Is It Finally Time to Fix the Tax Law Flaws That Encourage Asset Stripping?

Last October, in What to Do When Drowning in Money and Hauling in Tax Cuts, I explained why pumping tax breaks into the hands of people already basking in the benefits of low capital gains rates, almost non-existent federal estate taxes, and the unjustifiably favorable treatment of carried interests is foolish and dangerous:

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.”

At the end of my commentary, I shared these thoughts:

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.

Now comes news, in a Philadelphia Inquirer report, that Sears is suing its former chairman, Eddie Lampert, and board members, alleging that they engaged in a scheme to transfer Sears assets to themselves and their hedge funds. In other words, they are being accused of what I described, namely, setting out to “extract the last bits of value and to abandon what’s left.” The amounts in question total in the billions of dollars. The cost, according to the complaint, includes creditors getting paid pennies on the dollars, job losses, and store closures. The hedge fund disagrees, calling the complaint “baseless” and “fanciful.”

The allegations, if proven true, are astounding. Allegedly, Lampert directed employees to create misleading documents showing Sears on the brink of reaping “huge profits” when in fact it was losing billions of dollars a year. What is not disputed is that Lampert and the board paid $40 million to settle another lawsuit claiming that they sold Sears’ best real estate to another of Lampert’s businesses. Describing the transaction as “highly conflicted,” the Sears shareholders who sued predicted that it would ““plunge the company into insolvency.” Indeed.

Members of the board include the founder of an investment management firm, the president of a hedge fund, and the managing partner of another investment firm. Also on the board was Lampert’s college roommate, who is now Secretary of the Treasury. The reaction of Mark Cohen, director of retail studies at Columbia Business School and the former chief executive of Sears Canada, provides an insight into the sort of attitude being brought into government. He explained that “Lampert ran the company like it was a private company owned by him. But it wasn't private. It was very much a public company." Jordan Thomas, a partner at Labaton Sucharow and former Justice Department trial lawyer, put it this way: “For all of the directors, there will be an assessment of independence and whether they exercised appropriate fiduciary duty in making their decisions.” There’s the key phrase: fiduciary duty. Acting responsibly as a fiduciary is what too easily disappears when money accumulation for one’s self becomes the paramount goal.

The ability to engage in the sort of disruptive behavior by hedge funds and private equity firms that has afflicted the economy for the past decade and a half is significantly enhanced by the influx of money into that world caused by unwise tax breaks. Considering the damage done in the latter part of the last decade by these sorts of entities, the last thing that the Congress needs to be doing is to enact more and more tax breaks for their activities. The world is awash in capital, and owners of capital do not need more capital, other than to satisfy money addiction. It is time not only to repeal the unwise tax breaks but also to enact provisions to take back, and give to the 99 percent who don’t play these risky games, the tax breaks that ought not to have been granted. Considering how many members of Congress vote for these tax breaks because of “contributions” from the individuals who get the tax breaks, the return of the tax breaks are justified on the grounds that they were obtained not through the exercise of fiduciary duty by members of Congress but through the treatment of the federal government as a “private company” owned by members of Congress and other government officials.

Back in March, in Will Private Ownership of Public Necessities Work?, I issued a warning that at least some dismiss as over the top:

As companies merge, as hedge funds and private equity funds purchase companies, strip them of assets, and toss them aside, as local businesses are overwhelmed by national and global chains that give little regard to local concerns, as consumer choices are reduced because the number of providers from which to select decreases every year, and as private industry that cannot be held responsible at the voting booth becomes the replacement for government, the foundations of democracy will erode and the republic eventually will collapse.

I stand by that prediction. Unfortunately, I fear that too many Americans will heed the warning signs about as eagerly as do the ones who, as described in this article, are “oblivious or disdainful” when they receive as tornado warning, at least until they’re being blown out of Kansas.

Keeping Track of Charitable Contributions for Tax Purposes

So a bit of a brouhaha has popped up with respect to Beto O’Rourke’s charitable contributions. Rather than focusing on the question of whether a person’s charitable inclinations should include time spent running for office, I want to focus on the issue of unclaimed potential charitable contribution deductions.

As reported in various stories, including this Philadelphia Inquirer report, O’Rourke is being criticized because the charitable contribution deduction on his released tax returns amount to 0.7 percent of adjusted gross income. O’Rourke explained that "We've made donations to so many organizations in small amounts, in the hundreds of dollars, in larger amounts, in the thousands of dollars. This is beyond what's itemized and reflected in our taxes. . . . [we] "just didn't report it because it wasn't important for us to take the deduction. Never thought it would be an issue because I didn't expect to release my taxes 'cause I never thought that I'd be running for president." O’Rourke disclosed, "We're trying to go back to some of these organizations to see if they can share with us, over the last 10 years, how much we have donated."

