least a wash. It very well could be more than a wash, because it is, in effect, a form of demand-side economics, which is much more favorable to genuine businesses than is the failed supply-side economics nonsense.

But the best twist is an interesting one. The Michigan Treasury Department explained that most businesses would be able to deduct the proposed corporate income tax on their federal income taxes. Is that so? Many individual owners of S corporations and LLCs who are paying Michigan income taxes on the incomes of those entities are no longer getting the benefit of the federal income tax deduction for those state taxes because of the $10,000 cap on the federal deduction. Shifting the tax back to the entities as a corporate income tax makes the tax deductible for federal income tax purposes if the entity chooses to file as a corporation for federal income tax purposes. Otherwise, if the entity continues to be taxed as a pass-through for federal income tax purposes, the Michigan income tax that it pays continues to flow through to the tax return of the owners, where it probably, though not necessarily, is rendered useless by the $10,000 cap.

For any individual owner of a Michigan S corporation or LLC, the impact is best described by running the numbers and by making good guesses on future revenues and expenses. The idea that the proposed change would impact all S corporations, LLCs, and their owners in the same way is fallacious.

Wednesday, March 06, 2019

The Many Facets of Income Tax Refunds 

A recent article, thanks to its headline, appeared to focus on what taxpayers intend to do with their income tax refunds, but it touched on multiple facets of income tax refunds. The article’s focus is on federal income tax refunds, but presumably not much is different, other than scale, with state income tax refunds.

The article begins with the claim that “It's hard to not get excited about receiving a tax refund.” That’s true, I suppose, in most instances. But those who try to minimize the amount of money they lend to a government interest-free might not be too excited if they compute the lost interest.

The article notes that “On average, taxpayers expect to receive $3,030 back from the IRS.” Expectations are one thing, reality is another. Yet in this instance, it appears that the average refund, now at $3,143, is within the statistical ballpark of the expectation. The problem is that these are averages. Though averages matter, they can be misleading. An average refund of $3,143 could be one taxpayer getting a $2,000,000 refund and 999 taxpayers each getting a $1,144 refund. Of course, the expectations could have been in line with those outcomes, or they could have been one taxpayer expecting a $50,000 refund and 999 taxpayers expecting a $2,983 refund. Perhaps at some point there will be a survey that maps out individual expectations against individual realities. If the expectations are measured by what the taxpayers are seeing on their already-filed tax returns, of course actual refunds will be close to expected refunds. Yet with tens of millions of taxpayers being surprised by refunds much lower than expected, or even facing amounts due when expecting a refund, it is safe to assume that many taxpayers are encountering unexpected outcomes, most of them unpleasant.

The article explains that of people expecting refunds 43 percent plan to pay off some of their debt. Considering that consumer debt is at an all-time high, financial advisors tend to think these plans are good ones. Another 43 percent planned to invest the refund, put it in a non-retirement savings account, or make a major purchase of a necessary item. Only eleven percent, though, planned to set the refund aside for retirement. As for luxury purchases, only five percent admitted to having such a plan, perhaps the person getting a huge refund that brings up the average. Of the people surveyed, the largest group of respondents, coming in at 38 percent of those polled, did not expect to receive a refund.

The article concludes by suggestion that “getting nothing back from the IRS might be a good thing” because “Neither owing a balance nor receiving a refund is an indication that you paid exactly the amount of tax liability you owed.” That’s true, but it is extremely unlikely to hit the nail on the head in this regard. The odds are stacked against it. And in a year when the tax laws are significantly changed, calculating withholding and estimated taxes to equal exactly one’s tax liability is like trying to play archery on a field in New York looking for a bull’s eye on a target in Las Vegas.

Note: for those who read the article and wonder why I am giving different percentages, look at the chart accompanying the article. For example, three percent of those surveyed plan to spend their refund on luxury items. That three percent constitutes five percent of the 62 percent who expect a refund.

