Wednesday, November 16, 2005

A New Dawn Flickers on the Tax Horizon 

A small flicker of a new dawn twinkles on the tax horizon. Gathering clouds threaten to plunge the sky into darkness.

The good news: As reported by Reuters, CCH (pay subscription site with variable URL), and other press sources, the Senate Finance Committee approved a version of the "Tax Relief Act of 2005" that does NOT extend the expiration date for those low special tax rates on capital gains and dividends that I, and others, so firmly disdain. Making arguments similar to those I have advanced, Republican Senator Olympia Snowe pointed out that the impact on the federal budget of recent disasters changed priorities. Coming days after it another member of the Congress appeared to respond to my comments about the Tax Reform Panel proposals, I'm beginning to wonder if this is all coincidence or if somehow a few members of the Congress (or their staff) are reading this blog.

Well, as quick as I am to criticize the Congress, I'll be just as quick to congratulate Senator Snowe for taking the stand she has made. One of the few remaining progressive Republicans, a dying species to which fewer and fewer of us belong, she had the courage to stand up to the special interests that dominate the Republican tax agenda. With no other practical choices open to him, Senator Charles Grassley dropped the low rate extender, and the bill was sent by a 14-6 vote to the Senate floor for debate.

Of course, advocates of limiting high taxes to wages have announced "confidence" that the extension of the low rate for capital gains and dividends would be restored by the House of Representatives and somehow survive the Conference. Last night, the Ways and Means Committee approved, by a 24-15 vote, its "Tax Relief Extension Reconciliation Act of 2005," the acronym for which, TRERA, sound a bit too much like terror for my liking. This bill DOES include the extension of reduced tax rates on capital gains and dividends, so the Conference is going to be interesting, to say the least.

Senator Crapo called the omission of the special low capital gains and dividend tax rate extension a "very serious mistake." Hardy. The mistake is requiring wage earners to bear a disproportionately higher rate of taxation than do investors, trust fund beneficiaries, and the ultrawealthy. We've had more than a few years of this bifurcated tax rate scheme, and the economic position of most Americans surely has not flourished as it has for the beneficiaries of these special low tax rates.

The Senate Finance Committee bill would make other changes to the tax law. It extends the soon-to-expire research and development credit, the state sales tax deduction, the work opportunity credit, and some minor alternative minimum tax relief for middle income taxpayers. It makes changes in the New York Liberty Zone deductions and credits, and modifies the taxation of S corporation excess passive investment income. The bill also makes modifications to the charitable contribution deduction, the most significant being the allowance of a deduction in computing adjusted gross income for charitable contributions exceeding $210 ($420 for married couples). Ah, more complexity. The Committee also approved a Republican-sponsored deduction for mortgage insurance premiums. The House Ways and Means Committee bill also extends the state and local sales tax deduction, the work opportunity credit, and the research and experimentation credit, so bank on those being in the final legislation. It also extends a long list of other expiring provision, which are listed in the Ways and Means Committee news release.

Stay tuned. This story isn't finished.

Monday, November 14, 2005

Proposed Water Tax in Maine Almost All Wet 

Tens of thousands of voters in Maine have signed petitions to place on the ballot a referendum on a proposal to tax the withdrawal of water from Maine's aquifers that is bottled. According to this Portland Examiner story, the initiative, led by Jim Wilfong, a former legislator who served in Clinton's Small Business Administration and who specializes in international trade, reflects several concerns. One is the traffic that the bottling plants bring. Another is fear that the aquifers will dry up.

Wilfong's correct that access to clean, fresh water is an emerging issue. I've noted, on several occasions (for example,here and here ) that disputes over the supply of fresh water, not oil, may well be the cause of the next world war. Wilfong, who is not alone in contemplating the shipment of water in ways not unlike present-day shipment of oil and gasoline, explains that the underlying questions of who will own the water, who will control the water, and will fresh water supply be sustainable are the root questions. But is a tax the right way to go?

If the tax passes, it could backfire. The largest water bottler in the state, Poland Springs, has threatened to pack up and leave if the 20-cent-per-gallon tax is enacted. Already, the company has put on hold its plans to add another bottling plant.

A small portion of the tax would be used to protect aquifers, enhance the water environment, and otherwise remediate the impact of withdrawing the water. Most of the revenue would be set aside for small business development. Income from the trust holding the unspent revenues would be paid to state taxpayers.

The proposed tax would cost Poland Springs each year more than it currently earns in profits each year. Does the word "confiscatory" pop into anyone's head?

Wilfong denies that Poland Spring is a target. He explained, "We don't have it in for anybody. We just think this is something that's fair and ought to be done."

There are two serious issues to consider. One is the appropriate purpose of a tax and use of its revenues. The other is a question about the ownership of natural resources.

To the extent a water bottler, like Poland Springs, is imposing a cost on society by using roads, increasing traffic, contributing to pollution, or damaging the aquifer environment, a user fee (even if called a "tax") is appropriate. Perhaps a one or two cent per-gallon fee makes sense. It might even make business sense to the bottlers, because it would contribute to the sustainability of supply.

But the idea of soaking the companies (sorry) to generate money for small business development or windfall dividend income for state residents is a not-well-camouflaged money grab. Why should water bottlers or, in effect, their customers, subsidize small businesses in Maine? Maine taxpayers and Maine small businesses did not subsidize Poland Springs. It is worth noting that Poland Springs was at one time in bankruptcy, and emerged after being purchased by Perrier. If there are entrepreneurs with ideas that would make a small business go, then have at it. That's what Poland Springs did. If the idea is a good one, the business will grow. If it's not, it will stumble. Grabbing one's neighbor's income simply because, well, they have it, is short-term greed guaranteeing long-term failure. This approach to revenue generation and use surely isn't going to be interpreted as a welcome mat by businesses thinking of carrying on activities in Maine, and will be seen as an eviction notice by many of the businesses already working in Maine.

And that leads to the second issue. Wilfong and his supporters appear to treat the water as taxpayer property that it can sell to bottlers for 20 cents per gallon. If the water is owned by the state, that is a sensible approach but for the fact that such a price is so high that there will be no purchasers. Perhaps that is what Wilfong prefers. But if the water is owned by private individuals, is it permissible for the state in effect to seize that property? States do have the right to condemn property for public purposes after paying just compensation. Unfortunately, the Supreme Court also thinks it's ok for states to seize private property to assist other private citizens who claim their private development somehow helps the state, another barely camouflaged arrangement that has the word "bribe" smeared all over it. But the idea of a state seizing property simply because its value has increased is so close to how totalitarian regimes operate that any sensible voter, in Maine or elsewhere, ought to be shaking in fear as they contemplate the logical end of their approach to the issue.

User fee for actual damage? Yes. Confiscatory tax? No. The Wilfong proposal is almost all wet.

