When Tax Complexity Isn’t Attributable to One Tax System

Taxpayers understand that the federal income tax is complicated. They also understand that state income tax is complicated, though in some instances more complicated than the federal income tax and in some instance less complicated than the federal income tax. Though complexity is subjective, and what seems complex to one person might not seem so complex or complex at all to another person. By complexity, I am referring to the number of gross income exclusions, deductions, credits, adjustments, exceptions, the number of side computations or worksheets, the number of steps required for computations, and the degree to which answers can easily be found, to name some of the more significant characteristics of tax laws contributing to complexity.

Yet as complex as a particular income tax system might be, things get even more complicated when multiple tax systems are in play. In the United States, not only must taxpayers deal with a federal income tax system, they also must face state income tax systems in most states. Some taxpayers are subject to more than one state income tax system if they live in one state and work in another. Add to that local tax systems and taxpayers’ heads understandably spin, even if a tax return preparer is doing the heavy lifting.

An example of this complexity can be found in the recent changes to the tax treatment of unemployment compensation. Until this year, the basic rule was simple. Unemployment compensation was included in gross income for federal income tax purposes. Some states also included unemployment compensation in state gross income though others did not tax unemployment compensation. Though the existence of two different rules, taxed and not taxed, creates complexity, it’s nothing like the complexity that has shown up for tax year 2020.

The American Rescue Plan Act of 2021 amended Internal Revenue Code section 85 to provide that the first $10,200 of unemployment compensation is excluded from federal gross income if the taxpayer’s adjusted gross income is less than $150,000. States that automatically conform to the federal tax law automatically adopt this change though a state legislature can choose to amend state income tax law to ignore the exclusion or to cause it to apply to more or less than $10,200. States that already did not include unemployment compensation in gross income are unaffected by the federal change. States that do not conform to federal tax law and states that conform to the Internal Revenue Code as of a particular date earlier than March 11, 2021, and that tax unemployment compensation will continue to do so. It appears that the $150,000 adjusted gross income limit applies in states that adopt the exclusion by conformity, but if a state legislature adopts the exclusion, not only might the amount of the exclusion be different but there may or may not be an adjusted gross income limit and if there is one it might be different from the federal limit. At least one state that does not conform to the federal tax law is administratively permitting an exclusion matching the federal revision. And on top of this, the IRS changed the instructions for computing the limit, causing taxpayers and tax return preparers to learn new rules in the middle of tax season.

So, for example, for 2020, the first $10,200 of unemployment compensation is excluded from gross income in Iowa. In Rhode Island, unemployment compensation will continue to be taxed. Because state rules are changing and some states have not yet finalized their positions on the issue, I am not providing a state-by-state listing, and will leave that to the various commercial publishers that are doing so.

In an increasingly mobile society, the existence of separate rules in 50 states, the District of Columbia, and territories imposes friction on business and commerce. When the nation’s population was relatively isolated, and people’s employment and businesses generally confined to one state, it did not matter much that different states had different rules. Times have changed. Though it is understandable that states would want to impose different rates of taxation, to define income differently makes it difficult for taxpayers to find any sort of consistency in the concept of gross income or taxable income. All states agree with the federal income tax principle that the receipt of loan proceeds does not constitute gross income because the recipient is not wealthier. But unemployment either is income, and ought not income either be taxed or excluded from taxation on a consistent basis? Differences in the answer to that question creates complexity. That complexity is made worse when the rules change, and change with respect to amount that can be excluded, and change with respect to the adjusted gross income limit on the exclusion.

The major point is that the existence of multiple applicable tax systems compounds complexity orders of magnitude beyond the complexity created by any one tax system alone. Though most tax professionals understand this problem, most taxpayers tend to focus their complaints about tax complexity on the federal system even though some state tax systems alone are at least as complex as the federal system. States that conform to the federal system without date limitation minimize this complexity but do so in the face of criticism that they are “giving up independence” or “relinquishing sovereignty to Washington, D.C.” States that do not conform to the federal system or that do so subject to a date limitation impose additional compliance costs on their taxpayers for the sake of some abstract sense of “independence.” Though the voters in such a state can support or reject that approach when they go to the polls, the nonresident taxpayers do not have representation in the legislature in such a state.

Tax complexity is undesirable, much of it is unnecessary, too much of it arises from political rather than public benefit pressures, and a good bit of it could be reduced or eliminated through careful consideration and review of federal and state income tax laws. To paraphrase what I wrote in Tax Filing Deadlines: Theory and Practice in the connection with the extension of the federal filing deadline, “Though advocates of states’ rights champion the notion that states can serve as ‘living laboratories’ for experimenting with various public policy initiatives, the reality of modern life is that the interconnection among states is so tightly wound that” having a half dozen or more approaches to the taxation of a particular transaction does more harm to taxpayers than the cost to of conforming to the federal system.

When A Tax Return Preparer’s Bad Behavior Extends Beyond Fraud

Over the past decade plus, I have written about tax return preparers who fall short, not just negligently but deliberately, in posts such as Tax Fraud Is Not Sacred, Another Tax Return Preparation Enterprise Gone Bad, More Tax Return Preparation Gone Bad, Are They Turning Up the Heat on Tax Return Preparers?, Surely There Is More to This Tax Fraud Indictment, Need a Tax Return Preparer? Don’t Use a Current IRS Employee, Is This How Tax Return Preparation Fraud Can Proliferate?, When Tax Return Preparers Go Bad, Their Customers Can Pay the Price, Tax Return Preparer Fails to Evade the IRS, Fraudulent Tax Return Preparation for Clients and the Preparer, Prison for Tax Return Preparer Who Does Almost Everything Wrong, Tax Return Preparation Indictment: From 44 To Three, When Fraudulent Tax Return Filing Is Part of A Bigger Fraudulent Scheme, Preparers Preparing Fraudulent Returns Need Prepare Not Only for Fines and Prison But Also Injunctions, Sins of the Tax Return Preparer Father Passed on to the Tax Return Preparer Son, and Tax Return Preparer Fraud Extends Beyond Tax Returns. In all but the last of these posts, the failures involved tax law violations. The last post focused on a tax return preparer charged with Payroll Protection Program loan fraud.

When I titled the last post “Tax Return Preparer Fraud Extends Beyond Tax Returns” I didn’t think I would need to title the next tax return preparer commentary as I have. Yes, now comes news of a tax return preparer whose bad behavior went far beyond fraud. According to this report, a tax return preparer in Houston, Texas, was caught on camera “pulling out a gun on several of her clients.” During the chaos, one of the clients was injured. The preparer was, at the time of the report, in jail.

The ruckus was filmed by Marquita Boyle, a client of the preparer, who went to the preparer’s office after she learned she was being audited by the IRS. She went to the preparer’s office to “look over her paperwork after noticing some discrepancies” between what was on the return and the information she had given the preparer. When she arrived, the preparer was arguing with other clients. The preparer pulled out a gun, cocked it, and pointed it at another client who was upset about a refund. At some point the preparer was blocking the door with the gun, so Boyle decided to pull out her phone and record what was happening “because she didn't know what else to do.” When the preparer noticed that Boyle was recording, she grabbed the phone, hit Boyle on the head with it, and tried to delete the video. The preparer then threw the phone at a file cabinet and the phone slid across the floor. However, deleting a video on an iPhone simply moves the video to another folder, so eventually Boyle was able to recover it.

Law enforcement had been called, and when officers arrived they arrested the preparer. She was charged with “multiple charges, including aggravated robbery and assault.” In 2012, the preparer “was sentenced to more than four years in federal prison for her part in a multi-million dollar heist at an ATM servicing company.”

In the meantime, “Boyle was taken to the hospital in an ambulance.” From the accompanying video, she seems to be alright though she did mention some eye and headache problems. Boyle explained that she still needs to deal with the IRS audit and resolve her tax issues.