Monday, March 04, 2019

When Tax Collection Gets Beyond Heartless 

Most people dislike paying taxes. Yet whatever antipathy is directed against the imposition of a tax, or the tax rates, or what is included in or excluded from income, an even harsher hatred is aimed at tax collection. Outrage ensued back in 1979 when IRS agents, who decided to seize a car from a couple who owed back taxes, smashed the windows of the car and dragged the couple out of the car, an event recounted in this article. At the time, I remember several people commenting rhetorically, “So what could be worse? What’s next? Grabbing your kids?”

Yes, as bad as that was, it can be, and did get, worse. According to this story from several days ago, a family in Germany allegedly failed to pay amounts it owned to the town in which it lived. Among the overdue payments was a dog tax. Town officials, claiming that they had seized the family’s nonessential household goods, and presumably whatever financial assets the family had, decided to, and did, seize the family’s pet dog. The town then sold the dog online for the equivalent of $854.

Social media exploded with criticism of what happened. The officials claim that they had no other choice because there was nothing else to seize. I wonder, if the family did not own a dog but still owed other amounts, including taxes, to the town aside from the dog tax, would the officials have seized one or more of the children? Where is the line to be drawn?

Friday, March 01, 2019

Commas, (Tax) Statutes and Now, Semicolons 

Almost two years ago, in Commas and (Tax) Statutes, I wrote about the importance of commas, including the importance of commas in tax and other statutes. Specifically, I explained what had happened in O’Connor et al v. Oakhurst Dairy et al, in which the significance of the Oxford comma was front and center. It is helpful to review my explanations:
The Oxford comma is used to separate the next-to-list item in a list. For example, one could write, “I gave the instructions to Bob, Mary, Rachel and Tony.” Proponents of the Oxford comma argue that the sentence should be, “I gave instructions to Bob, Mary, Rachel, and Tony.” In this instance, with or without the Oxford comma, a reader can easily determine that the instructions were given to four people. But sometimes the absence of the Oxford comma can make a difference in meaning.

* * * The [O’Connor] case involved a dispute between a diary company and its drivers over the drivers’ rights to overtime pay. Under Maine law, which governed the employment relationship, overtime pay generally is required if the employee works more than 40 hours in a week. Among the exceptions to this requirement is Exemption F, which states that overtime pay protection does not apply to “The canning, processing, preserving, freezing, drying, marketing, storing, packing for shipment or distribution of: (1) Agricultural produce; (2) Meat and fish products; and (3) Perishable foods.”

The drivers argued that these words refer to the single activity of “packing,” whether the “packing” is for “shipment” or for “distribution.” The drivers explained that though they handle perishable foods, they do not engage in “packing” them. Thus, the drivers contended that they were not within the Exemption F exception.

The dairy argued that the statute refers to two distinct exempt activities, one being “packing for shipment” and the other being “distribution.” Under this interpretation the drivers are within the Exemption F exception because they unquestionably distribute perishable foods.

When the case was filed in the district court, it was referred to a Magistrate Judge, who decided that the dairy’s argument was the better one, and recommended granting the dairy’s motion for partial summary judgment. The district court agreed, and granted summary judgment for the dairy on the ground that “distribution” was a stand-alone exempt activity. The drivers appealed.

The Court of Appeals began by setting aside an unpublished opinion of the Maine Superior Court cited by the dairy. The Maine Superior Court had ruled that Exemption F provides an exemption “for the distribution of the three categories of foods.” The federal Court of Appeals pointed out that it is not bound by a Maine Superior Court decision because a Maine Superior Court decision does not bind the Maine Law Court. The Court of Appeals also noted that the cited case had been appealed to the Maine Law Court, which did not follow the Superior Court’s approach but decided the case on other grounds.

