Friday, February 28, 2020
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.
Wednesday, February 26, 2020
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.
Monday, February 24, 2020
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.
Friday, February 21, 2020
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.
Wednesday, February 19, 2020
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.
Monday, February 17, 2020
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.
Friday, February 14, 2020
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.”
Wednesday, February 12, 2020
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.
Monday, February 10, 2020
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.
Friday, February 07, 2020
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.
Wednesday, February 05, 2020
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.
Monday, February 03, 2020
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.
Friday, January 31, 2020
One of the reasons that the soda tax hasn’t been popping up in this blog for the past 12 months is that there has been much less activity and fewer attempts at enacting soda taxes across the nation. One reason, perhaps the principal reason, for this pause is explained in a Philadelphia Inquirer article from a few days ago. According to the article, the prediction that many localities would follow the soda tax legislation enacted in Philadelphia has not come to fruition because the soda industry expanded its fight against the tax from Philadelphia and other local jurisdictions to state legislatures. Despite public health officials predicting that dozens, if not hundreds, of cities and towns would enact soda taxes or some variant of soda taxes, only seven cities have one in place. It has been two years since a city has enacted a soda tax.
What the beverage industry has been doing is to lobby state legislatures to enact legislation prohibiting local governments from enacting soda taxes, and in some instances, other taxes as well. There are a variety of reasons state legislatures are easily persuaded to prohibit local governments from adding new taxes. State legislatures find it convenient to hold taxing power, because it provides leverage with respect to other issues. State legislatures can be cognizant of the “border crossing” issue, as exemplified by the number of Philadelphia residents taking their beverage, and even grocery shopping, across the city’s boundaries into adjacent suburban towns.
Though Philadelphia was not the first city to enact a soda tax – Berkeley, California was – its legislation and experience became a model for subsequent enactments and Philadelphia became the focal point of the dispute between soda tax advocates and the beverage industry. Though six other cities have a soda tax – Seattle, Boulder, Colorado, San Francisco, Oakland, Berkeley, and Albany, California – attempts to enact a soda tax in Santa Fe, New Mexico, was voted own, and Cook County repealed the one it had enacted. Seven proposals pending elsewhere have not been enacted.
Philadelphia’s mayor Jim Kenney, the leading advocate of soda taxes in Philadelphia, reacted to the hiatus in soda tax enactments by expressing this thought: “It’s a shame, because that money could be going to really good purposes in many communities.” It’s interesting that his focus was on the revenue, and not on the alleged public health benefits. Throughout my commentaries, I have stressed that the soda tax was motivated more by the quick and simple increase in revenue that it presents rather than a true concern for public health, because a genuine public health motivation would extend the tax to all sugar-containing foods and beverages, and would not reach, as some of these taxes do, beverages that do not contain sugar.
Opponents of Philadelphia’s soda tax want its repeal, though some seem willing to accept a modification. The biggest complaints are the high rate of the tax and the application of the tax to beverages that are far from unhealthy. The solution, of course, is what I have been proposing all along, that is, to expand the tax to include all items containing sugar and to lower the rate. Properly drafted, the revenue would be unaffected but the rate would be reduced to a level sufficiently low that it would not have the negative collateral effects that the current tax generates.
The so-called “war,” as the article describes the political jockeying, will continue, both in Philadelphia and across the nation. It will end only when the two sides find a way to meet in the middle, as I propose. Unfortunately, the likelihood of that happening is low, because at the moment whatever issue is being considered across the nation, the two sides line up in such a way as to make the middle a dangerous, and thus unattractive, place. Until the zealots on both sides find a way to understand the long-term disadvantages of zealous partisanship, not just on taxes or soda taxes or any issue, “war” and its adverse consequences will continue to thwart human progress.
Wednesday, January 29, 2020
The writer of the letter, Graham Downie of O’Connor, suggests that the solution is to impose a tax on tyres based on a sliding scale reflecting tyre sizes. His rationale is that the larger the tyres and the more the number of tyres, the more damage the vehicle does to the road. I completely disagree. For example, there are a variety of vehicles that use four tires but that weigh anywhere from 1,000 pounds to 10,000 pounds. The difference in tire size, if any, is small. The size and number of tires provides insufficient information. For example, weight is a better indicator of stress put on transportation infrastructure by a vehicle.
