Targeted tax measures rather than across the board cuts

A tax system most likely to meet principles of good tax policy has a broad base (few, if any, deductions) and low rates. Our current federal income tax violates this approach and the number of special deductions and credits, and the corresponding complexity and lack of transparency continues to grow.

If all of part of the "Bush tax cuts" are extended, we continue to leave the tax system complex and inequitable. The large dollars involved in any extension, could instead be used to reduce the deductions and credits and lower the rates. If there is continued belief that economic stimulus is needed, it should be targeted rather than provided in a shotgun approach as would be the case if all of the cuts were extended for one more year. As William Gale notes in an op ed in today's Washington Post - "Five Myths About the Bush Tax Cuts" (7/31/10) - "most Bush tax cut dollars go to higher-income households, and these top earners don't spend as much of their income as lower earners" (see his Myth #1). Gale suggests that the dollars would help the economy more if used for aid to states, unemployment benefits and credits to help job creation.

I think Congress should seriously consider:

1. Letting all of the tax cuts expire as originally planned.
2. Enacting some simplifications such as repealing the itemized deduction and personal exemption phase-outs which really just mask a higher rate on higher income individuals. The higher Medicare taxes that come into effect in 2013 already raise the tax rate for high income individuals.
3. Letting the 2009/2010 tax breaks enacted temporarily as part of the American Recovery and Reinvestment Act of 2009 expire as intended.
4. Following Dr. Gale's suggestion and target any stimulus dollars rather than give across the board cuts.
5. Using the dollars to repeal the AMT for individuals (rather than just patching it yearly).
6. Consider equity in the law. The data on 47% of individuals not having federal income tax liabilities is too high compared to how many individuals need tax relief. I've referred before to a letter to the editor in Tax Notes describing a hypothetical family of 5 with $100,000 of wage income that could easily have zero federal income tax liability! That is just wrong. (Note - I said federal income tax liabilities - most of these individuals do pay federal payroll taxes and a variety of other federal, state and local taxes. Also see the 4/13/10 New York Times article, "Yes, 47% of Households Owe No Taxes. Look Closer").
7. Set a schedule for hearings and public forums on how to improve the tax law - not by giving everyone all kinds of complicated tax breaks, but by broadening the base and lowering the rates. These hearings and forums also need to include discussions about what it will take to reduce the deficit and debt.

What do you think?

Helping Small Businesses

Congress have a variety of bills it has been working on that are supposed to help small businesses. These include:

• H.R. 4849, the Small Business and Infrastructure Jobs Tax Act - it passed in the House in March and is similar with respect to tax provisions to H.R. 5297
• H.R. 5297, the Small Business Jobs and Credit Act - it passed in the House on June 17. It includes some lending provisions as well as tax provisions such as increasing the expensing amount for start-up expenditures and increasing the gain exclusion for Qualified Small Business Stock under Section 1202
• H.R. 5486 - there was debate on June 15 and postponement
• H.R. 5893, the Investing in American Jobs and Closing Tax Loopholes Act - there was debate in the House on July 29 and hearings were postponed

There is concern over whether these bills really help. The Small Business and Entrepreneurship Council issued a letter to the Senate (7/28/10) saying that H.R. 5297 misses the mark in helping small businesses. They also note that small businesses need relief from continued regulation of them. Per the Council - "Legislative measures that will help small businesses includes tax relief in the form of making existing rates permanent, a time-out on various legislative initiatives and regulatory efforts that will drive their costs higher, and an end to excessive spending that is adding to our debt and eroding economic stability."

An article in the Washington Post - "Republicans block small business lending bill," 7/29/10 describes some of the problems in getting any bills passed with lending relief and tax breaks for small businesses.

My questions:

• What is the best stimulus and relief for small businesses? Congress has already tried a few measures such as increased expensing election, a payroll tax exemption for hiring new employees. Perhaps they need customers to get a stimulus so they will buy goods and services from small businesses.
• How did Congress select some of these measures? Is a larger start-up expenditure deduction really needed? I'd guess that a new business would not likely make a significant profit in its first year so why push more expenditures into that first year could instead be amortized over the first 15 years? Look for something of greater impact. Perhaps a refundable credit for starting a business?
• Why so many bills? Can't Congress just start with one and modify it during debate? It is confusing to the public in knowing what to provide input to Congress on.

