Proposal for a Net Receipts Tax for California Businesses - A Good Move?

The California Commission on the 21st Century Economy created by Governor Schwarzenegger and the state legislature is wrapping up its work. It is looking at some bold proposals that would make significant changes in the state's tax structure. One intriguing proposal is to create a subtraction method VAT called a "net receipts tax" for California businesses that would replace some existing taxes.

Here are a few observations I've got on this particular proposal. I hope you'll leave comments on what you think of the proposal and my observations.

The California Commission on the 21st Century Economy is looking at a variety of tax changes for CA. Tax Package 1 includes modifications to the personal income tax, elimination of the corporate income tax and state general fund sales tax, and addition of a business net receipts tax (NRT).

Is the NRT a sales tax?

No, although it has some similarities and differences.

It is similar because it is a subtraction method VAT. Theoretically, a VAT will raise the same amount as a sales tax but will be collected in a different manner. [Click here for background information on consumption taxes and VATs.]

Because the NRT applies to firms selling services, intangibles and tangible personal property, it has a broader reach than the CA sales tax which today only applies to a subset of tangible personal property (for example, food is exempt).

Application of nexus, and unitary and apportionment rules will cause the NRT to have some different effects than the existing California sales tax.

Nexus: The Commission's NRT proposal calls for a factor presence nexus standard (per R&T §23101(b), this will be the standard in CA after 2010 if Public Law 86-272 does not apply to the business). In contrast, the nexus standard for sales tax is a physical presence. (For income tax nexus for businesses that sell tangible personal property, the standard is that of Public Law 86-272.)

Example: AB Corporation has sales of $7,000,000 to CA customers, but has no physical presence in California. AB would be liable for the CA NRT, but today it is not liable to collect CA sales tax on sales to CA customers (the customers are required though to self-report use tax on these purchases).

Example: CD Corporation has $30,000 of property in CA which represents less than 25% of its total property. CD has no employees in CA and its sales in CA are less than $500,000 and 25% of its total sales. CD is liable to collect sales tax in CA (or it could voluntarily chose to collect sales tax) but would not be required to pay NRT. [Note: The AB example would be far more common than the CD example.]

Unitary and apportionment: If a unitary business only has sales and operations in California, the NRT base will be similar to the sales tax base. However, many businesses have operations and sales in more than one state. For a business with sales within and without CA, they would be subject to apportionment to determine their CA NRT base. The Commission's NRT proposal would apportion using only a sales factor. The numerator of the sales factor would be gross receipts in CA (presumably sales where the destination was CA) and the denominator would be gross receipts everywhere.

If the NRT were instead a gross receipts tax (GRT), unitary reporting and apportionment should not be needed because it would be fairly easy to determine the sales with a destination in CA and the broadened nexus standard would make most businesses with CA customers subject to tax in CA. However, because there are deductions from gross receipts for the NRT, there is a need to determine what expenses are attributable to CA versus other states. Generally, a separate accounting method will not work because of the challenges of allocating many types of expenses among operations in multiple states. Thus, the question becomes, what is the best approach for determining how much of the combined group's NRT base represents sales in CA. The Commission proposes to use just a sales factor (percent of sales everywhere that are CA sales). That seems like a logical approach because if payroll and/or property were factored in, it would likely be distortive because the location of sales is not solely dependent on where a firm's property and payroll are located.

However, it really only seems logical if one is trying to equate the NRT to a sales tax. The NRT, designed as a subtraction method VAT, is supposed to be taxing value added by a firm. The value a firm adds to the inputs it buys from other firms, is primarily labor. So, why isn't payroll factored into the formula to determine how much value a firm added in CA? The reason is that the NRT creators are trying to tie the NRT to be a sales and use tax substitute.

Example: X Corporation has operations in CA and 3 other states. X computes its total net receipts tax base and multiplies it by a fraction where the numerator is its sales to CA and the denominator is sales everywhere. The result is X's CA NRT base. The NRT should be the same whether X has most of its labor in CA or a different state.

The NRT will apply to almost all types of businesses (some financial services firms and insurance companies are excluded) while today's CA sales tax only applies to a subset of tangible personal property.

A sales tax is a very visible tax because it is added to a customer's bill at the time of sale. A NRT would not be included on a customer's bill, although some portion of it would likely be included in the price charged. If a credit method VAT were used instead, it would be noted on invoices.

Is the NRT an income tax?

No. The NRT is a consumption tax. While the formula for a subtraction method VAT looks like an income tax (except there is no deduction for labor costs, depreciation or interest expense, and fixed assets are expensed), it is not an income tax because it is not based on net income and it exempts savings from tax.

