Commas, (Tax) Statutes and Now, Semicolons

Almost two years ago, in Commas and (Tax) Statutes, I wrote about the importance of commas, including the importance of commas in tax and other statutes. Specifically, I explained what had happened in O’Connor et al v. Oakhurst Dairy et al, in which the significance of the Oxford comma was front and center. It is helpful to review my explanations:

The Oxford comma is used to separate the next-to-list item in a list. For example, one could write, “I gave the instructions to Bob, Mary, Rachel and Tony.” Proponents of the Oxford comma argue that the sentence should be, “I gave instructions to Bob, Mary, Rachel, and Tony.” In this instance, with or without the Oxford comma, a reader can easily determine that the instructions were given to four people. But sometimes the absence of the Oxford comma can make a difference in meaning.

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

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

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

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

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

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

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

After explaining why the arguments based on grammar did not resolve the matter, the Court of Appeals proceeded to explain why the arguments based on legislative history did not provide an answer. The court turned to the principle of interpreting a statute in favor of those whom the statute is intended to protect. In this instance, it was intended to protect employees. Accordingly, the Court of Appeals held that the drivers were not within the overtime requirement exception, and reversed the district court.

I then pointed out that the dispute between supporters of the Oxford comma and those who do not agree will continue. Though I did not know at the time, the dispute between the dairy and the drivers continued. Apparently the dairy was ready to try to take the case to the Supreme Court, but instead, according to this report, brought to my attention by a reader, the dairy settled the case and paid $5,000,000 to the drivers.

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

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

California’s No-Cash-Payment-of-Taxes Policy: Is It Getting Away With Something?

Reacting to Friday’s commentary, When Paying Taxes in Cash is Prohibited, reader Morris asked, “How does California's FTB get away with their no cash policy?” He was referring to the California Franchise Tax Board’s policy of not accepting cash as payment for taxes. The California Taxpayers Association has provided its analysis of the no-cash policy along with some background.

One point to note is that California’s Franchise Tax Board permits taxpayers to file an application to pay taxes in cash. The primary reason for this exemption application appears to be the fact that growers and sellers of legal marijuana in the state find it difficult or impossible to open bank accounts, because financial institutions are concerned with compliance with federal law. There is a bit more information in this commentary from a law firm in California.

The Franchise Tax Board claims that it is legal for it to refuse cash payments. According to the California Taxpayers Association, the Board relies on a California statute and two cases. It points to section 19005 of the California Revenue and Taxation Code, which provides that payment in the form of check, electronic funds transfer, credit card, or other payment device is acceptable. The Board claims that under the Coinage Act of 1965, 31 U.S.C. section 5103, it is not required to accept currency as a form of payment, and to this point the Board cites Tenn. Scrap Recyclers Ass’s v. Bredesen, 556 F.3d 442 (6th Cir.2009), and Genesse Scrap & Tin Baling Co. v. City of Rochester, 558 F. Supp. 2d (W.D.N.Y 2008).

There are multiple flaws in the Board’s position. First, section 19005 does not prohibit payment with cash; it merely permits payment by check, electronic funds transfers, credit cards, and other payment devices. Second, its claim that the Coinage Act of 1965 does not require it to accept payment in currency flies in the face of what the United States Treasury has promulgated with respect to that federal statute. In response to someone who asked, “I thought that United States currency was legal tender for all debts. Some businesses or governmental agencies say that they will only accept checks, money orders or credit cards as payment, and others will only accept currency notes in denominations of $20 or smaller. Isn't this illegal?” the Treasury provided this explanation:

The pertinent portion of law that applies to your question is the Coinage Act of 1965, specifically Section 31 U.S.C. 5103, entitled "Legal tender," which states: "United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues."

This statute means that all United States money as identified above are a valid and legal offer of payment for debts when tendered to a creditor. There is, however, no Federal statute mandating that a private business, a person or an organization must accept currency or coins as for payment for goods and/or services. Private businesses are free to develop their own policies on whether or not to accept cash unless there is a State law which says otherwise. For example, a bus line may prohibit payment of fares in pennies or dollar bills. In addition, movie theaters, convenience stores and gas stations may refuse to accept large denomination currency (usually notes above $20) as a matter of policy.

In other words, there is a difference between payment for goods and services and payment of taxes and debts. Third, decision in Tenn. Scrap Recyclers Ass’s v. Bredesen, 556 F.3d 442 (6th Cir.2009), and the cases it cites, including Genesse Scrap & Tin Baling Co. v. City of Rochester, 558 F. Supp. 2d (W.D.N.Y 2008), deal with payment for scrap metal in transactions that include payments for goods, not payment of taxes or debts. Those courts explained that a requirement to pay for goods or services by check or money order and not cash, whether imposed by a government or as terms of a privately negotiated contract, does not change the status of cash as legal tender nor make checks or money orders legal tender. The court provided that explanation because the parties in those cases objecting to the “no cash” rule argued that the rule ignored cash as legal tender and treated checks and money orders as legal tender. Because they were not dealing with payment of taxes, the question of whether the use of cash to pay taxes can be prohibited was not in issue, and thus citing those cases as relevant to the question is inappropriate.

As the California Taxpayers Association pointed out, the federal Coinage Act of 1965 takes priority over section 19005 of the California Revenue and Taxation Code even if section 19005 is interpreted as barring the use of cash, which it arguably does not do, rather than simply permitting the use of checks and other devices to pay taxes. At some point, someone who is prevented from paying taxes with cash, in California or any other place with a statute prohibiting cash payment of taxes, is going to litigate this issue. It might even end up in the Supreme Court. My guess is that one reason California made the exception for cash payments, which might make a case coming out of California not appropriate for reaching that issue – because the taxpayer was given the exemption as a means of escaping the prohibition – is that California did not want its marijuana growers and sellers to litigate the issue in a federal court.

So my answer to reader Morris is as follows. By providing the exemption, California is not, strictly speaking, prohibiting the use of cash to pay taxes, though at some point someone will be denied the exemption and want to pay in cash. The reason that California continues to “get away” with its policy is that no one has yet challenged it in a manner that would bring judicial evaluation. The issue remains unsettled.

What’s More Effective? Taxing and Restricting Soda or Educating People About Healthy Lifestyles?

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

Recently, reader Morris asked me, “What is your opinion on the 5 new bills in California to reduce soda intake?” He pointed me to an article describing those five proposals. One, of course, involved taxes, and it simply is a replication of the “sugary beverage” taxes enacted in Philadelphia and some other localities that pose more problems than they provide solutions. The other four proposals also pose more problems than solutions. Those four other proposals are to reduce unsealed soda container sizes, print warning labels on sugary beverages, remove sugary beverages from checkout lanes, and stop soda companies from offering promotions to retailers.

Rationales for these ideas, though appearing to be sensible, distract attention from a wider problem. The problem is the inability or unwillingness of many Americans to eat and drink and live in a healthy manner. Though sugary beverages presumably are the primary source of sugar consumption, and though excessive sugar consumption can trigger a variety of health problems, focusing on sugar while ignoring all the other unhealthy foods and beverages, to say nothing of unhealthy lifestyles, is not unlike enacting restrictions on drone use by people of a certain age while ignoring misuse of drones by those in other age groups simply because there is somewhat more abuse of drones by people in that certain age group.