What do you think will stimulate small businesses and do you think stimulus directed that way is what is needed? How might it be done without further complicating the tax law?

Congress' Multitude of Multistate Bills

There are ten bills in the 111th Congress that involve multistate tax issues. Several have been introduced in prior Congresses. I've got a short article summarizing these bills that deal with tax administration, nexus, prohibitions on state and local taxation, and mobile employees (see 7/29/10 AICPA Corporate Tax Insider - here).

101 Top Tax Policy Blogs

Mark Macaluso, who maintains a website on Masters of Accounting programs, recently created a list with links of what he viewed as the top 101 tax policy blogs. It is an impressive list which includes blogs from outside of the US. I'm honored to be on the list.

Click here for his list.

Thanks Mark.

Sales Tax Flaws

I've been writing for some time about the numerous flaws in most state sales tax - particularly that of California. Most recently - the weakness in California's system in that we exclude way too much consumption from the sales tax, particularly consumption by higher income individuals which makes the sales tax very inequitable. (See 7/27/10 post on digital goods.)

Alan D. Viard of the American Enterprise Institute (AEI) recently had an article in State Tax Notes - "Sales Taxation of Business Purchases: A Tax Policy Distortion." He lays out the premise for a sales tax - taxing personal consumption, notes that states tend to exclude several types of personal consumption and have the added flaw of taxing business purchases. I encourage you to read this 7-page article (here).

A sales tax is flawed when it applies to business purchases because it causes the tax to pyramid in that all of part of that sales tax will be embedded into the price of the goods sold and you'll then have a tax on a tax. Taxing business purchases also violates the transparency principle. For example, in most states, food purchased at the grocery store is "tax-exempt." The rationale for the exemption is that food is a necessity of life. But, the grocery store has paid sales tax on the equipment and furnishing in the store and perhaps on the utilities it pays to keep the lights on. That sales tax is embedded in the price charged for the food, so the food really is not exempt from sales tax - some is buried in the price.

And I can't leave that statement without noting that while food is a necessity of life - high income individuals spend more on it than do lower income individuals. So the exemption is of greater benefit to high income folks than to others. I advocate making it all taxable (which also eliminates the need to distinguish taxable food such as perhaps soda, from non-taxable food) and providing a refundable income tax credit to low-income individuals.

I have more on this topic here.

What do you think?

Past time for California to address digital consumption

Recently, Amazon announced that in the past three months, it sold 143 Kindle (digital) books for every 100 hardcover books that it sold (7/19/10 press release). Amazon says it also has over 640,000 books available for the Kindle with 80% priced at $9.99 or less. Also, sales for January through June 2010 are three times higher than for the same period last year.

For Californians buying digital books, the deal is even better because California doesn't apply its sales tax on digital goods even though they are personal consumption and the equivalent of buying a tangible book. California is way behind the times on this. What is the point of having a sales tax on consumption if you are going to exclude a modern, growing form of consumption - digital goods. Several states have modernized their sales tax - why not California?

Some say doing so will harm the sale of digital goods, but that is bogus. Note that the Kindle books are less expensive than the tangible. Also, when Apple increased the price of some iTunes downloads from 99 cents to $1.29 - they still sell them!

I've been writing about this for years (as have others). The longer the California legislators wait, the harder it will be to sell this one. AND, it is important that when they broaden the tax base to include digital PERSONAL consumption (not business consumption), they should lower the rate!

What do you think?

Tax Foundation Tax Calculator - Effect of 3 Different Scenarios

The Tax Foundation has an interesting tax calculator that will compute your 2011 federal income taxes under three scenarios:

1. Bush tax cuts expire
2. Bush tax cuts extended
3. Obama tax proposals enacted

I roughed out my 2011 information and found that I'd pay about $4,000 more under Scenario 1 than under Scenario 2, but almost $1,000 less under Scenario 3!

Well, given that each citizen's share of the $13 trillion national debt is about $43,000, looks like I'm getting off easy with the intended expiration of the tax cuts! But then, most people will get off easy until we have the "tough love" I've been talking about. We can't keep enacting tax breaks, increasing spending and hope that somehow we'll get back into better fiscal shape and the debt and deficit will go away.

