Soda Taxes: So It’s Not So Much the Soda, Is It?

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?, If Sugar Is Bad And Is Going To Be Taxed, Tax Everything That Contains Sugar, Time for a Salt Tax to Replace a Soda Tax?, and So the Soda Tax Really Was About the Revenue and Not So Much About Health. One of my criticisms is that the soda tax misses the mark if the goal of its supporters is truly to reduce sugar intake, because not only does the soda tax apply to some liquids that are not unhealthy, it also fails to reach most items that contain sugar. As I wrote in So the Soda Tax Really Was About the Revenue and Not So Much About Health:

One of my several criticisms of the soda tax is that it singles out certain liquids that contain sugar, and ignores other sugary substances. . . .

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. I wrote about that flaw of the soda tax in Time for a Salt Tax to Replace a Soda Tax?

Another concern, to which I’ve not given much attention, is the inequity of taxing sweetened beverages based on the number of ounces in the beverage rather than the amount of sugar. If the primary goal of the soda tax is to reduce sugar consumption, then even aside from the failure to tax solid forms of sugar, the tax should reflect the amount of sugar in the drink. Some sugary beverages contain twice or three times the sugar in a given number of ounces than do other sugary beverages.

All of these concerns, along with the silliness of taxing some items that are healthy despite having some sugar content, have contributed to my conclusion that the soda tax is designed for revenue production rather than health benefits. Taxing beverages is much easier than taxing all sugar-containing substances based on the number of grams of sugar in a particular substance. In a number of my commentaries on the soda tax I have suggested that it was designed as a revenue raiser. And now we have the proof.

According to this Philadelphia Inquirer story, “Mike Dunn, a spokesperson for Mayor Jim Kenney, said the health benefits of Philadelphia’s tax ‘have always been secondary to the primary goal’ of funding important city programs.” Wow. For quite some time, Kenney and other advocates of the soda tax have claimed that they proposed the tax in order to improve the health of people living in Philadelphia. As I, and others, have repeatedly emphasized, if reducing sugar consumption was the primary motivation for the tax, it would have been, should have been, and could have been, applied to all foodstuffs and beverages containing sugar. That approach, of course, would permit reduction of the tax to a level that would not have the adverse financial impact on businesses and consumers that the existing soda tax has caused.

And now comes news of a a study that suggests a better way to combat obesity and its attendant health problems: put a tax on “high sugar snacks” rather than simply on sugar-sweetened drinks. The study was conducted in the United Kingdom but surely the results would be the same if conducted in the United States. The researchers discovered that “high sugar snacks . . . make up more free sugar . . . intake than sugary drinks.” So I was on the right track with my suggestion that the “soda tax” should have been, and should be, a “sugar tax.” There’s a difference. As the researchers concluded, “Reducing purchases of high sugar snacks therefore has the potential to make a greater impact on population health than reducing the purchase of sugary drinks.”

The researchers determined that a tax on “high sugar snacks” would reduce a person’s weight by an average of 1.3 kilograms (almost 3 pounds) over a year. In contrast, the soda tax reduces a person’s weight by an average of just 203 grams over one year (less than half a pound). That’s a six-fold difference.

The researchers suggest that taxing “high sugar snacks” is something "worthy of further research and consideration as part of an integrated approach to tackling obesity." They point to the fact that their study lasted only one year, though they are confident that running a similar study over a longer period of time would not generate different outcomes.

What is particularly annoying about the soda tax is that its advocate fail to address the questions I, and others, have raised about its scope and effectiveness with respect to obesity. Now that a study confirms that obesity involves more than sugar-sweetened beverages, perhaps the advocates of soda taxes can refine their thinking and legislators at every level can go back to the drawing board.

Dollar Amount Marijuana Taxes Versus Percentage Marijuana Taxes

From time to time I have addressed the intersection of marijuana sales and taxation, principally the issues of how Internal Revenue Code section 280E applies to medical marijuana businesses and whether sales of medical marijuana in New Jersey are subject to the New Jersey sales tax. These posts included No Deductions for Medical Marijuana Distribution Expenses, A Not So Dopey Tax Question, Why Not Read the Entire Sales Tax Statute?, God’s Blessing Can’t Save Prohibited Deductions, and State Income Tax Deductions for the Marijuana Industry: Do They Exist and Do They Violate Federal Law?

Now another tax issue involving marijuana has popped up. According to this Philadelphia Inquirer article, marijuana growers in Alaska are caught between a per-ounce marijuana tax and declining marijuana prices. Alaska imposes a $50-per-ounce tax on marijuana. So it’s easy to understand that as the price of marijuana drops, the $50-per-ounce tax becomes an increasingly higher percentage of sale price.

Each time a legislature considers enacting, or amending, a tax, it must decide whether the tax is a percentage or a fixed dollar amount. There is a tendency to categorize fixed dollar amount taxes as user fees, but if there is no direct connection between the tax and the activity or object being taxed, it’s not a user fee. Those interested in the “user fee versus tax” discussion can look at my discussion in User Fee Accountability and my other commentaries cited therein.

When a legislature decides to measure a tax based on a fixed dollar amount rather than a percentage, it needs to consider how that tax would apply under different future economic scenarios. Assuming that the conditions existing at the time the tax is being debated will continue unchanged is a flawed approach. Good lawyers, for example, know that documents are not drafted simply for the present but also for the future, and a great example of that approach is the drafting of wills. The same approach is necessary when drafting legislation, including tax legislation.

Perhaps the per-ounce fixed dollar amount tax could have been scheduled, that is, set to be a different amount if the per-ounce price of marijuana fell into a different bracket. Or, it could have been set as a percentage, similar to how sales taxes are designed. According to the article, only a few states use a fixed dollar amount tax. The others rely on a percentage approach.

A related concern is the impact of state government actions on marijuana prices. Some in the industry argue that the price of marijuana in Alaska has declined because there is no limit on the number of grower and retailer licenses issued by the state. This concern raises a different issue, which is the intersection of tax revenue and government regulation of the activity or object being taxed. I leave that issue for another day.

Taxes and Tree Houses

More than three years ago, in Section 280A and the Tree House, I considered whether a tree house, equipped with heater, shower, and outhouse, was a dwelling unit for purposes of Internal Revenue Code section 280A. In other words, would section 280A apply if the owner used a portion as a home office or rented it out? I concluded that the answer would be “yes.”

The story about that tree house implied that the owner lived in it and was not renting it out or using a portion as a home office. Recently, reader Morris directed my attention to several stories from three and four years ago that makes the section 280A question more than a hypothetical. According to several articles, including a Patch story from Illinois, and a Chicago Tribune story, several tax issues popped up when the owner of a different tree house started to rent it out through AirBnB.

One question was whether the owner should pay property taxes on the tree house. Why would the answer be anything other than “yes”? Whether a property owner builds an addition to a home, a detached garage, or a swimming pool, property tax statutes and ordinances require that in valuing the overall property for purposes of the property tax, the value of improvements should be taken into account. The tree house, for these purposes, is no different from the cottage or addition constructed on the property.

Another question was whether the rental activity should be taxed. The town in which this tree house was built enacted an ordinance that subjects short-term rentals, such as those implemented through AirBnB, to the same tax applicable to rentals by hotels and motels. The owner’s reaction was, essentially, “not a problem provided everyone renting out properties on a short-term basis is subject to the tax.” That is understandable and sensible. A practical problem is collection of the tax, because the rent is handled by the online brokers such as AirBnB, and so the easiest collection procedure would be to have the broker add the tax to the rent paid by the tenant to the brokerage.

The town also enacted regulations limiting the size and height of new tree houses, and requiring owners to apply for a $15 permit. The regulations are designed to prevent construction of tree houses such as the one in question. It contained a bed, a kitchen, an RV-type toilet, WiFi, cable television, air conditioning, and a fireplace. Hopefully it isn’t fueled by branches cut from the tree. And where does one go during a thunderstorm? Well, those aren’t tax questions, so I’ll let others consider them.