Mr. Downie suggests that a tyre tax would “avoid the infrastructure required to collect a tax retrospectively, based on odometer readings, as suggested by Infrastructure Partnerships Australia.” He adds that “It would also avoid the possibility, indeed likelihood, of odometer tampering to avoid the tax.” Though odometer tampering has become increasingly difficult over the years because of new technology, and increases in the criminal penalties for engaging in odometer tampering, the device used in mileage-based road fee programs does not rely on the odometer, and it also identifies the type of road used by the vehicle, something that neither tires nor odometers can do.
Mr. Downie points out that in Australia, a tyre tax would need to be imposed by the Federal government, because otherwise states and territories could and would set varying amounts of tax, tempting vehicle owners to make cross-border purchases. Each state or territory has different policies with respect to highway development, maintenance, and repair, and faces different levels of burden depending on climate, population, and other factors. Thus, each state or territory justifiably would set different tyre tax rates. One advantage of the mileage-based road fee system is that the charge not only can be set to reflect a vehicle’s weight but also the number of miles driven in each state or territory. This issue is not unique to Australia, because its state-Federal structure is not unlike the one in the United States.
I agree with Mr. Downie that whatever system replaces the liquid fuel taxes must take into account the damage caused by vehicles, and thus should adjust for weight. I simply disagree that tyres are a reasonable proxy for that measure. I also agree with Mr. Downie that whatever system is adopted should encourage greater use of railroads for the shipment of heavy goods.
Readers of MauledAgain know that I am a strong supporter of the mileage-based road fee. Anyone interested in my commentaries, in which I have explained, defended, and advocated the mileage-based road fee can take a look at 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, and Getting to the Mileage-Based Road Fee in Tiny Steps.
Monday, January 27, 2020
In my commentary, I pointed out that the amount of real property tax treated as paid on account of the services would be treated as wages subject to income taxation. I noted that unless the state changed its tax laws, those taking advantage of these arrangements would incur higher state income taxes. I also noted that federal income taxes would increase for these individuals.
Recently, reader Morris pointed me in the direction of a report from the Daily News of Newburyport. According to the report, nine senior citizens who worked for the town of West Newbury in Massachusetts “were surprised to learn they would have to pay federal withholding taxes on their earnings.” Although the Massachusetts Department of Revenue concluded that the amount of the property tax treated as paid on account of the work would not be treated as income or wages for state income tax purposes, the amount is treated as wage income for federal income tax purposes and for social security tax purposes.
The town, unfortunately, had not been withholding any tax on the amounts in question until this past June, when several township officials learned at a seminar that withholding of federal income tax and social security tax was required. They did not tell those participating in the work-to-reduce-property-tax arrangement that the town would begin withholding the taxes.
Clearly, in the absence of legislation to the contrary, as enacted, for example, by Massachusetts, the amount of taxes deemed paid on account of the work constitutes gross income. The logic is simple. The locality is, in effect, paying wages to the individuals participating in the arrangement, and then the individuals are paying their real property tax. The fact that the money goes directly from one town account to another and doesn’t pass through the hands of the individuals is irrelevant. Over the decades, there have been cases involving employers paying debts of employees directly to the creditors, and the courts have consistently held that the amount in question constitutes wages included in gross income even though the money goes directly from the employer to the creditor and does not pass through the hands of the employee. The best example is the withholding of taxes by an employer, paid directly by the employer to the taxing authority on behalf of the employee. The employee’s taxable wages are not reduced by the amount of the withheld taxes.
These principles are addressed early in a basic federal income tax course. The outcome in West Newbury is not a surprise to tax professionals or students who are or have been enrolled in a basic tax course. Understandably, when these principles were applied to the individuals participating I the work-to-reduce-property-tax arrangement without advance notice, it must have been quite a surprise.