I encourage you to try out the tax calculator not just with your own income figures, but also with ones that are smaller and ones that are over $250,000 of income to see the differences.

Given recent history where it is mid-July and provisions that expired at the end of 2009 that Congress wants to extend have not yet been extended, I think it is unlikely that Congress will act timely to extend any of the 2001/2003 tax cuts. Of course, they might get to it in 2011 and we'll go many months not knowing what the real 2011 rules will be.

What do you think - about the prospects of Congress acting timely on the expiring tax cuts (whether to extend any or to decide that they will let them expire), about whether any should be extended, or any other changes that should be made for 2011?

More on BNRT

We haven't heard much lately about the Business Net Receipts Tax (BNRT) proposal of last fall from the California Commission on the 21st Century Economy (COTCE). But, if you're still interested in the topic, Dr. Charles McLure of the Hoover Institution has an interesting article on it and its problems, published in Hastings Law Review. It has a great title - "The Business Net Receipts Tax: A Dog That Will Not Hunt." It was posted to the TaxProf Blog on July 2.

Dr. McLure concludes that "the BNRT is a dog—a dog that will not hunt; it should not be seriously considered, much less adopted." He notes that almost no one supports it including some COTCE commissioners, labor, the business community, public interest advocates, academics and some elected officials.

Various problems posed by the BNRT are pointed out and clearly explained. McLure also notes inconsistencies in how the tax work versus how it is perceived as well as just what type of tax it is. He notes some inconsistencies such as whether it is really intended to tax businesses on benefits they receive (which seems to be the case in that a company with only sales in CA but no property or payroll would be subject to BNRT) or taxing consumers on the benefits they receive (as a sales tax would). He notes the inconsistency of the COTCE statement: “The BNRT is designed to tax the value a business adds to its production of products and services in California
and thus attempts to approximate the benefits of services and programs utilized by the business.” If that were truly the case, the tax apportioned to CA would be based on payroll and property in the state rather than only sales in the state.

I highly encourage a reading of the article for a good understanding of the economics of the BNRT and its inherent weaknesses as a replacement for much of the state level sales tax, the corporate income tax and the high end of the personal income tax.

Tweaking Corporate Estimated Tax Payments - More Tax Oddities

H.R. 4380, the United States Manufacturing Enhancement Act of 2010, which passed in the House on July 21 (378 - 43) includes a revenue offset to generate money from yet another change in the time for payment of corporate estimated taxes. H.R. 4380 includes the following change:

"The percentage under paragraph (2) of section 561 of the Hiring Incentives to Restore Employment Act in effect on the date of the enactment of this Act is increased by 0.5 percentage points."

Here is the text of section 561 of the HIRE Act:

"SEC. 561. TIME FOR PAYMENT OF CORPORATE ESTIMATED TAXES.
Notwithstanding section 6655 of the Internal Revenue Code of 1986, in the case of a corporation with assets of not less than $1,000,000,000 (determined as of the end of the preceding taxable year)--
(1) the percentage under paragraph (1) of section 202(b) of the Corporate Estimated Tax Shift Act of 2009 in effect on the date of the enactment of this Act is increased by 23 percentage points,
(2) the amount of any required installment of corporate estimated tax which is otherwise due in July, August, or September of 2015 shall be 121.5 percent of such amount,
(3) the amount of any required installment of corporate estimated tax which is otherwise due in July, August, or September of 2019 shall be 106.5 percent of such amount, and
(4) the amount of the next required installment after an installment referred to in paragraph (2) or (3) shall be appropriately reduced to reflect the amount of the increase by reason of such paragraph."

Problems:

1. Does anyone really know what the estimated tax payment is and when it is higher? Also, HR 4860 is not the only proposal to increase the percentage (see my post of July 1, 2010).
2. Calling something a revenue raiser does not make it so. This just requires that corporations pay more of estimated taxes. It doesn't increase what they owe! That's why I call this practice - which we see often, a tax oddity.

Sales Tax Holidays - more on this tax "oddity"

In my list of "tax oddities" I include sales tax holidays (particularly ones for gun purchases). There is an article in today's Baltimore Sun on the costs to the state and low-income taxpayers of their holiday which lasts for one week. The tagline of the article - "It drains state coffers of needed revenues while providing little benefit to consumers" says it all ("The hidden costs of 'tax-free' week" by Neil Bergsman, 7/22/10).