When a problem exists, focusing on one cause while ignoring all others is foolish and ineffective. If a house is insufficiently insulated, does it make sense to put in energy-efficient windows while ignoring the lack of attic insulation? If the nation is to become healthier, it will take much more than restrictions on the consumption of sugary beverages. Advocates will claim that restrictions on soda are “a start,” but that’s like locking one door while leaving the others open. As I’ve asked in the past, where are the restrictions on food and beverages that are no less damaging in the long run that soda consumption? What about the excess consumption of donuts, pies, and cakes? Or fast food? Or food tainted with pesticides or that are genetically modified? Perhaps in light of the adverse health effects of red meat and fatty foods, when will there be a focus on sales of bacon?

The flaw in focusing on a “soda tax” is demonstrated by the reach of the Philadelphia soda tax. It doesn’t reach a variety of foods containing high amounts of sugar. Yet it applies to beverages that contain relatively small amounts of sugar and that are in other respects much healthier than cakes and pies. There are plenty of people who drink soda but who are in great shape, and there are too many people who don’t drink soda but who suffer from serious health problems caused by the ingestion of foods and beverages that the soda tax advocates ignore.

So what do I think makes more sense? Being a fan of education, I certainly support putting warnings on dangerous things, including dangerous foods and beverages, though realistically I realize that warnings don’t deter everyone. But health education needs to be more than warning labels. It needs to be emphasized in the K-12 schools. It needs to be powerful. When supporters of warning labels attribute the decrease in tobacco smoking to those labels, they overlook two things. That decrease has been accompanied by an increase in vaping, despite warnings. And what I think worked are those television public service announcements showing the impact of smoking on individuals, who describe life using an electrolarynx or dealing with a throat stoma. Surely similar public service announcements can be crafted to show the dangers not only of excessive intake of soda but of ingesting unhealthy foods, failing to exercise, and omitting healthy life routines. Forcing people to live healthily doesn’t work, has never worked, and will not work. Encouraging people, through education in schools, intense public service announcements, and warning labels, can work, if it is honest and sensible.

When Paying Taxes in Cash is Prohibited

Three and a half years ago, in Does It Make Tax Cents?, I commented on a story about a Pennsylvania taxpayer who paid a tax by dumping 50,000 pennies and some dollar bills and higher denomination coins. Sixteen months later, in It Still Doesn’t Make Tax Cents, I commented on someone’s attempt to pay a parking ticket with loose coins. Two days later, in Trying to Make Cents of Two More Coin Payment Stories, I shared my thoughts on someone’s attempt to pay a $4,000 fine with coins, a tale told in two stories.

Though attempts to pay taxes and fines with coins, particularly pennies, get attention, there hadn’t seemed to be any attention given to the payment of taxes and coins with cash. Presumably, being handed 1,000 one-dollar bills isn’t quite the horror of being handed 1,000 or 100,000 pennies. But things are changing.

Recently, businesses in Philadelphia, and elsewhere, are adopting “no cash payment” policies. They claim that customers can be served more quickly, and lines move faster, when credit cards, debit cards, and iPhone apps are used to make payments. Of course, this presents a problem for people who, for whatever reason, do not possess those types of cards and apps.

According to this report, these “no cash payment” policies brought a reaction from a member of Philadelphia City Council. Bill Greenlee sponsored a bill banning stores that adopt such a policy. Along with other members of Council, he is concerned that as the practice grows, people without the ability to pay with other than cash will find themselves unable to acquire necessary goods and services. Greenlee noted that other jurisdictions either have enacted bans on “no cash payment” policies or are contemplating doing so.

Proponents of the “no cash payment” policies claim that a prohibition will stifle innovation. Another criticism seems more striking. The City of Philadelphia does not accept cash payments for a variety of transactions.

There is a Pennsylvania statute already in place, and in place since 1984, that provides:

It shall be unlawful for any person to refuse to rent or sell property or services to any individual for the reason that the individual does not possess a credit card. Nothing in this section requires the acceptance of any particular form of payment.

The statute does not prohibit governments from adopting a “no cash payment” policy for transactions not involving rent or sales of property and services.

What caused me to think and write about this was the reaction of Upper Darby Township to a situation in its Tax Office. As reported in this story, after an employee of the Tax Office was caught, and admitted to, stealing cash tax payments, the township adopted new policies to prevent the problem from resurfacing. It changed the tax payment system, and adopted a provision prohibiting taxpayers from paying taxes with cash.

As I wrote in It Still Doesn’t Make Tax Cents,

For the curious, it is permissible to pay taxes, debts, dues, and other charges with coins. According to 31 U.S.C. section 5103, “United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues.” It also is permissible for private businesses and organizations to refuse to take currency or coins as payment for services or the sale of goods. The difficult question, which continues to be debated, is whether a person, business, organization, or government agency can refuse to accept currency or coins as payment for a debt, a public charge, a tax, or dues. Though debates continue to flourish over this question, the answer is no.

The deeper question is why a government can have a “no cash payment” policy for tax payments. Although the Pennsylvania statute applies to rent, goods, and services, and not taxes, debts, and dues, there is a federal statute that treats coins and currency as legal tender for taxes, debts, and dues. And as I also pointed out, a well-written statute would clear up this issue, though it would need to be a coherent statute that treated people without credit cards, debit cards, and iPhone apps in the same way no matter what it is they are trying to pay.

Ignoring The Tax Withholding Warning Comes at a Price

In a series of commentaries, including The Realities of Income Tax Withholding, Indeed, Check Your Withholding, and Do It Now, and Time Runs Out on Tax Withholding Adjustments, I cautioned people against getting excited about take-home pay increases that will be offset, to a greater or lesser extent, by refund reductions and tax due amounts when filing season rolls around in 2019. And now that we are in tax filing season, people are discovering what is not news to those of us who paid attention. Numerous articles, including this Philadelphia Inquirer report, are sharing the experiences and reactions of taxpayers navigating what is, to them, a surprising and often unwelcome tax filing process.

The IRS reports that total refunds and the average tax refund have both decreased. People are discovering that their refund is not as large as expected, and, of course, many people expect their refunds to be in line with previous year refunds. Not a few are discovering that they owe tax and must transfer funds or write a check to the Department of the Treasury.

Arguments about the impact of the legislation focus on whether people are paying less tax than last year or more tax than last year. The flaw in that approach is that the only time it works is when a taxpayer’s income remains unchanged. A person who experiences a significant increase in income will almost certainly face a higher tax liability, even if rates are reduced. Likewise, if income drops significantly, tax liability will go down even if there were no tax cuts.

The only fair measure of the impact of the tax law changes on an individual is to compare total tax liability to total income. It makes no sense to compare to taxable income, because the tax law changes cause many taxpayers’ taxable incomes to change even if their income doesn’t change. In other words, what percentage of income must be paid as federal income tax?

Estimates of how many people are seeing a reduction in the percentage of income that must be paid as federal income tax are not available. Instead, we get statements such as the one issued by the Department of the Treasury claiming that most people are “seeing the benefits of the tax cut in larger paychecks throughout the year, instead of tax refunds.” But there is no benefit unless that percentage goes down. Does it? That percentage is not computed on the federal income tax return. It must be computed separately. I wonder how many people, and how many tax return preparers, are doing this calculation.

One Senator claimed that because the average refund is down $170 that people experiencing a reduced refund are encountering a tax hike. Some are, and some aren’t. The reduction in a refund does not answer the question. The Department of the Treasury could provide the information, considering it knows each filer’s income and tax liability, but I doubt it has the inclination, the time, or the financial resources to do the computation and publish summaries.

Another Senator cautioned that relying on early season refund statistics is misleading because the refund statistics change from week to week. That’s true, but again, that’s an argument about which set of useless information should be used. Worse, early filers are usually those expecting a refund. What is going to happen when the later filers, many more of whom expect to owe taxes, join the filing parade?

