MauledAgain

Friday, October 25, 2019

Once Again, Rebutting Arguments Against Mileage-Based Road Fees

Brandon * * * seems nervous about the prospect of the possibility that “the government will know where you are at all times.” But the mileage-based road fee device will not provide that capability. Why? Because it can track only the location of the vehicle. Thus, even if a government wanted to know, and figured out, that a person’s vehicle was in a shopping mall parking lot, there would be no way of knowing from that information which stores the person visited, what the person purchased, or how much the person paid for those purchases. Nor would it provide any information about the identities of individuals with whom the person met or the content of their conversation. As I explained in my last post on the topic, Mileage-Based Road Fees: Privatization and Privacy:
And, yes, there is a risk that a mileage-based road fee system can be used to determine where a vehicle has been. Vehicles, of course, do not have privacy rights. But because people assume that an owner of a vehicle is wherever the vehicle happens to be, it is understandable that knowing where a vehicle has been might reveal where the owner has been. Of course, a mileage-based road system need not track location, though those being considered and those in place do so, provided that the fee did not change based on the road being used. Connecting to the odometer would suffice. It also is important to remember that for many decades, the location of vehicles has not been a private matter hidden behind the sacrosanct walls of a person’s home. For a long time, law enforcement officials, investigative journalists, and even nosy neighbors have been able to determine where a vehicle has been, aided by the existence of license plates, bumper stickers, and other identifying characteristics. There’s nothing private about being in public.
Thus, Brandon’s concern that “tax collectors can access our physical location at the touch of a button” is overstated, because at best, the only location that could be accessed is the location of the vehicle. And considering that the system could be outfitted with a delay such as that used with EZPass and similar systems, because information about the use of the road need not be real-time for a fee to be imposed, by the time the button is pushed the vehicle very well could be at another location, its driver could be out of the vehicle, or another person could be driving the vehicle.

Existing technology, such as roadside cameras, credit card receipts for fuel purchases, electronic toll systems such as EZPass, and observations by law enforcement authorities, already provide substantial information concerning the location of a vehicle. Similarly, the location of an individual when in public areas is not a secret. The mileage-based road fee does not generate a significant increase in the revelation of vehicle location information, and does nothing to increase the disclosure of individual location information.

The Glostone analysis concedes that advocates of the mileage-based road fee “say privacy concerns are addressable,” and cites the limits Oregon places on the data recorded by the tracking device. Indeed, those who raise privacy concerns either haven’t yet thought through the analysis, or oppose the mileage-based road fee for other reasons and use privacy concerns to tap into the fears of the ignorant.

The Glostone analysis describe cost as the “largest problem.” It notes that the devices would need to be installed in all vehicles. The device don’t cost very much and are very easy to install. I have one in my car. It took all of 5 seconds to install. The Glostone analysis claims that the mileage-based road fee “would require every vehicle owner to periodically report distance tax and create a costly new bureaucracy that would have to audit these reports,” and that the “added bureaucracy alone could eat up any gains in tax revenue.” The tracking device reports without any need for owner intervention. Digital technology eliminates the need for the roomfuls of eyeshade-wearing human auditors.

The Glostone analysis notes that existing laws that address gas tax revenues would need revision. That’s correct, and I discussed this a few days ago in Getting Technical With the Mileage-Based Road Fee. It’s very easy to do. Model legislation would provide a template for legislatures.

The Glostone analysis claims that a mileage-based road fee “could reward users or increase purchases of less efficient vehicles while monetarily punishing drivers of energy-efficient cars by leveling similar charges for all drivers, weakening incentives to buy energy-efficient electric and hybrid cars.” If the mileage-based road fee was designed in that fashion, that would be the outcome, and it would be foolish. One of the advantages of the mileage-based road fee is that the tracking device can be calibrated to the weight, energy efficiency, pollution output, and similar characteristics of the vehicle. It obtains this information because it is plugged into the vehicle’s OBD port.

The Glostone analysis points out that “Some drivers in rural areas worry may have to pay more because they drive farther between destinations than do urban drivers. They argue that while they do drive greater distances on the roads, they drive at faster speeds that are more fuel-efficient.” The response is simple. The longer the road, the more expensive it is to build and maintain. The tracking device, as I pointed out, can and should be calibrated to adjust for the higher fuel efficiency. Even under the existing fuel tax, drivers who drive more miles pay more tax because they use more fuel. Thus, the mileage-based road fee isn’t disadvantaging them in that manner.

Finally, the Glostone analysis reminds us that “these on-board distance tracking devices may be vulnerable to tampering.” I also addressed this concern in Is the Mileage-Based Road Fee a Threat to Privacy?, again addressing the Adam Brandon editorial:

Brandon also poses an interesting concern. He predicts that some people, in an attempt to avoid paying the fee, would tamper with the device. Or at least would try. He’s correct, because it is unquestionable that people exist who want something for nothing and want road use for free. The answer is not to ditch the proposal, for the same reason people don’t stop buying houses because burglars exist. The response is to create a device that is as tamper-proof as possible, and to provide for serious penalties for those caught trying to tamper with the device. But when Brandon tries to explain why the possibility of tampering demonstrates what he sees as the inadvisability of the proposal, he makes an awkward assertion. Brandon claims, “Do we really own our own cars if we are not allowed to modify them?” The answer is yes. Under current law, it is illegal to tamper with odometers, certain safety features, catalytic converters, and some other items. Adding the mileage-based road fee device to the list does not make the owner of the vehicle any less an owner.

The Glostone analysis closes by arguing that “the debate needs to continue,” that “technology needs to advance,” that “an increase in funding for infrastructure cannot wait,” that “something will change,” and that “we all need to educate ourselves.” It also claims that there “is no simple, cost efficient answer that is available with today’s technology and social climate.” I disagree in part. The technology exists, and it is cost efficient. As for the social climate, perhaps a few more bridge and tunnel collapses and a surge in damage, injuries, and deaths from potholes, badly marked highway lanes, and other existing problems will bring about social climate change. As the Glostone analysis puts it, “In all likelihood, the answer will be a long term conversion process that starts with what can be done today (tax increase) and move towards a VMT as technology improves and social attitudes change.” I happen to think the time frame will be much shorter than long term. I give it three to five years.

Wednesday, October 23, 2019

Tax Cuts Cause Damage When Misdirected

In their new book, The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them PayEmmanuel Saez and Gabriel Zucman demonstrate that in 2018, the average federal income tax rate on capital was less than the average federal income tax rate on wages. That hasn’t happened for at least 100 years. I’m confident that it has never happened in the history of the federal income tax, because one of the chief purposes of that tax was to moderate the income and wealth inequality of the 1890s that caused so much disruption to the nation’s economy.

For the past 38 years, average federal income tax rates on capital have been dropping, and those on wages and self-employment income have been rising. Though the former have been higher than the latter throughout the past century-plus, they changed places in 2018. The reason is simple to identify. It was that ill-advised tax cut legislation of 2017. Proponents of that legislation claimed that it would fuel tremendous increases in business investment. That hasn’t happened. They claimed that wages would increase to levels necessary for workers to pay for the necessities of life. With the average bonus increasing between 2017 and 2018 by a penny, and with more workers needing to take on a second or third job to succeed, the promises of those who have continued to preach supply-side trickle-down nonsense were, as usual, quite false.