Maryland's 1-week sales tax holiday allows consumers to avoid the 6% sales tax on clothes costing under $100. While consumers save a total of $9 million, that represents a loss of revenue to the state. The holiday is for everyone regardless of how well they can afford to pay the sales tax. Thus, it is a poorly targeted tax relief measure.

As the author notes, the lost $9 million is money not available to fund programs that help low-income taxpayers. He also correctly notes that the holiday makes it more difficult to address the state's budget shortfall, it is complex, and it offers no relief to low-income consumers the other 51 weeks of the year.

This is an odd way to design a tax system!

Cost of extending the 2001 and 2003 tax cuts

A report by The Pew Economic Policy Group - Decision Time: The Fiscal Effects of Extending the 2001 and 2003 Tax Cuts, concludes that even extending the cuts for individuals with less than $250,000 of income (MFJ) or $200,000 (all others) would have long-term adverse effects on the deficit, debt and economy. They conclude that:

• "Making the tax cuts permanent for all taxpayers, regardless of income, would
  cost $3.1 trillion over the next 10 years and inflate the national debt to 82 percent
  of GDP."
• "Limiting the extension to individuals making less than $200,000 and married
  couples earning less than $250,000 would cost about $2.3 trillion in the next
  decade. Absent any offsets, this proposal would inflate the national debt to
  78 percent of GDP by 2020."
• "Extending the tax cuts for all taxpayers for only two years ... would cost $558 billion over the next 10 years and increase the debt to 70 percent of GDP by the end of the decade."
• "If the tax cuts are allowed to expire at the end of 2010, the debt-to-GDP ratio would rise, reaching 68 percent by 2020."

The report also observes that today the average debt-to-GDP ration is 57% and has averaged about 37% for the past 50 years.

The full report has nice review of the 2001 and 2003 tax cuts and their history.

A few things to bear in mind:

• The tax cuts automatically expire at the end of 2010. To keep any of them will require action by a majority of Congress and President Obama. It is already July 2010 and Congress is still trying to extend most of the temporary provisions that expired at 12/31/09!
• While dollar-wise, the tax cuts affecting higher income individuals, that population is only about 3% (a bit less) of individuals who file.
• There are a few other tax cuts from later tax bills that also expire after 2010, such as most of the American Recovery and Reinvestment Act provisions, and even a few others, such as one allowing certain musical works and copyrights a special depreciation period (IRC Section 167(g)(8) added by PL 109-222, the Tax Increase Prevention and Reconciliation Act of 2005.

Years ago, I thought Congress and the President would take advantage of the expiring tax cuts situation to work on some significant reforms to the income tax, such as broadening the base and lowering the rates. They would realize that they could not afford to keep the tax cuts as permanent provisions so would "sell" a greatly modified tax system as a replacement. Despite some talk of reform, the benefit of the long time period between 2003 and 2011 was not used wisely to address fundamental reform/improvement of our overly complex tax system and it just seems to get more complex with every new tax bill and those tax bills keep coming.

What do you think?

Deficit reduction - crazy?

The Wall Street Journal ("White House, Business Group Duel on Jobs," 7/14/10) and Tax Notes ("Fiscal Commission Cochair Wants Lower Rates, Consumption Tax," 7/19/10) report that Erskine Bowles, cochair of President Obama's National Commission on Fiscal Responsibility and Reform observed on the task of getting 80% of the commissioners to agree on a plan by December 1 - "Anybody who thinks we have a big chance to get this done is crazy."

Well, that doesn't sound very optimistic! There are plenty of proposals out there and it is possible to reduce the deficit. The problem is really that we might not like the answer because we are used to a growing number of tax cuts and growing amount of government services. As I've noted before on posts - we need "tough love." We need a plan to help get us away from the free lunch that someone else pays for because we are low on "someone elses" and lunch is getting bigger and bigger.

The Tax Notes article also states that Mr. Bowles suggested in a July 14 speech to the U.S. Chamber of Commerce that a solution would be to simplify the tax law, lower tax rates and create a broad-based consumption tax. Certainly, a consumption tax can bring in additional revenue, but as a new tax, adds costs and complexities. Why not increase an existing excise tax, such as the gasoline excise tax so that the Highway Trust Fund doesn't need to get funds from the General Fund? Or why not balance out the mix of income tax base broadening and rate reduction to still bring in enough to address the deficit (along with spending fixes)?