Taking this apart, there are two types of potentially deductible charitable contributions to consider. The first type is the small cash donation, often a dollar or two or five or ten or twenty, dropped into a collection plate, or a charity’s giving bowl, or otherwise made on the spur of the moment. There is no record, there is no letter of acknowledgement, and the deduction disappears for that reason. It’s why I encourage people to make donations other than in cash, or when making a donation in cash, to use envelopes, if provided, to supply the charity with donor information so that the charity can issue a tax-satisfying confirmation letter. As to these unsubstantiated cash donations, it is highly unlikely that O’Rourke will be getting any sort of confirmation from the charities. The second type is the substantiated deduction that a taxpayer simply fails to deduct on the return. In these instances, the taxpayer should have the confirmation letters, unless they were lost, which is why the taxpayer would need to request the charity to issue another one. It’s unclear if this is the situation in O’Rourke’s case.

So why forgo the deduction? There are many reasons. I have written about this issue, a controversial one, by the way, in No Thanks, Uncle Sam, You Can Keep Your Tax Break, 31 Seton Hall Leg. J 81 (2006), There are times when a deduction would be wasted because it does not generate a tax benefit and yet claiming it would generate some other disadvantageous consequence. The including this Philadelphia Inquirer report explains that “O'Rourke implied that the family didn't need the tax reductions, though, and his personal finances suggest that's the case.” It hen reveals that, “According to the nonpartisan Center for Responsive Politics, O'Rourke, who left Congress in January, had a net worth of nearly $9 million in 2015.” Of course, high net worth does not necessarily mean that a tax deduction has value, if the taxpayer’s income in a particular year is low or if there are sufficient other tax breaks to reduce tax liability to zero. It’s unclear why O’Rourke’s “personal finances suggest” that his “family didn’t need the tax reductions.” According to this Washington Post story, in 2017 he and his wife reported “more than $370,000” and “paid about $81,000 in taxes.” It seems to me that deducting the charitable contributions made in 2017 would have reduced tax liability and thus would not mesh with the idea that he “didn’t need the tax reductions.”

So is it a matter of unrecorded and unsubstantiated cash contributions? Is it a matter of charities failing to send the required confirmation letters? Is it a matter of having lost those letters before preparing the return? Is there some other reason to have decided not to deduct all of the charitable contributions that were made?

The Institutionalization of Ignorance

Detest is a strong word, but it works for me when I explain that I detest ignorance. There is nothing beneficial about ignorance, there are ways to eliminate ignorance and its consequences, and there is every legal, social, moral, and sensible justification to stand up against ignorance. Ignorance is the ally of evil.

I have written many times about ignorance, usually focusing on tax ignorance but also expressing my concern about ignorance generally and how it is ripping apart the threads that hold civilized society together. A probably incomplete list of my commentaries about ignorance and its dangers includes 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, Defeating Ignorance, and Not Just in the Tax World, and Tax Ignorance or Tax Deception?.

As reported a few days ago by numerous sources, including this report, White House press secretary Sarah Sanders had this to say about the prospect of Congress reviewing the President’s tax returns:

I don't think Congress, particularly not this group of congressmen and women, are smart enough to look through the thousands of pages that I would assume that President Trump's taxes will be. My guess is most of them don't do their own taxes, and I certainly don't trust them to look through the decades of success that the President has and determine anything,

My reaction was not one of surprise, because this isn’t the first time that nonsense has emerged from the mouth of Sarah Sanders. I almost laughed. How could someone in a position of serious responsibility be so ignorant? Is it that difficult to learn the facts, to brush up on a topic before opening one’s mouth? Apparently, judging from what I read and hear, too many people indeed find it difficult to engage their brain before opening their mouth.

Here are some pieces of information that Sarah Sanders apparently does not know, but should have known. Of course, it is possible that she knows these things but chose to engage in deception, hiding the truth from the millions of listeners who give cult-like attention to what she represents.

1. As noted in his biography, Representative Brad Sherman “is a Tax Law Specialist and a CPA.”

2. As noted in his biography, Representative Tom Rice is a tax attorney and a CPA, has practiced tax law, and is certified as a specialist in tax law, estate planning, and probate law.

3. As noted in his biography, Representative Tom Suozzi is both a lawyer and a CPA.

4. As noted in his biography, Representative Brian Fitzpatrick is both a lawyer and a CPA.

5. As noted in his biography, Representative Collin Peterson is a CPA.

6. As noted in his biography, Senator Mike Enzi has an accounting degree and has worked with tax issues both in the private sector and in government.

7. As noted in his biography, Senator Ron Johnson has an accounting degree, has worked as an accountant, and has been enrolled in an MBA program.

8. As noted in his biography, Representative K. Michael Conaway is a CPA.

9. As noted in his biography, Representative Bill Flores is a CPA.

10. Members of Congress have at their disposal the staff of the Joint Committee on Taxation, who are tax experts and charged with helping members of Congress understand tax issues, including the review of tax returns.

There is no question that at least some members of Congress can work through a tax return and understand what has and has not been reported correctly. For example, Representative Brad Sherman has “audited large businesses and governmental entities, provided tax law counsel on multi-million dollar transactions, advised entrepreneurs and small businesses on tax and investment issues, and helped represent the Government of the Philippines under President Aquino in a successful effort to seize assets of deposed President Marcos. Sherman was also an instructor at Harvard Law School’s International Tax Program.” Surely he would not be stumped by Trump’s tax returns.