Philadelphia’s Prohibition on Refusing Cash Payments Would Not Apply to the City of Philadelphia

Six months ago, in When Paying Taxes in Cash is Prohibited, I described legislation pending in Philadelphia that would prohibit stores from refusing to accept payments in cash. I pointed out that Philadelphia itself prohibits cash payments for certain transactions. That legislation was enacted, but does not get implemented until regulations are promulgated. According to this Philadelphia Inquirer report, the city has now released proposed regulations to interpret the legislation.

Under the proposed regulations, the city would be exempt from the prohibition against refusing cash payments, provided there is a “convenient location” that accepts cash. According to a city spokesperson,. the convenient location would be the Municipal Services Building in center city, and even so, the revenue, water, and licensing and inspections departments would refuse payments not made by check or money order. The spokesperson explained that these “government offices aren’t capable of accepting cash.” The spokesperson also explained that people without credit cards or other forms of cashless payment could purchase money orders, which would be accepted. Because money orders require payment of a fee, this avenue of payment imposes an additional burden on people who cannot make cashless payments.

What is bizarre is that the arguments in favor of prohibiting stores from refusing cash payments are just as strong for city offices. Concerns about people who do not have credit cards and bank accounts, usually people who are living in poverty, apply no less to people making payments to city offices than to the same people making payments to stores. Of course, objections have been raised by consumer advocacy groups, organizations helping those in poverty, and others. In Philadelphia, almost one-fourth of the population is “underbanked,” and almost 6 percent are “unbanked.” Interestingly, the primary sponsor of the legislation takes the position that the city should not be exempt.

Making it worse is the fact that some state government offices are refusing to accept cash. Of course, the city’s prohibition on refusing to accept cash cannot be enforced against the state government.

The law was supposed to take effect July 1 after Mayor Jim Kenney signed the ordinance in February, but the city delayed implementation until October as the commission hadn’t finished drafting the regulations.

The proposed regulations not only exempt the city from the prohibition on refusing to accept cash, it also exempts “Uber, vending machines, massage chairs, . . . purchases made by phone, mail, or online, parking lots and garages, wholesale clubs, rental companies, and goods sold directly to employees.” It also exempts “retailers that exclusively accept mobile payments through membership programs are also exempt,” a provision designed for Amazon even though Amazon doesn’t think the language is sufficient to give it an exemption.

Another provision permits merchants to install machines that convert cash into prepayment cards, but prohibits them from charging a fee for the service. It is unlikely very many stores will invest in those machines because they cannot pay for themselves.

To paraphrase what I wrote six months ago, refusing to take cash payments for taxes, other amounts owed to governments, and even for retail purchases is inconsistent with prohibiting some businesses from refusing to take cash payments. I wrote, “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.” Neither the Philadelphia statute or its proposed regulations qualify as coherent.

Taxing Robots?

Reader Morris alerted me to this New York Post article. The first thing I noticed was the headline: “Brave New World: Uncle Sam is taxing robots as companies invest in advanced tech.” As far as I know, the IRS is not, as of this moment, requiring robots to file tax returns. In fact, the article begins with these two inconsistent statements: “It’s a brave new world for the IRS: taxing robots. Uncle Sam is padding the Treasury with millions of dollars to assess bots at the same time that corporations invest more in advanced technology and labor-saving machinery, according to experts.” So which is it? Is the IRS taxing robots? Or is the IRS, and Treasury, spending money to “assess,” that is, to study, the question of whether, and if so, how, robots should be taxed? The answer, of course, is the latter.

The article quotes economist and author Mark Thornton, who explains, “Yes, governments already tax robots because they tax virtually everything that goes into developing and making robots. In a few cases, there are subsidies such as government grants for robot development. But that still means they are taxing you and me to provide the subsidies.” Parsing that explanation, perhaps what Thornton means to say is that there are state and local sales taxes that apply to at least some sales of robots or their components. That, of course, is true of any product not exempt from sales taxes, including assembly lines and their components, forklifts, cranes, whatever. There are subsidies, but I’d not use the word “few” to describe them. Robots, like other property, generate a variety of federal and state depreciation and expensing deductions, and qualify for a variety of credits.

The article then addresses Bill Gates’ proposal of two years ago to tax robots that replace workers by imposing an income tax on the salary that the displaced worker would have earned. Aside from the question of who is liable to file that return, a question that might go away if something like Turbotax and an internet connection is programmed into robots, the more challenging question is determining what the displaced worker would have been paid. Who’s to say whether the worker would have received a bonus or raise? Who’s to say that the worker would have retired early and been replaced by a worker not earning as much salary? And what is a robot? Is a piece of equipment that permits an employer to reduce the workforce necessarily a robot? Is time-keeping software that eliminates the need to hire a replacement for someone retiring from the HR department a robot?

This isn’t the first time I’ve commented on robots and taxation. More than three years ago, in Taxation of Androids and Robots, and Similar Pressing Issues, I described a discussion of the issue at a science fiction conference, but left it at that, because the focus was on the sort of robot that isn’t the sort raising the questions in the New York Post article. The New York Post article focuses on a different aspect of the question.

The problem with taxing robots on the basis of taxing the income that would have been earned by a person is that it opens the door to taxing people who do work for themselves instead of hiring someone. Should a person who retires and finds herself with time to tend to the lawn and garden be taxed on the income that would have been earned by the landscaper who she no longer retains? Should a person who enjoys do-it-yourself home improvement and who paints the living room be taxed on the income that would have been earned by the painter not hired by the homeowner? Should people who cook their own meals and eat at home be taxed on the income that would have been earned by a restaurant or take-out establishment?

The rise of robots poses all sorts of challenging questions, deep concerns, and troubling issues. Rarely, if ever, is the answer some sort of taxation. The biggest concern about the rise of robots is the loss of jobs. The answer, of course, is education. Teach and train people how to do the jobs that robots cannot do and probably will not ever be able to do, at least in the next several decades. Robots, like artificial “intelligence” programs, lack judgment. They lack wisdom. They lack empathy. They lack soul. Yes, adjustments in the economic, social, and legal fabric of civilization are, and will continue to be, needed, but taxation doesn’t provide what robots lack.

Are These Financial Literacy Survey Results Reasons to Rejoice or Worry?

Readers of MauledAgain know that I abhor ignorance. Unlike some diseases, we know the cure for ignorance. Sometimes, though, patients refuse to take the medicine. Though I usually focus on tax ignorance, I have also focused on other types of ignorance, such as financial and literary ignorance. When I used google search to find my blog posts that mention ignorance, the resulting list numbered in triple digits. Just some of my commentaries on this national affliction include 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, Tax Ignorance or Tax Deception?, and The Institutionalization of Ignorance.

The scope of ignorance varies by issue. Whether a certain amount of ignorance is a problem depends on the matter under consideration. For example, very few Americans could name the signers of the Declaration of Independence without looking up the answer, but I doubt ignorance on this point threatens civilization. There surely is a long list of topics that fit this description. On the other hand, every American over the age of, say, fourteen should be able to name the three branches of the Federal government, and yet an Annenberg Constitution Day Civics Survey revealed that only 26 percent could name all three branches, and 33 percent could not name any of them. That is appalling, and presents an invitation to those who want to undermine democracy.

One area in which ignorance is dangerous both at a national and individual level is financial ignorance. Financial ignorance is fertile ground for spammers and scammers and other malevolent actors. I have written about this problem in posts such as Is Basic Math Enough? and Making Headway on Financial Literacy Education?