Will Bowles' consumption tax proposal include relief for low income taxpayers so we aren't shifting taxes from high income to low income taxpayers?

Is this all crazy? What do you think?

California Local Governments

The California Legislative Analyst's Office (LAO) recently issued a brief report on California's numerous local governments (Overview of California's Local Government). The report points out something I think most people don't know. We have a lot of local jurisdictions:

• 58 counties
• 480 cities
• 425 redevelopment agencies
• "Nearly 3,400 Special Districts. Most provide a single service (such as fire protection or waste disposal). About two-thirds have independently elected boards or board members appointed for terms."
• 1,000+ K-12 and Community College Districts

The report notes a few of the restraints imposed on local governments, but not all. For example, it notes that local governments can't change the property tax rate or change how property tax revenues are allocated among local governments - even though property tax is a local government revenue source. There are a lot of topics very summarized by noting them in a timeline covering 38 years of state-local relationship milestones (page 4 - I highly recommend it - you may be surprised at the number of restrictions on local governments and that many were imposed by voters).

I think it is important that more attention be paid to effects of existing and proposed tax changes on local governments. One topic I've written about frequently is our outdated sales tax base. The base is controlled by the state legislature so local governments are stuck with it even though sales tax is a significant tax for local jurisdictions. It has led to odd decisionmaking over the years because one way cities can increase their sales tax revenues is to get big-box retailers to locate inside their borders. Sellers of tangible personal property are preferred to those that sell services.

While local governments can seek a vote of the electorate to increase a sales tax rate, an already high state sales tax rate makes that difficult to do. In addition, there is a state imposed cap on the local sales tax rate. Local governments are prohibited by state law from imposing an income tax. While local governments have a fair amount of control over utility user taxes, the transient occupancy tax and the business license tax, the base for these taxes is limited and does not adequately link to all types of services provided at the local level.

Local governments also face problems with subventions and other state controls. For example, through subvention and other arrangements, local governments obtain some taxes collected at the state level. For example, about 35% of the state gasoline excise tax is distributed to cities and counties for transportation purposes. Because the tax is not collected by local governments and there is no legal mandate that a portion belongs to local governments (as exists for the sales tax), it is possible for the state to take or borrow the funds. For example, in budget negotiations in June 2009, the assembly budget committee and others considered shifting some of these tax funds to other state purposes.*

* California State Assembly Committee on the Budget, Floor Report of the 2009-10 State Budget, 6/23/09, pg 16. The report states: "Accepts the Governor’s proposal to shift approximately $1 billion of transportation revenues from local governments and instead use the funds to pay debt service on transportation bonds. The shift will be in place for two years instead of the Governor’s permanent proposal. Proposition 1B funds will be accelerated to mitigate the impact of this cut on local governments." Also, LAO, 2009-10 Budget Analysis Series – Transportation, 2/09.

Another problem with the state-local fiscal relationship is the lack of transparency due to the design of the structure and the odd changes that get such names as "backfills," "triple flips," and "swaps." As noted in the Senate analysis to AB 676 (1999):

“After 20 years of voter initiatives, legislative reactions, and local
adjustments, the state/local fiscal relationship is nearly incomprehensible.”

This is an unfortunate situation and one that doesn't look like it will get better soon. What the LAO report lays out and what I added above are still just small pieces of understanding the overly complex state-local fiscal relationship. I don't think the problems should be ignored in any discussions of tax reform. Yet, that is often what happens. A recent example was the report from the Commission on the 21st Century Economy. One of their recommendations was to replace most of the state sales tax with a very broad business net receipts tax (BNRT). There was no mention of updating the sales tax base for the benefit of local governments that would still rely on it or of sharing any of the BNRT revenues with local governments.

What do you think?

Opportunity vs. Hope vs. Reality - Tax Incentives for Higher Ed

The federal income tax law includes several incentives and subsidies for higher education expenses. The Hope Scholarship credit that has been around since 1997 was temporarily replaced for 2009 and 2010 with a more generous American Opportunity Tax Credit that applies to almost all taxpayers with higher education expenses because the AGI phase-out range is so high (ends at $180,000 for MFJ) and it applies to the first four years of college rather than just the first two under Hope.

