Wednesday, June 22, 2022
Motor Fuels Tax Holiday Déjà Vu All Over Again
Apparently the President and his aides have not read my explanation, in Suspending the Federal Gasoline Tax Won’t Blunt Inflation And Will Harm Some People, of why reducing or suspending gasoline and other fuel taxes is an unwise idea. I explained that doing so would cause delays in road, bridge, and tunnel maintenance and repair, in turn generating more accidents, property damage, personal injuries, and deaths when vehicles hit potholes or other unrepaired structural elements. But perhaps the President and his aides did read my explanation and decided to include in the proposal a shift of revenues from other sources into the Highway Trust Fund (and presumably similar actions by state governments) so that my prediction of increased “bills for new tires, repaired suspensions, refurbished wheels, medical care, and funeral expenses” would not come to fruition. Yet the proposal to replace the missing Highway Trust Fund revenue means that the price will be paid by those who face cutbacks in programs whose revenues have been diverted. Will $10 billion be taken from health care for the poor? From food and nutrition services for the poor? From FEMA disaster relief?
In a follow-up to my commentary in In Suspending the Federal Gasoline Tax Won’t Blunt Inflation And Will Harm Some People. the not-surprisingly titled Yet Another Reason Fuel Tax Suspensions and Reductions Are Unwise, I seconded Saket Sundria’s observation in Costly Gasoline Spurs Tax Cuts That May Delay Demand Destruction that liquid fuel tax holidays will discourage people from taking steps to reduce demand for gasoline. Demand is one of the three major factors driving up liquid fuel prices. The other two are, of course, supply and transportation problems along with extraordinary increases in the profits of companies in the liquid fuel supply chain.
I learned of the President’s proposal today while listening to a news station on the radio while driving from Rhode Island back to Pennsylvania. Tellingly, as I listened I continued to observe two distinctly different driver reactions to the liquid fuel price increases about which so many people are complaining. I observed a handful of drivers lowering their speed to 15 to 20 miles per hour below the posted speed limit of 55, 65, or 70 miles per hour in order to increase fuel economy, of course, while driving not only in the right lane but in the center and left lanes. The sweet spot for ideal fuel economy is about 55 miles per hour, so there isn’t much benefit to driving at 35 or 40 miles per hour on a 55-mile-per-hour highway, or at 45 to 50 miles per hour on a 65-mile-per-hour highway. Worse, the impact of driving at such an inefficient speed causes other drivers to slow down to get a chance to pass and then to accelerate to return to a sensible speed, actions that are fuel inefficient. But I also observed that most vehicles were being driven in excess of the speed limit, often 15 to 30 miles per hour higher. There must be a lot of people who don’t care about what they are paying for gasoline, or who don’t understand that doing 80 or 90 miles per hour is the equivalent of paying an extra 75 cents per gallon, an amount much higher than the President’s proposed measly 15 cent-per-gallon temporary reduction. Perhaps the President’s efforts would be better spent getting the Department of Education, in collaboration with the Department of Energy, to do some educating.
In Suspending the Federal Gasoline Tax Won’t Blunt Inflation And Will Harm Some People, I noted that suspending a tax that would save people less than $100 in a full year “is like using a garden hose to fight a forest fire.” I characterized these fuel tax suspensions as “window dressing,” simply “a maneuver designed to help as elections approach,” with a “ ‘look what I did for you’ boast rest[ing] on a $97 savings,” offset by whatever reductions in payments or services that people suffer as funds are taken from the programs on which they rely in order to replenish the Highway Trust Fund.
After hearing about the proposal on the news, I thought about how I might put together something that would explain the situation in a style that might catch people’s attention and help them understand the shallowness of tossing a few dollars at a problem to soften the symptom of a much bigger problem. When I sat down to write this post and looked at previous commentary, I discovered that I had done that more than 11 years ago, in Motor Fuels Tax Holiday Déjà Vu. I share it here because it definitely is déjà vu all over again:
Richard: “Hey, Monica, did you hear the good news?”The message didn’t get through 11 years ago when complaints about high gasoline prices were no less vociferous as they are today, and I suspect the message won’t get through now. If I were to use the ratio of excessive speeders to the rest of the drivers as a benchmark, it seems to me that most American drivers are either not disadvantaged by today’s liquid fuel prices or are oblivious to the fact they are contributing to their own pain. Sadly, the tendency of Americans to contribute to the agonies of which they complain has become a feature of today’s culture. So sad.
