Fortune Cookies and Taxes

Reader Morris had an experience that surprised me. He went to his “regular Chinese restaurant,” had his meal, and opened his fortune cookies. The message? “Tax tip # 8 Travel could be considered a business expense. Even that island vacay. TaxAct Surprisingly legal. Start for Free: TaxAct.com”

Reader Morris noted, “Taxes are everywhere.” His experience suggests to me that “Tax advertising is everywhere.” From time to time I eat at Chinese restaurants. I always get fortune cookies. I’ve never seen one mentioning tax. But now I need to keep my eyes open.

I did a bit of research. Apparently the marketing world has discovered it can make use of the flip side of the paper on which the fortune is printed. According to several sites, such as Adweek and MediaPost, advertising agencies are buying that blank space on fortune cookie inserts. Who knew? I didn’t. Now I do. And so do you.

Apparently reader Morris also did some research, for shortly after he shared his dining experience he sent a link to the “Fortune Cookie: Bake. Learn. Give. Save” facebook page. Its “About” page explains the “Save” portion of the plan as follows: “Save- Pay your child for their time baking, packaging, and delivering the cookies for your small business, and put their earnings into a custodial Roth IRA.” A post on its main page elaborates: “Small business owners who are registered as an LLC can pay their dependent children up to $12,000/year without having to issue a w-2 or the kid having to file taxes.” Reader Morris asked, “Is this tax advice correct?” As a general proposition, yes. For many years, business owners have been hiring children to work in the business, paying wages included in the child’s gross income and deducted by the parent who owns the business, thus shifting the income to the child’s bracket, which at present is zero if it is less than the standard deduction (which is now $12,200, so the “advice” is technically out of date in that respect). Of course the children must actually be doing work and the wages must be reasonable in amount. Because the IRS looks closely at these arrangements, payment should not be in cash but by check or direct deposit into the child’s account.

But the tax advice offered on the Fortune Cookie facebook page is incorrect when it states that small business owners can pay their children up to $12,000 per year “without having to issue a w-2.” As the IRS explains in its General Instructions for Forms W-2 and W-3:

You must file Form(s) W-2 if you have one or more employees to whom you made payments (including noncash payments) for the employees’ services in your trade or business during 2020. Complete and file Form W-2 for each employee for whom any of the following applies (even if the employee is related to you).

• You withheld any income, social security, or Medicare tax from wages regardless of the amount of wages; or
• You would have had to withhold income tax if the employee had claimed no more than one withholding allowance (for 2019 or earlier Forms W-4) or had not claimed exemption from withholding on Form W-4; or
• You paid $600 or more in wages even if you did not withhold any income, social security, or Medicare tax.

Only in very limited situations will you not have to file Form W-2. This may occur if you were not required to withhold any income tax, social security tax, or Medicare tax and you paid the employee less than $600, such as for certain election workers and certain foreign agricultural workers.

And though the child might not be required to pay federal income taxes on wages of $12,200 or less, the child still needs to file a return so that the Form W-2 can be matched against a return.

A New and Questionable Type of Tax

Last week, voters in San Francisco, by a 69.6 percent to 30.3 percent margin, approved a vacant storefront tax. Though the margin appears overwhelming, the tax barely passed because enactment required approval by two-thirds of those voting.

The tax, as described in this article, applies to property owners in any of the city’s commercial districts whose storefront remains vacant for more than 182 days in the year. For the first year, the tax equals $250 for each linear foot of street-facing wall. The linear foot rate increases to $500 for the second year, and $1,000 for the third and later years. Revenue from the tax, which begins next year, would be used to help small businesses the city.

The tax is a reaction to complaints about empty storefronts that have popped up throughout the city. Supporters of the tax argue that the vacancies are caused by property owners holding out for high rents, rents too high for the marketplace.

The owner of one storefront business remarked that landlords "have an economic incentive to keep a building vacant where they can write off the lost [revenue] that they've had from a previous tenant as an expense." There is no deduction for revenue that isn’t received. Instead, I think the business owner was attempting to point out that when revenue goes down, income taxes also go down, which is the same effect that a deduction has on tax liability.

Opponents of the tax argued, in effect, that there can be economic conditions, such as online shopping and recessions, that make it difficult, if not impossible, to find tenants for storefronts in the city. One real estate broker pointed out that as younger people move into neighborhoods they are more likely to shop online rather than going to a brick-and-mortar establishment. He also complained that city regulations, including permit rules and inspection requirements, make it more difficult to rent out storefronts. My guess is that these regulations are more of a problem when the nature of the use of the space changes, such as a hardware store being converted into a restaurant. A Chamber of Commerce official suggested that the solving the vacant storefront problem requires changes in zoning and planning rules.

It seems to me that there are multiple factors contributing to the vacant storefront problem. To the extent that landlords holding out for excessively high rents are a cause, any tax addressing that problem needs to be more nuanced than a simple number-of-vacant-days and storefront-linear-feet computation. Surely a formula that compares the asking rent to comparable rents in the neighborhood can be added to the calculation. Another factor would be the number of offers from potential tenants, the amount of rent prospective lessees offer, and the counter-offers from the landlords. External economic factors, such as city GDP for the quarters in play, job numbers, and street and other construction impacting the storefront in question could be taken into account.

Only time will tell if this tax solves anything or even makes a dent in the inventory of vacant storefronts in San Francisco. I’m confident officials and businesses in other towns and cities will be watching.

The Primary Goal of the Philadelphia Soda Tax: Not a Reduction in Soda Consumption

The soda tax is one of those topics that probably will never go away. I have been writing about the soda tax since 2008, in posts such as What Sort of Tax?, The Return of the Soda Tax Proposal, Tax As a Hate Crime?, Yes for The Proposed User Fee, No for the Proposed Tax, Philadelphia Soda Tax Proposal Shelved, But Will It Return?, Taxing Symptoms Rather Than Problems, It’s Back! The Philadelphia Soda Tax Proposal Returns, The Broccoli and Brussel Sprouts of Taxation, The Realities of the Soda Tax Policy Debate, Soda Sales Shifting?, Taxes, Consumption, Soda, and Obesity, Is the Soda Tax a Revenue Grab or a Worthwhile Health Benefit?, Philadelphia’s Latest Soda Tax Proposal: Health or Revenue?, What Gets Taxed If the Goal Is Health Improvement?, The Russian Sugar and Fat Tax Proposal: Smarter, More Sensible, or Just a Need for More Revenue, Soda Tax Debate Bubbles Up, Can Mischaracterizing an Undesired Tax Backfire?, The Soda Tax Flaw in Automotive Terms, Taxing the Container Instead of the Sugary Beverage: Looking for Revenue in All the Wrong Places, Bait-and-Switch “Sugary Beverage Tax” Tactics, How Unsweet a Tax, When Tax Is Bizarre: Milk Becomes Soda, Gambling With Tax Revenue, Updating Two Tax Cases, When Tax Revenues Are Better Than Expected But Less Than Required, The Imperfections of the Philadelphia Soda Tax, When Tax Revenues Continue to Be Less Than Required, How Much of a Victory for Philadelphia is Its Soda Tax Win in Commonwealth Court?, Is the Soda Tax and Ice Tax?, Putting Funding Burdens on Those Who Pay the Soda Tax, Imagine a Soda Tax Turned into a Health Tax, Another Weak Defense of the Soda Tax, Unintended Consequences in the Soda Tax World, 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?, Soda Taxes: So It’s Not So Much the Soda, Is It?, The Soda Tax “War” and a Pathway to Tax Peace, and The Soda Tax “War” and a Pathway to Tax Peace.