If the proposal gets onto the ballot in November 2006, and there's some question about the validity of all the signatures, the rest of the nation ought to pay very close attention to the outcome. A small ripple of confiscatoriness could swell to a flood of state usurpation of private businesses involved in natural resource development. We could soon be drowning in a nation of five-year plans and collectives.

If There Must Be a Windfall Profit Tax, Then .... 

Someone asked me to comment on the various windfall profits tax proposals. As several commentators have noted, this issue was debated thoroughly several decades ago when the oil embargo caused market prices to increase, in turn causing increases in oil company profits. And as anyone who paid attention to the outcome knows, the effect was a downturn in oil company investments in exploration. After all, if the money is being sent to Washington, it isn't going to be spent paying engineers to prospect for oil.

One thing that a windfall profits tax does not do is to reduce the cost of gasoline, heating oil, or any other petroleum or gas product. The market sets the price, and oil companies would be sued by their shareholders if they simply reduced retail prices to less than wholesale prices. Profits surge, temporarily, because of the lag time between price changes and oil and gas shipments.

However, it seems that some degree of faith is required to accept present-day claims by oil companies that they will invest their current cornucopia of profits in exploration. True, such assertions make sense. But shareholder pressure for dividend increases is also a reality. What to do?

Here's my proposal. If there's going to be a windfall profits tax, add a new wrinkle. Without getting into the details, or "marking up" the previous version, I would allow a deduction for investment in energy exploration, including alternative sources other than oil and gas, that exceed the company's average investments for the past five years. Such a tax would encourage alternative energy development, and to the extent a company chose not to invest its profits in such a manner, it would pay what I prefer to call a user fee to offset the economic market disruptions that can arise by failure to develop additional and alternative energy resources.

Until I see windfall profits tax proposals making headway in the Congress, I'm not going to belabor this topic. But I will return to it and hammer home my proposed energy development windfall profits tax deduction if the situation warrants more intense advocacy of my proposal.

Friday, November 11, 2005

Everyone's Tax Ox to Be Gored? Not. 

It really amazes me. Last week, I asked, somewhat rhetorically, "So Whose Tax Ox Gets Gored by the Tax Reform Pane's Proposals? No, the question didn't amaze me. An answer has.

This week's Tax Notes has an article by Heidi Glenn, "Tax Panel's Report Kicks Off Tax Reform Debate," 109 Tax Notes 703 (Nov. 7, 2005), in which Rep. Bill Thomas, chair of the House Ways and Means Committee is quoted as saying, "Criticism of code provisions that the panel suggests should be scaled back or eliminated was unrealistic. At some point, everybody has to realize that fundamental tax reform by definition means that everybody's ox gets gored." The only on-line link that I can find is a long link to the Lexis pay site. UPDATE 12 Nov 2005: Thanks to Matt Gardner, State Tax Policy Director of the Institute on Taxation and Economic Policy, here is another link to the quote.

Not that I think Thomas is replying to my question, but is he serious? Does he really think that everybody's ox gets gored by fundamental tax reform? I'm not arguing that everybody should get gored, because, after all, there's no point and no worthiness in raising the tax liabilities of the poor. Yet the "reform" offered up by the Tax Reform Panel gores some people and not others, as I pointed out in my post last week. Consider, for example, someone living off a trust fund or off of investment income, and owning his or her principal residence and vacation home free of mortgages. The worst thing that happens to such a person under the Tax Reform Panel's proposals is the loss of the deduction for real estate taxes paid on those homes. A few other minor deductions might disappear. On the other hand, under the proposals, the person would be taxed at a lower rate on interest income and at a zero rate on domestic dividends income. The person would be relieved of alternative minimum tax liability. The person's regular tax rates would be reduced. Surely, this person, and others, are in the group of individuals whose tax liabilities would go down, as evidenced by the charts in the Tax Reform Panel's report that I described in my previous post on the issue.

There are circumstances under which a change in the tax law could increase the tax liability of all taxpayers. For example, a surtax, such as the one enacted during the Vietnam conflict, would have that effect. The arguments might then be about the severity of the goring, but every taxpayer would be hit. On the other hand, when a tax reform proposal is revenue neutral (and I don't understand why that needs to be so), unless somehow every taxpayer ends up with the same tax liability (which is for all intents and purposes impossible and which would make tax reform pretty much pointless), there will be taxpayers whose tax liabilities increase and taxpayers whose tax liabilities decrease. Even the Tax Reform Panel admits as much in its report.

So, how, someone explain, does the man holding the most important position in the Congress when it comes to tax legislation, conclude that "everybody's ox gets gored"? Although his statement makes for a great sound bite, it is flat out wrong. It is more than misleading. It is irresponsible. Well, in that respect, it matches up well with the Tax Reform Panel's proposals.

Another Prof. Maule Washington Tax Day 

After responding to former student Nakul Krishnakumar's inquiry of what I would do if I were President for a day, I noted that my plans would most likely go nowhere, considering that he had not asked me what I would do if I were Emperor for a day. Jeff Jacobs soon contacted me with a variation on Nakul's challenge. Jeff asked, after noting he "loved" the President-for-a-day post:
What if someone made you Commissioner of Internal Revenue for one day? And what if your salary was based on 1% of the revenue you collected? Which of the current laws included in the Internal Revenue Code would you choose to enforce?
Jeff clarified his question by confirming my assumption that he meant 1% of the revenue collected beyond what otherwise was being collected. Jeff also revealed his plan, if he got to make the one day Washington tax trip: "send Schedule H to everyone in your area (Delaware County; Montgomery County); my area (Fairfield County, CT); and similar zipcodes around the country." Jeff's hound dogs must be picking up the scent of some unpaid household employment taxes. Jeff also posed his question to Joe Kristan.

Here is what I told Jeff:
Schedule H would be a good candidate. Another would be an audit of all "pay cash pay less" transactions. The third would be tax shelter
investments with overstated debt, overvalued property, improper allocations, etc.
When Jeff replied with his confirmation about the computation of the "1% of revenue" he noted that Joe "chose home equity (vs. home mortgage) indebtedness." By that point I had looked at Joe's response, which also included a proposal to ferret out illegal tax shelters and scams, and commented, "Joe and I are in tune on the tax shelter thing. Another interesting one would be employee v. independent contractor." Pressed for an explanation, I elaborated:
Independent contractor characterization hurts the revenue (that's why the IRS does, in fact, go after it, especially when it is being abused throughout an industry, such as the not so long ago classification of law clerks as independent contractors).

Independent contractor classification, coupled with 1099 noncompliance, takes the withholding advantage away from the IRS. Even when the independent contractor files a return, there generally is a delay in collection because many mischaracterized independent contractors don't even know to make estimated tax payments.