What is troubling isn’t just the absurdity of what Sanders said, but the millions of Americans who are so bereft of knowledge and so unwilling to do independent research that they believe the nonsense that is tossed about by those who apparently dread the thought of the President’s tax returns from being seen by the Congress. As I have written more than once, ignorance, coupled with reluctance to seek education and to undertake research, has become an epidemic that poses a threat to the survival of democracy, and perhaps even the survival of the species, considering what ignorance has already destroyed. It has infected the highest level of government in the United States. Though the widespread existence of ignorance disturbs some people, it unfortunately doesn’t disturb enough people. The institutionalization of ignorance nurtures ignorance of ignorance and ignorance of the dangers of ignorance. Would that an anti-ignorance campaign could sweep this nation with the energy and intensity of campaigns such as the anti-tax movement and the anti-vaccination movement.

Paying the Price for Anti-Tax Damage

My reaction to the anti-tax pledge signed, willingly or under “pressure” by so many politicians, has always been one of disappointment. Not only is opposition to taxes as a general proposition unwise and exceedingly imprecise, it also imposes a more costly outcome on Americans. Worse, amounts called “taxes” but that are user fees are caught up in the anti-tax hysteria gripping those suffering from money addiction and fear of starving on seven and eight digit incomes.

Consider user fees imposed to keep the nation’s infrastructure in safe, efficient, and sensible shape. For decades, the anti-tax crowd has stood in the way of increases in the federal gasoline tax and in fuel taxes in many states. Even increases designed to keep pace with inflation were blocked. The outcome was predictable, unsurprising, and dangerous. Highways, bridges, and tunnels began to fall apart. People died. People were injured. Vehicles were destroyed. Vehicles were damaged. The economic cost alone surpassed the dollars saved by the obstructionist policies of the anti-tax crowd.

In recent months, efforts to undo the damage caused by the anti-tax crowd are taking hold or at least are being seriously considered. I’ve reported on some of these attempts in When Partisan Nonsense Muddles the Tax Debate (Michigan), Revenue Problems With A User Fee Solution Crying for Attention (federal and Pennsylvania), and Plans for Mileage-Based Road Fees Continue to Grow. (Virginia) Of course, the anti-tax crew has risen up in opposition, as I described in Will Private Ownership of Public Necessities Work?, though they seem less interested in capping what people will end up paying than in making certain that what people pay will end up in the pockets of their privatization sponsors.

In a recent story, David Eggert took note of an interesting phenomenon. Republican-controlled state legislatures are not only considering but also enacting increases in highway and fuel taxes. In Ohio, Alabama, and Arkansas, Republican governors have signed legislation increasing fuel taxes. He also mentions the legislation working its way through the Michigan legislature, as I described in = When Partisan Nonsense Muddles the Tax Debate.

Some Republican legislators and politicians are beginning to realize that their promises in earlier years that tax cuts would not cause reductions in services were ill-founded. Hit a pothole, incur hundreds of dollars or more of repair costs, and those tax cuts or avoided tax increases pale in comparison. Decades of disinvestment in the arteries that supply the nation’s economy are now coming home to roost. The foolishness of the anti-tax pledge is being revealed for the menace that it is. Of course, people were warned – by me and others – but too many did not listen, and now everyone is paying the price.

Some might ask what is the complaint of those who were willing to pay and are now paying the price. The answer is that the price being paid now, in the form of fuel tax increases along with hundreds of millions paid for vehicle repairs and personal injuries, is much more than would have been paid had the necessary tax increases been imposed and paid over the years.

Once again, another tax policy theory of the oligarchy has failed. Another of their theories has been exposed for what it is, a part of a larger plan to pull wealth from the 99 percent to the one percent. The goal of teasing Americans with the illogical promise of no tax increases coupled with no decreases in services has been to find excuses to impose privatization schemes that end up costing drivers even more, in an environment free from voter control and private sector accountability.

Perhaps some Republicans, at least, are beginning to realize they were sold a pig in a poke and are waking up to the practical reality of what has been happening. Perhaps they simply understand that unhappy motorists vote, and they risk losing those votes if they continue to stick with policies that harm motorists and everyone else who depends on the national economy.

I wonder when the rest of the anti-tax crowd will wake up. Perhaps they are aware that more and more Americans are emerging from the dream of cost-free lower taxes because it has turned into a national nightmare.

Escaping Taxes By Paying Even Higher Private Sector Charges

It’s a good day to talk about taxes. No one likes taxes. But like colonoscopies, which also are disliked by everyone, taxes are a necessity. Unpleasant, yet essential. So it’s disappointing when anti-tax groups propose anti-tax proposals that are far worse than tax increases. Yes, colonoscopies also can be avoided. The price for doing so can be quite high.

This time, it’s Americans for Prosperity (AFP) that offers a nice-sounding A Road Forward: Enhancing America’s Infrastructure Without Raising Taxes. How does AFP think this can be done?