Because it is not an income tax, businesses selling tangible personal property do not get the nexus protections (clarifications) of PL 86-272. The nexus standard for the NRT must meet constitutional requirements (of the due process and commerce clauses), which might be an economic presence (making a market in the state). Thus, more businesses will be subject to the CA NRT than are subject to the California corporate or personal income tax.

Some questions and observations about the proposed NRT and its formula:

Instead of expensing assets when acquired, an accelerated depreciation system is used in the Commission proposal. This is contrary to a consumption tax. If this adjustment is made due to the desire to raise a certain amount of revenue, it would be better to raise the tax rate rather than make the NRT a combination of an income and consumption tax.

The Commission calls for the Finnigan rule to be used to source sales of the combined/unitary group. This likely has little impact given that the nexus standard is broadened for the NRT making it more likely that any firm with sales in CA will have nexus in the state and its sales would go into the CA sales factor numerator anyway. However, the Finnigan throwback approach should reduce the throwback sales that are included in the CA sales factor numerator making that a more attractive approach than the Joyce rule.

Will any credits be usable against the NRT?

What happens to NOL and credit carryovers that corporations have from the corporate income tax?

With a single sales factor apportionment (after 2010) and various tax credits, such as for research, today's CA corporate income tax has significant economic development elements to it. The current system should encourage businesses to locate payroll and property in CA and sell to people outside of the state. Without the credits, it is not clear if CA would be a desirable place to locate unless you have lots of sales outside of CA and CA's NRT is lower than what the business would pay in other states. If the NRT is enacted along with repeal of both the corporate income tax and the general sales tax, CA should become more attractive to capital intensive firms such as manufacturers (although many states already exempt manufacturing equipment from sales tax). The state might not be as attractive for labor intensive firms who already pay little sales tax, but have significant labor costs which do not reduce the NRT base. However, the labor intensive firm would gain little from moving its labor force outside of the state because, having CA sales, it would still be subject to the NRT. Also, because payroll is not used to apportion the combined/unitary NRT base, there should be no change in its CA NRT.

Could the NRT be viewed as a sales tax rather than a business tax? If yes, then a physical presence nexus standard would apply. Also, the tax might not be applicable to food under the CA constitution. When Ohio enacted its gross receipts tax (called a Commercial Activity Tax) a few years ago, food vendors were successful at the trial court level in holding that the tax was really a transaction tax which under Ohio law cannot be imposed on food (see Tax Notes article on this). California's constitutional restriction is narrow prohibiting only a sales and use tax: Article XIII, Section 34 of the California Constitution reads: “Neither the State of California nor any of its political subdivisions shall levy or collect a sales or use tax on the sale of, or the storage, use or other consumption in this State of food products for human consumption except as provided by statute as of the effective date of this section.” Could the NRT be viewed as a sales tax?

The NRT is similar to the Michigan Single Business Tax (SBT) that it had for many years, but recently replaced with a different tax. Why did Michigan abandon its SBT and what lessons can we learn from that state's experience? [For some background on this – see the Michigan tax agency website, a 2003 Michigan report on the SBT and a 2007 Tax Foundation report.]

It would be interesting for firms to calculate their CA tax liability under the NRT to get a sense of how the NRT would change tax liabilities for CA firms.

What might businesses do to reduce their NRT liability?

• Increase sales to other states and countries.
• Hire contractors rather than employees so they get to deduct those labor costs (wages and payroll taxes do not reduce the NRT base).

Additional information:

• Presentation to the Commission by Robert Cline of Ernst & Young (6/16/09)
• Franchise Tax Board Analysis

What do you think (about the proposals and the accuracy and completeness of my observations)?

Cell Phones and Our Outdated Tax Law

In 1989, cell phones were not in common usage, were unlikely to fit in your pocket and were expensive to purchase and use. Today, they are quite cheap and commonplace - even kids often have their own cell phone. In 1989, Congress made cell phones "listed property" due to concerns over personal use and too favorable of tax deductions. Despite the tremendous changes in cost and usage, they remain listed property. This is another area of the law that needs to be brought into the 21st century.

As listed property, extensive records (such as for every call made) must be maintained in order to get any business deduction for a cell phone used by an employee. Some taxpayers, including UCLA, have been hit is significant tax bills for not following this outdated law. The IRS has proposed simplification options for which they are seeking public comment. Now, that is a waste of time! The IRS has plenty of things to do - why should they be taking time to draft rules to simplify a statutory provision that should no longer be in the statute?