Also, independent contractor status cuts down FUTA collections. And I think it permits employers to exclude lower compensated "employees" from deferred compensation computations, though I'm not sure this generates a revenue loss.
For the record, someone named "Brian" commented on Joe's website that "If I were Commissioner for a day, I'd test the lower boundaries of the 7701(a)(36) definition of return preparer to see just how little preparation is needed to prepare a substantial portion of a return. Better yet, I'd rather be Secretary for a day and change the definition of 'return preparer' to include all return preparation, (though keeping the de minimis exceptions intact). I'd require USPAP for all appraisal and valuation reports." Interesting idea, as the deterrent effect might cause a lot of tax shelter and other devices to be shelved.

The other night, one of our adjuncts, who also is a former student in both the J.D. and LL.M. Programs, stopped by my office after we both had finished teaching our classes. While chatting about the Tax Reform Panel's proposals, a conversation we should have recorded and offered for sale, we found ourselves debating the impact of the proposed reduction in the mortgage interest deduction. I learned that there's a lot of "over $300,000" mortgage debt in existence, especially among taxpayers with incomes in the $180,000 to $250,000 range. I was making the point that I made in a post several weeks ago, specifically, that the upper middle class would be harmed more than the wealthy and ultrawealthy. The point that the wealthy are already limited brought an explanation that inspired another candidate for Jeff's question. Because the IRS does not require mortgage lenders to disclose the principal balance of the loan on the Forms 1098, many (most?) taxpayers and tax return preparers simply deduct the interest that is shown without applying the $1,000,000 limitation. In one instance, almost $50,000 of tax liability would be generated, aside from interest and penalties, if the IRS pursued an audit and sought payment simply for the tax years still open under the statute of limitations. So coupling this with Joe's proposal to disallow the improper deductions of interest on home equity loans, there might be some meaningful amount of revenue to be recovered.

Perhaps as Commissioner for a day, I could spend the first half-hour looking at the IRS data indicating where noncompliance is highest. Unfortunately, much of IRS data is outdated, and there's no assurance that the IRS really knows enough to identify the most revenue-expensive misreporting. Perhaps getting partnerships to allocate income and losses in compliance with subchapter K would raise the most "additional revenue" but the shortage of tax practitioners and IRS employees genuinely expert in subchapter K would stymie that effort.

But to get anything done, the Commissioner needs a good Chief Counsel. So here's the deal. Joe can be Commissioner for a day, and I'll be his Chief Counsel for that day. We'll split the 1%. Neither of us are greedy, so we each could be content with one-half of 1%. Of course, I'm expecting Joe would spring for that day's lunch tab.

Yet I'd rather be Congress for a day. After all, given the choice between designing the system or cleaning up the mess under the existing system, I'd rather set up a system that requires far fewer mess cleaners. Something like a "low maintenance" appliance.

Wednesday, November 09, 2005

Restoration of the Sales Tax Deduction = Restoration of Old Authorities? 

Recently, while revising a treatise chapter dealing with the federal income tax deduction for taxes, I noticed a serious technical question generated by the restoration of the sales tax deduction. Although I have addressed the policy issues raised by the restoration (here, here, and here), I had not paid attention to this technical and practical aspect of the restoration. So, without further ado, here are my thoughts:

In the American Jobs Creation Act of 2004, Pub. L. 108-357, Congress enacted a limited restoration of the deduction for state and local sales taxes. Instead of permitting the deduction in addition to the deduction for state and local income taxes, Congress provided taxpayers with an election under which they could choose to deduct state and local sales taxes instead of state and local income taxes. As a practical matter, this means that taxpayers living in states that have no personal income tax will choose to deduct state and local sales taxes.

Mechanically, Congress restored the deduction by re-enacting the text of the deduction provision as it existed before the Tax Reform Act of 1986, Pub. L. 99-514, repealed the deduction. The text had been in section 164(b)(2), but on restoration it ended up as section 164(b)(5). The language for the election was placed in paragraph (A), which required relocation of the original subparagraphs (A) through (E) as (B) through (F). The separately stated sales tax rule that had been in section 164(b)(5) and which had also been repealed in 1986, was restored to paragraph (G) of the new section 164(b)(5), with the deletion of references to the still-extinct gasoline tax deduction. Congress also added specific instructions with respect to optional sales tax tables that had not been in the previous edition of the sales tax deduction statute.

What is now section 164(b)(5)(B) through (G) is identical to what was the pre-1986 section 164(b)(2)(A) through (E) and (b)(5). Accordingly, the question is the level of deference that should be accorded to regulations, judicial decisions, revenue rulings, and other administrative issuances addressing the pre-1986 statutory material. Nothing in the legislative history addresses this particular question.

It is this commentator's opinion that the deference ought to be as high as it would be if all of these authorities were re-issued under the restored statutory language. As a practical matter, the regulations issued under the pre-1986 statute are still in the Code of Federal Regulations (see Regs. sections 1.164-3(e) through 1.164-3(i) and 1.164-5). The IRS could, though it is unlikely, issue a revenue procedure that republishes the pre-1986 rulings and other administrative issuances. Of course, courts will not and cannot republish judicial decisions affecting section 164(b)(5) until there is a case in controversy for a judge to decide.

When advising a client, it would be most sensible to treat the pre-1986 interpretations of what is now section 164(b)(5)(B) through (G) as authoritative. Surely a disclosure should be made to the client that reliance is being placed on these old authorities, and for good reason. Taking a return position contrary to one of these authorities should be undertaken only in the most special and unusual of circumstances, where some fact indicates that the authority is somehow not deserving of deference. At the moment, I cannot think of any reason that the interpretation of the statutory language should be changed when the statutory language has not been changed but merely restored.

As for the election and the optional sales tax tables, it is not impossible for new issues to arise that have not been the subject of previous determinations. To this extent, client advising and tax practice decision making would follow the usual principles that apply when novel issues arise.

Monday, November 07, 2005

How Halloween Will Become Tax Time While August Vacations Are Returned to Tax Preparers 

The IRS has released a new Form 4868 which will permit individuals to obtain automatic six-month extensions for filing their tax returns. A companion new Form 7004 will permit business taxpayers, including not only corporations but also trusts and partnerships, to do the same thing. Note that the filing extension does not permit a delay in paying any tax that is due. The changes take effect for returns due in 2006.

For all individuals except those few without a calendar taxable year, this means that filing can be extended from April 15 until October 15. Just in time for Halloween. Actually, it’s very close to Columbus Day. How fitting. Taxpayers can celebrate what they’ve discovered as their returns are prepared.

In its announcement, the IRS explained that the new procedure will save taxpayers between $73 million and $94 million each year by eliminating or consolidating several existing IRS forms. How do they figure out those numbers? How do they know it’s not $52 million or $116 million?

Formerly, the automatic extension for individuals was a four-month extension, with a follow-up two-month extensions for taxpayers with acceptable explanations. That’s why tax return preparers weren’t taking vacations in August. August 15 had become a second April 15. Even though only 6 percent of taxpayers, according to the IRS, asked for the four-month extension, and only 2 percent asked for the second extension.