In their book, Saez and Zucman challenge the theory that tax rates on capital should be low, even zero. Advocates of special low and zero tax rates on capital claim that by lowering or eliminating taxes on capital, owners of capital have more resources to hire more workers and increase worker pay. Of course, that hasn’t happened. Instead, the tax cuts handed out to the owners of capital, particularly large corporations and wealthy individuals, were stashed or used to pay dividends or buy back stock. And of course, this process compounds the growth of capital, enlarging the income and wealth inequality gaps.

So why don’t tax cuts for the owners of capital create jobs? I answered that question many times, most recently in in Tax Cuts for Employers Do Not Create Jobs:

Whether it’s an existing business paying less tax or a new business writing off capital expenditures, those folks are not going to hire people unless they have something for those people to do. To have something for those people to do, those businesses, whether existing or start-up, need to sell goods and services. To sell goods and services, these businesses need customers. To have customers, these businesses need a vast consumer class that can afford to make those purchases. The proposed legislation [the 2017 tax cut deal] gives some of the consumer class a few dollars and actually raises taxes on another portion of the consumer class, thus reducing their purchasing power. Aside from that deep flaw, why would companies spend $1,000,000 on a piece of equipment in order to reduce taxes by $200,000? Why deplete those huge cash reserves by $800,000 if the equipment isn’t needed because there’s no one to purchase the goods it makes or the services it provides? Talk about voodoo economics.

So it’s no surprise that wealth inequality is growing at an alarmingly dangerous rate.

Aside from the question of whether taxes should have been cut when there is a budget deficit, if taxes were to be cut, the question of how those cuts should have been directed was answered incorrectly. Putting into the hands of the bottom 90 percent the unneeded tax breaks that were handed to the large corporations and top one percent of individuals would have caused an upsurge in true economic demand, required owners of capital to hire more workers, and increased tax revenues to offset the budget impact of the cuts. That’s called demand-side economics, and it works. It’s time to put supply-side economics in the rubbish bin of history.

Monday, October 21, 2019

Getting Technical With the Mileage-Based Road Fee

All fees collected by the State of Washington as license fees for motor vehicles and all excise taxes collected by the State of Washington on the sale, distribution or use of motor vehicle fuel and all other state revenue intended to be used for highway purposes, shall be paid into the state treasury and placed in a special fund to be used exclusively for highway purposes. Such highway purposes shall be construed to include the following:

(a) The necessary operating, engineering and legal expenses connected with the administration of public highways, county roads and city streets;

(b) The construction, reconstruction, maintenance, repair, and betterment of public highways, county roads, bridges and city streets; including the cost and expense of (1) acquisition of rights-of-way, (2) installing, maintaining and operating traffic signs and signal lights, (3) policing by the state of public highways, (4) operation of movable span bridges, (5) operation of ferries which are a part of any public highway, county road, or city street;

(c) The payment or refunding of any obligation of the State of Washington, or any political subdivision thereof, for which any of the revenues described in section 1 may have been legally pledged prior to the effective date of this act;

(d) Refunds authorized by law for taxes paid on motor vehicle fuels;

(e) The cost of collection of any revenues described in this section:

Provided, That this section shall not be construed to include revenue from general or special taxes or excises not levied primarily for highway purposes, or apply to vehicle operator's license fees or any excise tax imposed on motor vehicles or the use thereof in lieu of a property tax thereon, or fees for certificates of ownership of motor vehicles.

Washington courts have held expenditures for the following purposes to be within the scope of the amendment: construction of park-and-ride facilities, repayment of bonds issued to finance the building of a highway bridge, valuation of highway property in advance of transfer or lease of highway land, refunds of the gasoline tax for fuel used for off-highway purposes. The courts have held expenditures for the following purposes to violate the amendment: financing a public transportation system, relocating utilities if the relocation does not directly or indirectly benefit the highway system, paying tort judgments. Interestingly, in State Ex Rel. O'Connell v. Slavin, 75 Wash.2d 554, 452 P.2d 943 (1969), the Washington Supreme Court rejected the argument that financing public transportation was a permissible use of the funds because it would reduce congestion and wear-and-tear on highways, explaining that this reasoning would entitle private bus companies to claim monies from the highway fund.

The overriding issue is not one restricted to the use of revenues generated by a mileage-based road fee. It is an issue that affects every tax or user fee enacted by a legislature other than, perhaps, taxes destined for a “general fund.” To make certain that the revenues from a mileage-based road fee are not diverted as has happened with gasoline tax revenues and other user fee revenues, those drafting the implementing legislation must be certain to restrict the uses of those revenues. For Washington state, and other jurisdictions with similar restrictive language, the concern is that the 18th amendment does not apply to mileage-based road fees. That means an amendment to the amendment is necessary, though perhaps the same outcome could be accomplished by inserting expenditure restrictions into the enacting statute. I don’t know Washington constitutional law well enough to conclude what specifically would need to be done. As the writer of the News Tribune article put it, “State lawmakers, therefore, shouldn’t mess around with a mileage tax unless they have a parallel discussion about preserving the original intent of the gas tax.” I totally agree.

Friday, October 18, 2019

When, If Ever, Is a Toll a Tax?

Reader Morris directed my attention to a commentary criticizing the proposal in Connecticut to use a portion of proposed highway tolls to fund improvements and additions to trains. A similar issue has arisen in California, according to this report, where the governor wants to use some of the state’s gas tax revenues to improve and add train service. In Pennsylvania, portions of turnpike tolls have been diverted to other uses.

The writer of the Connecticut commentary argues that if a toll is used for something other than the highway for which it is charged, it no longer is a user fee but a tax. People can agree or disagree with that position, but to me, it makes no difference what the charge is called. Though it might appear that the anti-tax crowd would object to the charge if it were a tax or called a tax but not if it were a user fee, the reality is that the anti-tax crowd objects to any charges made by a government or government agency no matter its name or what it is called.

Readers of MauledAgain know that I oppose shifting user fee revenue, such as tolls, from the maintenance, repair, expansion, or other benefit to that for which the user fee is being paid. I have written about this issue in posts such as Soccer Franchise Socks It to Bridge Users, Bridge Motorists Easy Mark for Inflated User Fees, Restricting Bridge Tolls to Bridge Care, Don't They Ever Learn? They're At It Again, A Failed Case for Bridge Toll Diversions, DRPA Reform Bandwagon: Finally Gathering Momentum, When User Fee Diversion Smacks of Private Inurement, Toll Increases Ought Not Finance Free Rides, Infrastructure, Tolls, Barns, Jackasses, and Carpenters, and Using Tolls to Fund Other Projects.

The question, in the case of the Connecticut and California situations, is whether use of highway tolls or gas tax revenues to fund train service is a use unrelated to the purpose for which the toll or tax is collected. Infrastructure, Tolls, Barns, Jackasses, and Carpenters, I wrote, “
One question was very telling. Someone asked, ‘Why should I pay for someone else to ride the train?’ The article doesn’t disclose the answer, or if there was an answer. But the answer is simple. The toll not only purchases an improved road, it purchases space on the improved road by making train use economically efficient and attractive to someone who would otherwise be using the road, but who would give up road use if train use was economically more desirable. That’s a far different matter than paying a toll to fund unrelated projects.”