If people who wanted to be tax return preparers were required to obtain a license, would a background check on the gun-toting preparer have turned up the previous conviction? Would it have led to a denial of the license? Of course, tax return preparers are not licensed, and attempts to license them meet with opposition grounded on concepts of free enterprise, free markets, individual liberties, and distaste for government regulation. There also is the question of whether any tax return preparer licensing should be overseen by individual states or by the federal government. And if a federal license were required to prepare federal returns but a state license to prepare state returns, it could indeed create the sort of mess that those who oppose regulation use as examples of why regulation supposedly is bad. Perhaps a private group could license preparers in a manner similar to how the AICPA enrolls accountants, but that solution would probably increase what preparers charge and would not remove from the marketplace preparers who are not licensed, nor would it persuade people to refrain from using unlicensed preparers.

Try It, You Might Like It (The Mileage-Based Road Fee, That Is)

Almost two years ago, in Plans for Mileage-Based Road Fees Continue to Grow, I disclosed that I had applied to be a volunteer test driver for the mileage-based user fee pilot program conducted by the I-95 Corridor Coalition. I promised to “let you know if they let me participate.” Apparently I neglected to follow up or at least I cannot find myself having done so. Yes, they did let me participate. Last week, the Coalition, now known as the Eastern Transportation Coalition, released its report describing the result and providing more than 40 pages of information reflecting the driving experiences of the volunteers, the results of surveys it presented to the volunteers before and after the pilot project was in place, and the outcomes of focus groups with several dozen test drivers.

According to the report, almost 900 vehicles from 14 states and the District of Columbia participated, driving nearly 3.13 million miles across 42 states and Canada. If the hypothetical fee had been in place, the average driver would have paid an additional $7.50 per month compared to the gasoline tax. This is a consequence of both assumed administrative costs of phasing in and administering the fee and the effect of imposing the same fee on all vehicles regardless of fuel efficiency. An ideal mileage-based road fee would adjust not only for vehicle weight but also for fuel efficiency, to account for both the structural impact of road use and the environmental impact of road use.

The surveys revealed that participants’ concerns about privacy dropped 49 percent from the pre-pilot survey to the post-pilot survey. Privacy concerns are one of the most frequently cited reasons given by those who oppose or are leery of the mileage-based road fee. Of course, concerns about a mileage-based road fee onboard module disclosing a person’s location seem unwarranted considering that almost everyone walks around with an iPhone or similar device that constantly tracks location or makes it possible to identify location after the fact. Those who continued to worry cited concerns about the onboard module letting law enforcement know they were speeding.

The report also includes much more information, so I recommend those interested in the concept read the report. The report, and the results it provides, dovetails with the points I have been making for 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?, Mileage-Based Road Fee Enters Illinois Gubernatorial Campaign, Is a User-Fee-Based System Incompatible With Progressive Income Taxation?. Will Private Ownership of Public Necessities Work?, Revenue Problems With A User Fee Solution Crying for Attention, Plans for Mileage-Based Road Fees Continue to Grow, Getting Technical With the Mileage-Based Road Fee, Once Again, Rebutting Arguments Against Mileage-Based Road Fees, Getting to the Mileage-Based Road Fee in Tiny Steps, Proposal for a Tyre Tax to Replace Fuel Taxes Needs to be Deflated, A Much Bigger Forward-Moving Step for the Mileage-Based Road Fee, Another Example of a Problem That the Mileage-Based Road Fee Can Solve, Some Observations on Recent Articles Addressing the Mileage-Based Road Fee, Mileage-Based Road Fee Meets Interstate Travel, and If Not a Gasoline Tax, and Not a Mileage-Based Road Fee, Then What?>.

The report, in suggesting how to create support for a shift from traditional highway funding sources to a mileage-based road fee, notes that “Change is Hard.” Indeed. Most people, but for the most adventuresome, resist change. Examples abound. Someone tries to introduce a child, spouse, companion, or friend to a new food and very often the resistance is met with phrases like, “Try it, you’ll like it.” And often, the person tries it, and discovers that, indeed, they do like it. Change is hard because of the fear of the unknown, the comfort level of the known, and the lack of confidence in the ability to adapt.

What the Coalition’s surveys and focus groups demonstrate is that a person’s perception often changes when the person moves from an observer or a theoretical contemplator to a participant. That’s not news. What is news is the groundwork that these pilot programs are building. I suggest that there should be more pilot programs, throughout the nation. Instead of 800 participants, there should be thousands and tens of thousands. As participants share their reactions, which surely will parallel those of the participants in the pilot project of which I was a part, others will become less resistant, less afraid, and more willing to try it to see if they like it. It works that way with new restaurants, new ice cream flavors, new fashions, and new movies. It should work that way with the mileage-based road fee. Try it. You might find out, probably will find out, you like it, and like the improved transportation infrastructure it provides.

If Not a Gasoline Tax, and Not a Mileage-Based Road Fee, Then What?

Earlier this week, the Philadelphia Inquirer published an editorial reacting to the state’s governor establishment of a Governor’s Transportation Revenue Options Commission. The editorial generally approved of the governor’s move, pointing out the transportation revenue challenges facing the state. However, it criticized the governor advocating elimination of the gasoline tax, because the editorial considers the exclusion or inclusion of specific options to be a task of the Commission. The editorial pointed out the disadvantages of relying on the gasoline tax, so it wasn’t a matter of disagreeing with the substance of the governor’s position but with the procedural aspects of the process. The editorial also criticized the make-up of the Commission, pointing out that none of its 42 members has an environmental advocacy background.

The editorial listed the requirements for an alternative to current gasoline tax funding. Specifically, the “funding can’t be regressive, must raise more money than the gas tax, and not disincentivize a move to electric cars.” The editorial then claimed that most of the options, such as a “miles-traveled tax” poses the challenge that it “won’t bring in out of state dollars like the pumps in Pennsylvania’s gas stations do.”

The claim that the mileage-based road fee does not “bring in out of state dollars” is bizarre. That would happen only if the state imposed the mileage-based road fee only on state residents, an approach not currently taken, for example, with respect to tolls. There is no reason to treat the mileage-based road fee differently from tolls. Instead of paying gasoline taxes, out-of-state drivers would be paying the mileage-based road fee. Perhaps the writer(s) of the editorial think that a mileage-based road fee would apply to Pennsylvania residents not only for miles driven within Pennsylvania but also for miles driven outside Pennsylvania. If that is the case, then the fee would generate more revenue, because currently Pennsylvania does not collect gasoline tax when Pennsylvania residents purchase fuel while in other states. Worse, if Pennsylvania were to charge its residents a mileage-based road fee for miles driven outside the state, and Pennsylvania residents also are charged a similar fee by other states when they are in those other states, there would then be a double taxation problem requiring some sort of complex adjustment to provide some sort of credit and also, perhaps, some sort of reciprocity agreement with other states similar to the income tax reciprocity agreements currently in effect.

For more than 16 years, I have been explaining, defending, and supporting the mileage-based road fee 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?, Mileage-Based Road Fee Enters Illinois Gubernatorial Campaign, Is a User-Fee-Based System Incompatible With Progressive Income Taxation?. Will Private Ownership of Public Necessities Work?, Revenue Problems With A User Fee Solution Crying for Attention, Plans for Mileage-Based Road Fees Continue to Grow, Getting Technical With the Mileage-Based Road Fee, Once Again, Rebutting Arguments Against Mileage-Based Road Fees, Getting to the Mileage-Based Road Fee in Tiny Steps, Proposal for a Tyre Tax to Replace Fuel Taxes Needs to be Deflated, A Much Bigger Forward-Moving Step for the Mileage-Based Road Fee, Another Example of a Problem That the Mileage-Based Road Fee Can Solve, Some Observations on Recent Articles Addressing the Mileage-Based Road Fee, and Mileage-Based Road Fee Meets Interstate Travel.