Another Senator claimed, “That big refund they've gotten used to — that's a goner now that Trump's tax changes are the law of the land, and many might owe the government money. It sure looks like the Trump administration decided to put politics first, lowball the estimates of how much tax should be withheld from everybody's paychecks, and lure people into the false sense of security that they'd gotten a big tax cut, courtesy of Donald Trump." Of course, that’s exactly what happened. It’s a technique often used in private sector business deals, with the front end looking fantastic for the consumer and the back end turning out to be an ocean of interest charges.

Those of us who understand these things saw what was happening. People were warned. The IRS repeatedly told people to check their withholding. Not everyone listened. And now, some are paying the price. When the fine print isn’t examined, when projected computations are not done, when careful analysis is omitted, when limbic impulses overwhelm reason, prices get paid. And those who think that a reduced refund or the need to write a check or transfer funds to the Department of the Treasury is the only price they will be paying need to think again, and again. These refund decreases and tax payment increases are just the first installment in the total price that will be paid.

Is the Proposed New Jersey Stormwater Management Fee an Unfair Tax?

A little less than six years ago, in The “Rain Tax”?, I examined the storm management fee enacted by Maryland, which critics called a “rain tax.” I explained that it was not a “rain tax” because the water that runs off properties can be from sources other than rain, such as vehicle washing and lawn watering. I responded to one critic’s concern about the computation of the tax. I also responded to a long list of objections raised by opponents of the fee.

The New Jersey legislature has passed a bill that would permit local governments to set up stormwater entities to collect fees on property owners and occupants who contribute to stormwater runoff. And, not surprisingly, it has opponents. Last Thursday, in a letter to the editor of the Philadelphia Inquirer that does not appear to be online, David F. Lipton of Toms River, N.J., called it a “rain tax,” described it as a “lawyer’s dream,” and a “constitutional nightmare.” Lipton put the phrase “rain tax” in quotes, and it probably was an editor who used the phrase in the caption for the letter. So considering I’ve explained why this sort of fee is not a “rain tax,” I’ll set that aside.

Why is it a lawyer’s dream? Lipton explains that the provision in the bill permitting a “fee based on a ‘fair and equitable approximation’ of how much runoff is generated from their property.” Yes, that sort of language will invite in the lawyers. But as I wrote in The “Rain Tax”?, those computing the fee “can look to localities in a state such as Pennsylvania, which impose storm water management requirements on construction projects, to learn how to identify impervious surfaces, which actually isn’t rocket science. They can then calculate the total square footage of impervious surfaces in the county, which administers the fee.” It’s not rocket science. Yes, lawyers will jump on the words “fair” and “equitable” to develop arguments for why their clients should not pay the fee, or should pay a lower fee. Some of those arguments will be valid, which is why lawyers exist. Imagine being a property owner from whose property water runs off into the public street, though the water is coming from an adjacent property whose owner has not mitigated that runoff. Of course there will be litigation. There always is litigation when dealing with taxes. If a prerequisite for a tax would be a guarantee of no controversy, there would be no taxes. Though that would delight many, it also means there would be no government, no viable society, no safety, no freedom, and no justice.

Lipton also mentions what happened when the New Jersey legislature enacted a bill that permitted each local government to have its own entity to compute and impose connection fees for new users of the sewage system. The New Jersey Supreme Court held that this approach would allow unequal treatment, violating the New Jersey Constitution. Thus, a statewide system had to be used. Lipton predicts that allowing each of more than 550 local governments to set their own standards will be struck down for the same reason. He’s almost certainly correct. I say “almost” because predicting what a court will do is risky.

But does this mean that the stormwater management fee is unfair? Aside from the constitutional issue Lipton mentions, no, it’s not unfair. In fact, it is a good example of how a user fee should work. It’s a fee that can be avoided by engaging in water runoff mitigation. And that is fair to the environment, and those who use it now and will use it in the future.

Did a Revenge Mistake Alter Tax History?

The Philadelphia soda tax saga, like some other topics I have addressed over the years, is a tale that does not seem to have an end. I have written about the tax in posts such as What Sort of Tax?, The Return of the Soda Tax Proposal, Tax As a Hate Crime?, Yes for The Proposed User Fee, No for the Proposed Tax, Philadelphia Soda Tax Proposal Shelved, But Will It Return?, Taxing Symptoms Rather Than Problems, It’s Back! The Philadelphia Soda Tax Proposal Returns, The Broccoli and Brussel Sprouts of Taxation, The Realities of the Soda Tax Policy Debate, Soda Sales Shifting?, Taxes, Consumption, Soda, and Obesity, Is the Soda Tax a Revenue Grab or a Worthwhile Health Benefit?, Philadelphia’s Latest Soda Tax Proposal: Health or Revenue?, What Gets Taxed If the Goal Is Health Improvement?, The Russian Sugar and Fat Tax Proposal: Smarter, More Sensible, or Just a Need for More Revenue, Soda Tax Debate Bubbles Up, Can Mischaracterizing an Undesired Tax Backfire?, The Soda Tax Flaw in Automotive Terms, Taxing the Container Instead of the Sugary Beverage: Looking for Revenue in All the Wrong Places, Bait-and-Switch “Sugary Beverage Tax” Tactics, How Unsweet a Tax, When Tax Is Bizarre: Milk Becomes Soda, Gambling With Tax Revenue, Updating Two Tax Cases, When Tax Revenues Are Better Than Expected But Less Than Required, The Imperfections of the Philadelphia Soda Tax, When Tax Revenues Continue to Be Less Than Required, How Much of a Victory for Philadelphia is Its Soda Tax Win in Commonwealth Court?, Is the Soda Tax and Ice Tax?, Putting Funding Burdens on Those Who Pay the Soda Tax, Imagine a Soda Tax Turned into a Health Tax, Another Weak Defense of the Soda Tax, Unintended Consequences in the Soda Tax World, and Was the Philadelphia Soda Tax the Product of Revenge?.

The last post in that series examined the claims that union leader John Dougherty and City Council member Bobby Henon pushed for the soda tax in an effort to punish the Teamsters Union. Dougherty allegedly was angry with the Teamsters union for a television ad it had run that put Dougherty “in a negative light.” The ad suggested that Dougherty and Jim Kenney, running at that time for the mayor’s office, which he won, “supported police brutality.” Now, according to this Philadelphia Inquirer report, it turns out that the Teamsters did not arrange or pay for the attack ad. It was the Carpenters union that sponsored the ad, funded by an outfit called Leadership Matters, Inc., which “registered in Pennsylvania a week before the ad aired, just before the May 2015 primary.”

Why would Dougherty make a mistake in identifying who was behind the ad? Both the Teamsters union and the Carpenters union were supporting a different candidate in the mayoral primary, opposing Jim Kenney who was supported by Dougherty. It is understandable that someone would be confused about who is behind a political campaign ad, because national and state election laws, and judicial opinions, have created an environment in which the actual force behind the ad can hide behind a screen of multiply-layered organizations that pop up just before and disappear just after and ad or series of ads. On the other hand, without solid evidence of who is behind an attack ad, reacting to the ad needs to be delayed until that evidence can be ascertained. And, even if the actual identity is known, taking revenge by pushing for a tax that harms individuals not connected with the attack ad controversy isn’t a good long-term strategy. That the tax generates revenue that is put to good use does not in and of itself justify the tax nor the process, or particular elements of the process, that leads to its enactment.