First, AFP wants to end the “spending of gas tax revenues on non-highway projects.” Generally, I agree, though that statement is too broad. As I wrote in Will Private Ownership of Public Necessities Work?, “If the funds are being used, for example, to fund public transportation in order to reduce stress on roads and bridges and reduce the cost of maintenance and repairs, there isn’t anything wrong with that use of the funds. On the other hand, if the gasoline tax revenues are being used to finance sports arenas, libraries, or ski resorts, the diversion is very wrong.”

Second, AFP advocates “unleashing private investment in infrastructure assets.” This, of course, reveals what AFP and its allies want to do. They want to take infrastructure out of public and voter control and put it in the hands of corporations, hedge funds, and private equity firms that are beyond the reach of the voting booth and free to handle highways the way pharmaceutical firms handle medications. In other words, more dollars for the oligarchs, coming out of the pockets of the peasants. It’s mind boggling that those who oppose taxes because taxes shift money from people’s pockets to government have no qualms about money shifting into the coffers of the wealthy. As I also wrote in Will Private Ownership of Public Necessities Work?:

[P]rivatization does not work, and these private enterprises have a goal, maximization of the bottom line at all costs, that is inconsistent with the goal of maintaining and improving the public welfare. Why privatization does not work is something I discussed in Are Private Tolls More Efficient Than Public Tolls?, When Privatization Fails: Yet Another Example, How Privatization Works: It Fails the Taxpayers and Benefits the Private Sector, Privatization is Not the Answer to Toll Bridge Problems, and When Potholes Meet Privatization. As I noted in So Guess Who Pays for the Senate’s Tax Cuts for Corporations and Wealthy Americans?, the anti-tax/privatization movement is part of a “plan to eliminate or privatize Medicare, Social Security, national defense, and everything else so that eventually the oligarchy owns everything.”

Third, AFP advocates “returning power and responsibility to the states wherever possible.” Though states should have priority in determining transportation infrastructure issues that are truly local in nature, the national nature of present-day society and the economy requires overarching federal oversight and regulation of many transportation infrastructure issues. Bridges must meet national standards and not the “oh, let’s do the cheap thing and increase profits” practices of some shady local outfits backed by local politicos. Safety features, such as lane widths, entrance and exit ramps on interstate highways, signage, and similar matters cannot be left to the vagaries of state legislative decisions that cause driver confusion and endanger lives.

Fourth, AFP suggests “overhauling the regulatory and permitting system to improve outcomes and efficiency.” This is nothing more than a plea for letting profits override safety, environmental, labor, and other protections that history tells us would not exist in many states had federal legislation and regulation not put an end to the rampant disregard too many states have shown for issues of vital importance to all Americans. There is more to life than maximizing profits.

Fifth, AFP advocates “eliminating costly and unfair labor restrictions.” This is easy to translate. It’s the post-modern business practice of cutting wages in order to maximize profits. To have well-built infrastructure, one needs highly skilled workers. Highly skilled workers don’t come, and ought not to come, cheap.

Perhaps it’s time to remind the people who want to avoid taxes that the price of avoiding taxes is even higher than the taxes that are escaped. For example, in When Potholes Meet Privatization, I explained:

My use of potholes as the poster child for what is wrong with the public fiscal policy perspectives advanced by the anti-government, anti-tax crowd caught the attention of a long-time reader, who shared with me three reports. * * *

The first report explained that potholes cause far more damage than things I had previously mentioned. I had focused on damaged front-end alignments, wrecked tires, and pothole-triggered accidents causing death, injuries, and property damage. The first report adds to the list things such as back injuries caused by hitting potholes, swerving to get around potholes, and slamming on the brakes to avoid potholes. The list of complications reads like a medical school text, but it is unimaginable that anyone would be pleased if they suffered prolapsed inter-vertebral disc, whiplash, or vertebral compression fractures after encountering a pothole. Although some people are more at risk, no one is safe. * * * As I explained in Liquid Fuels Tax Increases on the Table, You Get What You Vote For, Zap the Tax Zappers, Potholes: Poster Children for Why Tax Increases Save Money, When Tax and User Fee Increases are Cheaper, and Yet Another Reason Taxes and User Fee Increases Are Cheaper, it is far better to pay taxes and user fees than to be saddled with the much higher cost of lost lives, crippling injuries, and property damage.

The third report corroborated the foolishness of putting pothole repair or any other public service into the hands of those who seek nothing but profits, particularly at others’ expense. In Are Private Tolls More Efficient Than Public Tolls?, When Privatization Fails: Yet Another Example, How Privatization Works: It Fails the Taxpayers and Benefits the Private Sector, and Privatization is Not the Answer to Toll Bridge Problems, I have explained why privatization benefits a select few at the expense of the many.

According to the third report, the town of North Bergen, New Jersey, using municipal employees and equipment, repaired 700 potholes at a cost $50,000 less than what it would have cost using private contractors. The cost to taxpayers of keeping the work in-house was approximately $1,000 per day. Private contractors would have charged the town $3,000 per day. That $2,000 daily difference represents the profits sought by the private sector, a factor that does not exist when public tasks are done publicly. As for the claims by privatization advocates that the private sector is more efficient, there is nothing to indicate that the private contractors would have generated at least a three-fold increase in the number of potholes repaired each day.