So when I saw the results of a WalletHub survey on college students and credit cards (scroll down the page to find the survey), I had to consider the results in the context of the importance of the issue. Were these issues in the world of naming all the signers of the Declaration of Independence or in the world of naming all three branches of the Federal government?

The survey revealed that 10 percent of college students think “credit cards are free money.” Should we rejoice that 90 percent know this is not the case? Or be worried that 10 percent lack understanding about credit cards even though they are enrolled in college? To me, this is an essential issue, and even if only one percent or one-tenth of one percent of college students perceived credit cards as free money, there is a problem.

Here’s another troubling revelation. When asked if they would rather miss a credit card payment or a party, 14 percent of the respondents would choose missing a credit card payment. Yes, we can be happy that 86 percent are demonstrating some sort of maturity mixed with responsibility, but one in seven lack the sort of approach to life that hopefully is developed by the time someone graduates from high school. Granted, this isn’t as much as issue of financial literacy as it is one of financial and social maturity, but literacy and maturity do tie together in many instances.

The survey also asked college students to evaluate their financial knowledge. Of those questioned, 30 percent gave themselves a grade of C or worse. It isn’t clear whether they were asked what they were planning to do to ameliorate the situation. Nor was there any benchmarks to determine whether the respondents, whether giving themselves low or high grades, were properly evaluating their financial knowledge. But the results of a 2018 Brookings survey, one of the few of its kind, suggests that financial illiteracy among college undergraduates is appalling. According to that survey, 72 percent should be giving themselves very low grades, and counting themselves lucky to earn something as high as a C.

Financial literacy is essential. Financial ignorance is dangerous. The time to make certain today’s youngsters don’t become tomorrow’s victims of scammers and businesses with shady practices is when they are in middle and high school. Accomplishing this goal requires education both in the school and at home and by teachers and parents.

The Menace of Impetuous or Maniplative Tax Policy Announcements

Recently, the President expressed support for two major tax cuts. His statements generated quite a bit of reaction not only throughout the tax world but also in the political, economic, and social worlds.

First, the President suggested he would make a unilateral decision to index capital gains, as reported by many sources, including this Bloomberg report. Readers of MauledAgain know that I am opposed to indexing capital gains unless there is a concomitant repeal of the special low tax rates for capital gains, as I described in When Lower Tax Rates Aren’t Enough.

Second, again as described by many sources, including this The Hill story, the President announced that he was considering imposing a temporary reduction in payroll taxes. It was unclear whether he thought he could make this change acting unilaterally.

Then, within a day, the President reversed course. As reported in various sources, including this Politco story, he announced he was not “looking at a tax cut now.” He said this even though a day earlier he had said, “We’re looking at various tax reductions. But I’m looking at that all the time anyway.”

There is a big difference between studying the possibilities of a change in tax law and the consequences it would generate for consumers, investors, and businesses, and announcing that unilateral actions are imminent. Impetuous off-the-cuff comments, soon followed by 180 degree reversals, something that has happened far too many times during the past 31 months, are troubling, dangerous, and unwise. Imagine the position of a person holding a capital asset, not necessarily or only hedge fund or private equity investors, but someone selling a house generating gain exceeding the exclusion limitation, or selling a small portfolio. Imagine what they were thinking several days ago. “Should I sell now, or wait until the amount of the gain, and thus the tax, is reduced though indexing of basis?” To what extent should impetuous comments, which might suddenly be reversed, be given serious consideration? Impetuous comments reflect the foolishness of not researching facts and thinking things through to a conclusion before turning a nation upside down with uncertainty.

Perhaps they are not impetuous comments. Perhaps they are carefully constructed bits of political manipulation, as described by this Vox article, which describes not only the multiple reversals with respect to the supposed payroll cut idea but also a tantalizing promise of a ten percent tax cut last year as the mid-term elections loomed. If this is the case, it’s even worse.

More than seven years ago, in The Disadvantages of Tax Incentives, I wrote, “The well-being of the national economy demands stability, continuity, predictability, and reliability in the tax system. By putting personal electoral goals ahead of the nation’s well-being, Congress is selling the nation short and ultimately risks selling it out.” Rather than taking my advice, Congress continued on a path that in some ways encourages the same sort of behavior by the Executive Branch. Again, I warn, “By putting personal electoral goals ahead of the nation’s well-being, the Administration is selling the nation short and ultimately risks selling it out.”

What Is a Tax Loophole?

The other day, I noticed a question on Quora that, unlike almost all of the questions I’ve read, focused on tax. The person posing the question asked, “Is it illegal to exploit legal loopholes in the U.S. tax system to avoid paying taxes? What are some examples?” I’ll get to the answer later.

To answer the question, it is necessary to know what a loophole is. Beverly Bird, at the balance, makes an important point. She writes, “Ask five people what a tax loophole is and you’ll probably get five different answers.” To prove her point, consider the definitions that are provided by various sources.

Beverly Bird provides this explanation: “Is it a tax break? Well…sort of, but not necessarily in an obvious way. Does a loophole save taxpayers money? Almost always when they can use them and if they qualify. . . Technically, a tax loophole is a provision that drains money from the government.” I disagree. A tax break is not necessarily a loophole, and most tax breaks are not loopholes. Tax breaks reduce tax revenue, even if they are not loopholes.

Over at smartasset, the same definition pops up: “The basic definition of a tax loophole is a provision in the tax code that allows taxpayers to reduce their tax liability.” The writer adds, “Lots of benign deductions and credits do just that,” and suggests there are “bad loophole[s]” and “good loophole[s].” Again, I disagree, for the same reason.

The folks at Dictionary.com provide a similar definition but then add an important proviso: “A provision in the laws governing taxation that allows people to reduce their taxes. The term has the connotation of an unintentional omission or obscurity in the law that allows the reduction of tax liability to a point below that intended by the framers of the law.” I agree with the sense of this articulation, but the focus isn’t the impact on tax liability in and of itself.

At InvestingAnswers, a different definition is provided: “A loophole is an exception that allows a system to be circumvented or avoided. It usually refers to legal, taxation, or security strategies that are exploited for personal gain.” An example is provided which I think misses the point: “Loopholes are failures of a system to account for all conditions, variables, or exceptions. To illustrate a legal loophole, consider a local development law that requires even an unoccupied building to pay real estate taxes so long as it receives a certificate of completion. In order to avoid paying taxes, a builder may exploit this loophole and choose not to "complete" the building.” Usually, the imposition of real estate tax liability based on a certificate of completion reflects the fact that a certificate of completion opens the door, literally and figuratively, for people or businesses to occupy the building, thus adding to the public burdens, such as sewage treatment, that require public expenditures the real estate tax is designed to fund. By failing to obtain a certificate of completion, the builder shuts to door on occupancy, and thus postpones the need for the government in question to incur costs. Put another way, the provision is intended to apply as it is written, that is, the certificate of completion is the benchmark for application of the tax. Note that as a practical matter, the property is still subject to the tax to the extent of the value of the land.

Those responsible for the definition at USLegal get it right: “A tax loophole is an exploitation of a tax law which can reduce or eliminate the tax liabilities of the filer. It’s a technicality that makes it possible for the filer to circumvent a law's intent without violating its letter.”

So however one defines tax loophole, agreement exists that tax loopholes exist. Thus, I was surprised to read this response given to the question asked on Quora:

According to the IRS, there is no such thing as a loophole. I learned that from an IRS Agent who was on a talk show years ago. Laws are made to address certain items and not others. That is the law.

The IRS knows what is and what is not legal. Taking a personal exemption is not a loophole. Taking a business deduction is not a loophole.

Some deductions are made available to get investments from individuals to go into certain areas where the U.S. Government wants more investment funds. Those are not loopholes.