As I wrote in Mileage-Based Road Fee Meets Interstate Travel, “I support not only states getting on board the mileage-based road fee approach, but also regional arrangements such as those mentioned in the Wyoming legislation and, more importantly, a federal benchmark setting interoperability for mileage-based road fee technology.” Thus, it is premature for the editorial writer(s) to jump to the conclusion that a mileage-based road fee would raise less revenue than does the gasoline tax. That conclusion conflicts with the charge given to the Commission to find a way to prevent additional revenue decreases and to increase transportation funding. It also presumes that if the Commission recommends a mileage-based road fee it would not charge out of state drivers for using the state’s highways. One wonders if the comment by the editorial writer(s) is intended to sow the seeds of opposition to a mileage-based road fee. Combining that opposition with the dislike of the gasoline tax raises the question of what the editorial writer(s) would propose as a solution to the decreases in gasoline tax revenues.

Tax Filing Deadlines: Theory and Practice

In theory, each state and the federal government sets the deadline for when income tax returns must be filed. Of course, anyone paying even scant attention to income taxation knows that the famous “tax day” is April 15 for federal and state individual income tax purposes. Some might realize that April 15 becomes April 16 or April 17 if the calendar puts April 15 on a Sunday or holiday.

So what happens when the IRS extends the April 15 filing deadline? It did so in 2020 because of the pandemic. It has done so again, this year, because of the many changes in the tax law enacted in early 2021 but affecting 2020 returns. One answer is that people have more time to gather 2020 information, and tax return preparers have more time to learn about the changes and work on their clients’ returns.

But there is another issue. Most states require taxpayers to compute state income tax liability by starting with federal adjusted gross income and making adjustments to reflect the differences between federal tax law and the state’s tax law. A list of states with this conformity can be found in this Tax Foundation article.

So how can a taxpayer file a state income tax return by April 15 if the federal tax return isn’t ready until sometime after April 15 and, this year, before May 17? They would need to guess, and then perhaps, and perhaps almost certainly, file amended state income tax returns.

That is why states are following the federal lead on the filing deadline. Without trying to examine all of states with individual income taxes based on federal adjusted gross income, I have noticed that the filing deadline has been extended to May 17 (or even later) in California, Colorado, Connecticut, Georgia, Illinois, Kentucky, Maine, Maryland, Missouri, Montana, North Carolina, and Utah, to name some. The list is growing so don’t rely on this paragraph as complete.* Even Pennsylvania, which does not conform to the federal tax law, has extended the deadline to May 17. Why? Because even though the computation of Pennsylvania taxable income does not begin with federal adjusted gross income, the items that are included in Pennsylvania gross income are most easily calculated by looking at those same items as reported on the federal return.

Though in theory states can set their own filing deadlines, and a few actually have regular deadlines later than April 15, as a practical matter, states would generate much misery for taxpayers and tax return preparers if they set deadlines earlier than April 15 or whatever temporarily extended deadline is set for federal income tax purposes. As of the time I am writing this, there are at least a dozen states in which the deadline remains April 15, though some are considering or taking steps to extend it, and the others probably will also join in, perhaps even by the time this post is published.

Though advocates of states’ rights champion the notion that states can serve as “living laboratories” for experimenting with various public policy initiatives, the reality of modern life is that the interconnection among states is so tightly wound that setting a state income tax filing deadline earlier than the federal deadline is impractical notwithstanding whatever theory is used to buttress states’ rights claims. Thus, as a practical matter, the IRS sets the earliest date that an income tax filing deadline can be set in any state. If it turns out that one or more states do not change their April 15 deadline, the consequences of nonconformity with respect to the filing deadline will be apparent very quickly. It’s not pleasant when substantial numbers of taxpayers in a state end up needing to file amended returns.

*There is a list at this lifehacker.com web page, though whether and how often it will be updated isn’t noted, a comment asks about the District of Columbia, and the links are to news reports and not, as I have done, to the official announcement.

Tax Return Preparer Fraud Extends Beyond Tax Returns

Over the past year or so, I have commented on the growing number of indictments of, convictions of, and guilty pleas by tax return preparers, in posts such as Tax Fraud Is Not Sacred, Another Tax Return Preparation Enterprise Gone Bad, More Tax Return Preparation Gone Bad, Are They Turning Up the Heat on Tax Return Preparers?, Surely There Is More to This Tax Fraud Indictment, Need a Tax Return Preparer? Don’t Use a Current IRS Employee, Is This How Tax Return Preparation Fraud Can Proliferate?, When Tax Return Preparers Go Bad, Their Customers Can Pay the Price, Tax Return Preparer Fails to Evade the IRS, Fraudulent Tax Return Preparation for Clients and the Preparer, Prison for Tax Return Preparer Who Does Almost Everything Wrong, Tax Return Preparation Indictment: From 44 To Three, When Fraudulent Tax Return Filing Is Part of A Bigger Fraudulent Scheme, Preparers Preparing Fraudulent Returns Need Prepare Not Only for Fines and Prison But Also Injunctions, and Sins of the Tax Return Preparer Father Passed on to the Tax Return Preparer Son. Now comes news of a tax return preparer whose fraud did not involve tax returns.

According to a Department of Justice news release, a South Florida tax return preparer has been charged by criminal information with wire fraud arising from his scheme to obtain 118 Paycheck Protection Program loans for himself and accomplices. The criminal information alleges that the 118 loan applications asked for more than $2.3 million in loans. On each application the preparer provided false information about the applicant’s previous ear income and expenses and submitted false tax forms with the applications. Before being caught, he and his accomplices allegedly received more than $975,000 in loans because of the fraud.

PPP loan application fraud is widespread. According the news release, more than 100 defendants have been prosecuted in more than 70 cases brought by the Department of Justice. More than $65 million in cash procured through fraudulent PPP loan applications has been seized, together with real estate and “luxury items” bought with the loan proceeds. This does not include prosecutions brought by other offices.

It is unclear whether this is the first PPP loan fraud indictment or criminal information involving a tax return preparer. No, I have not tried to dig up every indictment or criminal information alleging Paycheck Protection Program loan fraud to see if any involved a tax return preparer. There are more than a hundred, probably more. Instead, I searched in a different way and did not find anything.

But does it really matter whether this is the first such instance of a tax return preparer engaging in this specific type of fraud? No. What does matter is whether other tax return preparers will learn of this preparer’s situation and step back from initiating or participating in this sort of fraud, or any fraud for that matter. There also needs to be a stop to people asking tax return preparers to help them file fraudulent tax returns or fraudulent loan applications.

Parents, Don’t Let Your Children Grow Up To Be Fraudsters

Two stories that came to my attention this week caused me to think about the many posts in which I have discussed taxpayers and tax return preparers who so easily engage in fraudulent behavior. Some of the posts in which I have focused on tax fraud and return preparation fraud include Tax Fraud Is Not Sacred, Another Tax Return Preparation Enterprise Gone Bad, More Tax Return Preparation Gone Bad, Are They Turning Up the Heat on Tax Return Preparers?, Surely There Is More to This Tax Fraud Indictment, Need a Tax Return Preparer? Don’t Use a Current IRS Employee, Is This How Tax Return Preparation Fraud Can Proliferate?, When Tax Return Preparers Go Bad, Their Customers Can Pay the Price, Tax Return Preparer Fails to Evade the IRS, Fraudulent Tax Return Preparation for Clients and the Preparer, Prison for Tax Return Preparer Who Does Almost Everything Wrong, Tax Return Preparation Indictment: From 44 To Three, When Fraudulent Tax Return Filing Is Part of A Bigger Fraudulent Scheme, Preparers Preparing Fraudulent Returns Need Prepare Not Only for Fines and Prison But Also Injunctions, Sins of the Tax Return Preparer Father Passed on to the Tax Return Preparer Son, and Has Your Tax Return Been Altered Without You Knowing It?.