From every angle, potholes teach us why taxation is not evil and why privatization of public responsibilities isn’t the panacea its advocates claim that it is. Fortunately, there seems to be a slowly growing understanding among Americans that the smooth ride promised for several decades by the anti-tax, anti-government lobby is, in fact, quite a bumpy and dangerous journey. It’s time to hit the brakes on that failed philosophy before even more damage is done.

Thought the AFP proposal contains a few helpful suggestions, such as eliminating the use of fuel tax revenues for unrelated projects, all in all it is yet another plea for shifting control of society into the hands of the wealthy and the oligarchs. That not only is unnecessary, it is wrong.

So what is the answer? I provided it in Will Private Ownership of Public Necessities Work?:

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

C’mon, Americans, figure out that it is better to pay an additional $150 to $250 more per year than to run the 50 to 80 percent risk of paying $800, $1,500, or even $3,000 in vehicle repairs or thousands of dollars in uncompensated medical bills because of inferior transportation infrastructure. Think of the increased user fee, which is what a fuel tax is, not as a tax but as insurance, insurance provided by an organization within the control of voters and not behind a wall of corporate, private equity, and hedge funds obstruction.

Plans for Mileage-Based Road Fees Continue to Grow

For almost 15 years, I have explained, defended, and advocated for the mileage-based road fees for many years, in posts such as Tax Meets Technology on the Road, Mileage-Based Road Fees, Again, Mileage-Based Road Fees, Yet Again, Change, Tax, Mileage-Based Road Fees, and Secrecy, Pennsylvania State Gasoline Tax Increase: The Last Hurrah?, Making Progress with Mileage-Based Road Fees, Mileage-Based Road Fees Gain More Traction, Looking More Closely at Mileage-Based Road Fees, The Mileage-Based Road Fee Lives On, Is the Mileage-Based Road Fee So Terrible?, Defending the Mileage-Based Road Fee, Liquid Fuels Tax Increases on the Table, Searching For What Already Has Been Found, Tax Style, Highways Are Not Free, Mileage-Based Road Fees: Privatization and Privacy, Is the Mileage-Based Road Fee a Threat to Privacy?, So Who Should Pay for Roads?, Between Theory and Reality is the (Tax) Test, Mileage-Based Road Fee Inching Ahead, Rebutting Arguments Against Mileage-Based Road Fees, On the Mileage-Based Road Fee Highway: Young at (Tax) Heart?, Does the “No New Taxes” Crowd Think Tax-Financed Public Goods Are Free?, 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?, and Revenue Problems With A User Fee Solution Crying for Attention.

Now comes news that Virginia is ready to implement a pilot program to test the mileage-based road fee. It’s not the first state to do so. When Oregon operated a test program, I wrote about it in Progress on the Mileage-Based Road Fee Front?. Virginia’s entry into the testing process is part of a wider effort by the I-95 Corridor Coalition. I wrote about the Coalition’s efforts in Does the “No New Taxes” Crowd Think Tax-Financed Public Goods Are Free?.

In some ways, the testing can be fun for the drivers. Described as “theoretical,” the testing tells drivers what they would have been charged under a mileage-based road fee system, but it doesn’t charge them. The system sends what is described as a “faux invoice.” It permits the testing authorities to make better revenue estimates, to evaluate how to construct the system to deal with drivers who cross lines between participating and non-participating states, to examine the impact on urban and rural drivers, and to design interfaces between existing toll systems and a mileage-based road fee system. The testing will also let drivers who care to get into the arithmetic weeds to compare the theoretical charges with what they are currently paying in gasoline taxes.

The Coalition intends to recruit more drivers, particularly in Delaware and Pennsylvania. I volunteer! I’ll let you know if they let me participate.

Time for a Salt Tax to Replace a Soda Tax?

One of my several criticisms of the soda tax is that it singles out certain liquids that contain sugar, and ignores other sugary substances. I have been writing about the flaws of the soda tax for more than a decade, beginning with What Sort of Tax?, and continuing with The Return of the Soda Tax Proposal, Tax As a Hate Crime?, Yes for The Proposed User Fee, No for the Proposed Tax, Philadelphia Soda Tax Proposal Shelved, But Will It Return?, Taxing Symptoms Rather Than Problems, It’s Back! The Philadelphia Soda Tax Proposal Returns, The Broccoli and Brussel Sprouts of Taxation, The Realities of the Soda Tax Policy Debate, Soda Sales Shifting?, Taxes, Consumption, Soda, and Obesity, Is the Soda Tax a Revenue Grab or a Worthwhile Health Benefit?, Philadelphia’s Latest Soda Tax Proposal: Health or Revenue?, What Gets Taxed If the Goal Is Health Improvement?, The Russian Sugar and Fat Tax Proposal: Smarter, More Sensible, or Just a Need for More Revenue, Soda Tax Debate Bubbles Up, Can Mischaracterizing an Undesired Tax Backfire?, The Soda Tax Flaw in Automotive Terms, Taxing the Container Instead of the Sugary Beverage: Looking for Revenue in All the Wrong Places, Bait-and-Switch “Sugary Beverage Tax” Tactics, How Unsweet a Tax, When Tax Is Bizarre: Milk Becomes Soda, Gambling With Tax Revenue, Updating Two Tax Cases, When Tax Revenues Are Better Than Expected But Less Than Required, The Imperfections of the Philadelphia Soda Tax, When Tax Revenues Continue to Be Less Than Required, How Much of a Victory for Philadelphia is Its Soda Tax Win in Commonwealth Court?, Is the Soda Tax and Ice Tax?, Putting Funding Burdens on Those Who Pay the Soda Tax, Imagine a Soda Tax Turned into a Health Tax, Another Weak Defense of the Soda Tax, Unintended Consequences in the Soda Tax World, Was the Philadelphia Soda Tax the Product of Revenge?, Did a Revenge Mistake Alter Tax History?, What’s More Effective? Taxing and Restricting Soda or Educating People About Healthy Lifestyles?, and If Sugar Is Bad And Is Going To Be Taxed, Tax Everything That Contains Sugar.