In Revenue Problems With A User Fee Solution Crying for Attention, I described the problems arising from using turnpike tolls for other purposes:

[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?

The answer to that question is that using turnpike tolls to shift traffic to nearby roads by improving those roads in order to alleviate congestion on the turnpike or to make access to and from the turnpike easier falls within the scope of giving turnpike users something in exchange for the tolls they pay. That is far different from using bridge tolls to fund a soccer stadium, a mis-use of user fees I criticized in posts such as Soccer Franchise Socks It to Bridge Users, Bridge Motorists Easy Mark for Inflated User Fees, Restricting Bridge Tolls to Bridge Care, Don't They Ever Learn? They're At It Again, A Failed Case for Bridge Toll Diversions, DRPA Reform Bandwagon: Finally Gathering Momentum, When User Fee Diversion Smacks of Private Inurement, and Toll Increases Ought Not Finance Free Rides.

So what should highway user fees, whether tolls or gasoline “tax” revenues, be used to fund? In User Fees and Costs, I explained:

The toll should be based on the cost of building, expanding, improving, repairing, maintaining, policing, and monitoring the road. It isn't difficult for a cost accountant to determine how much it costs to operate the New Jersey Turnpike, the Garden State Parkway, or any other toll road. Tolls should be increased as costs increase, and though it is preferable to recalculate the cost each year, it might be easier to use some sort of inflation index and do the cost recalculation every four or five years. . . .

. . . The analysis I support is one that looks at the impact of the toll road and its use on surrounding residents, neighborhoods, and infrastructure. Traffic volume surrounding a toll road interchange is higher than it otherwise would be, and that generates additional costs for the local government. It makes sense to include in the toll an amount that offsets the cost of widening adjacent highways, installing traffic signals, increasing the size of the local police force, adding resources to local emergency service units, and similar expenses of having a toll road in one's backyard. I understand the argument that because the locality benefits economically from the existence of the toll road and its interchange that it ought not be subsidized by the toll road. It is unclear, though, whether the toll road is a net benefit or disadvantage. If it were such a wonderful thing, why are new roads so vehemently opposed by so many towns and civic organizations?

Using toll revenue to maintain and repair roads and infrastructure far from the toll road is more difficult to justify. Other than relying on arguments such as the maintenance of a high quality state-wide road network that would attract more tourists and business ventures, proponents of siphoning toll revenue to distant areas have a, sorry, tough road to hoe. A better approach would be to impose tolls on heavily used roads in those distant areas.

I reiterated this analysis, more succinctly, in Timing, Quantifying, and Allocating User Fees, by explaining, “Tolls should be used to pay for the costs of building, repairing, maintaining, and operating the toll road, and to defray the economic burden that the road imposes on the surrounding neighborhoods. Tolls should not be used for programs unrelated to the road.”

So, ultimately, the issue isn’t whether the toll is a user fee or tax, or whether the gasoline tax is a tax or user fee. Though I think both are properly classified as user fees, the issue, to me, is the expenditure side of the equation. To what purposes are the revenues from the user fee being put? When it comes to trains that alleviate congestion and wear and tear on the tolled highway, I consider that to be acceptable. Using revenues for train service distant from the tolled highway are just as indefensible as using revenues to fund a soccer stadium.

Wednesday, October 16, 2019

Contracts With Respect to Tax Refunds Should Be In Writing

Sometimes months go by from when I see a television court show involving taxes. Sometimes it’s a day or two. Just two days after the last television court show that inspired a MauledAgain post, along comes another. It joins the list of episodes that have been the subject of previous commentaries, including 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, When Tax Return Preparation Just Isn’t Enough, Fighting Over Tax Dependents When There Is No Evidence, and If It’s Not Your Tax Refund, You Cannot Keep the Money.

This latest drama was aired on episode 56 of season 5 of Hot Bench. The plaintiff and defendant had been engaged, but they broke off the engagement. While they were engaged, the defendant was the primary, and usually only, income earner. The plaintiff took care of the children, including one of her own that was not the defendant’s child. The plaintiff claimed that there was an agreement between her and the defendant, under which the defendant promised to give her half of his tax refund for the year in issue, which was the year before they broke up. The reason, according to the plaintiff, was that the defendant claimed the plaintiff’s daughter on his tax return as a dependent. The agreement was not in writing, and the plaintiff attempted to prove its existence by asserting that there was a past pattern of the defendant giving her some amount of his tax refund.

The defendant denied that he had agreed to give the plaintiff one-half of his tax refund for the year in question, which amounted to $10,000. The defendant admitted that he had given some of his tax refund to the plaintiff from time to time when they were a couple. He explained that his refunds usually were about three or four thousand dollars, and that he gave the plaintiff an arbitrary portion of each refund. The plaintiff countered with a claim that she received $1,300 each year from the defendant out of his tax refund, though she stated that on one occasion she received $1,500.

When asked by one of the judges if there was a family court decision dealing with child support, both parties answered that there was not. Further inquiry determined that the defendant’s tax refund had been garnished for other reasons, and that he had told the plaintiff he could not pay her anything. He also claimed he did not owe her anything. He admitted that if the refund had not been garnished he might have given her $1,300.

The court held that the defendant had no legal obligation under any agreement to pay any portion of his tax refund to the plaintiff. However, the court also determined that based on the parties’ prior course of dealing, and the defendant’s statement that but for the garnishment he might have given the plaintiff $1,300, the plaintiff should receive $1,300 from the defendant, because the refund arose from a tax return for a year during which the plaintiff and defendant were engaged.

The court then admonished the parties to get their situation resolved in one or both of two ways. First, they should work out an agreement drafted with professional assistance. Second, they could go to family court to get matters settled.

The court’s advice is excellent. Unfortunately, the court’s opportunity to give this advice arose after the dispute arose. The two parties would have benefitted from this advice at the outset, but at that stage of their relationship courts would not be involved. So advice to couples who are in relationships deep enough to involve financial matters is necessary, though most such couples don’t get that advice. Here it is. They need to enter into a formal agreement, preferably with professional assistance, before things deteriorate, even if at that stage of the relationship they are convinced things never will deteriorate. Anyone who enters into an arrangement with another person concerning that other person’s receipt of a tax refund and promise to pay some or all of it, whether or not in any sort of serious relationship, would be acting most prudently if insisting on getting that agreement in writing.

Monday, October 14, 2019

If It’s Not Your Tax Refund, You Cannot Keep the Money

Readers of MauledAgain know that I enjoy watching television court shows, not only because they often are amusing and instructive, but also because tax issues pop up from time to time. Some of my commentaries on episodes involving tax 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, When Tax Return Preparation Just Isn’t Enough, and Fighting Over Tax Dependents When There Is No Evidence.