How can 6 percent of taxpayers make August such a busy month for tax return preparers? These aren’t the taxpayers with the simple returns filed in March and early April. These are the taxpayers with partnership and LLC interests, who don’t receive their Schedules K-1 until after the April 15 deadline passed. These are the taxpayers with complicated returns. These are the taxpayers who struggle to gather all the information required to complete the return. These are the procrastinators, about whom I shared some thoughts about three weeks ago.

Six percent of taxpayers providing perhaps 30 or 40 percent of a tax return preparer’s annual workload hopefully provide 30 or 40 percent of the preparer’s fee income. But can that make up for the disappointment of the children who learn that August isn’t the month for family vacations?

So perhaps the six-month extension is a good thing. It means that tax returns not completed by April 15 while the children are in school will be occupying the preparer’s time in October, when the children are in school. It is highly unlikely that the August tax return flood will survive this change. The same few clients who ask that their returns be completed in May or June once the expected K-1 schedules arrive, and whose other return data was probably inputted early in the process, will still do so. The rest of the group, especially the procrastinators, will now wait until October 15 because there will be no reason for them to stop by the preparer’s office on October 14.

Too bad the extension deadline wasn’t changed to October 31. Imagine the glee of a tax return preparer who could greet each client with "Trick or Treat?" After all, there is a scary relationship between Halloween and tax.

It could be worse. Every so often, some clueless member of Congress proposes that tax returns be due on the taxpayer’s birthday. One of my favorite questions is what happens to joint returns filed by married couples who don’t share the same birthday? Of course, I can’t imagine that the proposal would extend the due date for paying any additional tax that is owed. Yes, the proposal, in its many variants, isn’t much more than political grand-standing.

So, next October, be patient with your friends, relatives, and neighbors who prepare tax returns. They’re going to be busy and harried. They’ll be digging through a combination of what had been the "August pile" and the "October pile." But at least, hopefully, they’ll have had a chance to relax in August.

Friday, November 04, 2005

A Thousand Tax Words 

Is that what a tax picture is worth?

This morning's post has inspired a response from Joe Kristan that is well worth, well, I can't say "reading" because that's not the right verb, so, well, it's well worth viewing.

Yes, there are some comments to read (including a good one suggesting use of a corporate dividends paid deduction to work through the dividend issue I discussed).

But there's also something to see. I laughed out loud. You might, too. Or you might scream. In fear or delight.

Joe, good work.

"Professor Maule Goes to Washington" 

Relax, it's not news. It was the subject heading of an email that I received from a former student, Nakul Krishnakumar, who keeps a close eye on what I write. In his email he sent a request. It's a scary one, but let's go along with him:
If someone were to make you President for a day, what would your tax policy be? In other words, if you were to be tasked with re-writing the tax code, what would our tax code look like? Obviously, I've heard/read various proposals that you have, but I wanted to know what your policy would be if you were given the chance to come up with a comprehensive plan. Would the tax code be progressive or regressive? Would there be a capital gains tax? Would you allow for deductions? How about a national sales tax? I'm pretty sure you would have a fuel tax!

I think that might be an interesting discussion ...
I suppose, since the odds of my being made President are about equal to the odds of my becoming Commissioner of Baseball, there's no harm in responding to Nakul's inquiry. In other words, I doubt anything I say will positively or negatively affect those odds (for either position!)

As I mentioned to Nakul privately, a full and complete response to his questions would require a treatise. I'm not about to do that, even though, as many know, the temptation is strong. Instead, I will try to explain how my taxation philosophy would manifest itself in a tax structure.

I begin with three ideas. First, by taxation I mean government revenue generation. In other words, whether something is called a tax or something else isn't critical, other than, perhaps, in the practical world of politics. So, for me, taxation includes user fees, tolls, taxes, and even, yes, "revenue enhancements" for those who remember how that creative phrase entered the public policy lexicon. Second, there is a distinction between federal and state (and local taxation) and it is important, and necessary, to consider those differences in responding to Nakul's question. Third, government revenue ought to be collected for one purpose, and one purpose only, and that is to fund the legitimate purposes of government.

My first idea probably doesn't trigger much controversy. My second idea is pretty much unavoidable and pretty much states the obvious. My third idea, however, certainly does open up a debate. Until and unless society agrees to the scope of "legitimate purposes of government" there is no firm foundation on which to construct a tax system. Even the purposes that seemingly are "easy" to define can generate disagreement. For example, national defense may not find advocates among genuine "turn the other cheek" pacifists. Environmental protection and regulation by the government does not find 100 percent support among voters. Maintaining the life and health of the economically disadvantaged is viewed by many as a business for the private sector and not government at any level, and some others consider it the bailiwick of state and local governments but not the federal government. I am not going to answer these questions. They are not tax questions. They are public policy questions. They ought not be decided as part of drafting the tax law. In other words, once the people, through democratic processes, agree that a government (federal, state, or local) ought to do X, Y, and Z, then the question of how the funds can, and if so, should, be raised sets up the tax policy issues.

I favor user fees, and thus government functions that can be funded through user fees ought to be so funded. For example, if the nation decides that the government should be responsible for the construction, protection, and maintenance of airports, highways, tunnels, bridges, and other facilities, the cost should be borne by the users. There is one caveat. To the extent that the users are financially disadvantaged, the question of whether they should be exempt naturally comes to mind. The answer is simply this: a user fee is an expense of life, just as the cost of groceries, clothing, and rent are expense of life. If the nation agrees that there is a valuable societal benefit in shielding the financially disadvantages from the ravages of poverty, user fees would be included with the other expense of life in determining how and to what extent society, through government, can and should step in to supplement or nurture improvements in the financial status of the poor, whether through grants, education assistance, job placement, or business development.

One of the tricky parts of user fees is the question of "who is the user?" It's easy when it comes to crossing a bridge. It's far more difficult when it comes to other functions, such as providing a public education. Is the user the child attending a public school? The parents of the child who attends public school? The employees who can hire graduates of the school without needing to provide the training that the school has provided (assuming it's doing its job, which is another, though related, issue)? Is it society, which benefits from the education of the electorate? If it is, as I think it is, society, the second tricky part of user fees arises. It's fairly easy to calculate the cost of crossing the bridge, at least for the engineers and cost accountants who sit down together to do the computations. It's almost, if not, impossible, to calculate the cost imposed by each citizen's "use" of the public school system. Thus, some other form of revenue generation must be found.