President Obama has proposed making the AOTC a permanent replacement for the Hope Credit.

I've got a short article comparing these incentives against each other and against the reality of how long it really takes most people to finish college today and what it costs, as well as a critique of the AOTC using principles of good tax policy. You can find it here (AICPA Tax Insider, 7/15/10).

I'd like to see these incentives pulled from the tax law where they really don't work well. The funds aren't available when tuition is due, they provide benefits to many people who really don't need them while others struggle to get to and stay in college, the federal government already has various programs for helping students pay for college, and they complicate the tax law.

What do you think?

The need for broader tax and budget education

There is a great post in TaxVox today from the Tax Policy Center (not to say that all of their posts aren't great). It is entitled - "We Can’t Always Get What We Want: Why Governing Americans is So Hard" by Howard Gleckman. He provides a candid and blunt assessment of the many odd things many people say and do. For example, he notes how many people complain about government spending, but then want more tax breaks - which are a form of government spending. He also notes how state governors want more federal dollars, but then complain about the red tape and fail to fix their budget problems to prevent needing federal funds.

I think this is a longstanding problem that is just getting worse. Today, it seems that we expect our politicians to tell us how they will either not raise any taxes or even lower our taxes, yet provide more funding for infrastructure, health care, education and Social Security. Who is supposed to pay for all of this? I noted this a few months ago when I got an April 15 email from my elected representative reminding me of the $800 billion of tax cuts Congress passed - with no mention of that fact that it raised the debt and deficit (4/15/10 post). And, why sent on April 15? I think the public has conditioned our elected officials to only talk to us if they are talking about tax cuts. Which elected officials are going to talk to us about reality? Or, perhaps we just don't elect those folks.

I think a revised civics education in high school would help somewhat. High school students should learn a lot more than that we have 3 branches of government and how a bill becomes a law. They should learn about the role of governments, funding, spending costs, the budget process, different types of taxes and how they work, understanding their role as a taxpayer, etc. The students could study the current federal or state finance systems and offer suggestions for improvement to their elected officials.

What do you think - about the TaxVox post - is it right on or not? What about solutions?

Call for more energy credits - good idea?

President Obama has asked Congress to expand the advanced energy project credit. Apparently, this is the IRC §48C - Qualifying advanced energy project credit, created by the American Recovery & Reinvestment Act of 2009. This was an unusual credit in that the total amount available was capped and taxpayers had to apply for the credit with that application reviewed by the Departments of Treasury and Energy. For an overview of this credit, see a short article of mine from August 2009 - Handing Out Credits.

According to the White House, the application requests exceeded the available dollars by 3 to 1. The press release (1/8/10) includes a link to a spreadsheet briefly describing the applications.

According to several news reports, President Obama wants Congress to expand the credit in the hopes that it might generate about 40,000 jobs. For example, see Reuters article - "Obama will urge boosting clean energy tax credit" (7/9/10) and Associated Press - "Obama urges increase in clean energy tax credits".

Is this a good idea? Well, how will it be paid for? Why didn't Congress also ask applicants to provide information on how many people they would hire so Congress would have some sense of whether this credit will indeed create jobs?

It is a better version of a credit than usual because it is capped, must be approved in advance, and some of the application data is publicly available. But does it need to be a tax credit? Why not just a grant from the Department of Energy?

What do you think?

Taxing Services - Michigan

An article today in the Detroit Free Press says that Governor Granholm has given up on a tax reform plan to extend the sales tax to services and lower the rate. That is too bad.

In 2007, the Michigan legislature did extend the sales tax to specified services, but then repealed it the day it was to go into effect (see prior post). Problems with that original proposal included:

• There was insufficient transition time for the law to take effect - just 2 months. That is not enough time for the tax agency and the businesses, such as palm readers and house sitters, to get ready to collect the tax. So, unfortunately, the initial legislation was really written with a time bomb that would lead to repeal - that was unfortunate. More time should have been given before implementation and funds allocated to help both the tax agency and the new tax collectors get ready.