Now a new television court show is being aired. Jerry Springer has opened up a television courtroom. It didn’t take long for a tax issue to arise. In this episode, brought to my attention by Reader Morris, a tax refund was front and center. For some reason, the first part of the show is missing, but it appears that the plaintiff sued the defendant because the plaintiff’s tax refund ended up in the defendant’s bank account and apparently the defendant did not want to turn the money over to the plaintiff. I am guessing that the plaintiff and defendant were not related to each other, or friends or acquaintances.

The evidence showed that the accountant made the mistake, by using the wrong bank information on the plaintiff’s return. This caused the refund to be direct deposited into the defendant’s bank account. The plaintiff had a statement from the defendant’s bank showing that the refund indeed was direct deposited into the defendant’s bank account.

Judge Jerry noted that the mix-up was not the defendant’s fault. However, he explained that no matter who made the mistake, whether the defendant, the accountant, or the IRS, the money was not the defendant’s to keep. Thus, he ruled that the defendant was obligated to transfer the money to the plaintiff.

I don’t know enough to know why the accountant did not contact the IRS, ask it to reverse the transaction and deposit the refund into the correct account. Because the first part of the episode is missing, I don’t know if there was an explanation. Perhaps there was a reason that the accountant could not do that, perhaps because the accountant was no longer around. Perhaps the IRS will reverse a deposit if it made the mistake but not if the taxpayer or the tax return preparer made the mistake. One can imagine the mess that would arise if at this point the IRS tries to reverse the deposit and put the money in the plaintiff’s bank account. At that point the defendant might end up suing the plaintiff.

The lesson is simple. Be careful. Be very careful. Double check, even triple check, bank routing numbers and bank account numbers, along with everything else on the return. Have someone else review the return. A second pair of eyes often is helpful, and sometimes can prevent disasters.

Friday, October 11, 2019

Paying the Tax Revenue Price for Underfunding the IRS

For as long as I have been involved in studying, teaching, paying, writing about, and preparing returns for, federal income taxes, I have criticized the Congress for underfunding the IRS. Those criticisms have found their way into posts such as Another Way to Cut Taxes: Hamstring the IRS, So Cutting IRS Funding Won’t Decrease Revenues? Yeah, OK , The Continued Assault on the Tax Foundations of American Civilization, and Voting for Tax Refund Delays.

For me, the prospect of paying $1 to get $7, in a situation where that outcome has been proven time and again, is an investment far more attractive than pretty much anything else available. So who would oppose such a step? The answer is simple. The opposition comes from those who don’t want the $7 to be collected, because their once-hidden-but-now-obvious goal is to destroy government by cutting off its revenue oxygen. Who would want that to happen? The answer again is simple. Those who want this result are those who would profit by shifting government functions into the hands of oligarchs who are beyond the reach of the ballot box, and who find fulfillment only in the oppression of others. Money-addicted and vying for supremacy as the chosen one, the elimination of government through the destruction of tax revenues is but one step in the process of creating a world owned and operated by a handful of oligarchs, though each envisions a way to become the “top dog” in such an arrangement.

A few days ago, the Center on Budget and Policy Priorities published an article demonstrating the impact of IRS underfunding on the collection of tax revenues. For those who already understand the larger forces at work, the report is a sad verification of what has been happening. For those who think that the warnings about tax revenue reduction and the replacement of government by private enterprises unresponsive to the people is nothing more than alarmist demagoguery, the report is yet additional proof of the risks posed by IRS underfunding, though unfortunately too many of those who don’t see the problem are unlikely to be swayed by facts.

What the article provides is an explanation of a more detailed report by the Treasury Inspector General for Tax Administration. That report reveals that “deep IRS funding cuts over the last decade have weakened the agency’s ability to perform its core functions.” As the article summarizes it, “Staff time [invested in enforcing the payment of income and payroll taxes by employers] plummeted by 84 percent between 2013 and 2017” because of underfunding by Congress. Had adequate funding been provided, at least $3.3 billion in unpaid payroll and withheld taxes would have been collected. Though that amount might pale in comparison to the annual $1 trillion deficit caused principally by dishing out tax breaks to starving billionaires and multi-millionaires, it is but one tiny facet of a significant revenue shortfall attributable to insufficient IRS funding. Between 2010 and 2019, IRS funding for enforcement has been cut by 25 percent, adjusted for inflation.

As I noted in So Cutting IRS Funding Won’t Decrease Revenues? Yeah, OK , at least one member of Congress, a few years ago, made the absurd claim that increasing IRS funding would not increase tax revenue, tossing out numbers that reflected several of those ill-advised tax cuts pushed through by the starving oligarchs. This genius legislator made that claim in order to support the additional claim that cutting IRS funding would not decrease tax revenue. The TIGTA report demonstrates why this sort of thinking is deeply flawed and certainly warped by ulterior motives.

In Voting for Tax Refund Delays, I wrote:

It is mind boggling that people will vote for what they don’t want. Though in some instances people are tricked into voting for what they don’t want when politicians use deception to hide their true intentions, the politicians who are working to destroy the tax foundations of civilization have been very clear that they are on a tax-elimination campaign that includes the destruction of the IRS. Folks, if you think it’s bad now, imagine what it will be like when the system falls apart. And it will, if people continue to vote for what they don’t want.

Nothing that has happened since I wrote those words four years ago has caused me to think that cutting IRS funding is a good thing. What has happened in the last four years strengthens my concern that too many people vote for what they don’t want, chiefly because they don’t understand how what they want fits in with everything else. I wonder how many people who think they want taxes abolished or reduced to negligible amounts, and who desire the abolition of the IRS, will be joyous when the face the consequences. It’s not just a revenue price that will be paid for eliminating government.

Wednesday, October 09, 2019

When Taxpayers Claim Credits To Which They’re Not Entitled, Who Loses?

The headline in this report caught my eye. It states, “Bogus Electric Vehicle Tax Credits May Be Costing IRS Millions.” I do understand, from my newspaper friends, that headlines often are written by someone other than the person who writes the article. But no matter who wrote the headline, I beg to differ.

It’s not the IRS that bears the burden of the reduced revenue. The burden falls on the other taxpayers. To think that the IRS is “something over there” and that it lost money is misleading. Perhaps an example will help. A customer purchases an item from a store on credit. The customer doesn’t pay. The store turns the account over to a collection agency. The collection agency finds the customer and persuades the customer to write a check for the amount owed. The check bounces. Who loses? Yes, the collection agency might get a reputational bad mark, and perhaps doesn’t collect its fee, depending on the terms of the contract. But it’s the store that loses. When the IRS fails to collect tax, or lets an unjustified credit reduce tax payments, the taxpayers lose. It’s that simple.

So I would have written this headline: “Bogus Electric Vehicle Tax Credits Harm Honest Taxpayers.” It’s that simple.