Now comes news from the Philadelphia Inquirer that a recent study by Drexel University researchers indicates that the amount of soda and other sugary drinks consumed by Philadelphia residents declined so little since enactment of the soda tax that the change is statistically insignificant. The decline was essentially the same as in places without a soda tax. Interestingly, a study in Washington state determined that soda sales in Seattle, which has a soda tax, dropped by 30 percent while sales in Portland, Oregon, which does not have a soda tax, dropped by 10 percent. However, not all sources of sugary beverage purchases were taken into account, and though retail establishments outside each city were included in the survey, only those within two miles were considered. The sweetened beverage tax in Cook County, Illinois, which didn’t last very long, reduced sales by 21 percent, according to the study reported in this story, but purchases outside the county limits did not seem to have been taken into account. One conclusion from these results is that consumption of sugary beverages is dropping generally, for a variety of reasons other than taxes, and that soda taxes are contributing, at best, a marginal increase in that decline.

Yet what struck me from the Philadelphia Inquirer story is something said by Lauren Cox, a spokesperson for the administration of Mayor Jim Kenney, the principal supporter of Philadelphia’s soda tax. As I described in Philadelphia’s Latest Soda Tax Proposal: Health or Revenue?, Kenney voted against the soda tax when it was proposed by his predecessor, but once he took office he flipped positions. Why? I suggested, “The answer appears to be quite simple. The new mayor has discovered that his spending proposals, such as universal pre-kindergarten, community schools, park and recreation center upgrades, and similar projects, require revenue. Rather than raising any existing taxes, he has turned to a tax on certain sugary drinks.” I added, “If the concern is health, as soda tax advocates claim, and if a significant cause of health problems is sugar, as soda tax advocates claim, and as research tends to demonstrate, then why not a sugar tax? Why not a tax not only on sweetened drinks, but also on cakes, cookies, pies, donuts, sugared coffee, ice cream, and candy?” According to the Philadelphia Inquirer story, Cox “said that reducing consumption was not the city’s primary goal in implementing the tax.” So what was the primary goal? Let me guess. Revenue.

If This Were An Exam Answer, It Would Earn a Low Grade

This time, reader Morris directed my attention to a MoneyWise article titled “What Is Taxable Income?” Though questions on the basic federal income tax exam aren’t presented that starkly, the definition and computation taxable income is one of roughly a dozen basic capabilities that a student needs to demonstrate in order to earn a grade higher than what can be called the “goodbye grades,” as in, get too many of them and the student fails to qualify to continue as a student.

Ester Trattner begins by offering several sensible observations. First, “To pay the right amount of taxes — no more, no less — and receive the refund you deserve, you need to understand what counts as taxable income.” She adds, “Most people have multiple income sources.” And she points out, “[Y]ou need to pull together your paperwork on what you earned during the previous year.”

Then, however, she announces, “The IRS puts taxable income into two main categories: earned income and unearned income.” This is wrong on two counts. First, it is gross income, not taxable income, that is divided between earned and unearned. Second. It is the Congress, not the IRS, that decided to categorize gross income in this manner.

Trattner then correctly explains, “To determine your taxable income, you first you need to calculate your adjusted gross income or AGI.” However, she then defines adjusted gross income as “all the taxable income you’ve earned minus any adjustments you’re eligible for. These might include tax credits for dependent children, and any deductions. You may take the standard deduction, or itemize deductions and take write-offs for medical expenses or gifts to charity, among others.” To classify this as confusing is to be kind. It’s wrong. First, if computation of taxable income requires that a taxpayer first compute adjusted gross income, which is in fact the case, then adjusted gross income cannot be “all the taxable income . . . minus adjustments.” It is GROSS income minus adjustments. Second, those adjustments consist of specified deductions, not credits. Credits don’t enter the picture not only after taxable income is computed but after tax liability is computed. Third, the decision to claim the standard deduction or to itemize deductions is reached after adjusted gross income is computed, and has nothing to do with the computations of adjusted gross income.

It gets worse. Trattner tells her readers, “Once all of your taxable income has been added up, and deductions and credits are subtracted, the result is your adjusted gross income.” The simple fact is that once taxable income has been computed, deductions have already been taken into account. Deductions are not subtracted from taxable income because they are subtracted as part of computing taxable income. And, of course, credits are not subtracted from taxable income or in computing taxable income. They are subtracted from tax liability to determine if the taxpayer needs to pay additional tax, or is getting a refund.

If that’s not enough, she then states that tax is “[b]ased on your adjusted gross income and your filing status.” Though it is true that filing status affects the computation of tax liability, the tax rates are applied to taxable income, not adjusted gross income.

She then correctly explains, “Essentially, the higher your taxable income, the higher the amount of tax you pay.” If the article were a tax examination answer, this explanation and the several other correct statements are what would cause the grade to be something more than an F, though it would not earn a grade at least as high as the C grade that represents the GPA required to continue one’s studies. Reader Morris, who in his email pointed out several of the errors, undoubtedly would fare much, much better.

Curious, I tried to determine what sort of tax background Trattner has. I discovered that she is a freelance writer, and according to LinkedIn, is the lead writer for MoneyWise and has been employed there since May 2017 after having been a self-employed writer and editor since October 2014. She also appears to have written money-related articles for other web sites. According to LinkedIn, she earned a Bachelor of Arts in English Language and Literature/Letters from York University in Toronto, Canada. So it is unlikely that while at York she took any sort of course in United States taxation. It is difficult to write about topics with which one is not sufficiently educated, experienced, or even familiar. That is why the list of topics on which I do not write is very long.

Some Observations on Recent Articles Addressing the Mileage-Based Road Fee

In the past several weeks, the mileage-based road fee has been popping up in a variety of stories, shared with me by reader Morris. I’ve been explaining, defending, and supporting that fee for almost 16 years, in posts such as Tax Meets Technology on the Road, Mileage-Based Road Fees, Again, Mileage-Based Road Fees, Yet Again, Change, Tax, Mileage-Based Road Fees, and Secrecy, Pennsylvania State Gasoline Tax Increase: The Last Hurrah?, Making Progress with Mileage-Based Road Fees, Mileage-Based Road Fees Gain More Traction, Looking More Closely at Mileage-Based Road Fees, The Mileage-Based Road Fee Lives On, Is the Mileage-Based Road Fee So Terrible?, Defending the Mileage-Based Road Fee, Liquid Fuels Tax Increases on the Table, Searching For What Already Has Been Found, Tax Style, Highways Are Not Free, Mileage-Based Road Fees: Privatization and Privacy, Is the Mileage-Based Road Fee a Threat to Privacy?, So Who Should Pay for Roads?, Between Theory and Reality is the (Tax) Test, Mileage-Based Road Fee Inching Ahead, Rebutting Arguments Against Mileage-Based Road Fees, On the Mileage-Based Road Fee Highway: Young at (Tax) Heart?, To Test The Mileage-Based Road Fee, There Needs to Be a Test, What Sort of Tax or Fee Will Hawaii Use to Fix Its Highways?, And Now It’s California Facing the Road Funding Tax Issues, If Users Don’t Pay, Who Should?, Taking Responsibility for Funding Highways, Should Tax Increases Reflect Populist Sentiment?, When It Comes to the Mileage-Based Road Fee, Try It, You’ll Like It, Mileage-Based Road Fees: A Positive Trend?, Understanding the Mileage-Based Road Fee, Tax Opposition: A Costly Road to Follow, Progress on the Mileage-Based Road Fee Front?, Mileage-Based Road Fee Enters Illinois Gubernatorial Campaign, Is a User-Fee-Based System Incompatible With Progressive Income Taxation?. Will Private Ownership of Public Necessities Work?, Revenue Problems With A User Fee Solution Crying for Attention, Plans for Mileage-Based Road Fees Continue to Grow, Getting Technical With the Mileage-Based Road Fee, Once Again, Rebutting Arguments Against Mileage-Based Road Fees, Getting to the Mileage-Based Road Fee in Tiny Steps, Proposal for a Tyre Tax to Replace Fuel Taxes Needs to be Deflated, A Much Bigger Forward-Moving Step for the Mileage-Based Road Fee, and Another Example of a Problem That the Mileage-Based Road Fee Can Solve.