Monica: “No, what?”
Richard: “Legislators in New York have introduced a bill to suspend the gasoline and other fuel taxes for Memorial Day weekend, Independence Day weekend, and Labor Day weekend.”
Monica: “That’s great. I’ve been paying a lot for gasoline. Maybe they'll do that in every state.”
Grady: “Can’t help but overhear. I think it’s a bad idea.”
Richard: “Why? How can something that reduces what we pay for gasoline be a bad idea?”
Grady: “Whatever the state doesn’t collect in fuel taxes means that much less it has to spend on fixing roads and bridges.”
Monica: “So what? The state has lots of money.”
Richard: “Well, THAT’S not true. The state is in financial difficulty.”
Grady: “Exactly. Less fuels tax revenue, less road repair.”
Monica: “We don’t need new roads. That just encourages people to drive.”
Grady: “I’m not talking about new roads. I’m talking about all those potholes.”
Richard: “Yeah, they’re all over the place. Why are they so slow in fixing them?”
Grady: “It costs money to fix potholes. There’s not enough fuels tax revenue as it is, and a so-called tax holiday means that there’s less money.”
Monica: “So what’s the big deal about potholes?”
Richard: “Well, if you hit one, it can be bad.”
Grady: “Exactly. Worse case, you lose control of the car, perhaps die, kill someone, injure somebody. But even without that sort of tragedy, it knocks the front end out of alignment.”
Monica: “The what?”
Richard: “The way the tires are set matters, and a jolt can make the various parts holding them in the correct angles go awry.”
Grady: “It wears out the tires faster, and causes the car to burn more fuel per mile.”
Monica: “Can it be fixed?”
Grady: “Sure, but it will cost way more than the few pennies you saved from the gas tax holiday.”
Richard: “So you’re saying that saving a few pennies on gasoline in the short-term is a long-run bad idea?”
Grady: “Absolutely. The gas holiday takes people’s attention away from the clash between growing demand for fossil fuel and diminishing supply.”
Monica: “But I HAVE TO HAVE my gasoline!”
Richard: “So what do we do?”
Grady: “Perhaps it would help if people drove in a manner that reflected their awareness of how precious and expensive gasoline really is.”
Monica: “What do you mean?”
Grady: “Here’s an example. Last week I was driving on a road with a 55 mile-per-hour speed limit. I was speeding, doing about 62. EVERY CAR on that road passed me. I passed no one except an old truck.”
Monica: “So? You’re holding up traffic.”
Grady: “They passed me like rocket ships. Imagine if they slowed down, if not to 55, perhaps to 60 or 65, instead of the 75, 80, 85, 90 that many of them are driving. They’d reduce their gasoline consumption by 10, 20, 30 percent. They could drive the same distance on 10, 20, 30 percent less gasoline. That’s the equivalent of cutting 40 cents, 80 cents, even $1.20 off the cost of a gallon of gasoline. Much more than three weekends of knocking 20 or 30 cents off the cost of a gallon of gasoline.”
Richard: “So if people really cared about the cost of gasoline they wouldn’t waste it?”
Grady: “Exactly. Actions speak louder than words. When I see fewer people driving at 80 on roads posted for 55 miles-per-hour, when I see fewer people driving children to school while school buses are half empty, when I see people bundling their errands into fewer trips, when I see people keeping their tires inflated to the proper level, then I’ll believe that these high gasoline prices really matter.”
Richard: “You should explain this to everyone.”