Monday, October 07, 2019

The Twisted “Logic” of Tax Break Giveaway Justification

A few days ago, I read a Philadelphia Inquirer article that not only strengthened my opposition to the New Jersey tax break giveaway, but that should make it even more obvious that my proposal, to provide deductions, credits, and exemptions only when promised benefits are generated, is becoming a necessity in the design of tax policy. Readers of MauledAgain know that one of the promises, substantial numbers of jobs for unemployed Camden residents, did not pan out. I have written about this failure in a series of posts, including The Tax Break Parade Continues and We’re Not Invited, and previously in When the Poor Need Help, Give Tax Dollars to the Rich, Fighting Over Pie or Baking Pie?, Why Do Those Who Dislike Government Spending Continue to Support Government Spenders?, When Those Who Hate Takers Take Tax Revenue, Where Do the Poor and Middle Class Line Up for This Tax Break Parade?, Another Flaw in the New Jersey Tax Break Giveaway, No Tax Break Until Taxpayer Promises Are Fulfilled, The Cost of Creating 27 Jobs? $8,000,000,000 in Tax Break Giveaways, and When Tax Break Giveaways, Praised as “Investments,” Deliver Low Returns.

So it’s time to add another promise to the list of disappointments. The flaw is in the New Jersey law, so it’s not a matter of the tax break giveaway recipients failing to deliver. The law permits the tax break giveaway recipients to include, in their list of why the tax break will generate more benefits than it will cost New Jersey taxpayers, the property taxes that would be paid on the facilities that the recipients promise to build. The bizarre twist to this logic is that the recipients are permitted to include those property taxes in the computation of benefits the recipients will provide to the taxpayers even though in some instances the recipients would not be paying any property taxes because they would be building on exempt property.

In other words, when benefits to New Jersey residents is calculated in an effort to demonstrate they exceed the tax break, the tax break giveaway recipients are credited with paying property taxes that they won’t be paying. So now these tax breaks turn out to have been “justified” by claiming that the recipients would create jobs and pay property taxes, even though very little of the former and in some instances none of the latter materialized.

The importance to the recipients of this fake credit cannot be disregarded. One company was credited with almost $5 million of property taxes, taxes that it would not pay but that it was permitted to count as a benefit to New Jersey taxpayers, and even with that credit the total of those benefits exceeded its $260 million tax break by only $155,000. Take away the unpaid fake property tax credit, and that tax break, unsurprisingly, becomes a tax burden for the rest of New Jersey’s taxpayers. Allegedly, this company will negotiate some “payments in lieu of taxes” in favor of Camden. The New Jersey agency administering the program determined that another company, recipient of almost $140 million in tax breaks, would generate a net benefit to New Jersey of $2,500, by including $2.5 million in property taxes that the company expected it would not be paying. In all fairness, the companies did not make the computation, and some did not see the results of the computations made by state agency employees. Yet they, through representatives, lobbied for the law in question.

So how did this nonsense end up in the New Jersey statutes providing these tax break giveaways? It appears that some “politically connected” law firms “helped write the legislation,” and then represented the recipients when they applied for the giveaways. The law’s supporters continue to claim all of this was necessary in order to bring development to Camden, and that it will create thousands of jobs. I wonder how many of these supporters also claim to be advocates of “free markets” that are unhampered by government regulation and interference.

The former head of the state agency involved in approving the tax breaks, when asked if including property taxes in the computation that weren’t going to be paid, “essentially allowed projects to get through even though they weren’t paying for themselves,” testified that he “would say that’s a pretty accurate statement.” Is there any better commentary on the foolishness of the tax break giveaway program than this admission?

So I again propose that all tax breaks ought to work the way many already do. First do something. Then claim a credit or deduction. If the taxpayer needs seed money to engage in the activity that the taxpayer claims will generate the promised benefits, the taxpayer can borrow the money, perhaps even from the state or locality, at a market rate of interest, with strict protection of taxpayers against the risk of failure.

Friday, October 04, 2019

Financial and Tax Literacy Education in High Schools: There Ought To Be a Law?

For almost as long as I have been writing commentaries on MauledAgain, I have time and again addressed the need for financial and tax literacy education in high schools. The problems that arise for people deficient in that literacy are numerous, serious, and sometimes irremediable. A select list of my postings on this topic include Economically Depressing?, Does It Matter Who or What is to Blame?, Promising Progress on the K-12 Tax Education Front, A School Tax Question: So Whose Job Is It to Teach Financial Literacy? , Additional Thoughts on Financial Literacy . . . and Taxes, Financial Literacy and Economic Inequality, and Making Headway on Financial Literacy Education?.

Now comes news in this Philadelphia Inquirer article that Dan Laughlin, a legislator in the Pennsylvania Senate has introduced a bill requiring high schools to teach a course on personal finance and to award academic credit to those who successfully complete the course. My reaction to the proposal is three-fold. First, of course this makes sense and causes me to wonder why it took so long. Second, of course there ought to have been this sort of course created and offered years ago and ought not have reached the point where the legislature must compel high schools to do this. Third, I think the list of topics that the bill requires to be taught – “understanding financial institutions, using money, learning to manage personal assets and liabilities, creating budgets, and any other factors that may assist an individual in this commonwealth to be financially responsible“ – isn’t long enough, or at least needs more specificity beyond the catch-all “other factors” language. The bill passed the state Senate unanimously, and is now in the state House of Representatives.

One question that has popped up is how the course would be funded. Laughlin claims that enactment of the proposal would be revenue neutral. Is that possible? Yes, if this course replaces another course taught by someone already on the high school faculty, or if someone already on the faculty opts to add the course to his or her workload. The likelihood of those things happening is far from certain.

Pennsylvania is not the first state to pass this sort of legislation. A handful of states do so, including New Jersey, which enacted a requirement that financial literacy be incorporated into the middle school curriculum. But schools need not wait for legislatures to command them to teach these sorts of courses. For example, according to the Philadelphia Inquirer article, two teachers at Aspira Olney High School in Philadelphia have been co-teaching a personal finance course for a few years, though they had to obtain a grant and seek donors to fund the course. One of the two had to write his own textbook for the course, which suggests that there is a shortage of appropriate materials for the course.

Teachers who need to learn how teach, or what to teach in, this sort of course can use resources provided by the Philadelphia Federal Reserve Bank, and in the process earn professional development credit. Perhaps those with business school degrees and those who took one or a few business courses could jump in more easily and more quickly.

There are those who might argue that this sort of education should be undertaken at home. Yes, that would be ideal. Even getting children started on some basic concepts while they are at home would be helpful. Unfortunately, there are many, perhaps too many, parents who themselves lack the understanding of these matters, let alone the ability to teach financial literacy to their children. I addressed this concern in A School Tax Question: So Whose Job Is It to Teach Financial Literacy? , in which I wrote:

The role of K-12 education is two-fold. It is to prepare students to live life, and to prepare students who wish to continue their education to do so. To prepare students to live life, the K-12 system needs to teach the things that ought to be known or understood by all citizens regardless of chosen profession. Financial literacy is one subject that comes to mind, along with civics, first aid, reading, writing, and arithmetic.

My advice to K-12 educators throughout the nation is simple. Start teaching financial and tax literarcy before being compelled to do so by the legislature, because when and if the legislature decides to mandate these courses, it might inject itself into the process to a degree much more intense than you would prefer.

Wednesday, October 02, 2019

The Planetary Scope of Ignorance

I deplore ignorance. If there is any one theme that has sustained itself through all of the activities in which I have engaged, it is my effort to curtail ignorance. Though I doubt ignorance can be exterminated, I have no intention of stopping my efforts. Every little dent in ignorance is a step forward for the entire species. It is no surprise that I write about ignorance fairly often. Consider this sampling of my commentaries: 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?, The Institutionalization of Ignorance, Is Tax Ignorance Eternal?, and Who Should Be Fixing the Ignorance Problem?.