The first article, from the Philippines, describes a legislative proposal to exempt motorcycles from the country’s road user tax, which carries the official name of motor vehicle user’s charge. The fee is not a mileage-based fee, but it does reflect weight and cargo load differences. The justification offered for the proposed motorcycle exemption is that owners of four-wheel vehicles “have more money to pay” the fee. That is such a silly rationale. There are wealthy motorcycle owners and there are four-wheel vehicle owners who are just getting by financially. A mileage-based road fee as I have proposed would not exempt motorcycles but would subject them t a much lower per-mile fee because the fee also would reflecting weight, and motorcycles are much lighter than almost all the other vehicles on the road. Yet motorcycles do contribute to road damage, because every pound hitting the pavement stresses that pavement, and thus it makes no sense to exempt motorcycles.

The second article describes a proposal by Senator John Barrasso, a Republican from Wyoming, to enact a “truck-only Vehicle Miles Traveled tax.” The author of the article, Chris Spear, criticizes the tax for several reasons. First, Spear claims that the technology to implement it is not yet ready but that, of course, is not the case, as demonstrated by the many pilot projects that have been undertaken. Second, Spear objects to a double taxation, and this is a point well taken because the mileage-based road fee should replace and not supplement existing fuel taxes. Third, Spear objects to singling out trucks, and this is another point well taken, because trucks are not the only vehicles using highways, bridges, and tunnels. On the other hand, when Spear notes that trucks are 4 percent of vehicles on the roads but pay half of the taxes going into the Highway Trust Fund, Spear is being clever by too much, because what causes the need for highway funding, namely, wear and tear, should not be measured by the number of vehicles but by the weight of vehicles and the number of miles they are driven.

The third article describes legislation introduced in the Washington State legislature to protect drivers from what are perceived as privacy risks posed by a mileage-based road fee. Those concerned about privacy note that the device measuring the number of miles driven, as well as the type of road or whether a bridge or tunnel has been traversed, can reveal where the driver has been. The legislator sponsoring the bill wants to prohibit any tracking of where a driver drives, which, of course, conflicts with how a mileage-based road fee works. He argued, “You can never track anybody based off the way they drive. In this case, no GPS transponders, no type of technology could load on your cell phone, nothing you could install in your car.” There is technology that permits the measurement of miles, the location of where those miles are, but that does not relay that information past the device that is computing the road fee. It seems to me that this legislator is listening to misinformation from opponents of the mileage-based road fee rather than sitting down and reading the reports issued by those who have studied the fee and managed the pilot projects, or at least my MauledAgain blog posts on the topic. When asked if the legislation was “just a roundabout way of killing the pay by the mile plan,” the legislator responded, “Well, that’s the best part.” He then explained that the fee could be calculated using odometer readings, but that does not permit identifying which vehicles use the more-expensive-to-build-and-maintain bridges and tunnels or the more-difficult-to-maintain-because-more-heavily-used highways.

The fourth article, from StreetsBlogUSA, includes the mileage-based road fee among its ten suggestions for subtracting cars from the road. Though I’m not persuaded that the number of cars on the road will shrink by shifting from a fuels tax to a mileage-based road fee, it was encouraging to see that the StreetsBlogUSA writer described the fee as an improvement over the fuels tax. It’s also worth noting that the device used to compute the mileage-based road fee could also be used to implement several of the other StreetsBlogUSA suggestions, such as congestion pricing, parking surge pricing, and distance-based insurance.

Opponents of the mileage-based road fee are accomplishing little other than to lengthen the amount of time that a serious problem goes unsolved. Eventually, when the fee is implemented, it will need to be higher than it otherwise would have been in order to make up for the delay in collecting revenue and repairing highway infrastructure. It is pointless and wasteful, to say nothing of unwise, to oppose the inevitable.

Seizing a Tax Refund to Pay a Fine Owed by the Taxpayer Does Not Change the Fine Into a Tax

Reader Morris directed my attention to an article and asked a question. First, the article.

According to the article, in 2018 the Mississippi legislature enacted legislation permitting local jurisdictions to seize some or all of a taxpayer’s state income tax refund to offset fines that the taxpayer has failed to pay. This arrangement is not unlike the provisions permitting federal and state governments to seize some or all of a taxpayer’s federal income tax refund to offset the taxpayer’s past-due child support, certain debts owed to federal agencies, unpaid state income taxes, and certain unemployment compensation debts.

The city of Vicksburg, Mississippi, facing fiscal constraints, calculated that uncollected fines amount to roughly $4,200,000. Considering that its annual budget is $30 million, having uncollected fines equal to 14 percent of the budget is troubling. So Vicksburg officials has decided to implement a state income tax refund offset program as authorized by state law. For some reason, rather than going after all of the unpaid fines, the city is starting with the top 50 scofflaws, a total of approximately $90,000. Interestingly, some residents have expressed disapproval, noting that, “People have other things they have to handle with their tax money.” I know they should’ve handled their fines too but they have bigger things too.” The mayor reacted by pointing out, “I’ll take whatever we can rather than raise anybody’s taxes.” Of course, if taxpayers don’t want to pay fines, they can avoid doing the things that trigger the fines. Stop at red lights, slow down, comply with zoning regulations, do the right thing. It’s cheaper.

Next, the question from reader Morris. He asked, “Does collecting unpaid a fine by going after income tax refunds change a fine into a tax?” The answer is “No.” Why not? Once computed, the tax refund represents money owned by the taxpayer. At that point, certain creditors, such as a government or a parent to whom child support is owed, can seize the taxpayer’s refund. The offset programs are designed to simplify the collection process and move it along more quickly than the usual debt collection process. Put another way, if child support is collected by taking money from a parent’s bank account, or if a fine is collected in the same manner, the amount collected from the parent or scofflaw isn’t a tax. So the fact that it is taken from a tax refund while it is on its way to the taxpayer doesn’t turn child support, a fine, or some other government debt into a tax.

Characterizing a “Meals Tax”

Reader Morris directed my attention to this article about a proposed increase in the Charlottesville meals tax. He asked, “Is a meals tax a regressive tax , a progressive tax, or a luxury tax?”

Before answering the question, a bit of background, is helpful. This background suggests why reader Morris asked the question.

Charlottesville needs revenue to fund affordable housing programs, so the city decided to increase the 5 percent meals tax to 6 percent and to increase the lodging tax to 8 percent. Restaurant owners dislike the meals tax. The city’s mayor reacted by writing, “The restaurant and hotel industry are selfishly making arguments about their failed revenue projection. A few small business owners who have not turned their hobbies into successful enterprises are blaming our potential tax increase as the foundation for their demise. A few restaurant owners want you to believe that they’re catering to low- to middle-income families and that the extra 10, 20, or 50 cents will prevent you from eating out.” Is that in fact the case? One restaurant owner noted that the increase would not hurt him, but that “It’ll hurt the poor people. It’s local people who eat here.” Another owner noted that increasing the tax will “punish your people,” mostly local residents. Apparently, according to restaurant owners, there is a “misperception [the meals tax] is paid by visitors and rich people.”

When the city raised the tax in 2015, those who objected were told by one city official that the tax is “not a regressive tax because eating out is . . . discretionary and a ‘luxury.’” As another restaurant owner put it, quite correctly, “No one who studies economics says that a sales tax isn’t regressive.” The meals tax is simply a variant of the sales tax, that is, a sales tax imposed on a very specific and narrow set of goods and services. So, to answer part of reader Morris’ question, the meals tax in Charlottesville is a regressive, not a progressive, tax.

Is the meals tax a luxury tax? The answer depends on the definition of luxury. As one restaurant owner put it, the meals tax “isn’t a yacht tax.” Is eating out a luxury? Does it depend on the “luxuriousness” of the restaurant? Does it depend on how much is being spent on the dining experience? I think that, if asked, most people would not consider a tax on eating at a low-cost restaurant to be a “luxury.”

A question not asked by reader Morris nor addressed in the article is whether the appropriate funding source for affordable housing should be a tax on meals and lodging. An advocate for increasing affordable housing program budgets stated that she “doesn’t think an extra 10 cents is going to stop someone who’s homeless from buying a cheeseburger,” especially because, as she claimed, “they’re also eating at soup kitchens and having breakfast at the Haven.” She added, “The lack of affordable housing options—that’s more important than whether my McDonald’s is going to cost $1.10 or $1.25. I don’t foresee this as onerous. It’s onerous when you don’t have a key to a place to live.” Suggesting that it’s appropriate to impose a tax because it’s not onerous pushes the analysis in the wrong direction.