Grady: “Someone already has. Five years ago, the guy that writes MauledAgain, in A Tax Trifecta: Gas, Enforcement, and Special Interests, explained why it makes no sense to reduce gasoline taxes. A year later, in Raise, Don’t Lower, Gasoline Taxes, he explained again why gasoline tax reductions and holidays make no sense in the long term. Three years after that, he wrote, in Tax Holidays, “Going on a tax holiday is one of the worst things that this nation could do. That would be the equivalent of spending hours in a tanning booth before going out into the sun without sunscreen.”
Monica: “Never heard of the guy. Never read his stuff.”
Grady: “You and most other people.”
Richard: “And if they did, they wouldn’t like what they read.”
Grady: “No kidding. I guess he’s not running for office or looking for votes.”
Monica: “If he did, he’d lose.”
Thursday, June 16, 2022
Property Tax Relief for Renters
The existing program provides tax relief to homeowners but not renters. There is an unfairness in that omission because renters pay property taxes because they pay rent to the landlord, which in turn is used by the landlord to pay for a variety of expenses including property taxes. The existing program denies the tax relief to landlords because only homeowners qualify, and homeowners are defined as individuals who own and occupy their homes.
The proposed expansion would include renters. It would not include landlords. That makes sense because if the tax relief were to be extended to landlords rather than renters, a complex procedural and administrative enforcement structure would be needed to make certain that landlords used the tax relief to refund rents paid by tenants rather than reaping a windfall.
The proposal also includes changes in the amount of the tax relief and increases in the income caps on eligibility. Those changes are the focus of partisan debate but do not bear on the landlord-tenant aspect of the proposal.
Thursday, June 09, 2022
What is “Gross Taxable Income” for Federal Income Tax Purposes?
So I did a bit of research. I looked at the text of the Internal Revenue Code to see if the term “gross taxable income” was in it. It turns out that the search function returned results from the entire law.cornell.edu site, so I narrowed the search to the U.S. Code, and the outcome was, as expected, zero.
Curious, I then widened the search to include state statutes and eight results popped up. So if the term is used, surely it must be defined? I poked around a bit. I could not find anything from the law.cornell.edu search so I turned to google. What an eye opener.
When I entered the term “gross taxable income” into google, it returned 53,800 results. Not having the time or the desire to look at all of them, I did some spot-checking and learned that the term is used in the tax systems of some foreign countries, including the Philippines, Finland, India, and Australia. For purposes of understanding why someone would use the term “gross taxable income” when explaining the United States federal income tax system, I did not need to examine the use of the term in the tax systems of other countries.
I then looked more closely and noticed that several American states use the term “gross taxable income” in various instructions to their tax forms. Pennsylvania even used the term “federal gross taxable income” in its 2017 Instructions to its Form PA-40 in describing how to handle amounts on a Form 1099-R. More on that in a few paragraphs.
That gave me an idea. I googled the term “federal gross taxable income” and got 63 results. The first result was a link to the text of proposed legislation in Montana. Proposed section 28 refers to “federal gross taxable income as defined in section 1” but when I examined section 1 I discovered there was no definition of that term. My first thought? Sloppy drafting. I looked at more of the proposed legislation Section 34 refers to “federal adjusted gross taxable income” but doesn’t even give a cross-reference let alone a definition. Leave out the word “taxable” and it makes sense, but that’s not the case.
Further research showed that the term “federal gross taxable income” was used in some state judicial opinions. Did the courts get that term from the briefs submitted by the parties? I didn’t see any references to statutes. So perhaps they were borrowing the term from revenue department instructions or commentaries written by those who are confused about federal tax terminology.
Then I got another idea. I went back to the law.cornell.edu web site and searched the Code of Federal Regulations. I wasn’t expecting anything but to my surprise there was one result. In an example in section 1.6041-1(f) of the regulations the term appears:
(f) Amount to be reported when fees, expenses or commissions are deducted -How could this be? My guess: The drafter made an error and used the phrase “includible in Q’s taxable income.” A reviewer marked up the draft by inserting “gross” and using strike-through for “taxable” but something in the formatting went haywire, a not unusual event when multiple people work on one document. And no one caught the result, which was the addition of “gross” and the non-removal of “taxable.” Nowhere else in the Code of Federal Regulations did the term appear. Nor was any definition provided. The example was picked up verbatim in Chief Counsel Memo 20133501F.