Many of my discussions of ignorance have focused on tax ignorance, and almost all of my discussions have involved stories originating within the United States. But ignorance knows no national boundaries. A recent Deloitte survey in the United Kingdom reveals how serious the ignorance problem has become. The survey was in the form of a quiz about taxation in the United Kingdom. The highest possible score was 30. The average person surveyed scored 10.6, with almost half scoring 10 or less. What is even more frightening is that those aged 18 to 24 scored the lowest. Only 19 percent of those surveyed could identify the top income tax rate.

Matt Ellis, Deloitte’s managing partner for tax and legal matters explained why it is important for people to understand basic tax concepts even if they are not tax professionals. "It’s important that people – especially younger generations entering the workplace for the first time – understand what is deducted from their pay slip and why." Daniel Lyon, Deloitte’s head of tax policy, noted, Educating people on tax affairs could help to inform both people and policy. In order to ensure a UK tax system in which people are satisfied with how much they pay and why, education is key.” Interestingly, 76 percent of those surveyed agreed that basic tax concepts and information should be taught more in schools.

Education about tax matters. So does education about pretty much anything. Unfortunately, when access to education is denied, or education is underfunded, or those who should be seeking education instead seek something else, the long-term consequences are dire. There is a connection between lack of education or insufficient education and the willingness to accept foolish ideas, believe false information, or to go along with a scam artist.

Ignorance isn’t a problem threatening just one nation. It threatens every nation. It is a planetary scourge, at the root of many of the problems people identify and want to solve. Without addressing the ignorance issue, attempts to solve the world’s problems are far less likely to succeed.

Monday, September 30, 2019

Clamoring for Tax Basis Indexing AND Special Low Rates: Inspired by Greed

Grover Norquist is at it again. Not that he has ever stopped his crusade against taxes and his efforts, to use his words, to “drown [government] in the bathtub.” I have written about his dangerous anti-tax campaigns in posts such as Debunking Tax Myths?, If the Government Collects It, Is It Necessarily a Tax?, Tax Policy, Elections, and Money, and Tax Ignorance or Tax Deception. Aside from criticizing his bullying tactics in trying to force his anti-tax ideology onto the nation, I have roundly dissected his arguments and demonstrated the deep flaws in his premises and his reasoning. I have also discussed the atrocious outcomes in places where his tax and government philosophy has prevailed, though for a short time given the need to reverse the bad decisions based on his advice. In all fairness, he and I do agree on at least one thing, the futility of putting tax return preparation in the hands of the Internal Revenue Service, so he’s not totally beyond redemption.

Two weeks ago, Norquist, as president of Americans for Tax Reform, sent a letter to Senator Mitt Romney. He told Romney that he, Romney, was wrong to argue that the President lacks authority to index capital gains. Norquist’s argument is that the word “cost” – which is one of many benchmarks for computing basis, which in turn is used to compute gain – can be interpreted to mean “cost plus inflation.” He relies on Verizon v. FCC, a 2002 decision by the Supreme Court, in which the court determined that the word “cost” in the context of rate setting under section 252(d) of the Telecommunications Act of 1996. The case, though, has no bearing on the issue of indexing tax basis because it involved a different statute, did not address inflation or indexing, was focused on the inclusion or exclusion of future costs in contrast to historical costs, and involved a statute giving an administrative agency a interpretative delegation authority for which there is no comparable provision dealing with tax basis. It is no surprise that the Department of Justice has concluded that the executive branch, specifically the Treasury, has no legal authority to index tax basis for inflation.

Norquist also argues, quoting the Tax Foundation, that “the lower rate on capital gains does not mitigate the inflation issue, as taxpayers still face tax liability whether they made a real gain or real loss.” That is such nonsense. How, for example, is a taxpayer whose capital gains tax rate is zero percent end up facing tax liability on capital gains? Or consider these comparisons between capital gains taxed at the maximum capital gains rate and capital gains computed with indexed basis but taxed at regular rates. For purposes of simplicity, I will use a 20 percent capital gains rate and a 40 percent regular rate. A person purchases an asset for $10, and later sells it for $100. The $90 capital gains, taxed at 20 percent, generates tax liability of $18. Assume instead, that inflation has doubled, and the $10 basis is indexed to $20. The gain of $80, taxed at 40 percent, generates tax liability of $32. That’s not an improvement for the taxpayer. Assume instead, that inflation has quadrupled, and the $10 basis is indexed to $40. The gain of $60, taxed at 40 percent, generates tax liability of $24. That’s still not better for the taxpayer. It’s only when inflation would cause a roughly six-fold increase in of basis, to $60, that the $40 gain, taxed at 40 percent, would generate a tax lower than $18.

Norquist also quotes the Tax Foundation with this tidbit of a jewel: “Indexing provides important protection for all citizens, even those who have no capital gains, by reducing government’s ability and incentive to raise effective tax rates by inflating the currency.” Those without capital gains are subject to tax rates that already are indexed for inflation. Those with capital gains are subject to tax rates that are substantially lower than regular tax rates. Why the push for indexing when special low rates already exist? The answer is easy.

What Norquist and his money-addicted acolytes want, of course, is BOTH indexing AND special low rates. Oink, oink. Norquist claims it is wrong to tax inflation. Fine. As I explained last month in The Menace of Impetuous or Maniplative Tax Policy Announcements and When Lower Tax Rates Aren’t Enough, 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. One or the other. Not both. Greed is bad. Very bad.

As I pointed out in If the Government Collects It, Is It Necessarily a Tax?, “Grover Norquist is not a tax guru. He does not practice tax law, nor tax accounting. He is not a commercial tax return preparer. He would struggle to earn points on any well-designed tax law exam.” So why should legislators charged with setting tax policy take tax policy advice from him?

Friday, September 27, 2019

When Tax Break Giveaways, Praised as “Investments,” Deliver Low Returns

As I wrote not long ago, I am not a fan of the New Jersey tax break giveaway that promised substantial numbers of jobs for unemployed residents of Camden. I reject the idea of jobs being created by giving tax breaks to wealthy individuals and corporations that do not need more employees. I have written about the flaws of this approach, particularly the New Jersey tax break giveaway, in posts such as The Tax Break Parade Continues and We’re Not Invited, and previously in When the Poor Need Help, Give Tax Dollars to the Rich, Fighting Over Pie or Baking Pie?, Why Do Those Who Dislike Government Spending Continue to Support Government Spenders?, When Those Who Hate Takers Take Tax Revenue, Where Do the Poor and Middle Class Line Up for This Tax Break Parade?, Another Flaw in the New Jersey Tax Break Giveaway, No Tax Break Until Taxpayer Promises Are Fulfilled, and The Cost of Creating 27 Jobs? $8,000,000,000 in Tax Break Giveaways.