The two stories aren’t about tax fraud. They’re about cheating and misrepresentation in other contexts. What particularly struck me was the revelation of who was involved in the unacceptable behavior.

According to one of the stories, a Pensacola, Florida, woman was charged with hacking a high school computer system in order to alter the votes so that her daughter would be elected prom queen. The daughter also has been charged with participating in the scheme. Worse, the woman who was charged is an assistant principal at an elementary school. Somehow, someone figured out that with more than a hundred votes coming from the same IP address something was wrong. Sure enough, that IP address was tracked to the woman’s phone. By the time the hacking was discovered, the daughter had already been crowned homecoming queen.

In the other story, a woman in Bucks County, Pennsylvania, in an attempt to force several girls from her daughter’s cheerleading squad, faked photos and videos of those girls engaged in illegal activities. She anonymously sent the photos and videos to the coaches of the cheerleading squad and to the girls, urging the girls to commit suicide. Police figured out the source of the photos and videos after being contacted by the parents of one of the victims, who was receiving harassing messages from an anonymous number. During the investigation, the parents of two more girls reported similar messages. Authorities traced the phone number through a website that sells phone numbers to telemarketers, and then tracked the number to an IP address to the woman’s computer. In this instance, the daughter was unaware of what her mother was doing, but surely she now knows. One of the parents suggested that he thinks the mother did what she did in response to he and his wife telling their daughter “to stop hanging out with” the woman’s daughter because of concerns about the daughter’s behavior.

So the question for me is a simple one. How can we expect children to grow up knowing that fraud, whether manifested by lies, cheating, manipulation, or other sorts of misrepresentation, is wrong when they see a parent engaging in that sort of activity, and are in some instances encouraged or even compelled to participate? If someone grows up thinking that it is acceptable to lie and cheat, to commit fraud and deception, how can we expect that person to tell the truth and to file fraud-free tax returns, let alone engage in truthful business practices and honest political campaigning?

In Clues into the Root Causes of Tax Fraud?, I wrote, “Perhaps it is inevitable that some people will lie, commit fraud, and make misrepresentations.” I deliberately used the word “perhaps” because it does not need to be so. Children are born without the ability to lie or cheat or deceive. They learn those behaviors, from a variety of sources. Unless those influences are counterbalanced by parents and teachers, the child will continue down a path of deception and manipulation until and unless consequences are encountered, and too often those consequences are a mere bump in that path. Attempts to steer the child in the correct direction are obstructed by, as I wrote, “[t]he willingness of those who hear or read lies, fraud, and misstatements to accept them, to ignore them, or to republish them” because that behavior “enables those who lie, commit fraud, and make misstatements, and that in turn puts these behaviors on an upward spiral of even more of that behavior.”

So what happens if the mothers in the story stay on a path of truth? A daughter doesn’t become prom queen. The mother teaches the daughter how to lose, and to lose gracefully. She teaches her daughter how to change so that she has a better chance of winning honestly the next time she enters a contest or race or other competition. So what happens if the mothers in the story stay on a path of truth? A daughter learns that her behavior drives away friends. The mother teaches the daughter how to behave appropriately so that friends’ parents don’t cut off the relationships because of the daughter’s behavior.

Hopefully, these two daughters learn a lesson when they realize that their mothers’ behaviors led to arrest and probably conviction and even worse consequences. Perhaps the mothers get back on the correct path. Hopefully if any of them decide to become tax return preparers their names won’t show up in indictments.

How sad. The only way to keep children from growing up to be fraudsters, con artists, and cheaters is to set the correct example.

So Who Decides If Tolls Can Be Imposed on Pennsylvania Bridges?

Recently, the Pennsylvania Department of Transportation put into effect a plan to impose tolls on nine bridges in Pennsylvania. The effort, called the Major Bridge P3 Initiative, is designed to generate funding for repairing and maintaining the bridges, which in turn releases other Department of Transportation revenues that would have been used to fix the bridges for use on other transportation projects. The initiative has been designed and approved through the public-private partnership program. That program, authorized by Act 88 of 2012, permits the Department of Transportation to enter into agreements with private entities to transfer use or control, in whole or in part, of a transportation facility to a development entity for a definite term during which the entity provides the transportation project to the Department in return for the right to receive all or a portion of the revenue generated through the use of the facility, including user fees. The agreement must specify if user fees will be imposed, and user fees include tolls.

The announcement by the Department of Transportation that it has entered into agreements with respect to the nine bridges has triggered an outcry of opposition from commuters, truckers and trucking companies, and, interestingly, state legislators. The biggest concern, of course, is cost, though there also are predictions that the tolls would force traffic onto alternative roads not subject to tolls. The legislator who chairs the state Senate’s Transportation Committee explained, according to this report, wants to stop the plan or at least require legislative approval before it is implemented. He “questioned whether the process used to approve the department’s plans were really envisioned by a 2012 law that created it,” and the “we see how PennDOT is attempting to use this for this size and scope of this large of a plan, and in my opinion, the legislation's intent may not have been of this size and scope back then.” Here’s some free advice for the legislator and those he claims support his position. Read Act 88. Find any limitation on the size, scope, or dollar amount of any of the projects.

As readers of this blog know, I am not a fan of these public-private partnerships. I have explained my objections to public-private partnerships and privatization of public functions in posts such as 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, When Potholes Meet Privatization, and Will Private Ownership of Public Necessities Work? These public-private partnerships don’t work out well. They are the product of legislative attempts to find funding without raising taxes while generating revenue for their private sector donors, with hopes that the outcry against tolls and similar charges will be directed against the private entity involved in the project. Of course, voters can’t control, vote out, or do much of anything with respect to the private entity, whereas legislators see themselves at risk of losing the next election, something on which they focus too much. So part of me reacts with agreement that the public-private projects in question should be examined, but part of me is annoyed that the legislature which created the monster is now, and only now, beginning to understand what I warned the legislature not to do. And, of course, to claim that the problem is the Department of Transportation’s use of Act 88 rather than the Act itself is downright absurd, because everyone who understands Act 88 has concluded that the Department of Transportation’s bridge initiative is within the law. As usual, legislator politicians are trying to blame others for what they, and their predecessors, have done. Of course, if the legislature wants to amend or repeal Act 88, it can.

Granted, there is a major problem that the Department of Transportation is trying to solve. To fix the nine bridges in question will require roughly $2 billion. The Department does not have that funding. If the bridges are not fixed, one or another or two or all of three things will happen. First, people will be injured and perhaps die, and property damage will be incurred, as these bridges partially or totally fail. Second, at some point the bridges will be closed, creating even more congestion on those alternative routes than would theoretically be created by tolling. Three, funds will be diverted from other projects to fix the bridges, causing closures, deaths, injury, and property damage on the projects postponed or abandoned to fix the bridges in question.