Now, with the soda tax continuing to be the focus of intense political debate, the upcoming election season in Philadelphia is certain to be even more heated than elections in Philadelphia usually are. For those not familiar with Philadelphia politics, election season is always very heated. Though sometimes tax issues get a good bit of attention during a Philadelphia campaign, this time a tax issue might be taking center stage. Charges and denials about the origin of the soda tax are going to be flying in every direction. So guessing an answer to whether this is my last commentary on the Philadelphia soda tax should be easy, barring something taking me out of the blogging circuit.

Why the Job Cuts By Tax Cut Recipients?

At some point, enough people are going to realize that the “give us a tax break and we’ll create jobs” promise is as empty as the pockets of the people who have been axed by the tax break recipients. I have written about this stream of broken promises, and how governments can avoid falling into the trap of believing those promises, in posts such as How To Use Tax Breaks to Properly Stimulate an Economy, How To Use the Tax Law to Create Jobs and Raise Wages, Yet Another Reason For “First the Jobs, Then the Tax Break”, When Will “First the Jobs, Then the Tax Break” Supersede the Empty Promises?, No Tax Break Until Taxpayer Promises Are Fulfilled, and When Job Creation Promises Justifying Tax Breaks Are Broken.

So it’s not surprising, but frustrating, to learn of another example of job creation going to the dark side of job destruction. According to this Bloomberg report, the 23 banks considered by the Federal Reserve to be the most important to the nation’s economy reduced their tax liabilities in 2018 by $21 billion, and during that same year cut 4,300 jobs. Additional cuts are planned. The ratio of employee compensation to revenue shrank. These banks saw their effective federal income tax rate fall from 28 percent to below 19 percent. Wouldn’t that sort of rate reduction be useful for individuals? So someone please explain why these banks needed tax relief? Surely it wasn’t to create jobs.

It’s easy to come up with lists of what could have been done with $21 billion. According to the Bloomberg report, that’s more than enough to fund NASA for fiscal 2019. It’s more than double what the FBI spends in its crime-fighting endeavors. At least NASA and the FBI generate benefits for the public at large. What did those banks do with the $21 billion? One bank spent $1.45 million, a miniscule fraction of its tax saving, for $1,000 employee bonuses. Several boosted their minimum wage, helping a fraction of the work force. Most of them passed a good chunk of their tax savings to shareholders, many of whom were also getting the lion’s share of the tax cuts enacted for individuals.

Companies that ask for tax breaks based on promises to create jobs, and that proceed to cut jobs, should be required not only to return the tax breaks but to pay interest and penalties on the amount procured through the making of false promises. Of course, as I’ve been advocating, the best way to avoid being fleeced by those making false promises is not to provide what is sought by the promise maker until the promise maker delivers on the promise and becomes a promise deliverer. It’s that simple.

Tax Ignorance or Tax Deception?

Reader Morris sent me a tweet by Grover Norquist, who claimed “Slavery is when your owner takes 100% of your production. Democrat congresswoman Ocasio-Cortez wants 70% (according to CNN) What is the word for 70% expropriation?” I’m not on Twitter, primarily because squeezing complex concepts into a limited number of words is a recipe for errors, misunderstandings, and manipulation. I dug round, found the link to this particular tweet by Norquist, and read the comments. Many of the comments made the same point that I made when I replied to reader Morris after he sent me the tweet.

Norquist claims that Ocasio-Cortez “wants 70% . . . of your production.” That simply is not what she has proposed. She has proposed a marginal rate of 70 percent on income above $10,000,000. So unless a person has income exceeding $10,000,000, the proposed 70 percent rate is irrelevant. Norquist apparently is trying to play the fear card, trying to cause someone earning $50,000 a year to think that the federal government would take $35,000.

Here’s the basic point about marginal rates. They are not average rates. They are not effective rates. Here is an example. Using 2018 tax rates, an unmarried person with taxable income of $12,000,000 has a tax liability of $4,405,689, an average rate of 36.7 percent. Using 2018 tax rates, but amended with the 70 percent proposal, the same taxpayer would have a tax liability of $5,805,689, an average rate of 48.3 percent. That’s nowhere near a tax of $8,400,000, which is what Norquist wants people to believe. As one comment put it, “You'd think the president of Americans for tax reform would understand this. I'm betting he does, and is betting 30% of Americans do not.” That comment suggests that Norquist is not suffering from ignorance but is playing with deception. The only flaw is the understatement of how many Americans do not understand how marginal rates work, and thus do not understand the 70 percent proposal.

In 2013, YouGov ran a poll, and the published results are sad. When asked, “Suppose that your income put you at the very top of the 28% tax bracket and you earned one more dollar such that you were now in the 33% tax bracket,” 52 percent selected the correct answer, “My tax bill would go up a very small amount, but 48 percent selected the incorrect answer, “My tax bill would go up substantially.” What was even more revealing was the split between Democrats and Republicans. Of the Democrats who responded, 63 percent answered correctly and 37 percent did not. Of the Republicans who responded, only 38 percent answered correctly, while 62 percent did not. Is it any wonder that there is such an opportunity among Republicans for Norquist and others to share false, misleading, or insinuative information about the 70 percent proposal? As another comment explained, addressing Norquist, “You certainly understand it’s not 70% of anyone’s entire income. You know it’s income over $10 million. So you are trying to mislead people.” Or as another comment framed the situation, “They play to their base's ignorance and then the damage is done.” That same ignorance is what causes “A lot of middle class folks [to] not even realize that they pay a higher effective income tax rate than Billionaires do.”

Whether a 70 percent marginal tax rate on taxable income above $10,000,000 is the best solution is open to debate. Perhaps the rate should be lower, or higher. Perhaps the cut-off should be $5,000,000 with a lower rate, or $25,000,000 with a higher rate. Perhaps there should be several rates and several brackets. That debate, though, needs to take place AFTER most people understand the realities of how marginal rates function.

Norquist and others in the anti-tax crowd suggest, and often declare, that a 70 percent rate would destroy the economy, cause huge job losses, and devastate industry. As another comment put it, “The word for a 70% top tax rate in 2019 is no one is sure. But in the 1950s, a 90% top tax rate equaled one of the best periods in American history when it comes to the growth in wealth per US household. The US could not have built the suburbs without this tax revenue.” As indicated in this chart, the top marginal federal income tax rate equaled or exceeded 70 percent from 1917 through 1921, and from 1936 through 1980. For almost one-half of the history of the federal income tax, top marginal rates of 70 percent or more were the norm.

Issues surrounding federal income tax rates intersect with other issues. It is important to understand how playing with these other issues is used to twist and obfuscate the reasoning necessary to reform the federal income tax so that it does not enhance income and wealth inequality, which, by the way, are far more likely to destroy the economy, cause huge job losses, and devastate industry.

One issue is the charge that high income tax rates constitute “socialism.” Depending on how one defines that word, one can label the interstate highway system as socialism, or one can classify the years with those top marginal rates of 70 percent or more as controlled capitalism, very different from “socialism” as defined by those who think it means a political system that has taxation. Norquist’s attempt to equate high marginal income tax rates with Nazi Germany, because the word “socialist” is in the name “National Socialis German Workers’ Party” was met with the retort, “Grover, the National Socialists (Nazis) were actual socialists like the [Iranian] Republican Guard are actual Republicans. Stop with the BS, you should know better.”

Another issue is Norquist’s claim that high income taxes are, or come close to, slavery, based on his flawed notion that slavery is what happens when someone takes 100 percent of another person’s production. The flaw is that a slave has no choice and must generate production, whereas those who are not slaves and do not want to generate production that is taken by another have the option of not generating production.

One comment addressed the underlying problem: “I can’t understand how so many people don’t know what marginal tax rates are.” The answer is simple. Insufficient education.