There are several problems with this response. First, something said by an IRS agent on a talk show is not necessarily, and almost certainly is not, official IRS position, even aside from the possibility that what the IRS agent said or intended to say wasn’t what the listener heard or understood. If the IRS does not think loopholes exist, then how does one explain its use of the word in this IRS News Release? Second, to state that laws are “made to address certain items and not others” begs the question, as is indicated by the following tautological statement, “That is the law.” Third, the IRS knows nothing. It is an organization without a brain. True, I’m being picky with articulation. What probably was intended was “The people at the IRS know what is and what is not legal.” And my reaction is to laugh, because I, and many others, can provide examples of instances when a particular IRS employee, or several or more, were flat out wrong on a matter of tax law. Fourth, to claim that taking a personal exemption of business deduction is not a loophole is to avoid the issue. The issues isn’t whether a business deduction is a loophole. The issue is whether a business deduction intended or designed to encourage particular behavior becomes a loophole in the hands of someone who finds a way to use the flawed language of the deduction statute or regulation to bring within the deduction behavior that is beyond the scope of what is intended. Personal exemptions and business deductions are tax breaks. That alone is insufficient to make them tax loopholes.

Loopholes exist. They are, simply, unintended tax breaks. They are the result of rushed or careless legislative drafting, fertilized by the inability of legislatures to know, understand, and predict every possible looming attempt to twist the tax break into something more than what was intended. And to answer the original question, “Is it illegal to exploit legal loopholes in the U.S. tax system to avoid paying taxes?” the answer is no. If a legislature doesn’t want people to benefit from a particular tax break, it needs to improve the initial drafting and to respond quickly and effectively when a loophole pops up. Note that the question contains its own answer. Is it illegal to do something that is legal? Of course not.

New Jersey Rental Fees and Taxes: When Exemptions and Exceptions to Exemptions Make the Law Complicated

Three months ago, in Making Sense of the New Jersey Rental Fees and Taxes, I described a tax issue afflicting owners of properties along the New Jersey shore. I described the problem as follows:

New Jersey imposes its sales tax and an occupancy fee on short-term rentals. Well, on some short-term rentals. If the rental is arranged through a licensed real estate broker, are exempt. Owners who rent their properties through home-sharing markets, such as Airbnb and Vrbo, are not exempt. Nor are owners who rent directly to their tenants. The issue is particularly contentious for owners of properties along the New Jersey shore, where short-term rentals are ubiquitous. Now, according to this story, the New Jersey legislature is considering a bill that exempts owners who deal directly with a tenant.

A little more than a week ago, as described in this Philadelphia Inquirer article, New Jersey changed the law.

Under the revised New Jersey law, exemptions to the tax on short-term rentals have been expanded. In addition to the rentals arranged through licensed real estate brokers, rentals that are arranged directly between the owner and the tenant are exempt. The exemption applies to rentals advertised through “newspaper ads, signs, and word of mouth,” and even if the property is advertised for rent on a website, provided payment is not processed by the website. But the exemption does not apply to property owners who own and rent three or more separate units in one year, no matter how they are booked.

The changes mean that rentals arranged and processed through websites such as Airbnb, Vrbo, and booking.com remain subject to the tax. So, too, are rentals arranged through travel agencies. Also taxed are those rentals that are part of a “three or more units rented” exception to the exemption.

The author of the the recent Philadelphia Inquirer article suggests that property owners might advertise on websites such as Airbnb and then arrange for processing of the rent independently. The New Jersey Division of Taxation has yet to issue regulations providing more specific definitions of what constitutes “arranged directly,” and I would not be surprised to see that term defined in such a way to close the suggested work-around.

One of the interesting aspects of this tax is the opportunity it presents to help people understand why tax laws are so complicated. The theory behind the tax is simple. It was designed to eliminate any tax-driven disparity between commercial landlords, such as hotels and motels, and independent property rentals. But the backlash compelled the legislature to carve out exceptions, and then to provide at least one exception to those exceptions. And thus the practical reality, as almost always is the case, clobbered the theory. That is a pattern familiar to any student or practitioner who studies tax statutes, or, for that matter, any statute.

Of course, as I pointed out in Making Sense of the New Jersey Rental Fees and Taxes, the tax is “aimed at home-sharing marketplace Airbnb.” I reacted to that proposition as follows:

It seems to me that a tax imposed on a particular individual or company, whether by name or narrow definition, is wrong. In a sense, it can be characterized as confiscatory. Whether such a tax gets enacted against one company and not another would seem to depend on how much money each company spends fighting the tax or contributing to the campaign coffers of legislators.

Justifying the tax on other grounds is possible, but doing so makes it difficult to justify exemptions, as I also explained in Making Sense of the New Jersey Rental Fees and Taxes:

Though I think user fees are an appropriate way to raise revenue, I also think they need to be applied to a specific concern. So the analysis would begin with this question: Why impose a tax on short-term rentals? The answer, I am guessing, is that short-term rentals can bring into the community people who have no sense of belonging, do not have as much civic pride in the area as do permanent residents, and are more likely to cause damage, require public safety services, and otherwise burden the community. That’s not to say all or even most short-term tenants lack civic pride, as many return summer after summer to the same property.

So if these taxes and fees on short-term rentals are being justified on account of extra costs incurred by the community because of short-term tenancies, then those taxes and fees should be imposed on all short-term rentals. To impose them on some, but to exempt others, is discriminatory. What is the justification for exempting certain types of short-term rentals? There is no connection between the channel through which the rental is arranged and the burdens that the tenants impose on the community that require funding in order to ameliorate.

The inconsistency between exempting some rental marketplaces, such as newspapers, but not others, such as websites that advertise the rental and process the payment, is difficult to justify if the tax is designed to fund the costs created by short-term rentals. This too, I explained in Making Sense of the New Jersey Rental Fees and Taxes:

Airbnb, which understandably opposes the exemptions, notes that rentals arranged through newspaper classifieds and magazine advertisements should not fall within an exemption because newspapers and magazines provide rental marketplaces. Airbnb suggests that piling exemption on exemption confuses would-be renters and makes the rental price change depending on the channel used to enter a lease. Airbnb has a point. When an exemption is created, it opens up the door to additional issues that involve defining who and what fit within the exemption, and who and what does not. Exemptions create complexity. Sometimes exemptions make sense and can be justified. In other instances they do not, and in those cases the complexity is a price not worth paying. Add to that the fact that when exemptions are reduced or eliminated, the overall rate of taxation can be decreased.

It remains to be seen if Airbnb and similar businesses challenge the exemptions, or try to restructure their operations to fall within an exemption.

Courtroom Standing Ovation: “I Promised to Pay When I Got My Tax Refund, and I Did”

It is not uncommon for people who borrow money or who otherwise owe money to promise that they will make the required payment when they receive an expected tax refund. It also is not uncommon for most people who make that promise to fail to keep it, sometimes because there is no tax refund and usually because they had no intention to make the payment, or changed their minds. I discussed one example of this behavior in “I’ll Pay You (Back) When I Get My Tax Refund.”

So what a surprise it is when someone makes that promise and keeps it. Reader Morris directed my attention to a recent Judge Mathis case, in which both the plaintiff and defendant agreed not only that the plaintiff had promised to pay the defendant $3,500 when she received her tax refund, but that she had, in fact, made that payment to the defendant when she received her tax refund. Judge Mathis was shocked. The linked video, showing roughly two minutes of the case, is well worth watching. Imagine a judge giving one of the parties a standing ovation and inviting everyone in the courtroom to do the same.

Indeed, it was a surprise. As Judge Mathis noted, at least once a week he handles a case in which one party promises to make a payment when a tax refund is received, and that until hearing this case, those promises were “lies.” Of course, it is a sad reflection on present-day values when the keeping of a promise is so rare that it warrants a standing ovation.