It is past time for Congress to fix the law so that cell phones are no longer listed property.

I have a short article from the AICPA Tax Insider with more details - please take a look - here.

Collecting Use Tax Is Not A Tax Increase

A few states, including California, have tried to or have, enacted a copy of what New York enacted in April 2008 to try to get non-present vendors (such as Amazon) to collect sales tax because the state's citizens are not very compliant about paying their use tax when they buy goods online from non-present (remote) vendors.

On July 1, Governor Schwarzenegger vetoed SBX3 17 (click here and search for this bill). Among a few other things, this bill would modify R&T Section 6203 on "retailer engaged in business in this state" to include:

"Any retailer entering into an agreement or agreements under which a person or persons in this state, for a commission or other consideration, directly or indirectly refers potential purchasers of tangible personal property to the retailer, whether by a link or an Internet Web site or otherwise, provided that the total cumulative sales price from all of the retailer's sales of tangible personal property to purchasers in this state that are referred pursuant to all of those agreements with a person or persons in this state, within the preceding 12 months, is in excess of ten thousand dollars ($10,000).
(B) This paragraph shall not apply if the retailer can demonstrate that the person in this state with whom the retailer has an agreement did not engage in referrals in the state on behalf of the retailer that would satisfy the requirements of the commerce clause of the United States Constitution.
(C) An agreement under which a retailer purchases advertisements from a person or persons in this state, to be delivered on television, radio, in print, on the Internet, or by any other medium,is not an agreement described in subparagraph (A), unless the advertisement revenue paid to the person or persons in this state consists of commissions or other consideration that is based upon sales of tangible personal property."

For more information on this type of law - please see my prior posts: 8/8/08, 2/10/09, 4/22/09.

In vetoing this bill on 7/1/09, Governor Schwarzenegger stated:

"Following Overstock.com’s announcement that it will pull its affiliate advertising from California due to the legislature’s proposal to increase taxes and the announcements of other companies such as Amazon.com threatening to follow suit, Governor Schwarzenegger today reiterated his deep commitment to not raising taxes to solve our state’s budget deficit and announced Overstock.com will reinstate California-based internet affiliate advertisers:

“After passing the largest tax increase in California history, it makes absolutely no sense to go back to the taxpayers to solve the current shortfall - that’s why yesterday I vetoed the majority vote tax increase passed by the legislature. With unemployment at an all time high, we should be doing everything we can to - keep jobs and create jobs - in California. That is why my Administration immediately contacted Overstock.com when we learned of this news and, I am pleased to announce Overstock.com has reversed its decision and will continue to do business with affiliates here in California. I will continue to fight to keep jobs and businesses in California.”

California lawmakers proposed a tax on affiliate advertising and sent legislation to the Governor, but as promised he vetoed it because we cannot solve our budget deficit by raising taxes and driving businesses out of the state.
Overstock.com estimates its internet affiliate advertisers in California create millions of dollars in revenue."

The part in bold above was emphasized by me. The proposal to broaden the definition of "retailer" isn't a tax increase, it just shifts who is responsible to collect the tax. Is it any wonder people are confused about use tax and most don't pay this tax that has been around since the 1930s?

While I don't agree with the approach of SBX3 17, I'm disappointed to see the statement that seems to imply that no one - neither Overstock or its California customers should pay use tax because it would be a tax increase. IT IS NOT A TAX INCREASE. It is just a desperate attempt to get SOMEONE to pay the use tax. Every year, over $1 billion of use tax goes uncollected in California!

The problem with SBX3 17 is that it is too easy for those affected to avoid having to become sales tax collectors. The vendor who has the web link/commission agreements with the associates just has to end these arrangements. This is what Overstock did in New York (Amazon started collecting the tax) and what both are apparently doing in other states that consider or do enact similar laws. If it is that easy to avoid collection, that's not a very effective law change.

I think the arrangements that Amazon, Overstock and others have with people and organizations who enter agreements with the vendors to put links on their pages and earn commissions on any sales that originate from the link, are interesting. Some of these affiliates make a decent amount of money. An article in BNA's Pike and Fischer's Internet Law & Regulation Weekly Alert (7/8/09) included a statement from Overstock President Jonathan Johnson that some affiliates make over $100K per year from these arrangements. You can do a Google search to find a variety of offers to help you make tons of money from this type of arrangement.