In Reaching New Lows With Tax Ignorance. I wrote “Ignorance has become an epidemic.” I think it poses a threat to the survival of democracy, and perhaps even the survival of the species, considering what ignorance has already destroyed. I have written about the horrible consequences of ignorance in numerous posts, so many that the following list is probably incomplete. I have focused not only on tax ignorance but ignorance generally in posts such as Tax Ignorance, Is Tax Ignorance Contagious?, Fighting Tax Ignorance, Why the Nation Needs Tax Education, Tax Ignorance: Legislators and Lobbyists, Tax Education is Not Just For Tax Professionals, The Consequences of Tax Education Deficiency, The Value of Tax Education, More Tax Ignorance, With a Gift, Tax Ignorance of the Historical Kind, A Peek at the Production of Tax Ignorance, When Tax Ignorance Meets Political Ignorance, Tax Ignorance and Its Siblings, Looking Again at Tax and Political Ignorance, Tax Ignorance As Persistent as Death and Taxes, Is All Tax Ignorance Avoidable?, Tax Ignorance in the Comics, Tax Meets Constitutional Law Ignorance, Ignorance in the Face of Facts, Ignorance of Any Kind, Aside from Tax, Reaching New Lows With Tax Ignorance, Rampant Ignorance About Taxes, and Everything Else, Becoming An Even Bigger Threat, The Dangers of Ignorance, Present and Eternal, and Defeating Ignorance, and Not Just in the Tax World. The answer is education. Yet, attempts to educate Americans face high hurdles. As I wrote in Defeating Ignorance, and Not Just in the Tax World:

The challenge in using education to combat ignorance is two-fold. First, those who profit from ignorance use their resources to curtail access to education, particularly quality education. Their efforts include underpaying teachers, underfunding schools and educational resources, and consigning lower income individuals to low quality schools. Second, those who profit from ignorance use their resources to distort curricula, to fill textbooks with misinformation, to leave important material out of educational materials, and to indoctrinate students, particularly those who grow up in cultural bubbles. The effort to keep Americans ignorant or misinformed, which is pretty much the same thing as ignorance, is intense, well-funded, and dangerous. The fear of letting people think for themselves, a skill that I was fortunate to learn and that I have tried to instill in my students, motivates the purveyors of ignorance to take steps that are inconsistent with the survival of a healthy democracy. Put another way, tyrants, dictators, and oligarchs delight in the spread of ignorance. * * * For all of the damage being done, the deeper entrenchment of ignorance in the citizens of an endangered democracy might be the most serious, longest-lasting, and most difficult to reverse.

Certainly Norquist’s tweet does not go into the “effectively combating ignorance” column. It is yet another entry in the “development and perpetuation of ignorance” list. Sad.

Broken Tax Promises: When Tax Cut Crumbs Are Brushed Away

Proponents of the 2017 tax cuts for large corporations and the wealthy bragged that this tax giveaway would generate good-paying jobs and raise wages. They pointed to what turned out to be miniscule bonus payments by a tiny fraction of the employers who were rolling in cash after they cut their taxes to even lower levels. I wrote about this sleight-of-hand in posts such as Those Tax-Cut Inspired Bonus Payments? Just Another Ruse, That Bonus Payment Ruse Gets Bigger, Oh, Those Bonus Payments! Much Ado About Almost Nothing, Much More Ado About Almost Nothing, You’re Doing What With Those Tax Cuts?, Arguing About Tax Crumbs, Don’t Want a Crumb? Here’s Dessert But Give Back Your Appetizer and Beverage, and How Tax Cuts for Large Corporations and Wealthy Individuals Impact Jobs. Rather than creating jobs, the 1,000 largest publicly traded companies reduced net employment by 140,000, as reported in this New York Times article. And, as Noah Smith pointed out in his Philadelphia Inquirer article, those bonus payments praised by the tax-cut folks constituted a trend that was “exaggerated,” a conclusion supported by an economic study he cited that demonstrated how those bonuses did not generate a significant increase in 2018 compensation.

Perhaps one reason that the bonuses did not do much in terms of worker compensation was the fact that there is a difference between announcement of a bonus, which gets the tax-cut acolytes all excited, and actual payment of the bonuses. What happened at Aramark demonstrates why talk is cheap and actions matter.

At first, in late 2018, as reported in this article, Aramark, a beneficiary of those 2017 tax cuts, and reporting its highest profit margin ever, based on profits of $1.1 billion, announced not only a reduction in its contributions to employee retirement plans, but also a delay in payment of bonus payments that had always been paid in December. Instead, the bonus payments would be paid on February 15, 2019. Then, in early February of this year, as reported in this article, the company announced that there would be no bonus payments for managers in the four lowest of eight compensation levels. Instead, “select” employees would receive one-time awards.

This is a company that racked up $237.8 million in tax reductions thanks to the 2017 tax giveaway. Ought not at least some of that money be used to increase contributions to retirement plans? Instead, not only was the company contribution not increased, it was reduced. Ought not some of that tax break money be used to pay bonuses, and even increased bonuses? Instead, bonus payments have been eliminated for many employees. The CEO, incidentally, whose total compensation is $16,000,000, received a bonus of $2,600,000. As reported in this article, though the $16,000,000 was a reduction from $16,300,000, Institutional Shareholder Services, a shareholder advisory firm, tagged the compensation as “high relative to peers.”

Aramark has a clawback policy that permits it to recover incentive compensation paid on “misstated financial results.” It has expanded that policy to cover more than 165 executives. It seems to me that there also ought to be, for all companies, a tax break clawback provision that permits the federal government to recover tax breaks paid on misstated promises of increasing compensation for all employees. As I wrote in What’s Not Good Tax-Wise for Most Americans Is Just as Not Good for Small Businesses:

If, indeed, the goal of the Congress and the Administration is to assist all Americans, including small business owners, then it would have proceeded, and would proceed, in a manner consistent with the platitudes too many of its members tweet, bark, and spew. Instead of handing out tax breaks to large corporations and wealthy individuals while driving up the deficit that will wreck the economy, Congress and the Administration should have, and could have, made tax breaks available only after the tax break recipient performs what has been promised. This is what I suggested in How To Use Tax Breaks to Properly Stimulate an Economy, How To Use the Tax Law to Create Jobs and Raise Wages, Yet Another Reason For “First the Jobs, Then the Tax Break”, and When Will “First the Jobs, Then the Tax Break” Supersede the Empty Promises? Of course, my suggestions fall on deaf ears in the nation’s capital, because it is no secret that adopting this approach would expose what is really happening behind the curtain of deflections, misstatements, and fabricated claims. What is happening is not good for the vast majority of Americans, nor is it good for small business.

I wonder, if the tax cuts had been tied to actual job creation performances and not empty promises, whether more jobs would have been created or far fewer large corporations and wealthy individuals would have lined their pockets. I have yet to read any sensible argument why making tax breaks conditioned on actual performance rather than on false promises is a bad idea or something that cannot be implemented. The number of broken promises in society needs to be reduced, and hopefully eliminated, and anyone who objects to taking steps that reduce or eliminate broken tax promises perhaps should be given the opportunity to experience life on the other side of a broken promise.

Was the Philadelphia Soda Tax the Product of Revenge?

Last week, when the U.S. Attorney’s Office issued an indictment of eight individuals, as described in this report, among others, I didn’t dig into the details. But then another report appeared that caught my eye. I saw the phrase “soda tax.” What’s THAT about?