(1) In general. The amount to be reported as paid to a payee is the amount includible in the gross income of the payee (which in many cases will be the gross amount of the payment or payments before fees, commissions, expenses, or other amounts owed by the payee to another person have been deducted), whether the payment is made jointly or separately to the payee and another person. The Commissioner may, by guidance published in the Internal Revenue Bulletin, illustrate the circumstances under which the gross amount or less than the gross amount may be reported.
(2) Examples. The provisions of this paragraph (f) are illustrated by the following examples:
Attorney P represents client Q in a breach of contract action for lost profits against defendant R. R settles the case for $100,000 damages and $40,000 for attorney fees. Under applicable law, the full $140,000 is includible in Q's gross taxable income. R issues a check payable to P and Q in the amount of $140,000. R is required to make an information return reporting a payment to Q in the amount of $140,000. For the rules with respect to R's obligation to report the payment to P, see section 6045(f) and the regulations thereunder. (emphasis added by me)
I shared my findings with reader Morris. He, too, is curious, and he soon replied to tell me that he searched google scholar federal courts and found 163 results. Like me, he didn’t have time to read all of the cases but selected a few to examine. Though he found the term “gross taxable income” being used, he did not find a definition. In some instances the court was simply repeating the use of the term as appearing in arguments made by the parties, and in at least some instances the courts used the term “gross income” when reacting to the parties’ arguments. In other instances it appears courts were paraphrasing stipulations without correcting the language of the parties.
He did share an observation, that many of the cases dealt with transactions before the enactment of the Internal Revenue Code of 1954. He asked if it was possible that the term was used before being abandoned in the 1954 statute. Good question. I tried to answer the question, and I failed to discover any use of the term “gross taxable income” in earlier statutes.
After I shared that with reader Morris, he then referred me to an article that offers a sort of definition of “gross taxable income.” The article, titled “Gross vs. Net Income in the United States” explains:
Understanding Taxable IncomeMy goodness! If this were an exam answer in a basic federal income tax course it might earn a D because a few concepts seem to come through the misuse of terminology, for example, the warning that “it’s important to remember your gross income is not the same as your taxable income.” But it’s “deductions” not “deductibles.” But to claim that not all income that make up gross income are taxable is to assume that income goes into gross income. The point of an exclusion is that the excluded item is not included in gross income. Then comes the whopper. “Gross taxable income is instead called adjusted gross income.” What? Where does the author get this nugget of misinformation? Worse, the author claims that adjusted gross income is “after you’ve subtracted deductibles like Child, Education or Earned Income Tax Credits.” That is so wrong. Credits are NOT deducted in computing adjusted gross income or in computing taxable income. Credits are not “deductibles” nor are they deductions. And if that’s not sufficiently erroneous, try the mathematically impossible “your gross income might be far less than your taxable income or AGI.” How? How can one go from a particular amount of gross income to a larger amount of adjusted gross income or taxable income? What would be added? So, no, this article does not provide any insight into the origin of the term “gross taxable income.”
It’s vital to understand these differences between gross vs net income when it comes to doing your taxes.
While you start off calculating the taxes you owe or are owed by the IRS with your gross income minus your deductibles, it’s important to remember your gross income is not the same as your taxable income.
Not all income streams that make up your gross income are taxable, for example. Things like inheritance, gifts, and life insurance payments aren’t taxable.
Gross taxable income is instead called adjusted gross income (AGI) after you’ve subtracted tax deductibles like Child, Education or Earned Income Tax Credits.
When you are working out your AGI, the IRS gives you the option of taking the standard deduction based on your family status (single, married, or head of household) or you can itemize your tax-deductibles. Itemizing your tax-deductibles might reduce your tax bill more.
In the end, your gross income might be far less than your taxable income or AGI.