There are people in New Jersey who agree with me, including the governor. He appointed a task force to explore the extent to which these tax break giveaways have generated the promised benefits. A New Jersey Senate panel also is hearing testimony on the issue. According to this Philadelphia Inquirer article, the CEOs of two of the companies receiving these tax breaks have testified that but for the tax breaks they would have placed their offices in a state other than New Jersey.

Susan Story, CEO of American Water, one of the recipients of the tax break giveaways, stated, “Incentives are and should be smart investments for the future of underserved or economically distressed cities throughout our state. They should be carefully designed, implemented, and tracked to ensure they are delivering as promised.” The investigation by the task force has turned up evidence that these tax break giveaways are not “delivering as promised,” along with other evidence of improper procedures in the granting of the tax break giveaways. When eight billion dollars in tax breaks generate 27 jobs among the group identified as the intended beneficiaries of the tax break, the tax break surely deserves being tagged as a giveaway, and not to the intended beneficiaries.

What boggled my mind were the attempts by two CEOs to justify the giveaways. Tom Doll, CEO of Subaru of America, another tax break giveaway recipient, revealed that “Doll said the company had contributed more than $5 million to Camden-based charitable organizations since 2016.” That sounds wonderful, until one remembers that the company received $118 million in tax breaks. Story, of American Water, noted that her company had “donated $900,000 to a local nonprofit that teaches Camden students how to use technology, with a goal of later hiring some of those people,” and “had contributed $200,000 to the Camden School District for science and technology studies, and donated computers and other equipment.” Again, that sounds wonderful, until one remembers that American Water received $164 million in tax breaks.

The dynamic of threatening to locate or relocate in another state needs further analysis. The short-term reaction by legislators is the temptation, often followed, to dish out tax breaks for fear of losing a business to another state. Yet that other state, as it continues to issue its own tax breaks to attract companies, will find itself facing revenue shortfalls, requiring it either to raise taxes on other companies and individuals, or curtailing services. That, in turn, will encourage those other companies and individuals to relocate, perhaps to the state that originally refused to be blackmailed into creating a no-tax or low-tax paradise for the companies issuing the original relocation threats. Economics, including tax policy, and like nature, continually seeks to rebalance things, though it doesn’t happen overnight and sometimes takes years.

As I’ve argued for years, the deal with these companies should be along the lines of the following: “OK, if you relocate here, or stay here, and prove that you generated the economic benefits you are promising, then, and only then, will you receive a tax break.” It’s that simple. If every federal, state, and local government adopted that approach, the economy would improve. Don’t believe me? Try it. Prove me wrong.

Wednesday, September 25, 2019

Rescuing a Legislature Not Prepared to Define “Prepared Foods”

The other day, in A Sales Tax Question: What Is “Prepared Food” And Who Should Define It?, I described the clamor that arose in Connecticut when the Department of Revenue Services defined “prepared foods,” on which an additional one-percent sales tax is imposed, in line with definitions used in other states following the general principles set down in the Streamlined Sales and Use Tax Agreement. As I wrote, “Essentially, legislators claim that the executive branch has included more items in the definition that the legislature intended.” I concluded

It seems to me that if the legislature wanted the additional one percent sales tax to apply to specific items but not other items, it could have, and should have, incorporated into the statute a definition of “prepared foods.” The concern isn’t so much which items are included, but the lack of guidance provided by a legislature some of whose members are complaining about failure to follow legislative intent but who could have provided specific legislative intent by drafting a precise statute. Some of the items included in the list prepared by the Department of Revenue Services would be treated as prepared foods in other states and some would not. It is the legislature that needs to make the determination. If there are items that legislators are “shocked” to see included in the list of “prepared foods” they could have avoided the situation by inserting into the statute the items that they do not consider deserving of being subjected to the additional one percent sales tax. Alternatively, they could have taken the definition used in another state and adopted it or adapted it. Legislators need to understand that imprecise and ambiguous legislation invites executive branches of government to finish the legislative tasks the legislature did not complete.

Reader Morris has alerted me that now comes a revised policy statement from the Department of Revenue Services explaining that the one-percent additional sales tax on “prepared foods” would apply only to items subject to the basic sales tax, and not to additional items. The Department pointed out that there were two possible interpretations of the statutory amendment, and chose to shift its position from one to the other in response to the outcry from the legislature. I continue to wonder why the legislature could not have made itself clear from the outset, rather than needing rescue from an executive agency.

Monday, September 23, 2019

Are Taxes the Deterrent Some Claim Them to Be?

Politicians, lobbyists, oligarchs, and some others often use the “taxes deter investment” and “taxes chase people out of states and cities” arguments to defend reducing taxes for people whose after-tax income is plentiful. Legislators too often buy into these claims, sometimes offering anecdotes and often relying on a theoretical construct that relies on assuming people dislike taxes so much that they are willing to uproot themselves to avoid them.

Recently, as reported in this Philadelphia Inquirer story, Pew Charitable Trusts conducted a “first-of-its-kind” survey to determine why approximately 60,000 people move out of Philadelphia every year.

The top reasons people leave are jobs and safety. For people with school-age children, the top reason was “better schools.” Interestingly, no one reason was dominant. Many survey respondents provided more than one reason. Most people who left the city weren’t so much escaping Philadelphia but were heading for “new opportunities elsewhere.” Roughly 70 percent of those who departed agreed that Philadelphia is a “good or excellent place to live.”

Interestingly, to quote the story, “What didn’t get mentioned much, particularly in the open-ended responses: local taxes.” Only six percent of the respondents mentioned taxes in writing their responses to an open-ended question asking why they moved away. When answering a specific question about ““high taxes in Philadelphia,” only 22 percent classified it as a major reason for leaving.

So much for the canard that taxes are the primary, or even a major, reason people move from one place to another. What tax policy needs are more empirical surveys of practical reality and fewer theories that make for tempting sound bites but offer little in the way of solid foundation.

Friday, September 20, 2019

A Sales Tax Question: What Is “Prepared Food” And Who Should Define It?

Some states that impose sales taxes require those taxes to be collected on the sale of “prepared foods.” Effective administration of a sales tax requires a definition of “prepared food.” Many states follow the model definition offered by the Streamlined Sales Tax Governing Board, with and without variations. See, for example, the definition in the Streamlined Sales and Use Tax Agreement. Some states make tweaks to the suggested definition. Thus, for example, New Jersey provides this definition:

Sales of prepared food are subject to Sales Tax. Prepared food, which includes beverages,
means:
• Food sold in a heated state or heated by the seller; or
• Two or more food ingredients combined by the seller and sold as a single item; or
• Food sold with eating utensils provided by the seller.
Food that is only cut, repackaged, or pasteurized by the seller, as well as eggs, fish, meat, poultry, and foods that contain these raw animal foods that require cooking by the consumer are not treated as prepared food. The following are not treated as prepared food, unless the seller provides eating utensils with the items:
• Food sold by a seller that is a manufacturer;
• Food sold in an unheated state by weight or volume as a single item; and
• Bakery items sold as such, including bread, rolls, buns, bagels, donuts, cookies, muffins, etc.