As readers of this blog know, the soda tax has been the subject of posts since 2008. I have written about its flaws in posts such as What Sort of Tax?, The Return of the Soda Tax Proposal, Tax As a Hate Crime?, Yes for The Proposed User Fee, No for the Proposed Tax, Philadelphia Soda Tax Proposal Shelved, But Will It Return?, Taxing Symptoms Rather Than Problems, It’s Back! The Philadelphia Soda Tax Proposal Returns, The Broccoli and Brussel Sprouts of Taxation, The Realities of the Soda Tax Policy Debate, Soda Sales Shifting?, Taxes, Consumption, Soda, and Obesity, Is the Soda Tax a Revenue Grab or a Worthwhile Health Benefit?, Philadelphia’s Latest Soda Tax Proposal: Health or Revenue?, What Gets Taxed If the Goal Is Health Improvement?, The Russian Sugar and Fat Tax Proposal: Smarter, More Sensible, or Just a Need for More Revenue, Soda Tax Debate Bubbles Up, Can Mischaracterizing an Undesired Tax Backfire?, The Soda Tax Flaw in Automotive Terms, Taxing the Container Instead of the Sugary Beverage: Looking for Revenue in All the Wrong Places, Bait-and-Switch “Sugary Beverage Tax” Tactics, How Unsweet a Tax, When Tax Is Bizarre: Milk Becomes Soda, Gambling With Tax Revenue, Updating Two Tax Cases, When Tax Revenues Are Better Than Expected But Less Than Required, The Imperfections of the Philadelphia Soda Tax, When Tax Revenues Continue to Be Less Than Required, How Much of a Victory for Philadelphia is Its Soda Tax Win in Commonwealth Court?, Is the Soda Tax and Ice Tax?, Putting Funding Burdens on Those Who Pay the Soda Tax, Imagine a Soda Tax Turned into a Health Tax, Another Weak Defense of the Soda Tax, and Unintended Consequences in the Soda Tax World. Thus my interest in this bit of news.

It turns out that two of the indicted individuals, electricians union business manager John Dougherty and City Councilman Bobby Henon, who were significant advocates for the Philadelphia soda tax, allegedly pushed for enactment of the tax in an effort to punish the Teamsters union. Dougherty allegedly was angry with the Teamsters union for a television ad it had run that put Dougherty “in a negative light.” The indictment claims that Dougherty told another union official, “Let me tell you what Bobby Henon’s going to do, and he’s already talked to [elected local public official]. They’re going to start to put a tax on soda again, and that will cost the Teamsters 100 jobs in Philly.” It also claims that when a member of the mayor’s administration started to explain why the soda tax would be good for the city, Dougherty replied, “You don’t have to explain to me. I don’t give a f—. Listen, my goal is to make sure you are alright, that’s all.” Allegedly, Dougherty and Henon stayed in touch during the time the soda tax proposal went through the legislative process. Some commentators consider the allegation as fuel for increased opposition to the soda tax from the beverage industry. It seems that the Teamsters union would also be aggravated by the disclosure, considering it has opposed the tax from the outset. Worse, the indictment alleges that Henon, a member of City Council, pushed for the tax as “part of a corrupt bargain he struck with Dougherty in exchange for a $73,131 salary from Local 98 and tickets to sporting events worth $11,807.”

The mayor of Philadelphia, Jim Kenney, explained, “It may have been a revenge plot by Local 98, but it wasn’t to do with me.” He claimed that his finance director suggested a soda tax shortly after he was sworn in as mayor. The soda tax had been proposed and rejected during the term of his mayoral predecessor. Kenney and Dougherty have known each other since childhood, went to school together, and have been active in Democratic politics in the city for a long time. Henon, in the meantime, denied any wrongdoing.

Several days later, two members of the Kenney administration issued a reply. Essentially, they repeat the mayor’s claim that the idea for the soda tax originated with the finance director and that Dougherty had nothing to do with it. They explain that the discussion started with a recognition of the city’s need for revenue to fund pre-K, rehabilitation of parks, recreation centers, and libraries, and other projects. They claim that they had no knowledge of Dougherty’s alleged effort to harm the Teamsters union until the indictment was released. They claim that “the tax was the result of creative thinking around improving education for our children and economic development in our neighborhoods.” After not finding money in the budget because they didn’t want to make more spending cuts in other programs, they considered new revenue sources. They claim that they “reviewed multiple options to raise new revenues,” but they do not identify those options, Instead they “decided to pursue the beverage tax because it provided the necessary revenues, it would not negatively impact other revenue sources needed to fund the School District of Philadelphia or other city services, and the reduced consumption of sweetened beverages has other health benefits that benefit Philadelphia.” A tax on donuts, candy, pies, cakes, fried foods, or other unhealthy food items would also raise revenue and have health benefits. Would such taxes harm the Teamsters union? I don’t know. Were such taxes among the “multiple options”? I don’t know. It seems to me that more information about the origin of the soda tax would be helpful and arguably necessary. Of course, these city officials point out the benefits generated by the revenue raised by the soda tax, but the same benefits arguably would be generated by a lower tax on a wider array of unhealthy foods and beverages.

It remains to be seen what actually transpired behind the scenes. My guess is that a multitude of factors were at play, and not all of them were as noble as the soda tax advocates would want us to believe.

Will Tax Increases Be Inevitable as the Federal Budget Deficit Increasingly Corrodes the Economy?

A few days ago, in this commentary, Mark Zandi pointed out that the “U.S. government is set to spend $1,000,000,000,000 more than it earns,” and asked, “Who’ll pay for it?” It’s a good question, and it’s one I’ve addressed at least several times in the recent past. In A Peek Into Congressional Tax and Deficit Confusion, I pointed out the inconsistency between Paul Ryan’s expression of regret for “not paying off the national debt” and his participation in a tax giveaway to the wealthy and large corporations that has caused the nation debt to grow beyond anything anyone would have imagined ten years ago. In fact, Ryan claimed that the “tax overhaul” enacted “under his leadership” would be be viewed by history as very good. In Another Tax Cut Failure, and So a Tax Cut Incentive Didn’t Work As Promised, But I Am Not Surprised, I explained how one aspect of the promised economic benefits of the tax breaks enacted for corporations, namely, a reduction in tax on repatriated earnings, wasn’t producing anything near the promised benefits. In a series of commentaries, including How To Use Tax Breaks to Properly Stimulate an Economy, How To Use the Tax Law to Create Jobs and Raise Wages, Yet Another Reason For “First the Jobs, Then the Tax Break”, When Will “First the Jobs, Then the Tax Break” Supersede the Empty Promises?, No Tax Break Until Taxpayer Promises Are Fulfilled, and When Job Creation Promises Justifying Tax Breaks Are Broken, I have explained how the jobs promised by the advocates of the deficit-enlarging tax giveaway have not materialized, or have shown up as low-paying positions prohibiting workers from meeting their financial needs.

Mark Zandi points out several aspects of the deficit catastrophe hanging over our heads. He notes that the fiscal restraint and responsibility once practiced by members of both parties has disappeared. Annual budget deficits exceeding one TRILLION dollars are upon us and promise to continue if nothing is done. Aside from recession years, the deficit has not reached as high a percentage of the economy as it now does.

Zandi points out what I have been writing and saying for year, that the supply-side trickle-down approach to federal budgeting, does not work. He writes, “Lawmakers who argued that the cuts would pay for themselves by jump-starting sustainably stronger growth and thus much more tax revenue were completely off base. Revenues are plunging.” He also points out, as I have noted, that the tax breaks for corporations have not triggered any measurable increase in investment, making that claim look “more and more like a pipe dream.” None of this surprises those of us who understand how taxes and the economy work. Piled on top of this are large increases in defense spending and in non-defense expenditures. Seriously, if a Congress decides it needs to increase spending, especially for defense, then it ought not be lowering taxes. Imagine if that approach had been taken in the 1940s.