This money should all be reported on 1099s and the affiliates should be paying income tax on that which is good for the state. But it does raise an interesting question - how does an affiliate/associate earn over $100K in commissions from a link on its web page? It sounds like it would have to be making effort to direct a lot of traffic to its link. Is that selling? The contract between the vendor and affiliate/associate will say that the affiliate/associate is not an agent and they can't bind the company - they really do not seem to be an agent - they are really more of an advertiser. Perhaps "advertising" has changed in the Internet era where some advertisers are more proactive of getting the customer to the store. Some state laws, such as in California, don't just refer to "agent" in the state, but also to "representative" in the state - whatever that is (R&T Section 6203(c)(2)). If the Board of Equalization thinks an affiliate/associate actively getting people to buy from a remote vendor is a "representative," they can pursue that without a legislative change.

It's all also an example of how our old law doesn't work clearly for today's types of transactions that were not envisioned when the laws were written decades ago.

A few more interesting links:
- Overstock 7/1/09 press release on its reaction to legislative efforts to get it to collect use tax on behalf of its customers and a few states.
- Info from About.com on making money as an affiliate
- An Affiliates Convention was held in Denver in June 2009

Today's business model is definitely challenging old rules. Enacting ineffective changes though is not the way to go. Technology could solve some of these problems (see prior post). The state definitely needs to do more to get consumers (and elected officials) to know what a use tax is. The state has already made it easy to pay use tax because you can do so on your California income tax form (which is easier than completing a sales tax form). California could make it EVEN EASIER by creating a table where all a person needs to do is find their income category and pay the stated use tax. If they don't like that, they can keep their receipts and pay the actual amount. Several states use the table approach (although usually, you need to add to it the use tax on big ticket items such as those costing over $1,000).

I say let's stop wasting time on ineffective law changes and instead - educate consumers about the use tax, create easy ways for it to be collected (technology or tax tables), and take a closer look at some of the affiliate arrangements to see if perhaps some have created a physical presence for the commission-paying vendor.

What do you think?

Uniformity of State Tax Laws - Possible? Desired?

When businesses operate in more than one state, the question arises as to how to determine how much of its income should be subject to tax in each state in which it is subject to tax. This is a matter that has been argued at the Supreme Court level numerous times and states have modified their approaches over the years.

Decades ago (1957), the National Conference of Commissioners on Uniform State Laws (NCCUSL) drafted the Uniform Division of Income for Tax Purposes Act (UDITPA). It was last amended in 1966. UDITPA provides rules on apportionment and allocation of multistate business income among states.

In 2007, NCCUSL decided to form a committee to look at changes to update UDITPA. Section 17 of UDITPA which deals with sourcing of sales that are not of tangible property was to be a focal point, but other areas could be looked at as well. Section 17 was clearly outdated. UDITPA provides that sales of tangible personal property are sourced to the destination state. Section 17 uses a costs of performance sourcing rule meaning that typically, sales of services and intangibles are sourced to the origin state. Several states including California have modified their laws to source services to the market (destination) state.

The Committee held its first meeting in late May 2008. There were protests by some businesses urging NCCUSL to terminate the project (see letter submitted by COST and a business coalition). Yet, others supported the project (see, for example, letter from Utah).

Uniformity among states cannot be guaranteed through a UDITPA revision though because states are not required to adopt the Act.

Well, on June 30, the committee voted to recommend termination of the project. Basically, it doesn't meet the goals for a uniform law if it is unlikely that any state is going to adopt the model law.

So, does this mean that Congress might step in?

I doubt it. If Congress took on how to source and apportion income among the states, there would be long debate among members of Congress, the business community and state governments (and some academics, of course) as to what the uniform rule should be. I think Congress is well aware that the states are struggling with how much to tax businesses versus how much to incentivize them to locate or stay in their state. While there has been some concern expressed in the press (Business Week, 7/1/09) as to whether federal stimulus dollars are being spent on state corporate tax breaks, I don't think Congress is going to step in.

Congress already has multistate issues on its plate that it has not be able to resolve in the past 6+ years - (1) updating PL 86-272 and (2) legislation to allow states to collect sales tax from remote vendors.

Perhaps states will move to uniformity given that more are moving to a single sales factor and sourcing sales of services to the market state (which makes sense to do along with a single sales factor if the state is trying to encourage businesses to locate property and payroll in the state). But, when (if) all states have these rules, the economic development aspect of it will be diminished - because all states are then offering the same incentive. So states will then have to find some other incentive to keep and attract businesses. It could be lower rates, more tax credits (such as hiring credits and R&D credits) or even repeal of the corporate income tax.