And so, leaving out the many chapters of the treatise that would carve citizen-approved government purposes into those sensibly funded by a user fee and those needing to be funded by some other revenue source, I'll turn next to what those other sources might be. In doing so, I am getting a little closer to answering the specific questions in Nakul's inquiry. What I'm also going to omit, for the most part, is the determination of which government (federal, state, or local, or some combination) ought to provide a specific governmental purpose activity and thus seek revenue to fund it. Traditionally, public education is provided by state and local governments, although federal funding is significant. The states use property taxes, income taxes, other taxes, and combinations, whereas the federal financial inputs pretty much come from the federal income tax. Without getting into the debate over the appropriateness or Constitutional legality of a federal property tax, and without trying to lock states into a tax structure that mimics the federal tax structure, I will describe non-user-fee revenue generation in terms not necessarily limited to federal taxation but reflecting federal taxation as the primary consideration.

Once user fees have been determined for those government activities appropriately funded by user fees, the choices left fits into several categories. There are status taxes, such as a tax on wealth (annually or at a specific time, such as an estate tax) or a segment of wealth (e.g., a real property tax). There are transaction taxes, such as a tax on retail sales (either in full or on specified items), a tax on financial transfers, a tax on net increases in wealth (such as an income tax), a tax on the making of gifts, a tax on transfers of property (such as real property realty transfer taxes), a tax on the value added to the economy by a particular activity of manufacturing or providing services (e.g., a VAT), a tax on the transmission of property at death (such as an inheritance tax), a tax on gross receipts (again, on all gross receipts, on business gross receipts, or on specified types of gross receipts). There are consumption taxes, such as a tax on the burning of fuel, a tax on the purchase of items for consumption, or a tax on the disposition of waste into a landfill. Some of these taxes, such as a tax on landfill deposits, are not all that different from a user fee. In many respects, a consumption tax is a user fee, reflecting the cost to society of a person's or a business' use of what ultimately is a natural resource.

As a practical matter, the types of taxes that get the most attention when federal tax reform is discussed are a sales tax, a consumption tax, a VAT, an income tax, an estate tax, and a gift tax. There are hybrids. There are all sorts of variation in the specific details. Selecting one sort of tax rather than another may appear to be a matter of general conceptual policy, but the details are what provide the salvation or the death writ. Details can make a seemingly unworkable tax work, or make a sensible tax a disgrace.

Again, I begin with a basic principle. It makes no sense to adopt a variety of taxes that do not mesh well together. It makes no sense, for example, to tax both wealth and income, because a sensible system either taxes the wealth as it is generated (an income-type tax), or at specified points in time while it is being held or transferred (an estate tax, a property tax, etc.) Combinations become defensible when a flaw in one tax creates the need for a backstop. The gift tax is an example of such a backstop, for it makes the estate tax effective, by foreclosing most tax-free lifetime transfers that would shrink the estate tax base. Unfortunately, imperfections in that meshing is part of what taxpayers pay estate planners to exploit.

The estate tax, as I've noted in other posts, would not be necessary if the income tax did not permit unrealized gains to go untaxed during lifetime and at death, and if gift transfers did not escape income taxation. The "a little of this" and "some of that" approach to taxation, as in cooking, is just as likely to generate slop as it is to brew up a delightful stew. Perhaps Nakul's basic inquiry reflects his understanding that the odds of getting a tasteful dinner when multiple chefs are messing with the ingredients are slim, indeed.

In the end, the sales tax does not earn points because it imposes the cost of government on the very activities in which people need to engage in order to live the lives that government exists to protect and defend. Existing sales taxes are regressive, and designing them to be progressive, though possible, would be unduly complex. Even as so designed, reliance on a sales tax would shift the cost of government onto those least able to pay, relatively speaking.

The VAT strikes me as ultimately counter-productive. Government and society want citizens and businesses to add to the value of the nation's economy. Because taxes act as brakes on economic growth, it makes little sense to impose a tax on those activities that are building up the nation's economic strength. It is possible for a person to add far more value to the economy through an activity than the person receives from that activity, unless, of course, the VAT is passed along to the next person or business in line. Ultimately, the VAT becomes a differently-measured sales tax, with variances in the timing of the imposition.

Consumption taxes present similar conundrums. Consumption taxes act as brakes on consumption, which isn't good for the economic well being of a nation dependent on the economic well being of its businesses and citizens who produce goods and services for consumption. But, wait, perhaps consumption taxes acting as a brake would be good, because we are told that too much consumption and insufficient savings is bad for the nation's economic well-being. So perhaps a consumption tax could be used not only as a revenue raiser but also as a throttle providing a means to nudge consumption up and down, though that power would be more efficiently exercised by the Fed or a similar board than by a Congress that has demonstrated little, if any, understanding of how public finance can and should function.

But consumption taxes, like sales taxes, are regressive. Perhaps the consumption that harms the economy is not all consumption but excess consumption. So perhaps a consumption tax ought to be imposed on consumption in excess of a particular dollar amount, in the nature of some sort of luxury consumption tax. But that would require record keeping almost as burdensome as that required by the current income tax. And surely consumption of products manufactured outside the country does not return as much to the national economy as does consumption of products manufactured within the country. So perhaps a consumption tax ought to be imposed on the consumption of imported products. Unfortunately, some things necessary for life cannot be consumed unless they are purchased from a person who has imported them because they're not manufactured in this nation.

Another problem with consumption taxes is that it shifts the cost of government away from those who hold investments. Although a consumption tax is an incentive to save, it is not an incentive for someone who inherits wealth without having had to generate it, and who needs to consume only a small fraction of the wealth in order to meet life's needs. The consumption tax entrenches the haves, and leaves economic power in the hands of a few rather than in the hands of the many, where it must be for a democracy to function well. After all, a democracy functions best when each citizen has a stake in the nation's economic well-being and encounters an economic and tax system that fortifies the protection of that stake.

Oh, I'm very good, it seems, at trashing just about every tax that isn't a user fee. But there are two major types of taxes still to consider. One is the income tax. The other is the wealth tax.

Both the income tax and the wealth tax can be designed to provide controlling throttles for consumption and to place the burden of the cost of government on those whose ability to pay reflects the benefit that the nation's economy, as protected and nurtured by the government, has provided to those with ability to pay. The undesirable structure is one that combines a bit of one and a bit of the other.

Using a wealth tax to generate revenue is less attractive than using an income tax. Imposition of a tax on wealth poses the risk that the taxpayer would need to liquidate an investment at the wrong time in order to generate cash to pay the tax. Imposing the tax only at death poses cash flow problems for the Treasury. Imposing the tax annually raises a variety of valuation issues, probably dwarfing those that bedevil state and local governments that impose real property taxes.

Using an income tax makes sense if income is appropriately defined to reflect increases in wealth. Of course, one can measure increases in wealth by measuring wealth at the beginning and at the end of a period, and then comparing the two. That approach, however, poses the same problem as does the wealth measurement aspect of a wealth-based tax. However, increases in wealth can be measured indirectly, by tracking income and what I will call outgo. Of course, this sort of measurement does not account for valuation increases that arise from market changes, at least not until something is done that fixes that increase in value as something more than speculative. If an income tax base is measured by subtracting certain outgo from income, the income tax also can serve as a luxury consumption tax without the need to track consumption expenditures.