Of course there is an answer. Again, readers of this blog know what it is. It’s the mileage-based road fee. During the past 16-plus years, I’ve been explaining, defending, and supporting the mileage-based road fee, 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?, Mileage-Based Road Fee Enters Illinois Gubernatorial Campaign, Is a User-Fee-Based System Incompatible With Progressive Income Taxation?. Will Private Ownership of Public Necessities Work?, Revenue Problems With A User Fee Solution Crying for Attention, Plans for Mileage-Based Road Fees Continue to Grow, Getting Technical With the Mileage-Based Road Fee, Once Again, Rebutting Arguments Against Mileage-Based Road Fees, Getting to the Mileage-Based Road Fee in Tiny Steps, Proposal for a Tyre Tax to Replace Fuel Taxes Needs to be Deflated, A Much Bigger Forward-Moving Step for the Mileage-Based Road Fee, Another Example of a Problem That the Mileage-Based Road Fee Can Solve, Some Observations on Recent Articles Addressing the Mileage-Based Road Fee, and Mileage-Based Road Fee Meets Interstate Travel. Instead of dealing with the transportation infrastructure crisis in a piecemeal manner, with financial band-aids here and patchwork repairs there, the legislature needs to focus on its obligation as a collection of public servants charged with serving and protecting the state and its residents by moving transportation funding out of the nineteenth and twentieth centuries and into the twenty-first century. Transportation funding approaches that once worked no longer do, because of changes in demand for transportation infrastructure caused by population increase and density growth, shifts in vehicle technology from fossil fuel propulsion to electric, hydrogen, and other energy sources, and decade after decade of legislative failure to respond while transportation infrastructure has continued to crumble. The time has come for the legislature to pay the price for its inadequacies, and that requires more than fiddling around with a nine-bridge repair initiative.

So the answer is, yes, ultimately the Pennsylvania legislature has the power and authority to determine whether tolls can be imposed on those bridges. But the legislature also has a responsibility to provide safe and efficient non-congestive transportation infrastructure for the Commonwealth. It’s time for it to live up to its obligations and if its members cannot or will not do so, it’s time for them to step aside and let others take on the responsibility and its concomitant power and authority.

Has Your Tax Return Been Altered Without You Knowing It?

Over the past year or so, I have commented on the growing number of indictments of, convictions of, and guilty pleas by tax return preparers, in posts such as Tax Fraud Is Not Sacred, Another Tax Return Preparation Enterprise Gone Bad, More Tax Return Preparation Gone Bad, Are They Turning Up the Heat on Tax Return Preparers?, Surely There Is More to This Tax Fraud Indictment, Need a Tax Return Preparer? Don’t Use a Current IRS Employee, Is This How Tax Return Preparation Fraud Can Proliferate?, When Tax Return Preparers Go Bad, Their Customers Can Pay the Price, Tax Return Preparer Fails to Evade the IRS, Fraudulent Tax Return Preparation for Clients and the Preparer, Prison for Tax Return Preparer Who Does Almost Everything Wrong, Tax Return Preparation Indictment: From 44 To Three, When Fraudulent Tax Return Filing Is Part of A Bigger Fraudulent Scheme, Preparers Preparing Fraudulent Returns Need Prepare Not Only for Fines and Prison But Also Injunctions, and Sins of the Tax Return Preparer Father Passed on to the Tax Return Preparer Son.

In one of those posts, Need a Tax Return Preparer? Don’t Use a Current IRS Employee, describing criminal charges filed against a tax return preparer who was a former IRS employee, I pointed out that IRS employees are prohibited by IRS rules from “Engaging in the preparation of tax returns for compensation, gift, or favor.” According to Seattle pi story to which reader Morris directed my attention and the underlying Department of Justice press release on which the story was based, a current IRS employee did worse than prepare tax returns for others.

According to the indictment, the IRS employee filed false tax returns for taxpayers in the Memphis, Tennessee, area. The employee claimed more than $500,000 in false deductions on those returns that inflated the refunds on those returns. Somehow, the employee was able to “take a portion from the refunds and transfer the funds to her personal bank account.” The indictment also states that “Many of these [taxpayers] were unaware of the false deductions discovered on their tax returns.” So my guess is that the taxpayers received the refunds they were expecting and the IRS employee pocketed the inflated portion of the refund.

Yet the statement in the indictment that “many of the” taxpayers whose returns were altered were unaware of what was happening gave me pause. Why did the indictment not say that “all of the taxpayers” were unaware or “none of the taxpayers were aware”? It suggests that perhaps a few or some of the taxpayers whose returns were altered were, in fact, aware and perhaps even participated in the fraud. Perhaps the indictment’s language was chosen carefully because other indictments are pending.

The situation is deeply concerning. It means that even those who follow the advice of not using a current IRS employee as a tax return preparer are at risk of having their tax returns altered by an IRS employee without knowing it has happened. Unless there is more to the story, such as some sort of software glitch or other circumstances limiting the opportunity to a narrow set of returns, anyone who files a return, whether through a tax return preparer or as a self-prepared returns using software or even pencil and paper, is at risk of having their return altered by an IRS employee. Though receiving a refund different from what is expected would be a red flag, what was allegedly done by the IRS employee in question would not tip off the taxpayer that the return had been altered. Is there a solution? Would it make sense to let taxpayers look at what the IRS thinks their return contains? Would that not simply amount to building another gateway into IRS information that would create more opportunities for the hackers of the world?

In some ways, what the indictment alleges to have happened is not unlike the store employee who copies and uses a customer’s credit card information, or the hacker who obtains the same information from a web site used by someone to make a purchase. Consider how often these breaches are discovered but not disclosed to the customer. Is the IRS notifying the taxpayers whose returns were altered that their returns were altered? Is the information in the IRS database being fixed so that the risk of these taxpayers being audited for the current or future filings is not increased on account of the tampering?

It’s not that fraud is a child of modern digital technology. Fraud and forgery have existed as long as there have been humans on the planet. But modern digital technology makes fraud both easier to commit and, in many instances, easier to detect. But preventing and detecting fraud requires both investment into cybersecurity that those addicted to the bottom line are unwilling to make and dedication to the education of programmers and engineers with the ability to design systems that are highly resistant to tampering, hacking, and fraud. And even that is not enough. What is needed most of all is investment in culture that disfavors cheating, lying, fraud, and hypocrisy and that elevates honesty, integrity, and truth. Until that happens, the risks not only of known dangers but also of unknown dangers remains high.

Former Tax Collector Continues to Make the News

Shortly after I posted my last commentary on the adventures of the former Seminole County, Florida, tax collector than reader Morris found another update. My commentary on the troubles afflicting the Seminole County, Florida, Tax Collector’s Office appeared in a series of posts, starting with A Reason Not to Run for Tax Collector (or Any Other Office)?, and continuing through Perhaps Yet Another Reason Not to Run for Tax Collector, Running for Tax Collector (or Any Other Office)? Don’t Do These Things, When Behaving Badly as a Tax Collector Gets Even Worse, Tax Collector Behaving Badly: From Even Worse to Even More Than Even Worse, When Tax Collectors Do Too Many Things, and Former Tax Collector Back In the News.

The latest chapter appears in this Orlando Sentinel story. In my previous commentary, I noted that Joel Greenberg was accused of “being out past his curfew” and traveling beyond a restricted travel zone by going to Jupiter, Florida, a town outside his restricted travel area. I concluded the commentary by predicting that the story “isn’t yet finished.” And indeed it wasn’t.

According to the Orlando Sentinel story, police in Jupiter, Florida, were called to the condominium of Greenberg’s mother-in-law looking for his wife. His mother-in-law called the police, explaining that he had arrived “uninvited.” She “asked that he be removed” from her condominium. His wife, who was not at the condominium, “told police that she left the couple’s Lake Mary home to ‘take a break from the stressful situation with Joel.’” How did Greenberg figure out where she went? According to the story, he “tracked her using her SnapChat social media account.” I don’t use SnapChat so I don’t know how that works, but perhaps somehow it reveals the location of a SnapChat user, either automatically or voluntarily. At that point, Jupiter police did a background check and discovered that Greenberg was on probation related to one of the charges pending against him. He was not arrested because Jupiter police were unable to contact his probation officer “to determine if he was allowed to travel to Jupiter.” Greenberg did leave his mother-in-law’s home “without incident.” Thereafter, a warrant was issued for his arrest because he violated the terms of his probation, he was put in the Seminole County jail, and ordered to remain there. Later, he was released into the custody of U.S. marshals. According to the Orlando Sentinal story, “A spokeswoman for the U.S. Marshals Service said she could not answer where Greenberg is being detained or why he was transferred out of the Seminole Jail.”