So, let's see what happens next. What do you think?

The Research Credit - The Saga Continues

In recent times, I've written about an almost 50-year old temporary provision of the law (PL 86-272 on nexus for income taxes), this post is about a 28 year old temporary provision - our federal research tax credit. It's odd that it has remained temporary for so long because all presidents since 1981 and most of Congress has said they support a permanent credit. President Obama's 2010 revenue proposals include making the credit permanent (p. 15) - we'll see what happens.

While the research credit was created and has been renewed over ten times to benefit the economy, some taxpayers have likely found it to be a difficult or mysterious provision. A recent taxpayer victory on the documentation needed to claim the credit on amended returns and what guidance applies in interpreting terminology, illustrates the challenges and frustration that both taxpayers and the IRS face in dealing with a temporary provision (its temporary nature causes it to not go too high on the list for issuing guidance).

I've got a brief article on the recent case (McFerrin) and current proposals for modification and permanence you may find of interest: The Research Credit — The Saga Continues, recently published in The AICPA Corporation Taxation Insider.

California Budget Proposals

The Floor Report 2009-10 Budget by the Assembly Budget Committee (6/19/09) notes the following as part of the package to address the $24 billion budget gap:

• "Seeks Targeted Revenue: Includes tax increases, but focuses these increases at oil companies and cigarettes. Also includes some fee increases to support parks and protect Californians against fires, earthquakes, floods, and other natural disasters.
• Eliminates Loopholes and Increases Compliance: Repeals recent changes to tax law, enacted in the September budget package, to allow the carry back of Net Operating Losses during the prior two years and another provision that allows corporations to assign a portion of unused tax credits to an affiliated corporation. Also includes various compliance measures to ensure payment of taxes owed to the state."

The plan is also to address the 2010-11 deficit. The plan also notes some spending cuts and the following:

• "$5 billion in revenue accelerations and fees, including the Governor's proposals to accelerate Personal Income Tax withholdings and Corporate Estimated Payments. Also includes a 3 percent independent contractor withholding requirement that is expected to generate $2 billion one-time in FY 09-10 and ongoing compliance revenue of about $130 million per year.
• $1.9 billion in new taxes. Of this amount $1 billion is from a new $1.50 per pack cigarette tax and nearly $830 million is achieved through a 9.9 percent oil severance tax.
• $5 billion in other solutions, also detailed later in this report. This includes a $1.2 billion one-time savings by deferring the June 30th State employee paycheck to July 1st and $1 billion from the sale of a portion of the book of business for the State Compensation Insurance Fund."

An acceleration means that something that was supposed to be due in a later year is shifted to an earlier year. For example, since the state is on a June 30 year end and individual taxpayers are on a calendar year, if you require individuals to pay more of their annual tax liability (through estimated tax payments and wage withholding) in January through June, you'll help the state's budget more in the earlier year than in the subsequent year AND this is not a tax increase - just a budget gimmick. It will likely cause there to be a budget issue in the subsequent years although perhaps the legislature and governor think that the recession will end and greater revenues will be collected in the future year.

There are true tax increases in the budget - increasing the regressive cigarette excise tax and creating an oil severance tax - a tax that many states have had for years. The oil severance tax means that oil companies have increased costs and that gas will cost more. I think that is a good thing for gas to cost more - after all, California does have aggressive goals to reduce greenhouse gas emissions and if we think we don't need to reduce oil consumption, we're being foolish.

It appears that the oil severance tax will go to the General Fund which is a good thing. The California Faculty Association (CSU faculty) have been pushing for the tax to go to help fund higher education. That seems odd because you'd think the faculty would want to help preserve the CALIFORNIA State Universities as a wonderful and crucial state resource funded by the General Fund rather than convince legislators and the public that it requires special funding. Also, there is no connection between oil and education so certainly an oil tax should not be earmarked for higher education - it should go to the General Fund so the legislators and governor can do their jobs and create a state budget.

The legislative budget also proposes closing "loopholes" (they aren't loopholes, that term is just used as a way to help convince people they are somehow misused rules - I've commented on this before - here) - disallow a recent change that would let affiliated corporations assign a credit carryover to another member and to postpone usage of NOL carrybacks.