So, I'm back at an income tax, though I'd design it very differently. Again, without writing a Code, even though it would be shorter than what now exists, I will outline the main features of such a tax.

Income would include income, with very few exclusions. It ought not matter whether the income is from wages, employment benefits, pensions, annuities, life insurance, dividends, interest, rents, royalties, gains from the disposition of property, or other sources. Taxing dividends means, of course, that corporate income would be taxed twice. Does it make sense to impose a second level of tax simply because the business is conducted in the form of a C corporation and not a partnership, LLC, or S corporation? Perhaps, if one wants to laugh at those who didn't know any better, or dish out "serves 'em right" if there were tax-savings motivations for forming a C corporation that didn't pan out. Unless one imposes a flow-through regime on C corporations, corporate income that is not distributed would not be taxed unless there were a corporate-level tax. Just as important, dividends paid to tax-exempt persons and entities would escape taxation if there were no corporate-level tax. The second problem is more easily solved, namely, taxing tax-exempt persons and entities with respect to dividends paid from income earned by corporations within the jurisdictional reach of the United States government. The first problem is more challenging. Ultimately, so long as the other tax escape routes for corporate earnings are foreclosed, the undistributed income of the corporation will be taxed when the shareholder's stock is sold, redeemed, or canceled upon corporate liquidation. It's a timing problem. Perhaps the solution, a bit complicated, is to impose a corporate earnings tax on undistributed income, and to allow that tax as a credit when the sale, redemption, or liquidation generates income at a later time.

Surely the arguments that taxing interest income, or dividend income, or gains from the disposition of property would hurt the economy or is somehow unfair have been made and would be repeated in response to my approach. Considering that someone once put together the top 80 or so arguments in favor of special treatment for capital gains and the top 80 or so arguments against such special treatment, it would be inefficient to repeat those analyses. Suffice it to say that the only thing of which I have been persuaded is to index basis so that the gain from the disposition of property is real gain and not imaginary inflation reflections. And, of course, the disposition of property at death, by will or otherwise, would be a disposition subject to income tax.

Why include life insurance? Because it is income, at least to the extent it exceeds the amount paid for it. Won't this make life miserable for the "widows and orphans"? No. After taking into account the proposed deduction/credit for outgo required for poverty-level existence (or some multiple thereof), the poor orphans would not be taxed, but the ones hauling in tens of millions of dollars from "super life insurance trusts" would no longer get treated by the tax law as if they were "poor orphans" in need of an exclusion.

What of retirement plans? There is societal value in having a citizenry so financially well prepared for retirement that social security becomes totally or almost totally unnecessary. Rather than encouraging a proliferation of various plans in a complex maze of sometimes inconsistent provisions, the tax law should simply provide that up to $x of contributions to retirement are untaxed (excluded from gross income if done by the employer, deductible if done by the employee). Whether $x ought to reflect income, or, as I prefer, be set at an amount (adjusted for inflation) that will generate a "sufficient" retirement income can be debated. And, yes, retirement income would be taxed because it very well could exceed the "sufficient" level because of additional amounts set aside by taxpayers willing and able to do so.

What of gifts? The transfer of property would be treated as a realization event and thus the gain would be included in income. What of nonrecognition provisions? I'm not yet certain that I would retain more than just a few of them. They are invitations to abuse, to the structuring of transactions that would not otherwise be conducted, and in many instances far more generous than they need to be, offering protection from taxation in instances where the justified rationale does not apply.

As for outgo, there would be two basic deductions. One would be for the expense of producing the income. In other words, I reject gross receipts taxes, which are one of the most perfidious exactions imposed by state and local governments except in those instances where gross receipts is a proper measure of a user fee, but I've yet to see such a situation. The other would be a deduction (or perhaps a credit) that would reflect the wisdom of not imposing a tax on those whose incomes were barely sufficient to live life. Whether that amount should be equal to (or be a credit amount equivalent to the amount equal to) the poverty level or a greater percentage thereof is a detail that I've not yet fully pondered. Perhaps, because all citizens ought to contribute something to the cost of government, a small ($10) tax ought to be imposed on taxable incomes under the cutoff, and a very low rate imposed on taxable income above the cutoff but below, say 125% of the cutoff.

There would be no depreciation on real property. Business real property so rarely goes down in value over the long-term that those few instances where it does so would be taken into account when the property is sold for a loss. Depreciation on personalty used in generating income would be computed over five years. Period. Arbitrary? Yes. Simple? Yes. Sensible? Yes. Most equipment currently is depreciated over a period equal to or nearly equal to five years. Equipment that currently is depreciated over longer periods is heavy duty infrastructure, investment in which ought to be encouraged because it provides the goose that lays the income egg for the national economy.

Oh, wait, cry the charities. With no deduction for charitable contributions, people will give less to charity. Well, if that's true, it tells us a lot, doesn't it, about the American people. Of course, the allegation is not true. People give to charity because they are theologically driven, morally compelled, or just flat-out nice. Think of all the charitable contributions that are made by people who don't itemize deductions and get no tax benefit. If, in fact, the government needs to bribe people with tax deductions in order to get them to give to charity, perhaps we should just close up shop and go home. With this plan's reduction in tax rates, people may "feel" more generous and even increase giving.

Of course, no surprise, when it comes to rates, all taxable income is taxed under a rate schedule. There is no special rate for capital gains. That alone takes about 30 percent of the current tax law and trashes it. Also trashed are all the social policy provisions that ought to be in some other law, if indeed the citizens think that the federal government should be providing financial assistance to particular individuals or communities or to those who engage in particular activities. I understand that the Congress, which consistently criticizes the IRS, has a habit of demonstrating its true thoughts about that particular federal agency by putting into the tax law provisions that deal with matters that are within the purview of other federal agencies because the IRS appears to be more capable of administering these programs, but it's time for Congress to demand of the other agencies the same sort of competence that it attributes to the IRS when it turns to the IRS to handle its pet project of the week.

This approach permits lowering the tax rates. The base would be broadened, and thus rates could be reduced. I would not make the plan revenue neutral for the simple reason that doing so would perpetuate the current revenue shortfall built into the federal budget by the deficiencies of the current income tax law. Thus, the budget deficits that have arisen could be reduced, perhaps with a trigger that lowers the income tax rates when the deficit is eliminated. Even so, the rates would be so much lower that there would be much less incentive to play tax shelter games. When's the last time someone trying to work around a 5 or 10 percent state income tax made the news?

Finally, there is the matter of credits. Of course the credits for taxes withheld (and I'd withhold on all income payments exceeding $500, not just wages and certain other payments) and estimated tax payments would be retained. The "poverty level" deduction probably would end up as a credit, because the arguments for making it a credit rather than a deduction are very strong. Should that credit be refundable? Yes, and it could serve therefore as an expanded version of the current earned income tax credit, which ought not be as limited as it is (for under present law it has become an incentive for fraud, is difficult to administer, and baffles almost all the taxpayers it is designed to assist).