Another, related, concern that I have about the soda tax is that it is premised on the claim that it is designed to improve people’s health, yet it is not applied to any food or beverage that is unhealthy other than sugar. So is sugar the prime cause of bad health? According to a recent study, reported in this article, the answer is no.

According to the study, the risk factor responsible for more deaths than any other risk factor is poor diet, and not smoking or high blood pressure. Yet poor diet isn’t so much the intake of sugar, red meat, and other unhealthy foods, but the combination of too much salt intake and insufficient amounts of whole grain, fruits, nuts, and seeds in diets. Examining 15 dietary risk factors, the study determined that in the five most populous countries, high salt intake was the most culpable in two of the countries, and insufficient intake of whole grains was insufficient in the other three countries. Where did high intake of sweetened beverages come in? Eighth in Brazil, eleventh in the United States, and thirteenth in China, India, and Indonesia. The only two factors in those three countries that contributed less to poor health, and premature death and disability, were high intakes of red meat and processed meat. In the United States, the only four factors contributing less to poor health, and premature death and disability, were insufficient intakes of calcium, milk, and polyunsaturated fatty acids, and too high of an intake of red meat.

So, as bad as sugar is for one’s health, there are other substances that play a bigger role in contributing to poor health. If the goal of the soda tax advocates truly is promoting health, and not just revenue raising, then the logical approach would be to tax the substances that contribute to poor health. What would make much more sense is a tax that applied not only to all items containing sugar, and not just liquids containing sugar, but also to red meat, processed meat, and items containing salt, trans fat, or both. And one of the places that at least most of the revenue should be directed would be credits for purchasing, or grants to reduce the prices of, whole grains, fruit, nuts, seeds, vegetables, legumes, milk, and items containing omega-3, fiber, polyunsaturated fatty acids, and calcium. This approach would permit a much lower tax rate, to the point where its application to sugary beverages would not raise such an outcry from some of those who oppose the soda tax.

Whether such a tax makes sense is a different question, and one that ought to be addressed before the issue of a tax’s scope is considered. Should a government use its taxing power to affect what people eat? Some would say, no, there’s no need for a nanny state. Others would point out that when people eat unhealthily, they put at risk not only themselves, but those who depend on them for support that ends when the unhealthy person dies or becomes unable to work, on the emergency services facilities and personnel who must respond to their crises, on the governments that must pay for the costs imposed on society by increases in unhealthy living habits, and on the health care system. If government takes no role in dealing with what people eat and drink, even aside from regulation of food growers, processors, and manufacturers and restrictions on driving under the influence, then perhaps it ought take no role in any other aspect of the consequences of eating and drinking. Of course, that outcome would eventually destroy society. When historians and others compare the decline of the Roman Empire with what is perceived as the decline of the United States, does societal health, aside from the lead poisoning theory, get much attention? It’s not as glamorous as the other factors, but perhaps it can be instructive.

And before discarding the notion of a tax on salt, consider this lead from the United Kingdom Salt Association: “Salt was frequently a source of taxation in ancient times and historically has probably been the most taxed commodity.” Salt taxes have also sparked protests, violence, and war. But so, too, has every other sort of tax. If compelled to choose between a soda tax and a salt tax, which would you choose?

Tax Ignorance Can Create Scam Victims

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.

Recently, reader Morris directed my attention to the results of an H&R Block survey on tax withholding. I have addressed withholding in posts such as It’s Time to Adjust Withholding, But Can You Do the Calculations?, Getting More Specific with That Withholding Question, and The Realities of Income Tax Withholding. Recently, tax withholding has received coverage in mainstream media, beyond the narrow reach of tax publications, because the impact of changes in the IRS-published withholding tables has caused anguish for taxpayers who discovered that their expected refunds disappeared or were diminished or that they owed additional tax.