As I pointed out in “I’ll Pay You (Back) When I Get My Tax Refund.”, there are ways to avoid being on the wrong end of a broken promise to make payments from a tax refund. I explained:

[T]he question from the problem prevention angle is how to deal with people who promise to make payments from anticipated tax refunds. As several television court show judges have mentioned, it’s rather common for people to ask for money or purchase something from a private individual and to promise payment or repayment from an anticipated tax refund. What should the seller or lender do?

In a commercial setting, when a person wants to borrow money or to make a purchase on credit, the lender or seller undertakes due diligence. The scope of the due diligence depends on the amount of money, but usually includes, among other things, a credit check, income verification, asset confirmation, and background checks. When someone in a private transaction encounters the promise of payment or repayment from an anticipated tax refund, what should the person do? I suggest that the person ask for a copy of the return showing the anticipated refund, proof that the return has been filed, proof, if any, that an electronically filed return has been accepted by the relevant tax agency, and a signed promissory note for the amount in question, with the amount, due date, interest rate, and other terms clearly specified.

I know, I know, people will react by exclaiming, “You sound like a lawyer,” or “You’re being such a nitpicker.” Indeed. In the long run, a few minutes or even an hour, and perhaps a few dollars, are an investment well worth making when the alternative is frustration, desperation, litigation, and friendship termination.

As much fun as a standing ovation from a judge and everyone in a courtroom might be, it is far better to arrange a transaction so that a courtroom appearance isn’t necessary.

Makers, Takers, Givers, Moochers, Taxes, Social Welfare Payments, and Measurement

Reader Morris reacted to Monday’s post, The Definition of A Taxpayer, by asking

If there is a word for someone who pays more in taxes than is received in kind, it isn’t “taxpayer.”

Could the word for someone who pays more in taxes than is received in kind be called a giver.

Could the word for someone who pays less in taxes than is received is kind be called a taker or words with a negative connotation such as parasite, moocher,etc.

I responded by explaining that “giver” and “moocher” might work as appropriate words only if giving and taking is measured by tax payments and social welfare payments.

Four years ago, in When Those Who Hate Takers Take Tax Revenue, I explained:

One of the arguments put forth by the anti-government-spending folks is that it is bad morally, socially, and politically to collect taxes from one group and to disburse the receipts to another group. These folks like to brand the first group as “makers” and the second group as “takers.” Yet when the takers are their friends and allies in the movement to feudalize America, not a peep is heard from them.

A year earlier, in More Tax Colors, I had written:

Those who are anti-tax seem quite happy to be among the takers even though their mantra in being anti-tax rests principally on a distaste for takers among whom, of course, they don’t count themselves.

The problem with measuring “makers” and “takers” (or “givers” and “moochers”) solely by the amount of taxes paid and social benefit payments received, aside from questions about how to identify and measure those amounts, is that making and taking involves much more than those amounts.

In the tax environment, ought not the fuel taxes that the anti-tax crowd wants to credit as having been “given” or “made” by the person paying it be adjusted by the amount of damage to the transportation infrastructure caused by the vehicle driven by that person? There is no doubt that fuel taxes are insufficient to pay for the cost of building and maintaining transportation infrastructure. Should people using the interstate highway system, funded with the taxes paid by their parents and grandparents, be treated as takers? Ought the same people not be treated as “makers” if they fund additions to that system? Under current circumstances, it is clear that there is more taking happening now than making when it comes to the interstate highway system. On the flip side, ought not the first responder who saves a life be treated as a maker or giver to the extent the value of that heroic deed exceeds the pay the first responder receives for that hour or two in which the first responder acted bravely? Ought not the resident of an inner city neighborhood who volunteers weekly to clean up the nearby park be treated as a maker to the extent of the value of the services provided by that person?

Moving beyond taxation and social welfare payments, ought not amounts taken by theft, fraud, embezzlement, and similar crimes be counted as having been taken by the perpetrators? Ought not the reduction of clean air caused by those who smoke or vape be stated in dollar amounts and treated as having been taken? Ought not the cost imposed on the nation to clean up water and air pollution be treated as having been taken by those who caused the pollution? Should those flying on airplanes be treated as takers to the extent the economic cost of the pollution caused by the airplane exceeds whatever portion, if any, of the ticket cost is used to limit that pollution? Though there are challenges in computing a dollar equivalent, ought those who prey on children be treated as being takers to that extent?

It’s so easy to see the speck in another person’s eye, and yet so difficult to see the log in one’s own. As I have repeatedly pointed out, the advocates of the “maker versus taker” argument used to defend reduction and elimination of taxes and government restrict their definitions in ways that cause them to appear to be net makers, even though in truth many, or even more, of them are net takers. Similarly, at least some of those who the anti-tax crowd so eagerly tags as takers are, in fact, net makers.

It’s Not Just Divorces That Require Agreements With Respect to Tax Issues

It’s been a while since I’ve seen a television court show that inspired me to write a blog post. One reason is that for almost two months I did not watch any television court shows, other than several episodes, all reruns, of a British television court show. Another reason is that many of the shows were ones I had already seen. Yet another reason is that tax just didn’t show up, and if it had showed up on one of those British reruns I would have needed to do some deep research.

It’s all a matter of timing. After all, it’s not as though television court shows involving tax issues are rare. The list of television court show cases that have become the subjects of my commentaries is quite long, and include Judge Judy and Tax Law, Judge Judy and Tax Law Part II, TV Judge Gets Tax Observation Correct, The (Tax) Fraud Epidemic, Tax Re-Visits Judge Judy, Foolish Tax Filing Decisions Disclosed to Judge Judy, So Does Anyone Pay Taxes?, Learning About Tax from the Judge. Judy, That Is, Tax Fraud in the People’s Court, More Tax Fraud, This Time in Judge Judy’s Court, You Mean That Tax Refund Isn’t for Me? Really?, Law and Genealogy Meeting In An Interesting Way, How Is This Not Tax Fraud?, A Court Case in Which All of Them Miss The Tax Point, Judge Judy Almost Eliminates the National Debt, Judge Judy Tells Litigant to Contact the IRS, People’s Court: So Who Did the Tax Cheating?, “I’ll Pay You (Back) When I Get My Tax Refund”, Be Careful When Paying Another Person’s Tax Preparation Fee, Gross Income from Dating?, Preparing Someone’s Tax Return Without Permission, When Someone Else Claims You as a Dependent on Their Tax Return and You Disagree, Does Refusal to Provide a Receipt Suggest Tax Fraud Underway?, When Tax Scammers Sue Each Other, One of the Reasons Tax Law Is Complicated, An Easy Tax Issue for Judge Judy, Another Easy Tax Issue for Judge Judy, Yet Another Easy Tax Issue for Judge Judy, Be Careful When Selecting and Dealing with a Tax Return Preparer, Fighting Over a Tax Refund, Another Tax Return Preparer Meets Judge Judy, Judge Judy Identifies Breach of a Tax Return Contract, and When Tax Return Preparation Just Isn’t Enough.

Late last week, tax issues surfaced in an episode of Hot Bench I had not previously seen. The episode illustrated why it’s not just when people divorce that they need professional tax advice. Even the breakup of a long-term relationship often requires some tax guidance. And the breakup of a short-term relationship can benefit from professional advice particularly if children are part of the equation.

The plaintiff had loaned almost $8,000 to his daughter and her then companion. The plaintiff borrowed the money from his line of credit. Because the plaintiff had not been fully repaid, he sued his daughter’s companion, who by this point had become his daughter’s ex-companion. The defendant had paid back $2,400, and testified he planned to repay the rest of what he considered to be his share from a tax refund he expected. However, when he filed his income tax return, he discovered that he would not be getting that tax refund because his ex-companion had claimed their children as dependents on her tax return, and this caused him to lose both the deductions for those dependency exemptions and eligibility to file as head of household.