It is alarming, sad, disappointing, and bewildering that a public official, responsible for serving the public, not only behaved in ways that generated a long list of criminal charges and civil litigation, but has continued to pile on problem after problem. That he was a tax collector is what initially brought the story to my attention, though he surely isn’t representative of the thousands of tax collectors across the land, and similar situations have afflicted public officials who are not tax collectors. What puts the situation in the spotlight is the fact that tax collectors are an important “face” of governments encountered by the public, and particularly so in Seminole County where the tax collector not only collects taxes but manages a long list of other services as I’ve pointed out in previous commentaries on the matter. And, again, surely the story is far from finished.

A Different Way of Getting Caught for Tax Fraud

From time to time, someone asks, “How does the government know someone has committed tax fraud?” Many people know some of the answers. The IRS might discover tax fraud during a routine audit. Sometimes a person’s tax fraud is brought to the attention of the IRS or the Department of Justice by a disgruntled current or former spouse or companion, or an unhappy current or former employee. Occasionally a partner in crime, disappointed with the situation, turns on one or more of the others involved in the activity. Years ago, someone committing tax fraud was identified because a neighbor, curious about the dozen or so high-end cars parked on a nearby property in a far-from-wealthy neighborhood, contacted the IRS, not the police, not the district attorney, but the IRS.

A recent story from the Patriot-News shares what might be a novel account of how tax fraud was discovered. In September of 2018, police were called to the home of a married couple who were shot by their daughter’s boyfriend. Upon arrival, they noticed and followed a “trail of bloody footprints through the house to an outside pool house.” What did they find in the pool house? The found “a garbage bag of cash.” The police obtained a search warrant, and found “a large gun safe holding more bundles of cash.” The story doesn’t explain the details of what happened next, but at some point thereafter the IRS and other law enforcement authorities determined that the couple who had been shot had failed to report more than $800,000 of gross income on their tax returns. It turns out that the couple reported income from checks and credit card payments to their business, but did not report the cash receipts. At some point the couple paid the almost $300,000 of taxes that they had avoided, presumably along with interest and penalties. The husband “pleaded guilty to four counts of tax evasion” and his wife “pleaded guilty to four counts of aiding in the preparation of false tax returns.” Both were sentenced to one year in prison, and the husband also was sentenced to a year of supervised release and a $40,000 fine.

The strange twist to the story is that the daughter’s boyfriend who shot the couple was charged with aggravated assault, but the local district attorney dropped the case nine months after the shooting. According to this York Daily Record story from June 2019, the charges were dropped after the prosecution concluded it had insufficient evidence to prove the case after a judge suppressed some of the evidence. The shooter’s lawyer explained that the defense position had always rested on an assertion of self-defense in a “domestic situation.”

Former Tax Collector Back In the News

During the past eight months, I have described the mess that overtook the Seminole County, Florida, Tax Collector’s Office attributed to the arguable unwise decisions of the now former tax collector. My commentary appeared in a series of posts, starting with A Reason Not to Run for Tax Collector (or Any Other Office)?, and continuing through Perhaps Yet Another Reason Not to Run for Tax Collector, Running for Tax Collector (or Any Other Office)? Don’t Do These Things, When Behaving Badly as a Tax Collector Gets Even Worse, Tax Collector Behaving Badly: From Even Worse to Even More Than Even Worse, and When Tax Collectors Do Too Many Things

Now he is back in the news. According to this story, Joel Greenberg, the former Seminole County tax collector, was arrested. The first line of the story, explaining that he was arrested because “he violated the conditions of his release on bail by traveling to Jupiter,” gave me pause until I remembered that there is a town in Florida called Jupiter. Greenberg was out on bail while waiting for his federal trial. He is charged with “stalking * * *, unlawful use of means to identify another person, production of identification and false identification documents, aggravated identity theft, sex trafficking of a child and violating the Driver’s Privacy Protection Act.” He has entered a plea of not guilty to all of the charges.

In addition to traveling beyond a restricted travel zone, he also is accused of “being out past his curfew.” When Greenberg was brought into court, his attorney explained that the travel was “due to family matters.” Greenberg wanted to speak, but his attorney would not let him. That was probably a good decision.

According to the story, his “trial was set for March” but it might be delayed because Greenberg hired a new attorney. The Seminole County tax collector story isn’t yet finished.

When Money Addiction Threatens National Survival

The headline to Joseph DiStefano’s latest column, “After SolarWinds debacle, the U.S. needs to keep software makers from being hurt by cost-cutting owners,” caught my eye. With a decades-long interest in both technology and economics, I read his commentary carefully. The back story is simple. Hackers using flaws in cybersecurity software developed and marketed by SolarWinds penetrated government agencies and businesses. There still is no full accounting of what information was stolen, how much damage had been done, how much national security had been compromised, whether the hacking continues, or why the United States is unable to protect its own government and its citizens from these attacks. But some information is beginning to emerge, and it isn’t good.

The hackers accomplished their nefarious objectives by “quietly penetrating SolarWinds” in order to attack entities that used the software for cybersecurity purposes. The head of the company admitted failure to detect and stop the hacking, which not surprisingly was conducted by at least 1,000 Russian operatives. The confession was made during a Senate hearing, but DiStefano points out that two questions not asked by the senators were these: “Have the tough new financial demands of software investors forced managers compromise vital security? Have our software defenses grown weak because the software sector is being hollowed out — like steel and a host of other once-proud U.S. industries — by profit extraction experts who relentlessly pressure professionals to cut corners?”

It turns out that SolarWinds, founded by visionaries, was sold to a private equity outfit headed by Thoma Bravo. Thoma Bravo is in the business of buying technology firms. The list of firms it has acquired is long. After buying SolarWinds about five years ago, Thoma Bravo “loaded it with debt” and then “sold some shares to the public.” Thoma Bravo is run by a billionaire, and claims to have “a track record of doubling, tripling or quadrupling clients’ investments over time.” With enough time, anyone can double, triple, or quadruple an investment. A $100 investment paying 3 percent interest will triple in about 38 years. Most people don’t want to wait that long. So those with sufficient funds to play the private equity game, which rules out almost everyone save for the economic elite, turn to private equity firms. How do those firms speed up the doubling, tripling, and quadrupling? To quote DiStefano, who relies on Matt Stoller’s “Goliath: The 100-Year War Between Monopoly Power and Democracy, “the only way firms can do that is to squeeze the software companies they buy, hard and at the expense of employees and customers[, using] the full arsenal of weapons, including cost cuts, price hikes, debt-funded mergers and consolidations, and, eventually, outsourcing.” Does Thoma Bravo follow this pattern? According to its recent profile in the Wall Street Journal, “Thoma Bravo identifies software companies with a loyal customer base but middling profits and transforms them into moneymaking engines by retooling pricing, shutting down unprofitable business lines and adding employees in cheaper labor markets.”

DiStefano asks, “Did such tactics contribute to the problems with SolarWinds?” He answers by again turning to Stoller, who has argued that private equity owners who demand huge and rapid investment returns, “a massive hack like this was inevitable.” DiStefano points out that more evidence would be required to link the tactics of private equity firms to the failures in software development, testing, scrutiny, updating, and monitoring, and asks current and past clients of SolarWinds, and its engineers and managers, to provide information about the effects on software protection of investor demands, and I suppose, any cost cutting and outsourcing.

DiStefano notes that although the practices of private equity firms stripping and closing factories adversely affects the factory’s locality, when those practices have a serious impact on national security when it’s not a factory but a software company. He gives examples of private equity firms bankrupting several big employers in the Philadelphia area after “extracting millions.”