• Do not tax services primarily used by businesses. Businesses should not pay sales tax, only final consumers. This prevents pyramiding of the tax where businesses add it to their costs and consumers pay tax on that amount. While most of the services identified in 2007 were personal ones, there were others, such as landscaping, also consumed by businesses.


• The base expansion was not accompanied by a rate reduction !!
  

The purpose for expanding the sales tax base is to tax all personal consumption (with limited exceptions, such as for basic health care and education). This makes the system more equitable. The law is inequitable when for example, it taxes a music CD, but not an iTunes download or concert ticket. And worse, some of the exempt consumption is by high income taxpayers (personal trainers, concert tickets, downloads requiring broadband access, etc.).

It is also important for lawmakers to squelch the loud but misplaced arguments that the tax will hurt small businesses. Small businesses that sell tangible personal property have been collecting sales tax for decades and surviving. The collection process won't hurt small businesses and the initial implementation costs should be subsidized with a refundable income tax credit. And, tax agencies should be required to find simple ways for companies to comply.

I've written about this for some time now. It is an issue that California needs to address as well. California should broaden its sales tax base to tax more types of personal consumption while lowering the rate and removing the sales tax paid by businesses to remove pyramiding. For more - click here ("tax base is too narrow").

What do you think?

Tanning Tax Questions

The 10% excise tax on indoor tanning services went into effect on July 1 and there has been a fair amount of negative press that is likely causing many people to wonder why this activity was singled out for taxation. The tax was enacted as part of the Patient Protection and Affordable Care Act (P.L. 111-148, Section 10907; March 23, 2010). It took the place of a provision that would have instead imposed a 5% tax on elective cosmetic surgery.

Several questions come to mind:

1. Why any new excise tax? To generate funds to help pay for health care reform although neither proposal raises a lot of revenue. The tanning tax is expected to generate $2.7 billion over 10 years per JCX-17-10), but the cosmetic surgery tax was projected to generate $5.8 billion over the same time period (JCX-55-09). Given the cost of health care reform, one wonders why Congress opted for the tax that generated less revenue or didn't go with both options.
2. Why a tax on indoor tanning services rather than on elective cosmetic surgery? Well, it seems that indoor tanning is worse for your health than elective cosmetic surgery. Some reports indicate that the American Academy of Dermatology Association pushed for the tanning tax. Per Dr. David M. Pariser, president of the Association: “A tax on indoor tanning services would serve as a signal from the federal government to everyone, especially young people, that indoor tanning is dangerous and should be avoided." (AADA press release of 12/22/09). The AADA also notes that 30 million people use indoor tanning salons including about 2.3 million teens who are potentially more adversely affected by the rays than older individuals. For more on the AADA warnings about tanning salons, see their 2-pager).
3. Was lobbying power a reason for one tax over the other? Apparently yes. A December 21, 2009 story from Reuters noted that the maker of Botox (Allergan) and plastic surgeons were successful in getting the Senate to replace the 5% cosmetic surgery tax ("Botox spared over tanning beds in U.S. health fight"). This article also notes that Congress likely did not want to anger doctors when they needed their support for the overall bill and the FDA had already issued warnings about tanning salons. A December 22, 2009 Daily Finance article notes that the salons are an "easier target" - there are about 20,000 tanning salons, over half of which are owned by women. This article also notes that the Indoor Tanning Association "claims moderate tanning can have health benefit of vitamin D production. Indeed, phototherapy performed by a medical professional wouldn't be taxed." (Alazraki, "'Botax' Out, 'Tan Tax' In: Health Care Bill Offers a Lesson in Lobbying")
4. Why tanning rather than other unhealthy activities? This is a good question. There are various ways to change behavior and tax is one of them, but not necessarily the best one. The new tax requires more administration and compliance time by the IRS and tanning salons. Congress could have required salons to post a warning about the potential harm. That might have deterred more people from indoor tanning than a 10% excise tax. Why not also post such warnings at beaches and public swimming pools? Where is data on the health care costs of skin cancer treatments caused by indoor tanning? Why not a tax on unhealthy foods? The problem is in defining unhealthy foods.
5. Are all indoor tanning services taxed? No. The regulations issued by the IRS exempt tanning services provided by a health club (gym) that comes along with the regular dues. This is odd and really seems to defeat the purpose of the tax if it was to help deter harmful behavior. But, apparently the IRS thought it would be too difficult to determine the amount of ones dues going to the tanning services. I think this should be changed for the final regulations. The health club can make an estimate based on how long a person uses the tanning services and what salons charge for similar time periods, but the amount would not exceed, say 90% of what the person pays for dues. For links to the IRS guidance - click here, as well as here for the IRS video and here for the final and temporary regulations.
6. What will happen to the tanning tax revenues? There was no requirement that any of the revenue be earmarked for educational purposes. The revenues go into the General Fund.
7. Will states adopt a similar tax? Perhaps. Once the federal tax is in place, it is fairly simple for the affected taxpayers to just calculate an additional percent and send it to the state. But I don't except we will see this because states are likely looking for larger revenue sources, such as taxing other "bads" such as soda.
8. Will the tax be repealed? The Indoor Tanning Association has a campaign underway to repeal the tax. There have been proposals to repeal some health care legislation provisions, such as 1099 reporting for corporations (H.R. 5141 - Small Business Paperwork Mandate Elimination Act). I don't expect Congress will repeal these measures because it could start efforts to repeal other health care provisions. Also the repeal of any revenue raiser will require Congress to find some other tax to create or increase or a deduction or credit to eliminate or reduce (to satisfy PAYGO rules).