So what’s so bad about huge federal budget deficits? Zandi shares what should be apparent to those who look closely at how economies work. The federal government will need to borrow much more money. That will add more spending to the budget, because the interest expense will increase. It also will cause interest rates to increase, because of the law of supply and demand. With the federal government grabbing more of whatever money is available to borrow, everyone else who needs to borrow, which is everyone other than the oligarchs swimming in tax break money, will find loans more difficult to obtain and interest rates even higher. This shrinks the economy. It begins to spiral down, not up as promised. Alternatively, the federal government can print money, which would pile hyperinflation on top of the economic mess.

What Zandi doesn’t mention is that finding money to borrow, the federal government or someone in the 99 percent, requires looking to those who have money to lend. It is no surprise that the oligarchy drowning in tax break money will be ready to lend, for interest rates that will surely not be declining. Eventually there will be a nation 95 percent or more of whom will be in debt to a handful of trillionaires.

So what’s to be done? Zandi tells us, “To rein in the nation’s deficits and debt will require both higher taxes and spending restraint.” Who gets taxed? According to Zandi, “The increased tax burden can only fall on wealthy and high-income taxpayers, simply because that’s where the money is.” Of course, the wealthy, one of whom has already suggested he will run for president in 2020 because he can’t afford to have his taxes increase, will object mightily, will use their wealth to dictate to the Congress that taxes on them not be increased, or to dictate to at least enough of the Congress to obstruct any tax increases on the wealthy. They will insist that the deficit be reduced by the “spending restraint” portion. Zandi thinks that it “must fall on the healthcare system, because its outsized growth in caring for the elderly and poor is busting the government’s budget.” The oligarchs have their eye on more than Medicare and Medicaid. They also want to eliminate, in steps, Social Security. The net effect would be a population reduction similar to what a pandemic would bring. Already, life expectancy is declining in the United States, even though it spends more on healthcare per capita than other nations. The healthcare spending problem can only be resolved by fixing the underlying causes, namely, overpriced pharmaceuticals, fraud, inefficiencies, and oligopolies taking over health care practices. That, too, will be difficult to do, because the oligarchs have a vested interest in the profits that can be extracted from providing health care. When an oligarch suggests that air and water should be purchased, it is easy to see glimmers of the plan.

To those who argue that it would be against the interests of the oligarchs to let the middle class and poor diminish in number or disappear, I suggest taking a look at Will Bunch’s commentary on “how the world’s billionaires and their powerful friends are talking about an automated near-future in which millions of jobs from truck driver to bookkeeper to newspaper journalist are replaced by machines,” perhaps eliminating as many as 40 percent of jobs by 2034. Bunch sees it as “a development all but guaranteed to cause massive societal upheaval but the grand poobahs of technology are powerless to stop it...because, you know, shareholders.” He’s quite right. He adds, quoting the president of Infosys, “CEOs who once had been thinking of gently trimming their workforce because of automation are now thinking bigger, that, ‘Now they’re saying, ‘Why can’t we do it with 1 percent of the people we have?’’”

What needs to be done, to fix the deficit as well as to counterbalance the impact of the so-called “robot revolution,” or “robot apocalypse” in some quarters, is what I have been advocating, and what Will Bunch suggests in his commentary. He writes, “I do think the idea of higher income or wealth taxes on multi-millionaires and billionaires . . . should be seen as a potential form of garlic to ward off any the invasion of the robots.” He explains, “Higher taxes on the rich — with a top marginal income tax rate ranging from 70 to 91 percent — played a role in the economic boom of the 1950s and ’60s. The high tax rate inspired CEOs to invest in their workers, or in capital that created new jobs, rather than in themselves and their suppressed yearnings for multiple mansions and yachts. The government also had more tax revenue to spend on projects like infrastructure, which created even more decent middle-class jobs.” Certainly this nation can “bring back the 50s and 60s” without bringing back the social baggage that predominated in that era, by bringing back the sensible economic policies of that time.

Zandi expresses pessimism. He writes, “Unfortunately, it doesn’t look like Washington is capable of doing much of anything anytime soon, let alone tackling the daunting challenge of raising taxes and reining in spending.” Until oligarch money is removed from the equation, “Washington” isn’t going to do much of anything for the 99 percent. It won’t be permitted to do anything that removes the oligarchs from power. Will Bunch addresses those oligarchs with advice I doubt most of them will heed: “Maybe stop obsessing over artificial intelligence and use some emotional intelligence for a change. The short-term sugar rush of quarterly profit margins won’t be worth a warm bucket of spit in an economy with Great Depression levels of unemployment, where the only guaranteed job is building the barricades of a social revolution. That means thinking about stakeholders, including workers, and not just shareholders.” Indeed. As I have pointed out many times, capitalists need consumers, and consumers need money to be consumers, which means they need jobs. The best approach to growing a business is to invest in workers.

What both Zandi and Bunch write is consistent with what I wrote in A Peek Into Congressional Tax and Deficit Confusion: “If it is difficult for a member of Congress to understand basic arithmetic and the practical reality of economics, imagine the challenge facing most Americans. This is what encourages advocates of failed tax policy to continue preaching this nonsense [of tax cuts for the wealthy and large corporations trickling down to the masses]. They have the means to do so because they are financed by the handful of wealthy individuals and large corporations that benefit from a situation that is detrimental to almost all Americans. Though some people look at their present situation and consider it comfortable, very few examine the long-term consequences of this harmful tax-cut gimmick and the impact of those consequences on their lives ten, twenty, or thirty years from now.”

I share the pessimism. As I also wrote in A Peek Into Congressional Tax and Deficit Confusion: “Perhaps it is the inability to understand tax and economic policy that encourages too many voters to line up with those who offer false promises that make for great tweets and sound bites but that in the long run, and in many instances in the short run, are disadvantageous to the vast majority of Americans. By the time enough people figure this out, it will probably be too late. So for those who don’t yet get it, cutting taxes for the wealthy and large corporations not only fails to reduce or pay off national debt, it also fails to improve the economic position of everyone else.”

When a mistake has been made, fix it. Fixing a mistake often requires undoing, or reversing, what was done. A person who drives past the store they wanted to visit needs to turn around. A person who types the wrong letter in spelling a word needs to hit the backspace key. A Congress that foolishly cut taxes needs to uncut those taxes, and not just in the future. The tax breaks that were dished out but that were not used for what was promised are not unlike a merchant giving too much change to a customer. Undo the tax cuts. It’s that simple. Otherwise, an exploding deficit will meet some robots, and it won’t end well for pretty much everyone.

Is a User-Fee-Based System Incompatible With Progressive Income Taxation?

Reacting to my commentary, Who Should Pay to Clean Up Water, suggesting that the cost of cleaning up polluted water should be borne by those who pollute the water, a reader asked me to reconcile that position and my support for the mileage-based road fee with my support for the use of a progressive income tax to pay for social safety nets. The challenge of fitting different types of user-based fees with progressive income taxes has existed since the income tax was enacted. It has inspired many commentators to share their perspectives. Here is mine.

When examining the use of federal income tax revenue generated by a progressive income tax, it makes sense to consider the various programs that consume federal revenue. There are many, but I focus on several of the biggest or most vexing.

The federal government spends money on national defense to protect lives and property. Those with more property have more to lose, and thus should pay more. Though a flat rate tax might appear to accomplish this, income is not the same as wealth, as many people with wealth manage to make their income, or at least their taxable income, appear disproportionately less than wealth. I’d prefer a tax on wealth, but I think that would violate the direct tax prohibition (as it would pretty much be a federal property tax). The closest one can get to that ideal system is a tax on real income, This is one major reason, by the way, why I support removal of most exclusions and deductions. For the curious, another major reason is my preference for the reduction of complexity in tax systems.