The lack of affordable housing imposes costs on society. It creates homelessness, which brings a variety of problems. It contributes to insufficient maintenance on houses, leading to neighborhood deterioration, increases in crime, and declines in health and well-being. Creating affordable housing also imposes costs on society. Funding is required to build and maintain affordable housing. So if there are going to be costs, which is better, to spend money dealing with the consequences of insufficient affordable housing or to spend money fixing the problem? And who should pay? The answer is simple, those who benefit from fixing the problem. Although some would argue that the beneficiaries are those who move from the streets into affordable housing, those who understand the complexities of life would also recognize that all of the city’s residents benefit from the impact of increased affordable housing, such as decreased homelessness, decreased crime, improvements in health and well-being, and overall societal improvement. Thus, if I were dealing with the issue in that city, I would advocate paying for the affordable housing programs through a tax that is spread across all of the city’s residents.

Another Example of a Problem That the Mileage-Based Road Fee Can Solve

Reader Morris sent me a link to a letter to the editor written by Tamara Porter and sent to the La Crosse Tribune. Porter objects to the $75 vehicle license surcharge imposed by Wisconsin on hybrid vehicles. She asks, “Are we being punished for buying a hybrid vehicle that is more environmentally sound or are gas-guzzling vehicle owners being rewarded?”

The answer is no and no. Because the owner of a hybrid vehicle purchases less fuel than would be purchased if the same vehicle were not a hybrid, the surcharge is designed to make up the lost fuel tax revenue. The fuel tax, and the substitute surcharge, are not designed to deal with pollution but to defray the cost of maintenance and repair of the roads used by the vehicles. Owners of gas-guzzling vehicles are not being rewarded. In fact, they probably are paying more than the combined fuel tax and surcharge paid by Porter because those vehicles use disproportionately more fuel.

Porter explains that the state’s former governor “put in place a surcharge on electric vehicles” though my guess is that the legislature enacted the surcharge and the governor signed the legislation. The current governor “proposed a gas tax” though my guess is that he proposed an increase in that tax. The proposed gas tax increase was not adopted during budget negotiations.

Porter argues that the “proposed gas tax made more sense. Those who use more gas, thereby adding more pollution, should pay more when they fill up their energy-inefficient vehicles versus those who fill up their energy-efficient vehicles.” Porter’s argument misses the point. The tax and surcharge are designed to pay for repair and maintenance of roads, something that is proportional to the weight of vehicles and the miles that the vehicle is driven. Another flaw in Porter’s argument is that the pollution caused by a vehicle needs to be measured not only by the amount of fuel it consumes, or, more appropriately, the amount of tailpipe emissions it generates, but also by the amount of pollution caused by the manufacture and the disposal of the vehicle. When those factors are taken into account, hybrid and electric vehicles are not necessarily as “clean” as their proponents argue.

The argument that Porter does not articulate, and that would have added much strength to her letter, is whether the surcharge is calculated in an appropriate amount. It is difficult to assign a fixed amount to a fuel tax substitute, because the number of miles that the hybrid vehicle is driven can vary, and thus the lost fuel tax revenue will vary. The substitute surcharge accordingly should vary. The solution, of course, as readers of MauledAgain know, is the mileage-based road fee. I have explained, defended, and supported that fee for more than 15 years, in posts such as Tax Meets Technology on the Road, Mileage-Based Road Fees, Again, Mileage-Based Road Fees, Yet Again, Change, Tax, Mileage-Based Road Fees, and Secrecy, Pennsylvania State Gasoline Tax Increase: The Last Hurrah?, Making Progress with Mileage-Based Road Fees, Mileage-Based Road Fees Gain More Traction, Looking More Closely at Mileage-Based Road Fees, The Mileage-Based Road Fee Lives On, Is the Mileage-Based Road Fee So Terrible?, Defending the Mileage-Based Road Fee, Liquid Fuels Tax Increases on the Table, Searching For What Already Has Been Found, Tax Style, Highways Are Not Free, Mileage-Based Road Fees: Privatization and Privacy, Is the Mileage-Based Road Fee a Threat to Privacy?, So Who Should Pay for Roads?, Between Theory and Reality is the (Tax) Test, Mileage-Based Road Fee Inching Ahead, Rebutting Arguments Against Mileage-Based Road Fees, On the Mileage-Based Road Fee Highway: Young at (Tax) Heart?, To Test The Mileage-Based Road Fee, There Needs to Be a Test, What Sort of Tax or Fee Will Hawaii Use to Fix Its Highways?, And Now It’s California Facing the Road Funding Tax Issues, If Users Don’t Pay, Who Should?, Taking Responsibility for Funding Highways, Should Tax Increases Reflect Populist Sentiment?, When It Comes to the Mileage-Based Road Fee, Try It, You’ll Like It, Mileage-Based Road Fees: A Positive Trend?, Understanding the Mileage-Based Road Fee, Tax Opposition: A Costly Road to Follow, Progress on the Mileage-Based Road Fee Front?, Mileage-Based Road Fee Enters Illinois Gubernatorial Campaign, Is a User-Fee-Based System Incompatible With Progressive Income Taxation?. Will Private Ownership of Public Necessities Work?, Revenue Problems With A User Fee Solution Crying for Attention, Plans for Mileage-Based Road Fees Continue to Grow, Getting Technical With the Mileage-Based Road Fee, Once Again, Rebutting Arguments Against Mileage-Based Road Fees, Getting to the Mileage-Based Road Fee in Tiny Steps, Proposal for a Tyre Tax to Replace Fuel Taxes Needs to be Deflated, and A Much Bigger Forward-Moving Step for the Mileage-Based Road Fee.

Porter wrote, “It’s time for all of us to vote against the lack of common sense in our elected officials and hold them accountable.” Indeed. Common sense mandates the mileage-based road fee. Elected and unelected officials who insist on preserving the outdated fuel tax and on blocking revenue-raising progress in the form of the mileage-based road fee ought to be denied the opportunity to continue with their stubborn attachment to the past.

How Difficult Is It to Release Tax Returns?

I did not watch the debate last Wednesday evening. But according to a variety of sources, including this report from The Hill, this article from the New York Post, and this story from CNBC, when several Democratic presidential candidates asked candidate Michael Bloomberg why he had not released his tax returns, he replied, “It just takes us a long time. Unfortunately, or fortunately, I make a lot of money and we do business all around the world, and we are preparing it. The number of pages will probably be thousands of pages. I can’t go to TurboTax.”

Presumably, Bloomberg’s tax returns for years before 2019 have already been prepared and filed. Releasing them is a simple task. If they are in paper form, which I doubt, it doesn’t take long to make a photocopy, even if the return consists of thousands of pages. If, as I think is the case, they are in digital form, releasing them does not take very long at all. If they’re not already in a common format, such as pdf, convert them. It’s easy and doesn’t take much time.

Access to TurboTax has nothing to do with the release of the returns. If the returns had been prepared using TurboTax they would already be in a pdf format. If they were not prepared using TurboTax, a person doesn’t need to “go to TurboTax” to release tax returns.

The answer was a side-step. I wonder why. And I wonder how many people who listened to, or read, Bloomberg’s response understand that it makes no sense. Unfortunately, we are living in an era in which too many candidate responses and declarations, across the board, increasingly make little or no sense.

Why Publicly Admit to Potentially Fraudulent Tax Reporting?

The question from reader Morris was simple enough. He asked, “Why would someone admit to possible tax fraud in a newspaper article?” Of course, I first had to look at the article.

