More data on sales tax holidays

I think that one of the "oddities" of the tax law are sales tax holidays used in some states. The holiday typically makes some specific item, such as children's clothing, tax-exempt for one weekend or week (such as before the start of the school year).

They are odd because they are an odd and ineffective way to provide a benefit to low income individuals. They end up providing a greater benefit to higher income buyers because they can afford to spend more during the holiday and perhaps better plan their purchases to make them during the holiday. A better approach would be to provide low-income individuals with a refundable income tax credit. Or state welfare agencies could sell qualified taxpayers special gift cards that are priced to eliminate sales tax. So, for example, in a state with a 6% sales tax, a $50 gift card only costs the low-income buyer $47.17 so the state pays the sales tax.

A preliminary study released in July 2010 by the Federal Reserve Bank of Chicago - The Effect of Sales Tax Holidays on Household Consumption Patterns by Marwell and McGranahan, evaluated the holidays to see if they were meeting their commonly cited benefits. These benefits were helping low-inocme families, helping retailers who compete with nearby retailers across state lines, and encouraging certain purchases deemed beneficial such as computers. The report notes that the first sales tax holiday was in 1997 in New York.

The researchers found that certain sales tax holidays did lead to higher sales of children's clothing. Yet, they found that there was no " statistically significant change in consumption for the lowest-income households" (page 17). The authors conclude: "As tool for providing economic relief to certain households, STH has fared quite poorly."

Small Business Jobs Act of 2010

On September 27, 2010 (Monday), President Obama signed an additional economic stimulus bill - the Small Business Jobs Act of 2010 (H.R. 5297).

For details:

• H.R. 5297 text - here.
• White House video and summary of the bill - here.
• Joint Committee on Tax (JCT) technical explanation (JCX-47-10) - here.
• Joint Committee on Tax revenue estimate (JCX-48-10) - here.
• Information from Senator Baucus, Chair of the Senate Finance Committee - here. At the bottom of his press release is a link to helpful documents about this new law.

I have a list of all of the tax provisions at the end of this post.

This legislation includes provisions to improve lending for small businesses as well as several tax changes including a few that affect more than what we might think of as "small" businesses. For example:

1. Extending 50% bonus depreciation (IRC Section 168(k)) through 12/31/10 for all businesses. This is the most costly provision in the bill per JCT estimates, costing the government $5.5 billion over ten years. I think this is puzzling because it is not giving businesses more depreciation deductions than they would have claimed but is instead just allowing them to claim a large portion of depreciation in the first year. Caveats to using this deduction is that the eligible property (generally equipment) must not only be purchased by 12/31/10, but placed in service. Also, to benefit from the deduction, the business needs to have sufficient taxable income in the current year or if an NOL is generated, the ability to carry it back and use it.
2. 100% exclusion on "qualified small business stock" purchased between date of enactment and 12/31/10. QSBS relates to a corporation with assets of $50 million or less (beyond what I think of when I think of "small business"). This could encourage eligible corporations to offer equity investment and eligible shareholders to purchase it before year end. (IRC Section 1202)
3. Expanded asset expensing for 2010 and 2011 under IRC Section 179. Because this higher expensing amount ($500K) would apply to businesses that acquire up to $2 million of eligible assets, I also label this one as beyond the traditional "small business."
4. Remove cell phones from listed property - for all businesses.

Observations

Does the Act meet principles of good tax policy and move the tax law into the 21st century? Well, partially, but it also adds complexity mostly due to multiple complex temporary provisions. At least one - bonus depreciation, is an extension and taxpayers and practitioners have mostly already figured this one out. A few more observations:

While several of the provisions are temporary to encourage small businesses to do things that might stimulate the economy, several are improvements that have long been sought, such as removing cell phone from "listed property" in order to simplify and modernize the tax law (see AICPA comments on this one). In addition, relaxing the onerous IRC Section 6707A penalty for small businesses has been on Congress' list of necessary changes for a while.