What do you think about the tax?

Tax Oddity - Messing with Corporate Estimated Tax Payment Rules

Sometimes Congress makes changes to the timing or calculation of estimated tax payments to create a revenue raiser. This is a really odd technique. First, it really doesn't raise revenue but just the timing of when during the year the tax is collected, and second, it complicates the law.

Recently, the HIRE Act (Hiring Incentives to Restore Employment Act; PL 111-147). It provides:

"SEC. 561. TIME FOR PAYMENT OF CORPORATE ESTIMATED TAXES.
Notwithstanding section 6655 of the Internal Revenue Code of 1986, in the case of a corporation with assets of not less than $1,000,000,000 (determined as of the end of the preceding taxable year)--
(1) the percentage under paragraph (1) of section 202(b) of the Corporate Estimated Tax Shift Act of 2009 in effect on the date of the enactment of this Act is increased by 23 percentage points,
(2) the amount of any required installment of corporate estimated tax which is otherwise due in July, August, or September of 2015 shall be 121.5 percent of such amount,
(3) the amount of any required installment of corporate estimated tax which is otherwise due in July, August, or September of 2019 shall be 106.5 percent of such amount, and
(4) the amount of the next required installment after an installment referred to in paragraph (2) or (3) shall be appropriately reduced to reflect the amount of the increase by reason of such paragraph."

H.R. 4849 (Small Business and Infrastructure Jobs Tax Act) proposes to make further changes to changes that were enacted as part of the Corporate Estimated Tax Shift Act of 2009 (PL 111-42):
"SEC. 310. TIME FOR PAYMENT OF CORPORATE ESTIMATED TAXES.
(a) Shift From 2015 to 2014- The percentage under paragraph (1) of section 202(b) of the Corporate Estimated Tax Shift Act of 2009 in effect on the date of the enactment of this Act is increased by 4.5 percentage points.
(b) Shift From 2016 to 2015- The percentage under paragraph (2) of section 561 of the Hiring Incentives to Restore Employment Act in effect on the date of the enactment of this Act is increased by 3.5 percentage points.
(c) Shift From 2020 to 2019- The percentage under paragraph (3) of section 561 of the Hiring Incentives to Restore Employment Act in effect on the date of the enactment of this Act is increased by 1.25 percentage points."

H.R. 4213 (extenders and closing loopholes proposal) also calls for further changes to corporate estimated tax payments!

There were also changes made to the corporate estimated tax payments by the Worker, Homeownership, and Business Assistance Act (PL 111-92), the extension of the Generalized System of Preferences and the Andean Trade Preference (PL 111-124), and the Health Care and Education Reconciliation Act of 2010 (PL 111-152). Wow!

I include this approach to enacting legislation an "oddity" because it really makes no sense. If Congress is looking for a revenue raiser for PAYGO, find a revenue raiser not one that just shifts payment of tax to an earlier year. There are plenty of possibilities - cut back or eliminate an unnecessary deduction or credit.

For more "tax oddities" - click here.