This is a fairly straight-forward plan. Granted, I've not jumped into a lot of issues that would need further discussion, such as international transactions. The point of this already-too-long essay is to give Nakul (and others) a big picture of how I would approach the tax reform question. It should be rather apparent that I'd come at this with a totally different perspective than did the Tax Reform Panel, even though it was operating under stated (but unfulfilled) objectives that are the same as those that energize my approach. And thus I reach a different result, one far more simple, imbued with far more fairness, and with at least as much a chance, if not more, to maintain a healthy economy.

However, like the Tax Reform Panel report, this short essay serves as a nice catalyst for conversation and discussion, but is otherwise worth little, if anything. Neither will get to, or through the Congress in any form, other than Congressional cherry-picking of revenue raisers in the Tax Reform Panel report. Both, if introduced in some legislative form, would attract every tax-seeking "I'm special" hornet intent on stinging it with its particular "my tax break cannot be touched" venom.

Remember, Nakul asked what I would do if I were President for a day.

He didn't ask what I would do if I were Emperor for a day.

Wednesday, November 02, 2005

If the Supremes Won't Sing for the Taxed Telecommuters, Will the Congress Dance? 

My posting about the Supreme Court’s refusal to hear the telecommuting income taxcase brought an excellent response from Jeff Jacobs, adjunct professor of law at Quinnipiac University's School of Business:
I agreed with your analysis last year of the New York Court of Appeal's decision allowing the state's taxation of telecommuter income. The case was incorrectly, and parochially, decided by a home-town judiciary against the "visiting team" (despite able representation from home-town counsel). And I agree with you that it is a further shame that the Supreme Court, whether because of "reduced caseload" or because of an inherent bias against taxation cases, declined to enter the fray.

But, even if the Supreme Court "got it right" in the case of Thomas Huckaby, would the matter be settled? Unlikely. You will recall that, even after the High Court decided in favor of Paul Davis and federal/military pensioners in 1993, the states refused to take corrective action in the area of nonresident pension taxation. We witnessed the painful deliberations affecting Henry Harper (Virginia), Charles Reich (Georgia), and countless other "victims" of state source taxation marching through their state judicial systems, patiently waiting for Supreme Court relief.

The only message that the states appear to heed is congressional preemption of their taxing authority. The practice of taxing nonresident pension income did not completely end until the enactment of the Pension Income Taxation Limits Act (P.L. 104-95) at the end of the 1995. In a similar vein, I do not believe that states will foresake taxing of telecommuter income without direct legislative intervention from Congress. After all, telecommuters share a common characteristic with nonresident pension recipients: neither group is eligible to vote in state legislative elections.

There is unlikely to be one Supreme Court justice from Tennessee "squaring off" against another justice from New York. But there are elected Senators and Representatives who do represent those constituencies and who do square off in legislative debates. From my perspective, there will continue to be "source" taxation of telecommuter income until Congress enacts the Telecommuter Tax Fairness Act (H.R. 2558/S. 1097) or a similar prohibition on current state practices.

I recall a text in law school (Charles E. McLure, Jr. and Walter Hellerstein, "Congressional Intervention in
State Taxation: A Normative Analysis of Three Proposals,"
) that concluded: "As the national economy became increasingly integrated, the U.S. Supreme Court found that diverse and complex state law can impose an unacceptable burden on interstate commerce, and it explicitly invited Congress to forge more comprehensive measures to alleviate such burdens than those it was capable of providing through case-by-case adjudication." I would submit that this situation cries out for a legislative, rather than judicial, solution.
I responded to Jeff: “Indeed, I am probably a wee bit too naive thinking that the Supreme Court's resolution of the matter (as you and I think it ought to be resolved) would bring the states into line. You've made a good practical point.”

Jeff shared his comment with Ed Zelinsky, who is on the faculty at Cardozo Law School, and who has had his own well-publicized disputes with the same New York taxing authorities who went after Mr. Huckaby. Ed commented:
Jeff-- I think your analysis of the need for legislation is well taken for another reason: At this point, I think it is highly unlikely that another telecommuting case will reach the Supreme Court anytime soon.
That seems to be the situation. So now the question is: What are the chances of Congress stepping up and dealing with yet another of its responsibilities?

A Dream (or Nightmare) of a Tax Chart 

Although I have been criticizing the Tax Reform Panel for its proposals, I will give credit where it is due. The Panel’s report does contain some very useful illustrations of current law. My favorite, which ought to be required reading not only for law students, tax practitioners, and citizens, but also for high school seniors, is a flow chart of the forms and schedules that link to the Form 1040. As an advocate of the principle that a picture is worth many words, this multi-page schematic is impressive. Take a look at Chapter Six of the report, on pages 146 and 147, Figure 6.11. Don’t do this at bedtime. You might end up dreaming about it. Or worse yet, wake up screaming from a nightmare.

So Whose Tax Ox Gets Gored by the Tax Reform Panel's Proposals? 

The Tax Reform Panel has formally issued its report, most of which had been informally released, leaked, or otherwise revealed during the past several weeks. Although there were some previously unannounced recommendations and some changes to ideas previously floated, the report cannot be characterized as a surprise.

The proposal is given very little chance of adoption. The San Francisco Chronicle headline, "Tax Plan Hasn’t a Prayer" says it all. Of greater concern is the risk that the Congress will pick and choose, enacting provisions that increase taxes on unfavored taxpayers while omitting the counter-balancing proposals, and adopting changes that decrease taxes on favored taxpayers while omitting other counter-balancing proposals. Think of Congress as engineers remodeling a vehicle by increasing the engine size while removing the brake system.

Reactions to the specifics of the report are quickly filling up print and on-line publication space. Paul Caron has prepared a nice list of links to commentary from various think tanks. He also has reproduced the report so that it is easier and faster to download. Thanks, Paul.

Today is not a day when I will pick apart the report. Having already reacted to much of what had already been made public, I want to share some interesting information in the report that confirms a conclusion I shared a few days ago. In discussing the proposal to reduce the mortgage interest deduction and convert it into a credit, I stated: It's also important to understand that the proposal is not an elimination of the mortgage interests subsidy but a curtailment that affects the upper middle class more than it affects the wealthy.” In the Tax Reform Panel’s report there are several charts that illustrate the impact of its plan.

In Chapter Six of the report, on page 139, in Figure 6.9, the Panel shows this information, using 2006 income levels:

* Taxpayers with income under $30,000: 41.6% would have a decreased tax liability under the proposal, and 15.2% would have an increase.

* Taxpayers with income from $30,000 to $75,000: 58.8% would have a decreased tax liability under the proposal, and 35.9% would have an increase.

* Taxpayers with income from $75,000 to $200,000: 68.2% would have a decreased tax liability under the proposal, and 31.1% would have an increase.