An equity measure - allowing self-employed to deduct their health insurance in computing self-employment tax is included - but just for 2010! There is a lot of inequity in the tax treatment of health insurance premiums. Employees with employer-provided health coverage (whether the employer pays the entire premium or part of it) get the best benefit because they don't have to include in their income the benefit they get from having the employer pay their health insurance premiums (so employees get both an income tax and Social Security tax break). This also comes at great cost to the government - meaning that everyone else subsidizes this. If Congress doesn't want to reduce this benefit, they should at least try to equalize it for others, such as by allowing an above the line for people who have to buy their own health care and letting self-employeds get a benefit for both income and self-employment taxes. This is an area that needs further work by Congress to both educate the public on the issue and make the law more equitable. I wrote a short article on this in 2008 - here.

One of the provisions to help offset the "costs" of the bill is to require information reporting on rental real estate. I think this is interesting in light of efforts to repeal the expanded 1099 reporting that was enacted as part of the March 2010 health care legislation and that has been complained about by both practitioners and the National Taxpayer Advocate. For more information see my 2009 article on the GAO findings that warranted 1099s for rental real estate, 6/21/10 post on current 1099 issue, and 2010 mid-year report of the IRS National Taxpayer Advocate).

The Act also increases certain information reporting penalties, such as for failure to issue a 1099 from $50 to $100. This is a good idea. Ideally, the penalties should be automatically adjusted for inflation and rounded to the next highest $10 increment.

List of all of the tax provisions:

TITLE II--TAX PROVISIONS

Subtitle A--Small Business Relief

PART I--Providing Access to Capital

Sec. 2011. Temporary exclusion of 100 percent of gain on certain small business stock.

Sec. 2012. General business credits of eligible small businesses for 2010 carried back 5 years.

Sec. 2013. General business credits of eligible small businesses in 2010 not subject to alternative minimum tax.

Sec. 2014. Temporary reduction in recognition period for built-in gains tax.

PART II--Encouraging Investment

Sec. 2021. Increased expensing limitations for 2010 and 2011; certain real property treated as section 179 property.

Sec. 2022. Additional first-year depreciation for 50 percent of the basis of certain qualified property.

Sec. 2023. Special rule for long-term contract accounting.

PART III--Promoting Entrepreneurship

Sec. 2031. Increase in amount allowed as deduction for start-up expenditures in 2010.

Sec. 2032. Authorization of appropriations for the United States Trade Representative to develop market access opportunities for United States small- and medium-sized businesses and to enforce trade agreements.

PART IV--Promoting Small Business Fairness

Sec. 2041. Limitation on penalty for failure to disclose reportable transactions based on resulting tax benefits.

Sec. 2042. Deduction for health insurance costs in computing self-employment taxes in 2010.

Sec. 2043. Removal of cellular telephones and similar telecommunications equipment from listed property.

Subtitle B--Revenue Provisions

PART I--Reducing the Tax Gap

Sec. 2101. Information reporting for rental property expense payments.

Sec. 2102. Increase in information return penalties.

Sec. 2103. Report on tax shelter penalties and certain other enforcement actions.

Sec. 2104. Application of continuous levy to tax liabilities of certain Federal contractors.

PART II--Promoting Retirement Preparation

Sec. 2111. Participants in government section 457 plans allowed to treat elective deferrals as Roth contributions.

Sec. 2112. Rollovers from elective deferral plans to designated Roth accounts.

Sec. 2113. Special rules for annuities received from only a portion of a contract.

PART III--Closing Unintended Loopholes

Sec. 2121. Crude tall oil ineligible for cellulosic biofuel producer credit.

Sec. 2122. Source rules for income on guarantees.

PART IV--Time for Payment of Corporate Estimated Taxes

Sec. 2131. Time for payment of corporate estimated taxes.

Employment Tax Problems + Need for Effectve Tax Administration

In addition to the decades old problem of distinguishing an independent contractor from an employee, is the problem of uncollected payroll trust fund taxes. That is, when some employers pay their employees and withhold employment taxes, not all of those taxes get remitted to the government as required.

The Treasury Inspector General for Tax Administration (TIGTA) released a report yesterday (9/22) - The IRS Should Improve Collection Actions For In-Business Trust Fund Accounts Closed As Currently Not Collectible. TIGTA reports that in their sample review, the IRS did not adequately review whether taxpayers were current in filing obligations in 33% of cases.

"TIGTA estimates that improving controls to ensure required collection actions are pursued could potentially prevent approximately $84 million in liabilities from accruing per year, which is approximately $420 million over the next 5 years."

TIGTA reminds readers that "Taxpayers who do not voluntarily pay their share of taxes create unfair burden on honest taxpayers and diminish the public’s respect for the tax system."