The first issue that the judges needed to decide was whether defendant was responsible for all or half of the loan. The court, by a two-to-one decision, concluded that the defendant was responsible for only half of the loan. The reasoning of the majority was that the loan had been made to both the plaintiff’s daughter and her then companion, and there was insufficient proof that the loan had been made only to the defendant.

The second issue that the judges needed to decide was whether the defendant should be given credit for the amount of the tax refund he was planning to use to repay his share of the loan, but that he did not receive because his ex-companion, by claiming the children as dependents, prevented him from getting that refund. The judges unanimously concluded that the plaintiff was not responsible for his daughter’s actions and should not have his judgment reduced because of what she did. Thus, the judges ordered the defendant to pay the plaintiff $1,500.

What the judges did not discuss was an issue that was not presented to them, because the daughter was not a party to the case. Does the defendant have a $1,500 cause of action against his ex-companion because she claimed the children on her tax return? That question cannot be answered without knowing more facts. Was there an agreement between the two of them? The defendant’s position suggests that he thought there was, but his thoughts don’t mean much without documentation. Did he satisfy the legal requirements for claiming them as dependents? Did he satisfy the legal requirements for filing as head of household if he did properly claim them? Again, without facts, the answer cannot be provided. But what can be provided is the suggestion, already made, that couples going through what the plaintiff’s daughter and her ex-companion experienced should think carefully about getting professional tax (and other) advice before parting ways.

The Definition of a Taxpayer

Reader Morris sent me the link to this letter to the editor of the Red Bluff (California) Daily News. He asked me if the definition of a taxpayer provided by the letter writer was correct.

The letter writer claimed that

A taxpayer, by definition, is one pays more in taxes than public welfare services received, such as free public school, food stamps, housing assistance subsidies, free school lunches, unearned income tax credits, aid to dependent children, Medicaid, Obamacare and others from the 90 plus government subsidy programs.

The letter writer is wrong. Unfortunately, it’s only a matter of time before this erroneous definition spreads like a virus throughout social media.

A taxpayer is a person who pays taxes or who is obligated to pay taxes even if the taxes have not (yet) been paid. The Internal Revenue Code, for example, in section 7701(a)(14), defines taxpayer as “any person subject to any internal revenue tax.” Similar definitions can be found in state and local tax statutes. Even aside from the legal definition found in those codes and statutes, the everyday definition is the same. For example, one finds the same definition in any dictionary, such as Merriam-Webster, or the Cambridge Dictionary.

If there is a word for someone who pays more in taxes than is received in kind, it isn’t “taxpayer.” Of course, the letter writer fails to include in the list of things received in exchange for taxes benefits such as military, police, and fire protection, emergency medical assistance, clean air, clean water, roads, sidewalks, snow removal, weather forecasts, and similar benefits that aren’t seen as “subsidies” because, from the perspective in question, subsidies are things that other people get but that the person defining subsidies doesn’t get.

Ignorance. It has become a disease that threatens to become a pandemic that eradicates the sapiens sapiens portion of the human species.

Some Thoughts on Teaching Law: Index

For readers who would like an index to the series of posts on sharing Some Thoughts on Teaching Law. Here it is.

Some Thoughts on Teaching Law: Part I: Introduction

Some Thoughts on Teaching Law: Part II: Transactional Curriculum for Doctrinal Courses

Some Thoughts on Teaching Law: Part III: The Problem Method

Some Thoughts on Teaching Law: Part IV: Teaching Ethics

Some Thoughts on Teaching Law: Part V: Team Teaching

Some Thoughts on Teaching Law: Part VI: Balancing Theory with Practical Reality

Some Thoughts on Teaching Law: Part VII: Smaller Classes

Some Thoughts on Teaching Law: Part VIII: Learning Outcomes Measurement

Some Thoughts on Teaching Law: Part IX: Online Education

Some Thoughts on Teaching Law: Part X: Teaching Loads

Some Thoughts on Teaching Law: Part XI: Tenure, Teaching, Scholarship, Service, and Compensation

Some Thoughts on Teaching Law: Part XII: Office Hours, Email, Virtual Classroom Discussion Boards

Some Thoughts on Teaching Law: Part XIII: Flipping the Classroom

Some Thoughts on Teaching Law: Part XIV: Laptops in Classroom

Some Thoughts on Teaching Law: Part XV: Attendance

Some Thoughts on Teaching Law: Part XVI: Formative Assessment

Some Thoughts on Teaching Law: Part XVII: Examinations and Assessments From the Law Professor Perspective

Some Thoughts on Teaching Law: Part XVIII: Examinations and Assessments From the Student Perspective

Some Thoughts on Teaching Law: Part XIX: Learning From Student Examination Errors

Some Thoughts on Teaching Law: Part XX: The Art or Science of Grading

Some Thoughts on Teaching Law: Part XXI: Challenge Examinations

Some Thoughts on Teaching Law: Part XXII: Remediation Semester

Some Thoughts on Teaching Law: Part XXIII: Paying for Law School

Some Thoughts on Teaching Law: Part XXIV: Course Evaluations

Some Thoughts on Teaching Law: Part XXV: In Conclusion, Passing It To the Next Generations

When Lower Tax Rates Aren’t Enough

So the starving oligarchs and impoverished investors, struggling to survive with their capital gains being taxed at special low rates, lower than those applicable to wage income, are now begging for indexing of basis in their investments. Worse, because they know that Congress isn’t going to hand them yet another tax break, they are pressuring the Executive Branch to usurp Congressional power and impose indexing by executive order.

The principal justification for special low rates on capital gains is that those rates compensate for the failure to index basis. The argument is that a portion of the gain reflects inflation rather than a “true” increase in economic wealth. I agree. I agree that the basis of capital assets should be indexed for inflation. But, that removes the justification for the special low rates on capital gains. To have both is to be greedy, and to succumb to the money addiction that is destroying the nation. Or perhaps it is part of an even nastier plot.

Some Thoughts on Teaching Law: Part XXV: In Conclusion, Passing It To the Next Generations

Perhaps my thoughts that I shared in this series about teaching law have been of interest to those who have read them. Perhaps they were a revelation to someone who has not attended law school. Perhaps they were a surprise to a student who was enrolled in one of my courses, or at least a better or more easily understood explanation of some of what transpired in the course. Perhaps former or current colleagues found these thoughts to be alarming, or ridiculous, or amusing, or helpful. Perhaps former students who are now members of a law faculty can examine what I wrote, meld it with what they experienced and observed while sitting in one or more of my courses, conclude that they could improve on what I have done, and incorporate it into their teaching. Perhaps they, some day, will in turn pass their thoughts on, to their students who eventually enter the ranks of law teachers.

As a student, and as a law professor, I watched, listened, conversed, studied, and thought about what was involved in teaching law. Several of my law professors mentored me not only in the courses they taught, but also in my development as a law professor, because it was no secret that they planned to bring me back, and they did. Many of my law professor colleagues taught me, guided me, shared ideas with me, advised me, challenged me, argued with me, and otherwise influenced me and my law teaching. I mixed all of that with my own ideas, with ideas from friends and relatives who taught in other disciplines, with memories of what I had experienced from those who taught me before law school, both in the institutional setting and as mentors outside of school, and with suggestions, proposals, and reports in articles written by law faculty and teachers in other disciplines who I never met in person. The concoction that resulted, though changing over the nearly 40 years I have devoted to teaching law, ended up defining me as a law professor. Though there are one or several courses left for me to teach, my thoughts have reached the twilight of their progression. They can live on in the minds of those who want to remember them.

Some Thoughts on Teaching Law: Part XXIV: Course Evaluations

When all is said and done, most law schools give their students an opportunity to evaluate the courses in which they are enrolled. For me, the course evaluation process presents three significant concerns.