Di Stefano then asks, “Is all this inevitable under free-market capitalism?” My answer is, yes. For the oligarchs and their devotees, free-market capitalism means unrestricted and unregulated money grabbing with the sole focus on the bottom line. So, of course, money becomes the goal and everything else, from employee health and job stability to protection of the nation’s technology systems and infrastructure, takes a back seat, even to the point of failure. All that matters to the money addicts is money, and the political power it gives them so that they can find even more money.

Then comes the warning. After pointing out that the Biden administration has added software to the list of key industries in need of government protection, that protection “means higher prices, and probably higher taxes.” He notes, “It would be worth it, if it really makes America safer.” It should, and it is necessary, because clearly the money grabbers aren’t worried about protecting anything except their wallets.

None of this should be surprising to those who read my commentary, What to Do When Drowning in Money and Hauling in Tax Cuts. In that short article, I pointed out the underlying flaws in the system that have brought us to this point:

The idea of trying to amass tens of millions or billions of dollars has never appealed to me. What would I do with it? I don’t need it. But there are people who need it, because money breeds money, and those who never have, in their own minds, enough money, need every bit that they can get. Is it for bragging rights? Is it to purchase the world and lord over it as global god? Is it addiction? Is it compensation for some unrecognized subconscious shortcoming?

There are many ways of amassing money. Hard work. Luck. Winning the birth lottery. Theft, robbery, embezzlement, fraud. Investment. When it comes to investment, most people think of bank accounts, stocks, bonds, real estate, precious metals, and commodities. But there are other types of investment, available to those who already have amassed large sums of money. There’s the hedge fund. There’s private equity. They’re not secrets, though most Americans aren’t familiar with how they work.

Hedge funds pursue high risk investments in hopes of hitting it big. Private equity consists of funds not listed on a public exchange. In one sense, the sole proprietor who owns a $300,000 landscape business owns private equity, though those are not the sort of investments that come to mind when people familiar with private equity think of it.

What do hedge funds and private equity do? One path of investment is to acquire public companies and turn them private, or to invest in public companies that are in trouble and hope they turn it around. But increasingly, private equity and hedge funds are grabbing distressed businesses simply to extract the last bits of value and to abandon what’s left. As explained in this article, too often, when given the opportunity to turn a distressed business in the direction of modernization, hedge fund and private equity managers prefer to take out money than to invest enough to turn the business around. This is what has happened with Sears, in which a controlling interest was purchased by hedge fund ESL Investments. It failed. Toys ‘R’ Us was acquired by KRR, Bain Capital, and Vornado Realty Trust. It failed. It happened to Gymboree, another Bain Capital investment. It failed. It happened to Payless ShoeSource, owned by Blum Capital and Golden Gate Capital. It failed. It happened to Radio Shack, in which Standard General had a substantial interest. It failed. Twice. It happened to Fairway, owned by Blackstone. It failed. The same outcome fell upon The Limited, Wet Seal, Claire’s, Aeropostale, Nine West, Brookstone, David’s Bridal, and Sports Authority.

From the perspective of the hedge funds and private equity, these aren’t tragedies. These have been good investments. From the perspective of employees, customers, and the malls in which these businesses rented space, these transactions have been disaster. Granted, retail stores have faced competition from their on-line counterparts, but would not saving one of these retailers included plans to go online? That didn’t happen. It didn’t happen because the new owners preferred not to put in even more money but to take out what was left. Worse, according to investment officer Jack Ablin, “many private equity investors lack the expertise to make the shift from traditional retail to online commerce.” Yet, surely they had the money to hire people who had the expertise. They didn’t, because, according to that investment officer, those investors “were also reluctant to commit more capital for the long-term to transform these struggling retailers.”

* * * * *

I wonder how things would have turned out if tax cuts had not been handed out to these folks during the past two decades. I wonder if they would have had the resources to do what they have done, are doing, and intend to continue doing. Retail stores probably still would have failed – they have, for many decades – but the resources that remained would not have been channeled into the hands of those already drowning in wealth. Perhaps not as many stores would have closed. Perhaps not as many people would have lost jobs. Perhaps some businesses would have hired people willing and able to take them online.

There are many lessons to learn from these events. Sometimes learning a lesson is helpful for the future. Sometimes learning a lesson comes too late, and the future is altered forever, often in a bad way. Perhaps we have run out of time.

Indeed, have we reached the point where takeovers of companies endangers the survival of the nation? If resources are plowed into the pockets of the starving billionaires who cannot live without satisfying their need for infinite wealth instead of into improvements in cybersecurity, infrastructure, jobs, health, education, and environmental protection, we are doomed. The ultrawealthy will survive because their allegiance is to money and their own international circle of oligarchy, but everyone else will be the ones paying the price of helping the money addicts add to their never-sufficient stash of wealth. What’s most depressing is that many of those afflicted by this situation, unhappy with the struggles they accordingly face, continue to vote for, support, and defend those who are part of the culture that creates the very troubles that these folks want to eliminate.

The Oregon Stimulus Taxation Twist

Oregon taxable income is based on federal adjusted gross income, with a handful of adjustments. One of the adjustments is a deduction for federal income taxes paid by the Oregon taxpayer. A report from The Oregonian, based on examples from the Oregon Department of Revenue explains how the receipt of stimulus payments by some Oregon taxpayers increases their Oregon tax liability compared to what it would have been absent the stimulus payment. The underlying cause of this tax wrinkle is the treatment of the stimulus payment as a reduction in federal income tax liability. This strange twist does not affect all Oregon taxpayers. For example, it does not affect Oregon taxpayers who would have had zero federal income tax liability without the stimulus payment, because they would have zero federal income tax liability with the stimulus payment. It also does not affect Oregon taxpayers who did not qualify for, nor receive, stimulus payments because their federal income tax liability is unaffected by a stimulus payment. It is estimated that about 877,000 Oregon taxpayers, roughly half of those who received stimulus payments, would be affected. The average increase in state income tax liability is about $130 from the first stimulus payments. The examples provided by the Department of Revenue show Oregon tax liability increases of $114, $235, $215, and $405, though there is no indication of how many Oregon taxpayers have a tax situation similar to each of the four examples.

When the Congress classified stimulus payments as tax-free for both federal and state income tax purposes, it did so by providing that the payments are excluded from gross income. However, that language does not prevent the sort of problem facing Oregon taxpayers. There are five other states that permit deduction of federal income taxes, namely, Alabama, Iowa, Louisiana, Missouri, and Montana. It appears that the same problem exists in those states, but I haven’t seen anything similar to what Oregon has publicized nor did a quick search using several search term variants turn up anything.

There is a bipartisan sentiment among Oregon legislators that this result is unfair. Whether an amendment to the state’s tax law can happen quickly enough is unclear. Some Oregon taxpayers have already filed their tax returns.

Conceptually, the fix would be easy. Rather than subtracting their actual federal income tax liability, Oregon taxpayers would subtract the federal income tax liability that they would have had if they had not received a stimulus payment. Pragmatically, the fix would require Oregon taxpayers to prepare, in effect, a pro forma federal income tax return for the sole purpose of calculating what their federal income tax would have been. Though that is fairly easy with tax preparation software, it is unclear how quickly tax software companies could publish updated software, including software for taxpayers who already filed their returns to file amended returns. And pity the folks who are still preparing tax returns manually.

The fault does not lie with the Congress. Even if it had used language that not only excluded stimulus payments from gross income but also provided that the receipt of a stimulus payment should not cause an increase in federal or state income tax liabilities, Oregon taxpayers would still be required to compute that fictional federal income tax liability predicated on no stimulus payment being received. The fault is simply inherent in the mechanics of allowing a deduction for federal income taxes paid by the taxpayer.

Edit: Reader Morris found the Alabama legislation that fixes the problem in Alabama. His search was more successful than my quick search.

If a Payment is Voluntary, Is It a Tax?