According to the survey, 46 percent of those surveyed felt ready to update their withholding Form W-4 without help. So it’s no surprise that only 19 percent updated their withholding after the December 2017 tax legislation was enacted. According to the survey, and 45 percent were not confident when it came to determining W-4 withholding allowances. Though completed W-4 forms must be filed with the employer, only 42 percent knew that, whereas 27 percent thought it goes to the IRS, 7 percent thought it goes to their financial advisor, and 6 percent thought it went to the Social Security Administration. Only 47 percent realized that a Form W-4 can be updated whenever they want to do so.

Of those surveyed, 40 percent claimed that they had updated their W-2 forms, which is impossible for employees to do. For unknown reasons, 17 percent “updated their insurance documents.” Shockingly, only 48 percent knew that “increasing withholding would result in a larger refund,” and only 47 percent “knew decreasing withholding would result in larger paychecks.”

Is it any wonder that with so many people ignorant of how withholding works, or how to make adjustments to it, that the Congress and Administration played the situation by changing withholding tables without ensuring that taxpayers would understand the consequences? Granted, the IRS several times reminded taxpayers to check withholding, but when at least half of taxpayers don’t know how to do so the field is ripe for the manipulation that caused people to think that tax breaks for the non-wealthy were more generous than they actually were. It is important to remember that most scams rely on people’s ignorance, such as not knowing that the IRS does not call people on the phone asking them to purchase debit cards.

Why aren’t these things taught in high school? Isn’t high school a good place for people to learn the things everyone needs to know no matter what career path they choose? Would it not make sense for employers to provide a short online tutorial for employees that explain how the Form W-4 should be completed, just as they provide online training for information security? The most important question, though, is why do so many Americans fall for the con games, and why do almost all Americans tolerate the scamming and even make excuses for some of those who scam and con on a grand scale.

Deducting Bribes By Making Fake Charitable Contributions: Is There a Steep Price to Pay?

A few weeks ago, in What The Wealthy Can Do With Tax Breaks: A New Form of Trickle-Down?, I described my reaction to learning that wealthy individuals whose children apparently could not get admitted to certain colleges and universities under the usual admissions processes had paid paid William Rick Singer to help them create fake admission examination scores, and to provide fake student-athlete identities for their children, few of whom were close to having college-level athletic skills. They also created, or accepted Singer’s offer to create, fraudulent tax deductions for the amounts they shelled out. Singer created an organization, made it appear to be a qualified charity, and had the organization issue receipts that included, among other lies, the statement that the payments were not in exchange for goods or services.

In that commentary, I pointed out that aside from the bribery and fakery by these wealthy individuals that caught everyone’s attention and generated outrage, there also was another issue. I wrote, “On top of this criminal activity, these wrongdoers claimed tax deductions. Disguising a bribe as a charitable contribution deduction is flat out fraudulent.”

Now, as reported in this article, public attention is turning to the tax issue. According to the article, the IRS has been investigating these fake deductions. As a former deputy commissioner of the IRS explained, and as many people know, the IRS follows the money just as it did with Al Capone. The IRS investigation apparently will reach beyond those charged with paying bribes to others who also made payments to the fake charity set up by Singer.

So now what happens? None of those charged with bribery and other crimes has yet to be charged with tax fraud. According to the article, some are speculating that prosecutors are holding back, using the threat of tax fraud prosecution as leverage to get guilty pleas from those who have been charged with bribery and other crimes. Others point out that to get a conviction, prosecutors need to prove that these individuals knew they were committing tax fraud, which might not be as easy as one would think or hope. But even if not charged or convicted of criminal tax fraud, these individuals surely will be hit with a variety of penalties. There is a 20 percent penalty for claiming the disallowed deduction. There also is a 75 percent civil fraud penalty, which, unlike the criminal tax fraud conviction requiring proof beyond a reasonable doubt, merely requires proof by preponderance of the evidence. The article also revealed that some of these individuals used family foundations to make the payments, and that opens the door to an additional set of penalties.

That these people thought it was ok to do what they did is deeply troubling. Then, again, there’s a lot of behavior in which people have been engaging that they think is ok, and that isn’t. Is it enough that they are convicted, imprisoned, fined, and subjected to tax penalties? Will that stop them next time? Will that deter others from doing the same thing or trying to do the same thing in some other manner that they think will go unnoticed? How extensive is this behavior? Are there others who have paid similar bribes but who have not been caught? Do they boast of it in ways that encourage others to try, willing to risk the odds? Does the tax law, which already subjects taxpayers claiming charitable contribution deductions to a gauntlet of substantiation and other requirements, need to be made even more complicated to prevent future incidents of this sort? Or is there some better, easier, simpler way?

Tax Advice from a Sportscaster

I doubt there is a transcript. I cannot find one. But I know what I heard while listening to a Philadelphia sports talk radio show. The host, a sportscaster and commentator well known in Philadelphia, was describing an item up for auction in connection with his planned bike ride to benefit a charity. The item was a package of two 50-yard-line seats in a suite at an away NFL football game, two nights in a high-end hotel, dinner at a fine restaurant, opportunities for photos with players, and some other odds and ends. At the time I heard the description, the high bid was at $3,000, though later it had increased to $3,100. As part of his pitch, the sportscaster explained that the value of this package surely was at least the amount bid so far. He almost certainly was correct, as the tickets alone were described as being worth at least $1,000 each. He then added, and I’m paraphrasing, but I’m close, “It’s for a charity, it’s tax deductible.”