The first concern involves the questions that are asked. Fortunately, over the years, improvements have been made in the nature of the questions posed to the students. For example, no longer do the evaluations at the law school where I teach ask if there was a syllabus. There are much easier ways to determine if the person teaching the course has complied with the requirement that a syllabus be distributed to the students. As another example, there is no need to ask all of the students whether any classes were cancelled or if the professor failed to show up for a class. That information reaches the administration through other means, and so that question disappeared. But there still remain some questions that could be improved or perhaps eliminated, and there are questions that could be added. Recently, the law school where I teach has amended the evaluation form to permit faculty to add questions. So, in time, I think this first concern of mine will disappear.

The second concern involves participation rates. Law schools take all sorts of steps to encourage student responses, including making it easier to fill out an evaluation using the school’s web site. To move beyond encouragement to full participation, law schools would need to do what is done to get full responses to questions that matter for accreditation purposes, such as employment information. For example, diplomas are handed over only after the employment information is provided. Why does participation matter? Without a full canvass of the class, the evaluations tend to be those provided by students who are overjoyed with the course or, more likely, those who are angry for some reason, perhaps because they didn’t bring their full attention to the course. One need only examine independent online course and faculty evaluation sites to realize how skewed, inaccurate, and silly evaluations can become when they are do not represent a full cross-section of the class. Though these misleading websites aren’t going to disappear, law school administrations don’t pay attention to them, but it will not take very much to get full participation.

The third concern is the one that is most troubling. As a general proposition, a course, like a restaurant, a movie, or a business deal, cannot be fairly evaluated until it is completed and its effects can be observed or experienced. True, there are times when something about the meal, movie, or business negotiation justifies walking out early and rating the experience as awful. But in many instances, it’s only after dessert, or a great dramatic ending, or a longer-term profit that an evaluation is worthwhile because it takes into account the entire experience. I cannot count the number of times a former student, several or more years after graduation, has encountered me at an event and shared an opinion that can be summed up thusly: “I thought you were a jerk and I hated you and the course, but now that I’ve been in practice I realize what you were doing, and it has made a difference, it has made me a better lawyer.” Colleagues have had similar reactions, and the fundraising office also has relayed similar anecdotes. For years I have advocated asking graduates to do evaluations a few years after graduation, but that proposal has never gained traction. Cost, which once was an issue because it would have required postage, no longer is an impediment, thanks to digital technology. The biggest challenge is the participation rate, even taking into account graduates who cannot be found or who are no longer practicing law. The response might resemble the hit-or-miss outcomes of the independent websites offering forums for evaluations. But is there any harm in trying, to see what happens? Perhaps something more formal can be incorporated into the communications between graduates and alumni and development offices.

Some Thoughts on Teaching Law: Part XXIII: Paying for Law School

Though it is one of the first things prospective law students consider, I have left the question of financing law school to near the end. Teaching law can happen only if law schools have sufficient funds to pay a faculty and staff, maintain facilities, and operate programs. Over the past several decades, the costs have increased not only because costs in the economy have increased generally but also because law schools have had to add technology, which isn’t inexpensive, and programs, such as those designed to provide remediation.

Law schools obtain funding primarily from three sources. One is tuition, another is donations, and the third is endowment income. Donations come from graduates, from private sector third parties interested in the programs of a law school, and occasionally from government. Private sector donations often arrive with strings attached, sometimes necessitating the creation of a new program while existing programs are financially squeezed. In theory, law schools with large endowments can reduce tuition from what it otherwise would be, but endowment earnings fluctuate and can be unpredictable.

During the past decade, a law school’s stated tuition has become akin to a car manufacturer’s suggested retail price. Few, if any, pay that amount. Instead, law schools offer discounts, scholarships, and occasionally loans. Where do law schools obtain the funds to do this? Donations help, as do endowment earnings, but a good bit of the tuition reductions reflect what is paid by students getting little or no tuition reduction. This approach to law school financing cannot continue. There is little dispute among law school administrators and faculty, and among university finance officers, that something needs to be done.

Though donations from graduates are helpful, very few law schools experience high levels of graduate participation in donations. Donations from graduates who received financial assistance of one sort or another isn’t materially different from donations from graduates who did not. Nor is there a strong correlation between a law graduate’s financial status and the amount of giving. Some graduates who make a modest living are loyal donors, and some graduates who have done very well give nothing. Unfortunately, graduates who head out after graduation unhappy with something about, or someone at, the school often cut off subsequent contact. No school expects all or even most of its graduates to participate in annual giving or some similar program, even though every school wishes that it had 100 percent participation.

What I think could work is a mechanism to establish law graduates as part of the law school’s financial health. Though discounts are helpful in attracting students, they don’t necessarily instill in a student a sense of giving back. The recipient of a scholarships or grant from the school might be a bit more likely to donate, but giving back is far from a sure thing. Why not instead shift from discounts and scholarships to loan programs?

Law schools have had loan programs and the experience has been mixed. Too many loan recipients do not pay back the loans. Law schools have been reluctant to play the role of bill collector, or to damage goodwill by turning loans over to collection agencies. Yet in many instances the lack of repayment simply reflects the weak financial condition of the loan recipient. Would it not make sense to connect the amount and timing of loan repayments to the income and wealth status of the loan recipient? By doing so, the law school is investing in the futures of its graduates, and has an increased incentive to teach them well, to guide them in their educational endeavors, and to be supportive of them as they develop their careers. Law students and law school graduates often complain that the school “doesn’t care,” and though I don’t think that is true, a loan program of this sort would make the law school’s caring about its students and graduates more visible. It also recycles the loan dollars, with interest, so that a donation of a particular size can support many more students than it would if it were simply distributed as scholarships.

It’s worth a try, is it not? What is there to lose?

Some Thoughts on Teaching Law: Part XXII: Remediation Semester

The flip side of the challenge examination is what I call the remediation semester. It’s not something I’ve ever proposed, because it probably would dissatisfy administrators, faculty, and students. It addresses what I perceive to be a set of increasing problems.

Law students arrive on the first day of law school from a diverse array of educational backgrounds, both in terms of quality and in terms of subject matter exposure. In many ways, there are significant benefits to having a classroom in which a veterinarian, a history major, an accountant, a computer science major, a police officer, a theology major, an engineer, and a geology major can engage in discussions about legal issues. Having multiple perspective enriches the law school education experience.

Yet there are drawbacks to these differences. Students who have progressed through educational systems that are not up to par face a steeper climb to law school success. It’s not their fault that they attended underfunded or de facto segregated schools, as has been the experience of at least several students who were in my classes, and those are only the ones who shared their education stories. Law schools try to help students in these situations “catch up” by offering programs delivered in the summer before they enter law school, by offering programs available to students who need remedial assistance during their time in law school, by hiring professionals to help students ameliorate basic grammar and other writing deficiencies, and by assigning mentors and tutors or assisting in the retention of tutors.

Students who have majored in certain subjects have advantages that create a background gap between them and their classmates. The flow of discussion becomes interrupted, or at least causes some students to tune out, if attention must be given to help students without a certain background “come up to speed,” especially when assigning supplemental readings or videos isn’t effective for various reasons. Students who major or have backgrounds in certain disciplines have a head start in thinking in the ways those teaching law are trying to help students incorporate into their intellectual analyses.

It’s not so much that students who major in certain subjects have an overall edge compared to their classmates. The advantage that a particular student gains in terms of background knowledge by majoring in a particular discipline is offset because that student did not major in a discipline that a classmate pursued and that gave the other classmate an advantage in structuring a thinking process. It would be wonderful if law schools could dictate a set of prerequisite undergraduate courses, though not majors, in a way similar to the organic chemistry requirement that bedevils pre-med students. Law schools hesitate, though, for two reasons. One, which I understand, is that imposing such a requirement would reduce the number of applicants, an outcome that would be harmful, if not fatal, to the financial position of law schools, both in terms of numbers of tuition-paying students and in the quality of students. The other, which I hesitate to accept, is the idea that law schools can teach anyone to become a lawyer no matter the person’s previous education provided the person has sufficient intellectual capacity.