According to the article, two years ago the Iowa Workforce Development Agency concluded that the Iowa Center for Faith-Based and Community Initiatives had improperly classified one of its employees as an independent contractor. The Center disagreed, but an administrative law judge held that the state was correct. This made the Center liable for $952 in taxes and penalties. Eventually the state dropped the investigation in exchange for the Center’s payment of $535, an amount reflecting the unpaid taxes without the penalties. At the same time, the state agreed to close its investigation into the classification of the Center’s other workers, all of whom had been classified by the Center as independent contractors, and stated that “no other individuals are or were employed by the center.”

The president of the Center, Daryl VanderWilt, told the Iowa Capital Dispatch that “he has structured some of the center’s payroll to avoid taxes.” He gave an example. He and his wife are paid $120,000 annually in compensation. Of the $10,000 monthly pay, they direct $2,333 into their personal checking account, and leave the other $7,667 with the Center. What do they claim as salary “for which we pay taxes”? Not $10,000 per month. Only $2,333 per month. The amount left with the Center is used by the Center for expenses, including “a ‘personal’ donation to a Christian church-building program.” It is unclear whether in addition to not reporting $92,004 of compensation gross income on their tax returns they also claim a charitable contribution for the portion of the $92,004 that is donated to a charitable church-building project.

To me, the question posed by reader Morris actually consists of a series of questions. Let’s take each in turn.

First, does Daryl VanderWilt know that failing to report the full $120,000 of compensation on the tax return violates the tax law? My guess is yes, considering that he structured the arrangement to save taxes, particularly in light of his admission that he classified workers as independent contractors while fully aware of the tax consequences of doing so.

Second, does Daryl VanderWilt intend, by not reporting $92,004 of salary gross income, to reduce his federal, and presumably state, income tax liability? Yes. He revealed his plan as an example of how “he has structured some of the center’s payroll to avoid taxes.”

Third, are other taxes, such as social security and Medicare payroll taxes being paid on the full $120,000 or only on the $27,996 that VanderWilt reports as salary on the tax return? There’s not enough information in the article to answer that question.

Fourth, why would VanderWilt engage in behavior that has all the indicia of tax fraud? Perhaps he does not realize that what he is doing presents the indicia of tax fraud. Perhaps he thinks that it is not tax fraud because he doesn’t think he is hiding anything. Perhaps he was told by someone, or read somewhere, that this was an acceptable approach to dealing with compensation. Perhaps he sincerely believes that what he is doing is acceptable under the tax law.

Fifth, finally getting to reader Morris’ question, why would he reveal this to a newspaper reporter? Perhaps he did not think that anyone, especially IRS or Iowa state revenue employees, would notice the article. Perhaps he did not expect the reporter to reveal the example, though I doubt that. Perhaps he is banking on the ever-shrinking percentage of returns selected for audit. Perhaps he didn’t think through the consequences of discussing this in a public forum. Or perhaps, as some psychologists might suggest, he has a subconscious need to confess and be caught. Who knows?

To this I add a twist. Years ago, I was asked by the fellow who was then my church’s sexton to fill in for him on Christmas Eve because his eyesight had deteriorated to the point where he could not drive at night. I did so. When he realized I wasn’t messing up the task, he asked me to fill in for him during a six-week stretch in late January through the end of February while he and his wife spent time in a warmer area of the country. This substitution happened for several years, until he eventually retired as sexton. When things didn’t work out well for his successor, I was approached and asked to take on the position permanently. I agreed, and explained I would continue to volunteer as I had when I had filled in for the fellow who had now retired. No, I was told, you must be an employee, because there are legal issues involving worker compensation, insurance, liability, etc. Though I could not figure out why those weren’t issues when I was filling in from time to time as a volunteer, I agreed, but insisted that the church keep the salary, which is a very small amount that I didn’t need or want. Under the arrangement, the net monthly paycheck (which for those curious is in the very low triple digits beginning with a one or a two) was signed back to the church but now it’s all done electronically and there is no more paper check. The church withholds social security, Medicare, and state taxes. So the amount I donate is less than the gross pay. Thus, I don’t get a full offset, because my charitable contribution deduction is perhaps $200 less than the gross income I am reporting. It’s no big deal.

So why am I sharing this story in a public venue? Because it also is an example, but an example of how the reporting SHOULD be done when someone working for a tax-exempt employer chooses to “leave” some or all of the salary with the employer. What would be improper for me would be to simply ignore both the income and the deduction, a choice not possible anyhow because the church reports the transactions properly, and unlike the Center’s president, I’m not in charge of nor in a position to control payroll or how transactions are reported. I include the full salary as gross income, even though doing so it increases adjusted gross income by a couple of thousand dollars which in turn has other effects that ripple through the tax return and that also potentially affects the computation of Medicare premiums. All of that, however, is a small price to pay for doing the right thing.

Sadly, doing the right thing has become increasingly difficult for a rapidly expanding segment of the population. Doing the right thing isn’t always easy in the short-term, but it surely is in the long-term. That should be particularly the case for those who believe in the long-term.

The Illogic of Tax Cuts Based on Supply-Side Theory

It amazes me how difficult it is for those sucked into the now-discredited trickle-down, supply-side theory of tax cuts to let go of their deep attachment to a failed approach. Is it simply because this bad theory is used to justify tax cuts for wealthy individuals and businesses and that’s all that matters to them? Is it an inability to understand some basic principles of economics?

On more than a few occasions I have explained why demand-side economics makes much more sense, and why supply-side economics makes no sense. In The Expensing Deduction is an Expensive and Broken Idea, I reacted to a proposal “to deduct all expenditures related to the operation of their business in the United States” with this explanation:

However, it nonetheless amounts to nothing more than a windfall tax break for those businesses, chiefly large enterprises that are buying equipment. Giving a tax deduction for an expenditure that already is being made surely is not an incentive to make that expenditure. The solution to job creation is not supply-side, but demand-side. Some members of Congress understand this. Others don’t, continuing to drop raw eggs on the concrete floor from three stories up, in the belief that the eggs won’t break.

In Does Repealing the Corporate Income Tax Equal More Jobs?, I explained why repealing the corporate income tax does not create jobs. I explained:

There currently are corporations drowning in cash, and they aren’t hiring. Why? A business does not hire unless it needs employees. Acquisition of cash is not a reason to hire. A business hires if it needs employees. It needs employees if it has more work to do than its current employees can handle. Those situations arise when the gross receipts of the business increase. That happens when customers spend more. Customers do not spend more unless they have both resources and either a need or desire for the goods or services being sold by the business. That happens when money is infused into the hands of consumers. In other words, what works is demand-side economics. Eliminating the corporate income tax does not increase demand.

In Tax Perspectives of the Wealthy: Observing the Writing on the Wall, I reacted to a letter written by almost four dozen New York millionaires supporting an increase in New York state income taxes applicable to millionaire income. I wrote:

What motivates these millionaires is the realization that, in the long run, insufficient tax revenue erodes the infrastructure on which the economy rests, an economy that generate the income and wealth held by the millionaire and billionaires. Similarly, as the number of “New Yorkers who are struggling economically” increases, there is a decrease in the amount of purchased goods and services, in turn harming the overall economy. Put simply, though these millionaires did not articulate it in this manner, a healthy state economy, just like the national and global economies, depends on demand-side activity. The death of supply-side, trickle-down economic theory is a slow one, but its final breath draws nearer.

In Kansas Demonstrates Again Why Supply-Side Economics Fails, I reviewed my earlier commentaries on the supply-side disaster in Kansas, and noted. “Apparently belief in failed supply-side economics dies hard.”

So it was disappointing to see that, once again, Tom Giovanetti of the Institute for Policy Innovation has continued to support making business expensing permanent. In his latest essay, written in support of Senator Pat Toomey’s “Accelerate Long-Term Investment Growth Now (ALIGN) Act,” he repeats Tax Foundation claims that this massive tax cut “would increase GDP by $172 billion and add an additional $1 trillion to the nation’s capital stock” and “create an additional 172,000 jobs and grow wages by an additional 0.8 percent.”