An new report out of Waterloo, Iowa caught my eye. It explains that people on “the south side of Iowa City feel they get left behind when contractors and developers want to build in town.” They are concerned that businesses stay for only a month or two or three when they open a location in their part of the town. So the president of the South District Neighborhood Association, together with some businesses in the area, decided on a “self-supported municipal improvement district (SSMID).” According to the report, the “SSMID is a voluntary tax levied on businesses and the money goes into a common pool where they can pay for improvements like new walkways, signage, employee retention and more.” The supporters plan to submit their idea to City Council once they collect enough signatures for the proposal.

What drew my attention was the phrase “voluntary tax.” It struck me as oxymoronic as a “voluntary stop sign,” or a “voluntary speed limit.” It struck me as another misuse of the word “tax,” just as major league baseball refers to the payment imposed on clubs with payrolls above a specified limit as the “competitive balance tax.” It’s not a tax because it is not imposed by a government or governmental agency.

Taxes are mandated payments. It is true that a person can “voluntarily” pay a higher tax by failing to claim deductions or exemptions, but that doesn’t make the tax voluntary. It is true that taxpayers can make voluntary payments to the U.S. Treasury or a state revenue department In addition to their tax liability, but those are contributions or donations, not taxes.

Curious, I wondered if the folks in Iowa were the only ones to use the phrase “voluntary tax.” They’re not. For example, as explained in this Saline County, Arkansas, FAQ, Arkansas permits localities to enact “voluntary taxes.” Saline County has enacted three of these “voluntary taxes.” The Voluntary Animal Care and Control Ordinance explains: “There is hereby levied an annual Voluntary Tax in the amount of $5.00 per every tax statement for personal property in Saline County for the purpose of establishing animal control services in the unincorporated areas of the County,” and that “The Saline County Collector is hereby directed to include on the annual tax statement mailed to each personal property owner in the County the Voluntary Tax for animal control services. Upon receipt of the statement, the personal property owner may choose whether or not to pay the Voluntary Tax.”

They can call the $5.00 fee a tax, but it is not a tax. It is a solicitation for a donation. It is no different from the letter sent by charities that ask for money, which a person can chooise whether or not to pay. It is not unlike the somewhat misleading “invoices” that are mailed by certain vendors and marketing firms that contain fine print stating, “this is not a bill, it is an offer to provide services.” What’s wrong with that? Those who are not sufficiently schooled in the methods of marketing might instinctively write a check for what appears to be an invoice from a business or for what appears to be a mandatory payment to a government or governmental agency.

Why not call it what it is? It is a voluntary donation or a voluntary contribution. Calling it a tax is misleading, and is an erroneous use of the word tax.

The Price of Eliminating a State Income Tax

According to this story, the governor of West Virginia wants to eliminate the state income tax. Why? To “make the state more appealing for out-of-state residents and businesses.” The state’s income tax, according to another report on the proposal, generates $2.1 billion in revenue, which about 43 percent of the annual budget.

Of course, if the income tax is repealed, the state faces a choice between reduction of services, increases in other taxes, or some combination of both. At a virtual town meeting, the governor was asked about reducing services and replied, “No chance on the planet. . . . A decrease in services – ridiculous.” He added, “My goal is to lower your taxes, now. There is a million different ways this can be done.” I wish someone had asked him to list the million ways to reduce taxes without reducing services.

So that means repeal of the income tax requires increases in other sources of revenue. The governor explained what he would do to raise $2.1 billion in lost revenue. He would increase the sales tax by something between 1.5 and 1.9 percentage points, from 6 percent to 7.5 to 7.9 percent. He would increase taxes on tobacco and soda. He was open to raising taxes on liquor. He would increase severance taxes on coal, oil, and natural gas. He suggested “there could be an unspecified tax on some professional services.” He suggested a new tax, which he inadvertently called a wealth tax, but then explained it would be a luxury tax, something akin to a sales tax on the purchase of items costing $5,000 or more, other than homes and cars. He opposed raising the gasoline tax.

The governor then paraded out the usual litany of why reducing or eliminating taxes is a wonderful accomplishment. “It will drive job opportunities beyond belief. It will drive the ability for wages to increase substantially, it will help our schools, it will drive up property values.” He also claimed that eliminating the income tax and replacing it with increases in other taxes would reduce the “net tax burden” for state residents. All that it would do would be to shift the tax burden from some residents to other residents. More on that in a moment.

The governor then admitted, in response to a question, that the goal of his plan is to “give people from other states in that upper income bracket an “incentive” to come and settle in West Virginia.” It seems to me that enticing someone to move to a state requires more than low or lower taxes. It requires a state that has high quality education, a clean environment, reliable power sources, sufficient water and food supplies, excellent medical care and health facilities, adequate highways, bridges, and tunnels, top-notch cyber infrastructure, and programs to reduce poverty, crime, addiction, and disease.

The current West Virginia income tax is a progressive tax. It imposes higher rates as income increases, though the rates are low in comparison to most other states and the federal income tax. On the other hand, the taxes that the governor wants to increase are regressive taxes. They take a higher portion of a lower income person’s income than they take from a higher income person’s income. The so-called luxury tax won’t make up the difference, because any wealthy person who did decide to move to West Virginia would have the means to make those purchases elsewhere. The proposed luxury tax, like a sales tax, is rather easily avoided by those intent on doing so.

So the proposal is just another piece of the grand plan to free the wealthy from tax burdens and impose the cost of civilization on the poor and working class, to push them in the direction of serfdom as much as possible. What continues to boggle my mind is the willingness of those being oppressed economically to vote for those making their economic condition increasingly worse. It reminds me of the person who exits through the wrong door on the Wilkos show. And then eventually regrets it, when it’s too late to prevent the ensuing tragedy.

Short-Term and Long-Term Effects of Early Real Property Tax Payment Discount Suspension?

Many local taxing jurisdictions in Pennsylvania, perhaps most or all, offer discounts if a real property owner pays a real estate tax a month earlier than the due date. The discount in some locations is two percent if the tax is paid at least two months ahead of time. In Philadelphia, until recently, the discount was one percent for bills paid at least one month early. As noted in this story, the city suspended the discount in order to avoid the revenue loss that it creates, because the pandemic has significantly reduced tax revenues. It is unclear when, if at all, the discount will be restored.

Does eliminating the discount increase tax revenue? Perhaps. With the incentive to pay early removed, taxpayers who focus on cash flow and rate of return analyses will wait until the last minute to make the payment. That disadvantages the city in two ways. First, it reduces cash flow during the month when early payments would be flowing into its coffers. Second, it deprives the city of the opportunity to earn interest on the cash that is received early. The latter factor is small, because the city is unlikely able to earn back in one month the one percent that it otherwise would have, in effect, paid by allowing the discount. According to the city, the increased early cash flow sparked by the discount helped but not enough to justify keeping the discount in place. In fact, the city has concluded that eliminating the discount will increase tax revenues by roughly $6 million as it attempts to deal with a $750 million pandemic-induced deficit. In addition, eliminating the discount is projected to increase revenue for the budget-constrained school district by about $7 million.

Though taxpayers who manage their own real estate tax payments now have no incentive to pay early, those who pay through mortgage companies will lose out because mortgage companies tend to pay real estate tax bills quickly. Because the taxpayer, and not the mortgage company, is the one who loses out with the discount being suspended, there is no incentive for mortgage companies to wait until the due date to pay the tax.

The question that remains is whether other jurisdictions that offer real property tax early payment discounts will see what Philadelphia has done and follow suit. Though some of these localities are not trying to cope with budget deficits or are dealing with deficits nowhere near the size or proportionality of what is afflicting Philadelphia, the only reason not to suspend or eliminate the discount is the risk of political backlash. It remains to be seen if there is any political backlash in Philadelphia, and, if so, what effect it has.