Attempts to compensate for what I call the subject background gap have produced a variety of approaches. Some schools create mini-courses to fill in basic principles from other disciplines. In some instances, these courses are optional. In other instances, they are mandatory for students who lack an educational background in the content of the course. In still other instances, the courses are mandatory for all students, with no waiver and no challenge examination pathway to waiver, with the rationale being the value those students bring to their classmates. Some schools offer full-fledged courses with titles often ending in “for Lawyers” in order to provide a means of filling in the gap. More recently, law schools are turning to the resources available in the rest of the university, finding ways to permit law students to enroll in courses that can enhance and enrich a law student’s understanding and appreciation of the activities or transactions that generate the need for a lawyer to help prevent or solve a problem.

As helpful as these various remediation techniques are, unless they are offered at the outset, they are of no help to the student while enrolled in courses during semesters before the remediation experience is available. Would it not make sense to set up the first semester with remediation courses and projects, of varying lengths? Or perhaps, to set up something available in the summer before law school, as Harvard Law is starting this summer. That semester (summer or fall of the first year) could also include other preparatory courses such as Legal Writing, as well as one or two substantive courses least likely to be affected by education background gaps. Combined with challenge examinations, the entire law school experience could be increasingly personalized, with students finishing in anywhere from five semesters to eight semesters. Already there are students who take summer courses and thus could graduate in five semesters if it were permitted, which it is not. And there are more than a few students who because of leaves, or the need to earn additional credits, take seven or eight semesters to graduate. There is room here for law schools to explore even more possibilities as legal education moves away from the decades-ago model of a one-size-fits-all three-year experience.

Some Thoughts on Teaching Law: Part XXI: Challenge Examinations

One of the complaints about present day legal education is that law school takes too long to complete, and that shortening the length of the program would reduce law school tuition, the level of which is another complaint about present day legal education. Though I disagree that three years is too long, I do see a way of shortening the time a student spends in law school, though perhaps it would only eliminate one semester.

Why not permit students to obtain law school academic credit by taking and earning an A level grade on a challenge examination? Though I doubt very many students would succeed, it makes sense to provide the opportunity so that the few who would benefit could do so. Surely there are, for example, students who majored in business or accounting who could do well on a basic tax examination. There might be librarians who could excel on a Legal Research examination. In the long run, the existence of challenge examinations might entice undergraduate programs to offer law courses, perhaps taught by faculty at an affiliated law school, for which law school credit could be earned. I’ve always thought it would make sense, and in many ways be cost-effective, to offer a section or two of the basic tax course or the business organizations course in the business school. Why not offer a section of criminal procedure in an undergraduate criminology program? Why not offer a section of intellectual property law in an undergraduate computer science program? The course would enrich those programs, and for graduates of those programs who decide, at that point or later in their careers, to attend law school would save time and money.

The idea of law school challenge examinations popped is not a new one, nor is it mine alone. My first consideration of the idea occurred several decades ago, when a student in the M.T. program asked permission to take an advanced J.D. tax course without having had the prerequisite course (because he was not a J.D. student). We, that is, myself and those with the final decision-making power, decided to let him do so. The student struggled. At that point, I suggested that in the future a student be permitted to skip a prerequisite course only if the student earned an A on a challenge examination. The particular situation in question never again preseneted itself to me, but it did start me thinking about challenge examinations more thoroughly.

Some Thoughts on Teaching Law: Part XX: The Art or Science of Grading

For as long as there have been American law schools, grades have been the subject of numerous and sometimes intense faculty discussion and a source of much distress, glee, and bewilderment for law students. Rumors about grading that circulate among law students range from those that raise concerns to those that are laughable. Never, for example, have I known a law professor to toss examinations down the steps and base grades on where the examinations landed.

When students ask me how I determine grades, I tell them. Years ago, in an effort to avoid fielding and answering that question multiple times each semester, I decided to share with students how I grade. Not only do I provide the basic information faculty now are required to provide, such as whether the grade is based on one or more examinations or papers and whether examinations are open-book or closed-book, I also explain how I translate student assessment and examination performance into a final grade. What I do is not a secret.

The final grade in my courses, other than the occasional seminar or similar course I have taught from time to time, is based on a combination of performance on semester assessments and a final examination. The semester assessment score constitutes one-third of the grade and the final examination constitutes two-thirds. In recent years, there have been ten semester assessments. Some, usually four or five, are assigned for completion outside of class. The others, usually five or six, are administered in the classroom, using student response system software. Because a student might be absent from class on the day that a semester assessment is administered, and because there is no administrable way of providing a make-up assessment, the two lowest semester assessment scores are dropped. Though I could limit the dropped scores to scores earned from in-class assessments, I permit dropping scores from out-of-class assessments because there might be a good reason for a student to fail to provide a response even though they are usually give four or five days to send an answer. The combination of the semester assessment total score and the examination score is a matter of simple arithmetic.

I grade against a standard. There is a model answer for each question. For a multiple-choice questions, the model answer is the correct selection. For a true-false question,. the model answer is the correct response accompanied by correct reasoning. One without the other does not earn credit. For short-answer questions, the model answer is what I would have answered, with points assigned to each component of the answer. For example, a semester assessment might ask a student to identify four facts that need to be determined in order to resolve the client’s problem, or to identify four questions that need to be asked of the client. A student who provides three correct facts or questions earns three-fourths of the maximum score for that assessment. A student who provides a correct response that is not in the model answer earns credit for that answer.

Thus, there is a total maximum possible score for the course. Grades reflect the percentage of that score that a student has earned. Over the years, discussions with law faculty, including those who taught me, and careful consideration of articles written about grading have shaped my decisions with respect to those percentages. A student who demonstrates he or she has learned at least something, particularly very basic concepts, ought not fail. Thus, a score that is 20 percent or more of the maximum possible score earns at least a D. On the flip side, a student whose score is at least 80 percent of the maximum possible score earns an A, which is the highest grade. Other grades fall in-between. The precise cut-off point can shift so that there is not a one point difference between one grade and another. I also re-grade examinations that earn low grades of F, D, and C minus, and those examinations that are close to the cut-off point for each grade.

I grade against a standard. I do not use a grading curve. The debate about grading curves is a long and interesting one. Why do I grade against a standard? My goal in teaching law is to prepare students for law practice. The standards that I set for the course, which dovetail to what can be called learning outcomes, are intended to match what a student ought to be able to understand, explain, and do with respect to what is covered in the course. The question that needs to be answered is whether, and if so, to what extent, has the student achieved the course standards? Students who demonstrate an accomplishment at the level of a particular grade earn that grade. The idea of telling a group of students who have demonstrated mastery of a course that only some of them will be awarded a grade of A because there are a limited number of A grades to be awarded makes no sense to me in the context of measuring preparation for the practice of law. It makes sense that there are a limited number of medals awarded in an Olympic competition, but those events involved athletes competing against each other, whereas students in a course are striving to attain an accomplishment measured by a standard and ought not be competing with each other, aside from moot court and similar competitions.

Students think that law professors “give” them grades. I have explained to students, many times, that I do not give grades. Students earn grades. Years ago, a colleague expressed surprise at the idea a student could “earn” an F grade. My response remains the same. It is the equivalent of telling someone, “You have earned nothing.” That is what I would say to someone hired to mow the lawn, who doesn’t show up, but demands to be paid. Yes, it is possible to earn nothing and possible to earn an F. Fortunately, the earning of an F has been a very rare occurrence in my courses. May it stay that way.