Giovanetti writes, “But how, exactly, do tax cuts stimulate economic growth? By encouraging businesses to invest in new plant equipment, research & development, employee training and the like, tax cuts can help make the economy more productive.” In a general sense, that’s true. But generalities don’t answer specific questions. Realizing that, Giovanetti continues, “But it has to be the right kinds of tax cuts—that is, tax cuts that encourage businesses to invest.” He adds, “Tax cuts that are simply designed to ‘put more money in people’s pockets’ may help those individuals, but they don’t necessarily stimulate economic growth because they don’t encourage investment and productivity growth.”

The flaw in this reasoning is easy to discern. First, many businesses already pay little or no taxes, so a tax cut doesn’t generate much in the way of cash flow. But let’s set that problem aside. Second, in what will the businesses invest? Employees? To do what? Equipment? To be used for what? Giovanetti explains, “The idea is simple: If you need a new fleet of trucks, a new warehouse, a new manufacturing plant or a piece of equipment in order to become more productive, the tax code shouldn’t hold you back.” If the business has those needs, it’s because it has revenue arising from demand for its goods and services, so it can make the necessary purchases, which should be deductible over time as depreciation. The idea that the purchase cannot be made without a total, immediate tax write-off suggests either that the business lacks the necessary cash to make the purchase, which in turn suggests that the business doesn’t have enough revenue, and demand, to justify the need for the purchase, or that the business owners see the tax-cut argument as another way to boost cash flow that already is more than sufficient.

The flaw is magnified by the claim that putting “more money in people’s pockets may help those individuals, but they don’t necessarily stimulate economic growth because they don’t encourage investment and productivity growth.” Of course they do. The 99 percent of Americans not drowning in cash and other wealth would not keep the money in their pockets because they have needs. They need to pay for food, for health-care, for transportation, for housing, for clothing, for education, and for everything else needed to survive. And if they’re just getting by, that extra cash inflow will be spent on wants, such as vacations. Or perhaps it will be put in the bank, where it can be loaned out to people who, despite having money “put in their pockets” continue to struggle. When these people begin spending on what they need, and perhaps on what they want, demand will increase, and the businesses supplying those needs, and wants, will experience revenue increases, of such magnitude that they will have plenty of cash, without the need for tax breaks, to purchase equipment and hire workers.

Giovanetti responds by arguing, “Productivity growth is what leads to higher personal income, because rising productivity means creating more output for roughly the same amount of input. The benefits flow to employees, shareholders, and throughout the entire economy.” As has been pointed out by numerous economists, almost all of the 2017 tax cuts and most of the recent productivity growth has flowed into the stock market, into dividends, into stock buy-backs, and into the hands of the shareholders and economic elite. Nearly half of U.S. workers earn less than $30,000 annually. Making expensing permanent isn’t going to jack their salaries up by any meaningful amount, particularly when inflation is taken into account.

It's tough watching people go back for seconds and thirds at the buffet table when other people aren’t even getting a decent meal. Claiming that heaping more food onto the buffet table will solve the problem is clever by too much. In Tax Perspectives of the Wealthy: Observing the Writing on the Wall, I also wrote, “The concern is not that the writing is on the wall for outdated trickle-down economic theory. The concern is that some people are unable to read that writing or to understand what it means or why it is there.” It’s time for Tom Giovanetti to let go of ideas that have enriched the rich, impoverished the poor, and pretty much destroyed the middle class.

Gross Income or Taxable Income: Does It Matter?

Last week, reader Morris contacted me with a question. He pointed me to several stories about an IRS ruling on the taxability of grants funding improvements to the septic systems of some Suffolk County, N.Y., residents. For example, this Newsday article explained that grants from the county used to upgrade septic systems “count as taxable income,” even if the money goes directly to the contractor doing the work. Reader Morris wanted to know if it mattered that the grant was characterized as taxable income rather than gross income.

It does matter. Putting the amount of the grant directly into taxable income would almost certainly increase the taxpayer’s tax liability, as perhaps some otherwise unused credits would be available to offset the increase. Putting the amount of the grant into gross income would increase tax liability for many taxpayers, but others could have enough itemized deductions or standard deduction to offset the income. In other words, it depends on the numbers. The bottom line is that gross income and taxable income are two totally different concepts.

The manner in which the articles were written seemed to suggest that the IRS had ruled that the grants were taxable income. If that were indeed the case, it would be quite a big goof by the IRS. So I tried to find the ruling. What I found were even more articles describing the grants as taxable income. So I contacted reader Morris, told him why I wanted to find the IRS document, but that I could not find it. Reader Morris replied that he had also been looking, with no luck, and had noticed what I had. But he this directed me to this online video with the advice to stop at the 0:58 mark. In the video is a still photo of part of the ruling, and it clearly indicates that the IRS concluded that the grant should be included in gross income.

Later, reader Morris alerted me to this article, which included a screen shot of the top of the ruling. The ruling is PLR-108847-19, issued January 15, 2020, but its full text apparently is not yet online.

What struck me about these articles is the ease with which journalists decided to use “taxable income” in place of “gross income.” Surely it was not to save space. Instead, it reflects either a lack of knowledge concerning the difference between gross income and taxable income, or a disregard of the difference despite knowing the difference exists and matters. My guess is that it is the former, as very few journalists writing about tax are experts in tax. Did multiple journalists independently change “gross income” to “taxable income” as they wrote their stories? Or did one journalist do so, with others then picking up on that journalist’s story?

It’s not just the journalists who don’t get it right. Upset with the substance of the ruling, New York politicians are complaining about the outcome and suggesting or requesting that the IRS revisit the question. According to several articles, including this report, Senator Chuck Schumer described the IRS position as “in effect double taxation” because the “contractors pay taxes on the installation” and the IRS wants the homeowners to “show the grant as part of their personal income.” It’s not double taxation. If the grant had been paid directly to the homeowner, the homeowner would have gross income. When the homeowner then paid the contractor, the contractor would have gross income. That’s not double taxation. It’s no different from a person receiving wages included in gross income, and then paying a lawn care contractor to mow the person’s lawn. The contractor has gross income, and the fact that two people have gross income from the same dollars moving through the economy does not constitute double taxation. Then Schumer asserted, “The IRS should not tax people when they get help from the state or the county to improve their homes. Plain and simple.” Here’s news for the Senator. The determination that the grant constitutes gross income is based on the Internal Revenue Code, which is the product of the Congress. As a matter of policy, perhaps the grant should not be taxed. But that’s a decision for the Congress, of which Senator is a member.

It’s Not a Tax, It’s Not a Fee, It’s a . . . Yeah, OK.

Reader Morris directed my attention to this article and asked me if a surcharge the same thing as a fee. I know that reader Morris has been following my commentaries on the use and misuse of the terms “tax” and “fee,” including Please, It’s Not a Tax, So Is It a Tax or a Fee?, Tax versus Fee: Barely a Difference?, Tax versus Fee: The Difference Can Matter, When is a “Tax” Not a Tax?, When Use of the Word “Tax” Gets Even More Confusing, Sometimes It Doesn’t Matter If It Is a Fee or a Tax, It’s Not Necessarily a “Tax” Just Because It’s an Economic Charge You Don’t Like, Court of Appeals for the First Circuit: Tolls Are Fees, Not Taxes, The “Tax or Fee” Discussion Gets a New Twist, Is It a Tax? Is It a Fee? Does It Make Sense?, and Can the Proper Use of the Terms “Tax” and “Fee” Be Compelled?

The story from Hawaii is yet another example of how difficult it is for some people to face, accept, and speak the truth. Gene Ward is the Republican minority leader in the Hawaii House. He has a very long history of resisting tax increases and fee increases, no matter the purpose for which the increase is designed. Recently, Ward has become concerned about a statewide police shortage, and supports proposals to recruit and retain police officers. That sort of project requires money. Ward’s response to getting the money is to impose a $5 “surcharge” on all air flights to and from Hawaii. Interestingly, Ward justified the proposal not only because of the police shortage but because of crime increases, even though the most recent information shows that Hawaii’s crime rate has been dropping for the base few years.