The Court of Appeals concluded that Exemption F was ambiguous, even after taking account of interpretive aids, the law’s purpose, and the law’s legislative history. The dairy argued that the words “distribution” and “shipment” are synonyms, that accordingly “distribution” is not a type of “packing,” and that “shipment” describes the exempt activity of “packing” whereas “distribution” is a separate exempt activity. The dairy also relied on the linguistic convention of using a conjunction to mark the last item on a list, and thus argued the lack of a conjunction before “packing” made “distribution” a separate item. The dairy conceded that if a comma had been placed after the word “shipment,” its interpretation would be unquestionable, but tried to block the conclusion that the lack of the comma required the opposite outcome by pointing out a rule in the Maine Legislative Drafting Manual that stated, “when drafting Maine law or rules, don’t use a comma between the penultimate and the last item in a series.”

The drivers argued that “shipment” and “distribution” are separate activities. They explained that “shipment” refers to outsourcing delivery to third-party carriers, and “distribution” refers to a seller’s in-house transportation of products to recipients, relying on dictionary definitions. The Court of Appeals noted that if the dairy was correct in treating “shipment” and “distribution” as synonyms, it would be odd for the legislature to use both terms. Additionally, the court noted that in other statutes, the Maine legislature treated “shipment” and “distribution” as different activities. Thus, using both terms was consistent with an exemption for “packing for shipment” and “packing for distribution.” The drivers also argued that because each exempt activity was described by using a gerund – a word ending in “ing” – the use of “shipment” and “distribution” should be treated as having the same grammatical role under the parallel usage convention. Thus, the drivers concluded, those two words are objects of the preposition “for” that follows the gerund “packing.” The drivers responded to the dairy’s reliance on the Maine drafting manual by highlighting a caution in the manual that drafters should “be careful if an item in the series is modified.”

After explaining why the arguments based on grammar did not resolve the matter, the Court of Appeals proceeded to explain why the arguments based on legislative history did not provide an answer. The court turned to the principle of interpreting a statute in favor of those whom the statute is intended to protect. In this instance, it was intended to protect employees. Accordingly, the Court of Appeals held that the drivers were not within the overtime requirement exception, and reversed the district court.
I then pointed out that the dispute between supporters of the Oxford comma and those who do not agree will continue. Though I did not know at the time, the dispute between the dairy and the drivers continued. Apparently the dairy was ready to try to take the case to the Supreme Court, but instead, according to this report, brought to my attention by a reader, the dairy settled the case and paid $5,000,000 to the drivers.

In the meantime, while the parties argued about the meaning of the statute, the Maine legislature amended the statute. Perhaps they had noted my advice at the end of Commas and (Tax) Statutes, specifically, “Those who draft statutes, regulations, rulings, contracts, or any other document need to pay very careful attention to each word and each punctuation mark, including the comma.” But though the legislature sought to fix the statute so that in the future a case like this would come out the other way, it avoided the comma. Instead, it replaced all of the commas with semicolons! It also changed the word “distribution” to the phrase “distributing,” a change perhaps reflecting my observation that “distribution” was not a gerund as were the other words used to describe activities. The statute in question when the case arose had denied overtime pay protection to “The canning, processing, preserving, freezing, drying, marketing, storing, packing for shipment or distribution of: (1) Agricultural produce; (2) Meat and fish products; and (3) Perishable foods.” Now the statute denies overtime pay protection to “The canning; processing; preserving; freezing; drying; marketing; storing; packing for shipment; or distributing of: (1) Agricultural produce; (2) Meat and fish products; and (3) Perishable foods.”

Why the semicolons? Had the commas been left in place and a comma added after “shipment,” the dispute would have disappeared. Is it possible that the legislature wanted to avoid being perceived as taking sides in the Oxford comma debate? I hope not. For the reasons that I have shared, the Oxford comma is essential in many instances, and in the instances in which it is not essential, it does no harm. The use of the semicolon in the statute violate the grammar rule that semicolons are used in a list only if one of more of the items in the list themselves contain commas. So now the semicolon debate will heat up.

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