Health care reform and our tax law

Health Care Reform Needs to Reach the Buried Treasure

Much of the current health care debate is about how to provide coverage to everyone. Current reform proposals would cost about $100 billion annually and will drive up deficits for years. Meanwhile, buried in our tax system are billions of dollars of health care benefits that go to a select group. Why is there no reform plan with a smaller price tag that doles out more equitably the federal dollars going to this select group?

The select group? Employees with employer-provided health insurance. Despite the fact that employers can deduct their costs of providing that insurance, the employees are not required to report it as income.

For example, if Jane's employer pays $10,000 for her health insurance, Jane does not have to treat that benefit as income. If Jane is in a 35% tax bracket, the benefit to her is a $3,500 lower tax bill. But really, Jane is even further ahead because she did not have to write a check for the $10,000 of insurance coverage. Asking Jane to pay tax on even half of the insurance benefit she gets is still a great deal for her (she'd get $10,000 of coverage at a cost of $1,750).

At about $117 billion per year, this special rule is one of the most expensive tax breaks in the federal tax system. This special rule benefits only the 60% of individuals with employer-provided health care coverage. Because this benefit is part of the tax law, it's cost is buried. You won't see any federal agency with an expenditure of $117 billion for issuing payments to individuals to subsidize their health insurance premiums.

Reducing this tax break would free up funds that could be used to provide a government benefit to everyone. Change would also make the system more fair by treating employees with employer-provided insurance similarly to individuals who must purchase their own insurance. For example, the health care benefit could be included in wage income with a capped deduction or tax credit for health insurance available to all individuals whether they buy the insurance on their own or get it from their employer.

The current reform plans are too expensive and it is wrong to ignore the buried treasure that could be dug up and used to reduce the cost as well as to spread federal health care dollars more equitably.

Changing nature of work and technology

I've written about this a few times before* and hope to someday (soon) complete a more thorough analysis of economic, social, technological and environmental trends and how they illustrate where our tax laws are out of date and how we might change them to make the most of current technologies and ways of doing business.

I saw a short video today released by the AICPA to recruit young people to become CPAs, that highlights some of these trends, such as that young people entering the workforce today will want to work from outside of the office. After all, why be tied to an office from 8 - 5 (although I recall it was 8 am to 2 am most of my days in public accounting - a long time ago) if you can reach clients and conduct research from anywhere? Even client and employee recruitment will continue to change.

Some of the tax questions this raises is the reality that we will have a more mobile workforce and location will really matter less in a firm's ability to generate revenue. People will expect to be able to communicate with their advisers and tax agencies just as they might on a social network.

The video can be found here. Here is more of the AICPA "Start Here, Go Places" recruitment campaign.

What do you think - (1) of the direction the tax law needs to move to be in the 21st century - and (2) of the video?

* Some prior posts and writings on trends and tax reform:

• 6/16/08
• "Strive for a Sound and Respected Tax System" (9/09)

More on the BNRT and its place in tax reform discussions

I haven't heard much discussion lately about the business net receipts tax (BNRT) proposal offered by the California Commission on the 21st Century Economy. I don't think that means it is over - perhaps there are some legislators and their staff taking a closer look. I think it is possible that other states might be taking a closer look. While I am doubtful that any state will enact such a tax as proposed, I think it is a useful discussion item in that it is better than a gross receipts tax and a possible substitute for a sales tax (although the CA proposal kept the local and selective sales taxes so was not a full substitute for it).

I've got a short piece on looking at this tax as part of any state business tax reform discussion - AICPA Corporate Taxation Insider article of 10/29/09 - Looking for a Better State Business Tax.

Michigan Again Considering Sales Tax on Services

In 2007, Michigan enacted law to apply its sales tax to selected services. However, the law was repealed on the day it went into effect. Legislators created an business tax to replace the expected revenues. For more information on that, see my 12/8/07 post.

In October 2009, legislation was introduced to repeal the MBT surcharge and apply the sales tax to services. [HB 5527, HB 5528 and HB 5529]

This is an interesting development. I'm doubtful that these bills will be enacted although there is likely high interest in repealing the MBT surcharge due to some confusion and complexity with it.

As I've noted in this blog and reports, it makes sense to have the sales tax apply not only to tangible goods we consume but also to services, intangibles (such as digital downloads), entertainment and services. The sales tax should not apply to purchases by businesses in order to avoid pyramiding. Click here for links to my reports on these topics.

The proposals are also interesting given the recent proposals by the CA Commission on the 21st Century Economy (here). They proposed to replace the corporate income tax and the state level sales tax with a business net receipts tax that is somewhat similar to Michigan's MBT.

What do you think? Should Michigan replace the MBT surcharge with a sales tax on services?