Governments at all levels spend money on assisting those with financial and health problems. I consider this, too, to be an aspect of national defense. Those financial problems contribute not only to the health problems but also to other problems such as education deficiencies and crime. History is filled with examples of military forces at a disadvantage because their recruits were unhealthy, inadequately educated, or otherwise suffering from the effects of financial problems. Even the United States, in both World Wars, had to spend money to bring its military recruits “up to speed” in remedial education and health efforts before getting them through basic training. The need for education is even more important in the twenty-first century. When the next war breaks out, there will be even less time to engage in remediation required to offset the deficiencies that safety nets address, especially because those safety nets are inadequate and inefficient. For me, the bigger issue is not whether we should be investing in the nation’s human capital the way we have been investing in financial capital, but how the nation should be spending the money devoted to developing, strengthening, and protecting its human capital. For example, too much money spent on health care assistance flows into the coffers of pharmaceutical companies that prevail on captive legislators for tax breaks and raise prices to make even more profit to satisfy the insatiable desire of the wealthy for even more profit. From a long run perspective, the focus needs to address not just immediate health care issues but also the education required to teach people how to live in ways that reduce health problems. Similarly, there needs to be investment in teaching people how to improve their financial lives, and life generally, by staying in school and avoiding particular harmful behaviors. Payment for these efforts cannot come from those who lack financial resources, but must come from those who would benefit the most from having a larger “supply” of national defenders and who would lose the most if the national defender pool continued to become inferior in terms of health and education.

Governments at all levels spend money on programs such as environmental cleanup. Cleaning the environment benefits everyone, but again, it is those who have the most who have the most to lose.

From a macroeconomic perspective, a nation with a significant portion of its population sick and uneducated, especially as that portion has been rapidly growing, becomes increasingly a nation with a smaller consumer base, which is detrimental to the interests of the wealthy. Throughout corporate America, large corporations are swallowing up small, local enterprises, trying to “buy” customers, rather than enticing them with high quality goods and services. Private equity funds and hedge funds are acquiring everything they can grab. The number of people holding large amounts of wealth and thus controlling the nation and its legislatures is shrinking, while their wealth grows, causing substantial increases in the number of people with little or nothing, or just getting by as members of a shrinking middle class. The trend is such that eventually fewer and fewer people will own more and more. Taken to its logical extreme, what happens when one person, directly or through owning all corporations and private equity funds, owns everything? To whom will this person sell? Granted, this scenario is improbable, because the tipping point will be reached before the contestants for world financial domination reduce themselves to the last two standing. It demonstrates, though, not only why supply-side economics and trickle-down theories not only are failures and masks for the satisfaction of greed but also the need for progressive taxation. A progressive income tax is the braking system necessary to prevent the consequences of the inevitable runaway oligarchic and monopolistic consequences of unfettered capitalism.

When the Tax Stuff Piles Up

One of the unfortunate consequences of the federal government having been shut down for as long as it was is the backlog that piles up. Life brings all sorts of backlogs. We encounter backlogs caused by equipment failure, backlogs caused by traffic accidents or road repairs, and backlogs caused by people running late due to other backlogs. It is not unusual to encounter backlogs when returning from vacation, particularly with mail and packages piling up, though in recent years the volume has been reduced because of the shift from paper to digital communication.

During this week, we have been informed that when IRS employees returned to work when the shutdown ended, they found 5,000,000 pieces of unopened mail. Apparently the shutdown not only caused the usual mail to accumulate, but the closure of in-person IRS help centers left taxpayers with little choice but to use mail. So instead of getting the usual 200,000 pieces of mail each day, the IRS received 700,000.

The Tax Court has experienced a similar avalanche. According to this report, the Tax Court, stopping mail delivery during the shutdown, has received a “mountain” of mail. It is unclear whether the inability to file electronically generated more paper mail than usual.

The mail backlog is just one facet of the impact of the shutdown on the federal tax system. The list of questions and problems is long. Bloggers at the Procedurally Taxing blog, published by four current and former full-time and adjunct colleagues, including a former student, has offered a series of commentaries examining these questions:

A Close Look at the IRS Shutdown (27 Dec 2018)

Tax Court Operations During Federal Government Shutdown (29 Dec 2018)

Don’t Forget Guralnik and Parkinson during Tax Court’s Indefinite Closure (31 Dec 2018)

Dealing with the Shutdown When You Have an Impending Calendar Call: Take Me Back to 2013 (15 Jan 2019)

IRS Updates Contingency Plan (16 Jan 2019)

After The Shutdown: Dealing with Time Limitations, Part I (22 Jan 2019)

After The Shutdown: Dealing with Time Limitations, Part II (23 Jan 2019)

The Taxpayer Advocate Service’s Role During an IRS Shutdown (25 Jan 2019)

Finding Guidance on the Effects of the Shutdown (27 Jan 2019)

After The Shutdown: Dealing with Time Limitations, Part III (28 Jan 2019)

After The Shutdown: Dealing with Time Limitations, Part IV (31 Jan 2019)

All of these commentaries, and surely any that follow, are worth examining, and will continue to be helpful as the process of digging out from the backlog continues. They will continue to be valuable if another shutdown occurs. And if that happens, I expect more guidance and commentary from the quartet that is far more adept at tax procedure than I am.

Edited 1 Feb 2019 to add Finding Guidance on the Effects of the Shutdown, Part IV, released after this post was originally published.

Pay Tax Now? Pay Tax Later?

Those familiar with how federal income tax disputes can be resolved know that in most instances taxpayers have a choice. They can pay the amount that the IRS claims is due, and then file a claim for a refund. They can decide not to pay and file a petition with the Tax Court. If they prevail in their refund claim, they get interest on the refund. If they lose in the Tax Court, they pay interest on the deficiency.

A recent Philadelphia Inquirer article explains that Philadelphia will permit property owners disputing their 2019 real estate tax assessments to delay paying the disputed tax increase until their appeals are concluded. There currently is a big backlog of pending appeals, most of them generated by the city’s recent re-assessment of properties.

The legislation passed despite the mayor’s refusal to agree. The mayor’s signature is not required if the legislation has passed City Council by a sufficient margin. The mayor’s objection reflects his concern that the delay in collecting the disputed increased taxes will harm the city and the school district because it will reduce their current year revenue.

What is unclear to me is whether property owners who do not prevail in their assessment appeals will be required to pay interest on the unpaid tax for the period between when it otherwise would be due and when it eventually is paid. My attempt to find the specific legislation was unsuccessful, as no 2019 legislation is showing up yet on City Council’s web site. My attempt to find the Philadelphia general rules with respect to postponed real property tax payments also failed. The article simply states, “After appeals are settled, which can take a year — or longer if appeals continue into the court system — property owners would need to pay the difference if the outcome of their appeals were still higher than their 2018 assessment.” No mention is made of interest. It is possible that there is a general requirement of interest payment but the specific legislation in question waives it. Without the text of the legislation it is impossible to know the answer.

It seems to me that taxpayers who are appealing assessments ought to have the same sort of choice facing taxpayers who face IRS claims of additional income tax due. If they choose to delay paying the increased real property tax, and lose the appeal, they ought to pay interest. They also should have the option of paying the disputed real property tax increase, and if they win the appeal, they should be paid interest. Perhaps it works that way and I simply cannot find the provisions that specify those choices and interest payments. If someone knows the answer, please let me know.