West Virginia provides this definition:

Prepared food is defined in any one of the following ways:
A. Food sold in a heated state or heated by the seller.
B. Food items that are combined by the seller for sale as a single item except:
1. Food that is only cut, repackaged or pasteurized by the seller.
2. Eggs, fish, meat, poultry and foods containing these raw animal foods requiring cooking by the consumer as recommended by the Food and Drug Administration.
3. Foods sold in an unheated state by weight or volume as a single item unless sold by the seller with utensils.
4. Bakery items, including bread, rolls, buns, biscuits, bagels, croissants, pastries, donuts, Danish, cakes, tortes, pies, tarts, bars, cookies and tortillas unless sold by the seller with utensils.
5. Food sold by a seller that is primarily a manufacturer (NAICS section 311), except Bakeries (section 3118) unless sold by the seller with utensils.

Maine provides this definition:

The definition of “prepared food” contains three categories:
(1) All meals served on or off the premises of the retailer. This category includes sandwiches (whether prepared by the retailer or by someone else) and heated food. However, fully-cooked frozen sandwiches are not considered “prepared food” and are therefore subject to the general sales tax rate. See Instructional Bulletin No. 12 (“Retailers of Food Products”) for more information.
(2) All food and drink prepared by the retailer and ready for consumption without further preparation. This category includes:
a. Food products that are not individually prepackaged for resale and that are served from self-serve areas (such as salad bars and “coffee nooks”) designed to offer customers food for immediate consumption;
b. Food prepared for sale in a heated state regardless of cooling that may have occurred, such as pizza, pieces of chicken, convenience meals, or rotisserie chicken;
c. Bakery items such as cookies, donuts, bagels, etc., that are prepared by the retailer;
d. Deli and bakery platters, such as cold cuts, cheeses, appetizers, finger rolls, bakery products, crackers, and fruits or vegetables.
“Without further preparation” means that the product does not require boiling, frying, grilling, baking or cooking. “Further preparation” does not include toasting, microwaving, or otherwise heating a product for palatability (rather than for the purpose of cooking the product).
(3) All food and drink sold by a retailer at a particular retail location when the sales of food and drinks at that location that are prepared by the retailer account for more than 75% of the gross receipts reported with respect to that location by the retailer. See Paragraph C(2) below for details on how to calculate the “75% rule.”
The definition of “prepared food” excludes “bulk sales of grocery staples.” See Section 4 below. Other than deli and bakery platters, “prepared food” does not include cutting and repackaging a grocery staple. For example, a pound of ham sliced from the deli case as requested by the customer, or fruits/vegetables that are cut and repackaged in cups or bowls, are exempt “grocery staples.”

Similar definitions are provided by many other states.

It is against this background that a dispute has arisen in Connecticut over the meaning of “prepared food,” as reported in this Hartford Courant story. Essentially, legislators claim that the executive branch has included more items in the definition that the legislature intended. The statute in question imposes an additional one percent sales tax on restaurant food and “prepared meals.” The Department of Revenue Services included within the scope of the additional sales tax items such as “popsicles and other frozen treats, doughnuts and bagels, pizza slices, hot dogs, smoothies, power bars, a hot bag of popcorn, and even pre-packaged bags of lettuce and spinach,” as well as “beer, fruit juices, milkshakes, hot chocolate, wine and distilled alcohol like brandy or rum, . . . coffee and tea if purchased prepared to drink, rather than as coffee grounds or in tea bags.”

It seems to me that if the legislature wanted the additional one percent sales tax to apply to specific items but not other items, it could have, and should have, incorporated into the statute a definition of “prepared foods.” The concern isn’t so much which items are included, but the lack of guidance provided by a legislature some of whose members are complaining about failure to follow legislative intent but who could have provided specific legislative intent by drafting a precise statute. Some of the items included in the list prepared by the Department of Revenue Services would be treated as prepared foods in other states and some would not. It is the legislature that needs to make the determination. If there are items that legislators are “shocked” to see included in the list of “prepared foods” they could have avoided the situation by inserting into the statute the items that they do not consider deserving of being subjected to the additional one percent sales tax. Alternatively, they could have taken the definition used in another state and adopted it or adapted it. Legislators need to understand that imprecise and ambiguous legislation invites executive branches of government to finish the legislative tasks the legislature did not complete.

Wednesday, September 18, 2019

The Cost of Creating 27 Jobs? $8,000,000,000 in Tax Break Giveaways

I am not a fan of the New Jersey tax break giveaway that promised substantial numbers of jobs for unemployed residents of Camden. Readers of MauledAgain know that I reject the idea of jobs being created by giving tax breaks to wealthy individuals and corporations that do not need more employees. I have written about the flaws of this approach, particularly the New Jersey tax break giveaway, in posts such as The Tax Break Parade Continues and We’re Not Invited, and previously in When the Poor Need Help, Give Tax Dollars to the Rich, Fighting Over Pie or Baking Pie?, Why Do Those Who Dislike Government Spending Continue to Support Government Spenders?, When Those Who Hate Takers Take Tax Revenue, Where Do the Poor and Middle Class Line Up for This Tax Break Parade?, Another Flaw in the New Jersey Tax Break Giveaway, and No Tax Break Until Taxpayer Promises Are Fulfilled.

In that last post I commented on the news that the New Jersey tax break giveaway lacked oversight, and that New Jersey had “failed to hold companies accountable for the jobs and investments they promised.” The news followed an audit by the state’s comptroller, whose office was unable to verify the 3,000 jobs that the tax break recipients claimed to have created or kept.

Now comes more news, and it isn’t good for the folks who engineer tax breaks for their friends by making claims that those giveaways are for the benefit of the unemployed in Camden who seek jobs. This time, the state’s Economic Development Authority examined 25 construction projects undertaken in Camden by companies receiving the tax breaks. Aside from the fact those jobs are temporary, it is unclear whether those 1,098 jobs involved hiring 1,098 individuals or included jobs held in succession by one individual. In any event, the report refers to individuals, and reveals that of the 1,098 construction jobs, only 27, or 2 percent, went to residents of Camden. Almost one-fourth went to individuals not resident in New Jersey, and three-fourths went to individuals living beyond the boundaries of Camden County, in which Camden is located. So much for bringing jobs to Camden. It would have been cheaper for the state to have sent checks to those 27 Camden residents.

Supporters of the giveaway called the report “meaningless.” Why? They claim that jobs other than construction jobs were unreported. The report was limited to construction jobs because the only information available to the Economic Development Authority was construction payroll reports. The authority’s failure to obtain information demonstrating the promised job creation was one of the reasons for the audit of its operations, and the political turmoil that ended with the non-renewal of the tax break giveaway program, an outcome for which I advocated. Supporters also claimed there were construction projects not included in the authority’s report. Even if several hundred additional jobs were created in Camden, as the tax break supporters argue, it still would have been cheaper for the state to write a check than to shell out the $8 billion in tax breaks it handed to the politically privileged enterprises that grabbed those tax cuts.

I continue also to advocate for a different approach to the “tax cuts and promised jobs” snake oil sales pitch offered by the wealthy who are starving. The process should be reversed, and companies that want to claim a job creation tax break should be required first to produce iron-clad evidence that jobs have been created and maintained for a specified period of time. This approach would spare tax breaks from becoming victims of broken promises. Broken promises have no place in a tax system.