Regulating Tax Return Preparers

The complexity of federal and state income taxes causes the majority of individuals to either hire a preparer or use tax prep software. Unfortunately, some paid preparers do not have a strong enough understanding of the tax law or they intentionally make mistakes that lower their client's tax bill. For a few years, the National Taxpayer Advocate and others have been calling for regulation of preparers in order to perhaps mandate a minimum educational preparation, mandatory annual continuing education and perhaps some type of registration, likely with a fee that could help fund the regulation program.

A few government agencies have conducted undercover reviews of some preparation office and found some egregious stuff. For example, here is an excerpt from a 2006 GAO study where 19 tax prep offices were visited for return preparation:

"In our site visits, paid preparers often prepared returns that were incorrect, with tax consequences that were sometimes significant. Their work resulted in unwarranted extra refunds of up to almost $2,000 in 5 instances, while in 2 cases they cost the taxpayer over $1,500. Some of the most serious problems involved preparers
• not reporting side income in 10 of 19 cases;
• not asking about where a child lived or ignoring our answer to the question and claiming an ineligible child for the EIC in 5 out of the 10 applicable cases;
• failing to take the most advantageous postsecondary education tax benefit in 3 out of the 9 applicable cases; and
• failing to itemize deductions at all or failing to claim all available deductions in 7 out of the 9 applicable cases. "

Here is another report from 2008 from the Treasury Inspector General (TIGTA) - here.

The IRS has held three public forums on regulation of preparers and expects to issue guidance by the end of the year. I have a short article on this topic - here.

Part of the problem is complexity. I think some preparers with little education on the tax law might not really even know just how complicated many rules are. Also, some rely on IRS publications for guidance and while they are useful to a layperson, they are not intended to provide enough detail to correctly file a return. Preparers should be expected to know how to look up information and have some type of tool, such as RIA Checkpoint, to have access to primary authority they'll likely need to know how to correctly file returns.

It will be interesting to see how stringent the upcoming IRS regulation rules are. What do you think?

AICPA Revised Tax Reform Report - 10/09

The AICPA Tax Division has updated its 2005 report on tax reform and issued and sent to President Obama's Tax Study Task Force - Tax Reform Alternatives for the 21st Century. Well, what a great title!

This is a very good report that aims to explain the problems with our existing federal tax system, how to analyze proposals, income versus consumption taxes, types of reforms (both income and consumption tax proposals), a checklist for evaluating proposals and a bibliography (which I was pleased to find out also includes my 21st Century Taxation and tax reform webpages).

The report has a lot of content from the 2005 report which makes sense because not much has changed in terms of the reasons for reform and how various types of consumption taxes work. Additional reasons for reform are noted such as the Baby Boom generation and growing federal deficits.

I highly recommend the report for anyone who wants to get a solid foundation for understanding reasons for reform and the variety of proposals that have been floated for the past several decades.

Sunday Commentary on Commission Proposals

There were several editorials and op eds on the recommendations in the final report of the California Commission on the 21st Century Economy in Sunday papers (10/11/09). I had one in The Press-Enterprise ("Sane Taxation?").

Here are some links and summaries:

• Sacramento Bee - Daniel Weintraub - "Panel's tax overhaul plan sparks fierce debate in state"
• Sacramento Bee - "Proposed tax would penalize, not help, our small business, customers"- concerns with the Business Net Receipts Tax (BNRT) by owners of a small business. (The final report recommends a small business filing threshold of $500,000 of gross receipts. It also notes that net receipts of $250K or less "would effectively be exempted from the BNRT base through a credit mechanism.")
• Sacramento Bee - "2 commission members tout plan's promise" by John Cogan and Chris Edley, Jr. who apparently worked on the BNRT proposal
• Sacramento Bee - "Revenue spikes, not tax structure, are to blame" by commission member Bill Hauck (who did not endorse the final report)
• North County Times - "Tax reform merits study, but isn't a panacea"

I may have missed a few for Sunday October 11. There were a good number of editorials and op eds published between the Commission's final meeting and the days immediately following the release of its report. Here are a few:

• Los Angeles Times - "A flat-wrong flatter-tax plan" (9/21/09)
• San Francisco Chronicle - "A blueprint that avoids the toughest choices" (9/27/09)
• Los Angeles Times - "California tax reform plan much too bold for Capitol" (10/1/09)
• San Jose Mercury News - "New tax plan is far from ready for prime time" (10/3/09)
• Los Angeles Times - "State tax reform panel blew its opportunity" (10/5/09)

Most of the opinions are not favorable although a few positive comments may have been noted (I noted a few in my 10/11 op ed, such as that taxes with broader bases and lower rates tend to work better).

What do you think? Should the proposals of the final report be enacted? If not, what should happen?