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 However, the law was repealed on the day it went into effect.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?

Info Hearings Held on Recommendations of 21st Century Economy Commission

On October 8 & 9, 2009, the CA Assembly Revenue & Taxation Committee held informational hearings on the final report approved by 9 of the 14 members of the CA Commission on the 21st Century Economy (COTCE). Several commissioners, including those who did not vote for the report, testified (see agendas). There was also testimony from some public interest groups.

I don't see that any transcript has been posted anywhere yet, but here are some links to observations of people or groups that are listed on the hearing agenda.

• California Budget Project - here - this group does not favor the plan, calling it "fatally flawed" and finding that it shifts too much of the current tax burden from higher income individuals to low and middle income individuals. This group notes that the Business Net Receipts Tax (BNRT) will be paid directly by businesses that can deduct it in calculating their federal income tax, but the higher prices paid by consumers does not produce a deductible tax. Of course, today's sales tax does not produce a tax deduction for California consumers and neither does any of the corporate income tax passed along to consumers. The only taxes individuals can deduct on their federal return are state income taxes (unless they chose to instead deduct sales tax and for those in AMT, neither tax is deductible) and property taxes. There is some interesting data and observations in the CBP presentation.
• California Tax Reform Association - here - I don't know if this is the exact testimony delivered on 10/8/09, but it is an earlier statement voicing opposition to the COTCE report. The concern is disproportionate tax relief to high income individuals. Concern is also expressed over many uncertainties of the operation and effect of the BNRT. There is a statement that the BNRT falls disproportionately on rental housing. I'm not sure of that. Certainly, rental income is subject to the BNRT and expenses paid to other businesses are deductible. Perhaps it is that there are not many expenses paid to other businesses. I haven't read through the many pages of statutory language for the BNRT, but fixed assets purchased by the landlord should be fully deductible when purchased which would reduce the BNRT.
• California Chamber of Commerce - here - they expressed concern the day after the release of the COTCE report. “We must not rush into replacing our 70-year-old tax system with an unproven experiment that may fail to deliver the promised results."

Some observations:

• While there is statutory language (lots of it) for enactment of the BNRT, it would be nice to see more explanatory language. That allows those not comfortable with deciphering statutory language to better understand the BNRT and for those comfortable deciphering it, to be able to verify it against what the COTCE expect the BNRT to do.
• More explanation is needed from the 9 commissioners as to why they would want to replace a direct income tax with an indirect consumption tax. A personal income tax is transparent in showing what each income group pays. However, a tax that is paid directly by businesses but indirectly paid by consumers, investors and employees is not transparent. It is unlikely that the thousands of dollars of personal income tax reduction of high income individuals will be replaced with their "share" of the BNRT. This is because high income individuals do not consume all or most of their income while low income individuals do consume most of their income and some portion of the BNRT will be included in prices of many goods and services purchased if a BNRT is in effect.
• Why was there no proposal for some type of carbon tax given California's aggressive plans to reduce greenhouse gas emissions? One example I've suggested before is to replace some part of the personal income tax (to reduce its volatility somewhat) with a sales tax on utility bills of individual consumers. There would be relief (either on the utility bill or via a refundable income tax credit) such that there would be no tax on a bill representing utility expense for a 1200 square foot home with 4 inhabitants. There could also be an increased gas excise tax.
• I would like to see more study on the BNRT to answer the various questions mentioned in this blog and in many other places, such as the oft-mentioned letter from nine law and economics professors to the COTCE.

Please post comments - were you at the info hearings on October 8 and 9? if yes, what was your reaction? What should be the next step regarding the COTCE report? Other comments on CA tax reform?

Opportunity to submit ideas to President Obama Tax Reform Task Force

Earlier this year, the White House announced that President Obama was forming a task force to make recommendations to simplify the tax law, reduce corporate welfare and reduce the tax gap (see my 3/25/09 post).

Recently, the task force announced that it was seeking ideas from the public that addresses any of the three goals for this project (click here). The deadline to submit comments is October 15, 2009. The task force is to issue its report by December 4, 2009.

What would you tell the task force?