And it gets worse. Reader Morris directed me to a case study in its VITA program materials. In that case study, which is simply an example, the material states that “The formula for calculating the allowable portion of a deduction is: (Gross taxable income subject to U.S. tax / Gross income from all sources) x Deduction = Allowable portion of deduction.” Curious, I used google to see if the term “gross taxable income” appeared elsewhere in the VITA program material. It appears one other time, in the summary of the lesson preceding the case study:
SummaryAside from the fact that the term “gross taxable income” is not used in the lesson until it reaches the summary, the term is used in the formula even though the formula does not reflect the prefatory language. That language states that the standard deduction is allocated using gross income. Yet the formula uses the term “gross taxable income” though that term is nowhere else defined or used except in the case study example that follows.
This lesson showed how to:
Identify the correct standard deduction
Determine when to allocate the standard deduction
Calculate the allowable portion of a taxpayer's standard deduction
For Puerto Rican taxpayers who do not itemize, the standard deduction must be allocated based on total gross income from all sources (including Puerto Rico source income).
To calculate the allowable portion of a taxpayer's standard deduction, use:
The Worksheet for Puerto Rico Filers with Exempt Income under Section 933 Who Do Not Itemize Deductions, or
(Gross taxable income /gross income from all sources) x standard deduction = Allowable portion of the standard deduction
Reader Morris then directed me to a recent article that uses the term (once). The sentence reads, “The term "gross income" has been interpreted for this purpose to mean ‘gross taxable income,’ specifically excluding tax-exempt income, which separates this from the legal concept of fiduciary accounting income.” Interpreted by whom? Curious, I looked to see if perhaps I had missed something in the trust tax area. So I looked for “trust’s gross taxable income.” In this commentary, the following sentence appears: ”When calculating the income distribution deduction, DNI is computed only with items of income and allowable deductions included in the trust's gross taxable income (Secs. 651(b) and 661(c)).” Aha, a clue. Perhaps the term is in the cited Code sections. No, it is not. The text of section 651(b): “(b)Limitation on deduction. If the amount of income required to be distributed currently exceeds the distributable net income of the trust for the taxable year, the deduction shall be limited to the amount of the distributable net income. For this purpose, the computation of distributable net income shall not include items of income which are not included in the gross income of the trust and the deductions allocable thereto.” No mention of “gross taxable income.” How about section 661(c)? Here’s the text: “(c)Limitation on deduction. No deduction shall be allowed under subsection (a) in respect of any portion of the amount allowed as a deduction under that subsection (without regard to this subsection) which is treated under subsection (b) as consisting of any item of distributable net income which is not included in the gross income of the estate or trust.” Again, no mention of “gross taxable income.” The same sentence with the citations to sections 651(b) and 661(c) also appears in this article.
Reader Morris then directed me to this web site, which in two places stated that “The 1099 Form will reflect gross taxable income. . .” So off I went to see if I could find the term “gross taxable income” on a Form 1099. I found a variety of commentaries that used the term in connection with a Form 1099, but in most instances claiming that a particular amount on the Form must be reported in gross taxable income even though that term was not on the form. For example, this commentary, in describing a Form 1099-SA, states in several places that the taxpayer would need to “include [an amount] in gross taxable income.” Yet the Form 1099-SA does not include the term “gross taxable income.” Perhaps the confusion arises because the Form 1099-R has an entry for “Gross distribution” and a separate entry for “Taxable amount.”
Perhaps the confusion arises from the sort of sentence found on this web site. It states, “Section 61(a) of the Internal Revenue Code provides that gross (taxable) income includes ‘all income from whatever source derived.’” Actually, section 61(a) defines gross income. It does not define something called “gross (taxable) income.”
Precision matters. When drafting legal documents, whether statutes, regulations, judicial opinions, contracts, wills, or any other writing, and a word or phrase is used that does not exist in the language or that is being used other than in its common meaning, definitions are required. Otherwise, confusion abounds, mistakes are made, litigation ensues, and unhappiness and frustration afflict people. Has anyone using the term “gross taxable income” in the federal income tax context provided a citation to its statutory or regulatory definition?