No, it’s not tax deductible except to the extent that the amount paid exceeds the value of what is received. If the winning bid comes in at $3,100, and I doubt it will as it’s likely the bids will increase, there would be no charitable deduction assuming the package is worth at least $3,100 as described. I wonder how many bidders think that if they win, they will get a charitable deduction for the full amount paid. I wonder if the expected tax deduction plays a part in computing how high a bidder is willing to go.

I doubt I’ll ever know what ends up happening on the tax return of the winning bidder. The only way I’d know is to make a bid and win. That’s not going to happen.

Broken Tax Promises Should No Longer Be Accepted

Last Wednesday, Christopher M. Shelton, president of the Communications Workers of America, testified before the House Ways and Means Committee to explain how the 2017 tax legislation has not produced the promised results. Most of what he shared with the Committee was not news. Americans who pay attention already knew that the promised minimum annual increase in household wages of $4,000 hasn’t happened, that the promised reduction or reversal of jobs moving offshore hasn’t materialized, that an explosion of employment hasn’t shown up, that companies tossed one-time bonus amounts of $1,000 or less in efforts to dampen the criticism of the tax legislation’s failures, that companies have increased the portion of health care premiums paid by employees, that companies continue to close facilities and dismiss employees, and that companies continue to see increases in profits even aside from the tax break windfalls. Shelton provided additional details about his organization’s experience trying to persuade AT&T to live up to those promises. It’s well worth the read. He provided similar information with respect to other companies with which his organization has contracts, as well as companies whose workers are represented by other unions and companies that subscribe to “right to work” employment practices.

Shelton pointed out several reasons that this tax legislation fiasco could have been avoided by the enactment of much more sensible provisions that would generate the promised changes. He pointed out an attempt to get companies to subscribe to a legal obligation to use their tax breaks to implement the promised job creation, return of offshore positions, and increase worker annual pay by the promised $4,000. Not one company signed on, which, of course, provides further proof that those making these promises had no intention of following through on them. Shelton pointed out that the 2017 legislation was enacted without providing an opportunity for people to testify and to share their predictions and thoughts about the proposals that, in Shelton’s view, and mine, were “rushed through Congress.”

Had I had the opportunity to testify, I would have proposed what I have been suggesting for quite some time. I’ve described my proposal in a series of posts, 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, When Job Creation Promises Justifying Tax Breaks Are Broken, and Why the Job Cuts By Tax Cut Recipients?. What is the proposal? It’s this easy to understand:

Employers could be allowed to deduct not only compensation paid, but, in addition, a percentage, perhaps 25 or 30 percent, of the excess of the compensation paid during the taxable year and the compensation paid during the previous taxable year, perhaps leaving out of the computation increases in compensation paid to individuals earning more than a specific amount, such as $150,000, $200,000 or some similar figure in that range. This incentive would, or at least should, encourage employers to raise the pay of their low compensation employees rather than CEOs and other highly compensated employees. As for employers that would have no use for these deductions, encouraging failing businesses or successful businesses that use tax shelters to mask taxable income, they ought not be encouraged to continue on those paths. In this way, tax breaks would be tied to performance. People who don’t create jobs ought not get to share in tax breaks held out as job-creation inducements.

What motivated my proposal? As I explained in How To Use Tax Breaks to Properly Stimulate an Economy:

The worst way to use the tax law to encourage behavior is to hand out tax breaks without requiring anything in return other than promises. Promises too often are made to be broken. This is why the legislation enacted in December is proving to be a long-term failure. It came with promises of increased pay and increased production, but it did nothing to require those things. So a few bonus crumbs of several hundred dollars were handed to a small fraction of the work force, an even smaller group picked up a $1,000 bonus, and tens of thousands of individuals lost their jobs.

How difficult is it to understand the proposal? I answered that in Yet Another Reason For “First the Jobs, Then the Tax Break”:

it’s time to stop with the “here’s a tax break, now create the jobs you promised and if you don’t, oh well, see you at my next campaign fund raiser” approach to tax legislation, and to implement the “create jobs, get a short-term tax break, don’t cut those jobs next year, get another short-term tax break” style of holding tax break recipients’ feet to the fire. When a child says, “Give me a cookie and I’ll behave properly,” sensible parents reply, “Show me you can behave properly and then you’ll get a cookie.” It’s that simple, really.

Because it is highly unlikely that members of Congress read this blog, it will take testifying as did Shelton to create widespread awareness of what can, and should, be done to create and preserve jobs and alleviate the income and wealth inequality destroying this nation.

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

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

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

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

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

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

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

Revenue Problems With A User Fee Solution Crying for Attention

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

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

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

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

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

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

An Alternative to Using Tax Law for Non-Tax Purposes

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

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

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

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

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

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

A Tax Break That Pays For Itself?

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

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

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

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

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