Ward is misusing the term “surcharge.” A surcharge is an addition to something. So a surcharge on a tax is an additional tax. A surcharge on a fee is a fee. A “surcharge” on something not a fee or tax, if collected by a government, is a tax or fee depending on the factual circumstances. What is being proposed by Ward is a tax because it’s imposed on flights, and the revenue it generates would be used for something unrelated to flights. If the $5 went into a fund that financed airport maintenance or expansion, improved flight safety, airport health screening, or airport security, then it would be, and should be called, a fee.

It’s obvious that Ward wants to preserve his anti-tax persona while yet proposing a tax. Apparently he thinks calling it a surcharge will deflect opposition from anti-tax groups because the word “tax” doesn’t appear in the proposal. Though there are people who fall for that sort of mischaracterization, most people should be able to identify what it is that Ward is proposing.

So when someone claims that the $% is not a tax, not a fee, but a surcharge, my response is, “Yeah, ok. You can call it a surcharge but it’s a tax. Have the courage to be truthful and to call it what it is.”

Car Purchase Case Delivers Surprise Tax Stunt

Readers of MauledAgain know that when I have the time, I watch television court shows because I never know when a tax issue will pop up. I know I’ve seen only some of the many television court show episodes that have been filmed, and I know that tax rarely is the focus of the dispute, yet I’ve managed to comment on a long list of television court show episodes, 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, If It’s Not Your Tax Refund, You Cannot Keep the Money, Contracts With Respect to Tax Refunds Should Be In Writing, Admitting to Tax Fraud When Litigating Something Else, When the Tax Software Goes Awry. and How Not to Handle a Tax Refund.

Usually, something in the episode’s description, which I check when I tune into the show, suggest that a tax issue is looming. That wasn’t the case for episode 104 of Hot Bench’s sixth season. The description simply stated, “What begins as an argument over a $3,500 car ends with ex-friends reportedly committing government fraud.” Though various fraud possibilities zipped through my brain, tax wasn’t one of them. So I wasn’t paying close attention until, as by now you can guess, the phrase “tax return” popped up. I tried to figure out how to re-watch the first several minutes of the episode, but was unable to do so. Fortunately, I had paid enough attention to get the gist of the dispute, and because it was not germane to the tax aspect of the episode, I had enough to describe the situation.

The plaintiff and the defendant met at a wedding vow renewal ceremony of mutual friends. At some point, the defendant purchased a car for $3,500, borrowing the money from a bank. The defendant claimed that he bought car for himself, but let the plaintiff use it. The plaintiff claimed she bought the car with the defendant’s help. The plaintiff paid the defendant $500 toward the cost of the car.

Later, when the defendant wanted to use the car one day, the plaintiff borrowed his truck. While driving the truck, the plaintiff was rear-ended, and received $1,000 in damages. She deposited the $1,000 into the defendant’s bank account. The defendant agreed that the plaintiff had made the deposit she described, but claimed that he then transferred $960 back to the plaintiff. The plaintiff denied receiving the $960. Plaintiff sued defendant for $3,500.

The defendant testified that when he was doing his taxes, the plaintiff asked what he was doing, and when he said he was doing his taxes, the plaintiff told him to claim her as a dependent, so that his expected refund would be increased, and to use that increased refund toward payment of what the plaintiff owed the defendant for the car. The plaintiff testified that she did not file a tax return because she was claimed by the defendant on his tax return. In response to a question from the court, asking if he paid other monies to the plaintiff, the defendant testified that he paid for the gas and other costs of the car, and for the utilities and other costs of his house, where the plaintiff had been living. One of the judges suggested perhaps the defendant was justified in thinking that the plaintiff was his dependent, but noted that the issue was not material to the case. The defendant then testified that when he received the refund he planned to set aside some of it for the plaintiff. It turned out that the defendant and the plaintiff used the tax refund for a trip to Las Vegas. That is when the plaintiff told the defendant that she had a boyfriend and was going to move in with him. This news upset the defendant and thus the plaintiff and defendant broke up. The defendant took possession of the car, and the plaintiff sued to get back the $3,500 she claimed she paid for the car.

Ultimately, the case involved the fact question of how much, if anything, the plaintiff had paid the defendant for the car now possessed by the defendant. One of the judges asked the plaintiff if she understood that the additional refund received by the defendant by claiming her as a dependent was, in effect, a reimbursement to the defendant for the monies he spent supporting the plaintiff. The plaintiff replied in the affirmative. The court noted that the refund did not belong to the plaintiff and should not be considered by her to be a payment on the amount owed to the defendant. AS for the $500 that she had been able to prove she transferred to the defendant, the court treated it as a payment equivalent to renting the defendant’s car for the several months she had use of it. So judgment was entered for the defendant.

The tax twist in this case was irrelevant because the plaintiff was unable to prove that the increased tax refund received by the defendant by claiming her as a dependent should be treated by her as a payment for the car. It’s unclear from the facts provided at the trial whether the plaintiff qualified as a dependent of the defendant. If she did, there was no evidence that the increased refund received by the defendant was related to the purchase of the car. If she did not, then she, and perhaps the defendant, engaged in tax fraud. Imagine a borrower who owes money to a lender telling the lender that the way to get repayment of the debt is to claim the borrower as a dependent. If it can be established that the borrower knew that such a claim was unjustified, the risk of fine or prison time becomes very real. And the lender faces similar dire consequences unless the status of dependent exists, which is highly unlikely, or the lender declines the borrower’s foolish stunt.

Definitely a Misleading Tax Headline

The headline, showing up on another page with a link to the article, caught my eye. The headline was a simple one, “Tax season 2020 tips: How to avoid an IRS audit.” The promise that it offers is simply too extreme. It reminds me of the investment commercials that guarantee what can’t be guaranteed, that no matter what happens, the investment will not be at any risk and will provide a positive return in all events. Perhaps the fine print is a bit more accurate.

The article in question offers suggestions that, at best, reduce the chances of being subjected to an IRS audit. They are good suggestions, and it makes sense to follow them. The article suggests it is better to “blend in” than to report amounts that are “outside the norms.” Avoid deductions that “don’t make sense.” Don’t omit amounts that are being reported to the IRS on Forms W-2 or 1099. Be certain to check the math, look again at names, addresses, and social security numbers, confirm that the numbers on Forms W-2 and 1099 match what is on the return, and file on time.

The notion, as suggested by the article, that doing these things permits a taxpayer to “remain under the radar” is wrong. Though few in number, there are returns pulled for audit randomly. If a legitimately claimed deduction of credit is on the IRS watch list for a particular audit season, all the accuracy in the world isn’t going to prevent the return from being audited. More than a few returns that are audited are accepted “as is,” and even a handful of audits bring taxpayers the presumably good news that their tax liability is lower than they had calculated.

White reading the article, I noticed a teaser with a link to another article from the same source. The teaser stated, “IRS AUDITS MORE POOR TAXPAYERS BECAUSE IT'S EASIER, CHEAPER THAN TARGETING THE RICH.” My brain yelled, “Wait! Didn’t the article I was reading tell me that “Although taxpayers with incomes in excess of $1 million are more likely to be audited, there are a number of ways taxpayers across all income levels can decrease their chances of being screened.” Indeed, the headline of the referenced article claimed, “IRS audits more poor taxpayers because it's easier, cheaper than targeting the rich.” So which is it? It’s this sort of “say one thing, say the opposite” approach, unfortunately prevalent throughout society, that reduces the credibility of what’s being stated.

The headline to the article in question ought not be, “Tax season 2020 tips: How to avoid an IRS audit.” It ought to be “Tax season 2020 tips: How to reduce the chances of being audited by the IRS.” The existing headline gets people’s hopes up and puts them at risk of seeing those hopes dashed.

Tax Misinformation So Easily Goes Viral

It was just a bit more than a month ago, in Indeed, In Tax, as in Most Everything Else, Precision Matters, that I wrote about a recent article titled, “Tax Deductions: Is College Tuition Tax Deductible?”. That article featured a serious error, specifically, the following assertion: “However, you can still help yourself with college expenses through other deductions, such as the American Opportunity Tax Credit and the Lifetime Learning Credit.” Reader Morris, who had pointed me in the direction of the article, commented to me, “The AOTC and LLC are tax credits not deductions.” I explained that he would get an A and the writer of the article would not.