* Taxpayers with income of $200,000 and over: 68.52% would have a decreased tax liability under the proposal, and 31.4% would have an increase.

So which group of taxpayers has the highest portion facing increased tax liabilities? The group with income between $30,000 and $75,000.

A similar chart, on page 140 of the Report, in Figure 6.10, shows the same analysis with respect to the law in 2015, as proposed, and as applied to 2006 income estimates. Under this analysis, the group with the highest portion facing increased tax liabilities is the $200,000 and over group, followed not by the $75,000 to $200,000 group but by the $30,000 to $75,000 group.

Do these outcomes make sense? Only if this group has too much of an “advantage”under current tax law that somehow, following the Tax Reform Panel’s thinking, “needs to be removed.” I wonder what this chart would look like if true reform were pursued. For example, what happens if the reduced capital gains tax rate was eliminated, and income was taxed at the same rate regardless of its character?

There is no question that the Tax Reform Panel wants to move the nation to a tax on wages. Can anyone suggest who would prefer that sort of tax system?

[Edit as of Nov 18, 2005: Gee, no one mentioned the typo in the headline, where I left out an l and referred to the Tax Reform Pane instead of the Tax Reform Panel. Hmmm. Perhaps everyone thought it was a clever pun. No lies. No, it wasn't. Only after I saw the typo today did I see the pun. Not intended, and the headline has been fixed.]

A Tax Nightmare or Rip Van Winkled? 

No, I did NOT dream about taxes last night. But although Halloween may be two days behind us, when I opened this morning’s Philadelphia Inquirer business section, I thought I had fallen into a tax nightmare, or perhaps had pulled a Rip Van Winkle.

The inner page headline: “Interest Deduction Revised” WHAT? They changed the tax law? They revised the deduction? I'm in the middle of teaching the interest deduction ... started yesterday, will finish it in tomorrow's class. WHOA! Then I read the story. WHEW!

I suppose it was a matter of headline space constraints. What is meant is that the Interest Deduction REDUCTION PROPOSAL was Revised.

Words. Talk may be cheap, but words can be valuable. Especially the ones that are missing.

More thoughts on the Tax Reform Panel’s report later. There’s lots to absorb.

Tuesday, November 01, 2005

Do You Dream of Taxes? 

Yesterday, a student emailed me a question about section 267. The student offered an apology in the event the answer was clear from the statutory language, noting that he did not have his Code with him because, "[b]elieve it or not I actually dreamt of this hypo."

It was a good question, and I answered it as best I could. I then shared it with the tax law professorate, one of whom noted, after agreeing with the analysis, that "The real
question, though, is whether it is good or bad to be dreaming tax hypos."

I repsonded that "When our students begin dreaming in tax, we have done our jobs well." If we can get our students to dream tax, "[i]t could revolutionize romance, poetry, and song."

So consider how we want out tax law students to think, as I share here evidence of why I did not major in English Literature and am no threat to be Poet Laureate of any country:

Oh dear Code how sweet thou art
Your tax rules rest near my heart
At night tax hypos fill my dreams
Cites come dancing by in streams

Oh that lovely Treas'ry reg
For its logic I do beg
Rulings, rev procs, cases too
Tax has become my life's glue

Aren't I glad I took that class
I want more than just to pass
Let me make this my life's work
Starting as a Tax Court clerk

Then to practice in a firm
Only for a time short term
Lastly law school where I'll teach
To my students one dream each

When my life on earth dost cease
And my tax dreams I release
I'll speak this with my last breath
To the end, taxes and death.

OK, someone write the music, and we've got the theme for the next highly rated reality competition television show, "Can You Tax THAT?" Hosted by guest tax law professors, and evaluated by a panel of celebrity judges who are eligible to serve if they have been the subject of an IRS audit or Tax Court litigation.

Oh, by the way, I don't dream of taxes. Nor are they the central focus of my life. If they were, do you think I'd be smiling in that picture at the top left of the page?

Supreme Court Refuses to Resolve Interstate Tax Dispute 

Back in January I shared my analysis of a case involving New York's insistence on taxing a Tennessee resident, a fellow named Huckaby, who is not a New York resident, on the income he earns in Tennessee doing computer work for a New York organization. He lost at the trial court level. He appealed, but by a 4-3 vote the New York Court of Appeals rejected the taxpayer's appeal. The taxpayer followed through on a promise to take the case to the Supreme Court. Yesterday, the Supreme Court declined to hear the case.

In my commentary on the New York Court of Appeals decision in the matter, I said, "I hope they [the taxpayer and the taxpayer's attorney] decide to do that [appeal to the Supreme Court], and I hope the Supreme Court gets it right." Well, the Supreme Court won't get it right. Or wrong. It dodged the issue.

The Court's decision is all the more puzzling because several months after prevailing in Huckaby, New York was rebuffed in a similar case. Clearly there are competing views of the Constitutional issues involved. Considering the impact of a state the size of New York, the likelihood that higher energy costs and public transit strikes will increase the number of telecommuters, and the public inefficiencies of having unsettled issues of interstate taxation percolating beneath the tax planning and compliance surface, it is disappointing that the Supreme Court has chosen to include this case in the long list of cases shunned in interest of a reduced workload. It is no less disappointing that the Supreme Court has shunned an important tax case. Sure, tax cases are challenging, and occasionally boring, but duty is duty. So what that tax cases aren't popular with members of the Supreme Court? As TaxProfBlog phenom Paul Caron wrote a few years ago, and here he quotes himself: "The view that tax law is less interesting or important than other areas of law pervades even the Supreme Court....[W]hen asked why he sings along with the Chief Justice at the Court's annual Christmas party, Justice Souter replied, 'I have to. Otherwise I get all the tax cases.'" Surely the Justices have time for another song.

So, perhaps the answer to another of today's hot news stories is lurking in this one. Perhaps the President should nominate a tax expert to the Supreme Court. Just like a balanced law firm, there ought to be someone on the Court who can competently and enthusiastically take on tax issues worthy of national importance. And wouldn't it be fun to watch the pundits analyze the nominee's tax writings?

All joking aside, the nation and its taxpayers have been deprived of a resolution by the only Court with no interest in the issue. Isn't it an interesting feature of the political construct and judicial jurisdiction that the decision on New York's "right" to tax a Tennessee resident has been made by New York, not Tennessee, courts? Isn't this sort of inter-state competition for tax revenues one of the reasons that a Supreme Court exists?

It would be nice if someone questioned the nominee, whoever that may be by the time hearings are held, on his or her views about taxation and the role of the Supreme Court in interstate tax issues. Surely, when it comes to matters of government revenue, there will be Senators with at least some interest in the matter. Maybe one from Tennessee, and one or two from New York. They've had a lot to say recently about Supreme Court nominations. I wonder if they're aware of this particular difference between their two states.

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