Also included in the budget is a copying of what New York did in April 2008 (the so-called "Amazon tax"), described as follows:

"Extends sales tax "nexus." Requires out-of-state sellers, such as Amazon, that pay commissions to California firms or residents for sales referrals (often through a website link) to collect use tax (equivalent to sales tax) on their sales to California residents. This provision improves compliance, but does not change tax liability. Existing law requires Californians to pay equivalent use tax on these purchases, but compliance is low. Provisions reflect AB 178 (Skinner). The estimated General Fund revenue gain is $48 million in 2009-10 and $110 million annually, with additional revenue increases in local sales tax revenues."

This is technically not a revenue raiser because it is getting remote vendors like Amazon to collect what should otherwise be paid by its California customers. But the state knows that Amazon can do a much better job collecting the tax than consumers are doing in paying it on their own.

The response in New York was that Amazon started collecting sales tax from its customers and Overstock.com cancelled its contracts with NY affiliates. At trial court in NY, the court found that Amazon's claim that the law was unconstitutional was not correct. The court found that it was reasonable for the state to assume that affiliates (those with links on their websites they hope people will use in buying from Amazon) would help promote sales and Amazon could have rebutted the presumption that the affiliates were soliciting sales in NY. (I've written on this before: 7/08 and 8/08 and 2/09 and 6/09) People and organizations that have vendor links on their websites that earn them commissions when someone orders by first clicking on that link, don't like this provision because they think vendors will do what Overstock did in NY - cancel the agreement resulting in less revenue for the person or organization (you can find these links on PTA website and many others).

You can find details of the budget at:

• Assemblymember Evans blog (lots of links here)
• Assembly Budget Committee - includes link to the committee's final report
• California Budget Project chart comparing budgets of legislature and Governor

So, will any of this help move our tax system into the 21st century? Well, the intent is certainly to close a large budget gap rather than to modernize the system. Since an oil severance tax can help reduce oil consumption and we need to reduce CO2 emissions, there is some benefit there. But we could have also just increased the existing gasoline and fuel excise taxes. The "Amazon tax" proposal may reduce our $1 billion use tax gap, but doesn't help educate consumers that they need to be use tax compliant. The "Amazon tax" collects use tax from just a segment of e-commerce.

Perhaps the legislators are also just waiting for the report, due in July, from the CA Commission on the 21st Century Economy, for ideas on how to modernize our tax system.

Certainly more is needed but because true tax reform will require a 2/3 majority vote, it won't be pursued at this time (and it is not clear how strong the desire is to modernize California's tax system even though it should help the economy, individuals and businesses).

What do you think?

Tax cuts versus smaller deficits and a better tax system

A few days ago, the Joint Committee on Taxation released its revenue estimates (JCX-28-09; 6/10/09) of President Obama's FY 2010 revenue proposals. There are some very expensive items in the plan, such as the following estimates for a 5-year period:

Permanent AMT relief (the "patch") $177 billion
Broaden and make permanent the Making Work Pay Credit $217 billion
Broadened Hope scholarship credit (renamed American Opportunity credit) $18.5 billion

And there is more. While there are some offsets, such as $91.7 billion generated by limiting the tax benefit of itemized deductions to 28% for those with income above $250,000, the net effect of the proposals is $1.1 trillion of deficit spending over 5 years!

Is the 21st century supposed to be so expensive?

The AMT fix is needed because otherwise, millions of middle income individuals who were never supposed to pay AMT will owe it. The Making Work Pay Credit is intended to alleviate some of the regressivity of social security taxes.

But - what about improving the system rather than continuing to tweak it - particularly when some of the tweaks are costly. For example, better changes would include;

• Reviewing all of the numerous deductions and credits and eliminating ones that are really not needed. Perhaps these changes would enable the AMT to be repealed rather than just patched.
• Expanding the earned income tax credit rather than create (or make permanent) a credit with the same goal. The MWPC adds complexity for some individuals by causing too little to be withheld from their paychecks because the tables are adjusted for the MWPC but not all individuals are eligible for the credit.
• Simplifying the education tax provisions by not having so many. They also need to be better targeted. Consideration should really be given to why these items are in the tax law rather then just enabling the Dept of Education to determine who should get education assistance.
• Rather than capping the tax benefit of all itemized deduction, why not reduce or eliminate the ones that make no sense. That is, why cap someone home equity debt or mortgage interest on their second home to 28% when there is no good reason to even have these deductions in the law.

Obama formed a Tax Reform Tax Force (President Bush had an Advisory Panel on Tax Reform) to look at simplification, reducing the tax gap and reducing corporate loopholes. Their report is due 12/4/09. What will they say about Obama's revenue proposals or how will they fit within any proposals?

What do you think? Should we be enacting tax system changes that will increase the deficit by over $1 trillion over the next 5 years?