Three years ago, in Credit? Deduction? Federal? State? Precision Matters, I wrote:

One of the core principles that students need to learn in a basic federal income tax course is the difference between a deduction and a credit. Deductions are subtracting in computing taxable income. Credits are subtracted in computing tax. A one-dollar credit reduces tax by one dollar. A one-dollar deduction reduces taxable income by one dollar, ignoring limitations, floors, ceilings, and other complexities, and a one-dollar reduction in taxable income reduces tax by something between a penny and perhaps 40 cents. In other words, in most cases, credits are more valuable than deductions.

I suppose it would have been expecting too much to discover that my commentary of a month ago would go viral, making certain that a large segment of the population would understand the difference between credits and deductions. Well, it was.

Several days ago, I came across an AOL article, “9 things you didn't know were tax deductions. One of those “things” is described under the heading, “Lifetime Learning,” as follows: “The tax code offers a number of deductions geared toward college students, but that doesn’t mean those who have already graduated don’t get a tax break as well. The Lifetime Learning credit can provide up to $2,000 per year, taking off 20 percent of the first $10,000 you spend for education after high school in an effort to increase your education. This phases out at higher income levels, but doesn’t discriminate based on age.”

Goodness. The Lifetime Learning credit is not a deduction. It’s a credit. What shocked me is the identity of the author. The article was written by “Turbotax staff.” But in all fairness, perhaps an editor removed “and credits” from the article’s title. I can see that sort of thing happening because of concerns about word limits and space. But would an editor have objected to replacing the word “deductions” in the quoted portion with “credits”? I doubt it, but perhaps that happened.

I wonder if the misinformation in the article that reader Morris shared with me a few weeks ago influenced the article I found a few days ago. Is there some third article that in turn influenced both of these two articles? At what point in the dissemination of information is a error-detecting filter imposed? Without filters, misinformation goes viral, and does at least as much, if not more, damage than biological viruses do. So sad.

A Lesson in Tax Legislation Drafting

Reader Morris alerted me to a story from Fulton, Missouri about a use tax ordinance that was quickly redrafted after ambiguities in its language were brought to the attention of the city council. The ordinance proposes a 2.5 percent tax on purchases made online from out-of-state sellers, but only after $2,000 in purchases have been made. The use tax would change to match any changes in the city’s sales tax.

As originally drafted, the first $200,000 in annual revenue would be used for “public safety.” Apparently the drafters considered that phrase to be an adequate description of police and fire department expenses. But after communicating with other towns that had enacted similar ordinances using that term, city council learned that spending revenue on “public safety” could mean spending the revenue to fix potholes or build bridges.

So council redrafted the ordinance, removing the words “public safety” and inserting the phrase “police and fire capital expenditures.” That phrase is even more narrow than “police and fire department expenses” because the new language would not permit the revenue to be used for operating expenses.

It is wonderful how legislation can be improved when those drafting it reach out to as many people as possible to discover possible pitfalls in the language. In this instance, officials in other towns, the police chief, the head of the firefighters’ union, and others, were given an opportunity to offer suggestions before the proposal went on the ballot. It is so much easier to get things right when planning rather then when litigating after the fact. There’s a lesson here for legislatures that are less welcoming of pre-enactment suggestions.

A Much Bigger Forward-Moving Step for the Mileage-Based Road Fee

There’s news on the mileage-based road fee front. I’ve been explaining, defending, and supporting that fee for more than 15 years, in posts such as Tax Meets Technology on the Road, Mileage-Based Road Fees, Again, Mileage-Based Road Fees, Yet Again, Change, Tax, Mileage-Based Road Fees, and Secrecy, Pennsylvania State Gasoline Tax Increase: The Last Hurrah?, Making Progress with Mileage-Based Road Fees, Mileage-Based Road Fees Gain More Traction, Looking More Closely at Mileage-Based Road Fees, The Mileage-Based Road Fee Lives On, Is the Mileage-Based Road Fee So Terrible?, Defending the Mileage-Based Road Fee, Liquid Fuels Tax Increases on the Table, Searching For What Already Has Been Found, Tax Style, Highways Are Not Free, Mileage-Based Road Fees: Privatization and Privacy, Is the Mileage-Based Road Fee a Threat to Privacy?, So Who Should Pay for Roads?, Between Theory and Reality is the (Tax) Test, Mileage-Based Road Fee Inching Ahead, Rebutting Arguments Against Mileage-Based Road Fees, On the Mileage-Based Road Fee Highway: Young at (Tax) Heart?, To Test The Mileage-Based Road Fee, There Needs to Be a Test, What Sort of Tax or Fee Will Hawaii Use to Fix Its Highways?, And Now It’s California Facing the Road Funding Tax Issues, If Users Don’t Pay, Who Should?, Taking Responsibility for Funding Highways, Should Tax Increases Reflect Populist Sentiment?, When It Comes to the Mileage-Based Road Fee, Try It, You’ll Like It, Mileage-Based Road Fees: A Positive Trend?, Understanding the Mileage-Based Road Fee, Tax Opposition: A Costly Road to Follow, Progress on the Mileage-Based Road Fee Front?, Mileage-Based Road Fee Enters Illinois Gubernatorial Campaign, Is a User-Fee-Based System Incompatible With Progressive Income Taxation?. Will Private Ownership of Public Necessities Work?, Revenue Problems With A User Fee Solution Crying for Attention, Plans for Mileage-Based Road Fees Continue to Grow, Getting Technical With the Mileage-Based Road Fee, Once Again, Rebutting Arguments Against Mileage-Based Road Fees, Getting to the Mileage-Based Road Fee in Tiny Steps, and Proposal for a Tyre Tax to Replace Fuel Taxes Needs to be Deflated.

Reader Morris alerted me that the Washington State Transportation Commission had just released its Road Usage Charge Assessment Final Report. The report was almost eight years in the making, as it was in 2012 that Washington’s legislature charged the Commission with the task of determining “the feasibility of transitioning from the gas tax to a road user assessment system of paying for transportation.” During some of those years, a voluntary pilot mileage-based road fee system was implemented. Getting information from empirical field tests is commendable, because in this sort of situation it surpasses simple theoretical analysis.

It’s in three volumes, and it makes for quite a bit of reading. However, it’s not so much designed as a cover-to-cover reading opportunity than as a bundle of resources available to any jurisdiction examining the feasibility and benefits of a mileage-based road fee. Much of what is in the report addresses issues I have discussed in my commentaries on the fee, and so I will not repeat those analyses. Instead, I will share the executive summary from the Washington State Transportation Commission:

The Washington State Transportation Commission (WSTC) recommends that the Legislature enact a per-mile road usage charge (RUC) now on a small number of vehicles, including alternative fuel vehicles and state-owned vehicles, as the first step in a 10- to 25-year transition away from gas taxes to fund the state highway system. With the gas tax already declining, adoption of cleaner and alternative fuel vehicles accelerating, and RUC systems and technologies ready for implementation, the State must act now to avoid a predictable transportation funding crisis later. Starting small and transitioning gradually affords the Legislature and state agencies time to make necessary system refinements and policy adjustments to a RUC system in a deliberate, controlled manner.

Whether this happens, as the Commission points out, is up to the legislature.

According to the Commission, “The Federal Highway Administration (FHWA) is also a sponsor and recipient of this report. The information contained in this report takes into account national level interest in road usage charging. Therefore, the intended audience for this final report includes the US Department of Transportation, the US Congress, and other states that are considering road usage charging as a potential transportation revenue alternative to the gas tax.” Let’s hope members of that audience, as well as their staff assistants and other affiliated individuals, take a good look at the report, especially if they have been unaware of the many articles, studies, pilot projects, and commentaries dealing with the mileage-based road fee or, worse, ignoring them. It’s time to acknowledge that it’s time for change.