A reminder that an effective tax system needs an adequate administrative structure to ensure that taxes owed are collected. This also requires an appropriate infrastructure with the revenue agency (such as IRS) - training, information technology, public education, etc.

This reminds me of some claims I've heard regarding the fair tax (national sales tax) that the tax will allow for elimination of the IRS (although states would take over collection). The uncollected payroll tax situation should also be a reminder that with a sales tax, not all of that gets paid over to the government either.

So, just an observation and reminder that tax system design also needs to consider the appropriate administrative structure.

Make Room on the Shelf — One More Tax Reform Report

"Make Room on the Shelf — One More Tax Reform Report" is the cynical title I gave to my article published today in the AICPA Corporate Taxation Insider. It refers to the report issued a few weeks from the White House group that studied three aspects of tax reform (simplification, improved compliance and corporate reform).

I'm afraid the title is accurate in that the 100+ page report won't get much attention and it really doesn't add anything new to the tax reform debate. Please see my article for some suggestions for moving any tax reform effort along (whether largescale or smaller), as well as a link to the report.

What do you think?

Making Work Pay Credit & Economic Stimulus - Need for Better Discussion

The Wall Street Journal reported yesterday (9/22/10) - "Obama Tax Credit Looks Endangered" by McKinnon. The article refers to the Making Work Pay Credit (MWPC) that was added for 2009 and 2010 by the American Recovery and Reinvestment Act. President Obama would like to extend it through 2011. The estimated cost would be about $60 billion for 2011.

Is this good tax policy? I have a few questions and observations I'd like to see be part of the debate on whether the temporary MWPC and Economic Recovery Payment should be extended.

1 - Effective stimulus? The MWPC was originally enacted for economic stimulus purposes. If we still need economic stimulus perhaps we don't need the MWPC (if it really helped the economy before, why do we still need economic stimulus?) I'm aware that unemployment rates are still high and the economy is weak, I just think the question needs to be answered - was the MWPC the best type of stimulus?

One issue raised about MWPC in its original form was that the credit was doled out via paychecks. A single person eligible for the full $400 credit saw and extra $7.70 in her weekly paycheck. This distribution method was intended to better ensure that those receiving the credit spent it rather than saved it. Let's see Congress and the Administration engage in the discussion - is the MWPC the best type of economic stimulus?

Obama also proposes to extend the Economic Recovery Payment of $250 for those on Social Security for one year. This was a companion to the MWPC and a person could not receive both. Again, there should be a discussion of whether this is the best economic stimulus. If not, something else should be done with the approximately $74 billion the 1-year extension of these provisions would cost. [Joint Committee on Taxation, JCX-7-10R]

2 - How do we pay for one more year of the MPWC and the ERP? What spending will be cut or taxes raised to cover the $74 billion cost of a 1-year extension and how will that change affect the economy?

3 - Are these provisions too generous? The MWPC results in $400 for single taxpayers and $800 for married taxpayers. There is an AGI phase-out, but it is fairly high - $75K for single and $150 for married. I say fairly high because, as reported by the US Census Bureau recently (9/16/10), the "real median household income in the United States in 2009 was $49,777" (9/16/10 press release).

The cost of extension can be reduced by lowering the AGI phase-out levels. But again, see my question 1 above.

4 - What does temporary mean? It is not unusual for Congress and the President (and taxpayers) to really view a "temporary" measure as meaning only that Congress has to revisit regularly to extend. That is not really temporary. It also hurts the budget, creates compliance difficulties and becomes a pointless exercise because there is little discussion or data collection to inform the almost non-existent debate on why temporary measures should be extended.

5 - Are there reasons other than economic stimulus for the MWPC? The Administration's reasons for a 1-year extension of the MWPC are (Greenbook FY2011, page 1):

The MWP credit partially offsets the regressivity of the Social Security payroll tax. It effectively raises the after-tax income of workers eligible for the credit, which makes work more remunerative and so encourages individuals to enter the labor force. Furthermore, the ability of many taxpayers to receive the credit through reduced withholding, rather than after the end of the tax year, increases the incentive effects of the credit. Extending the credit would allow the positive benefits of the credit to continue during the period in which the economy is still recovering from the recession."

If there is truly concern about the need to reduce regressivity of the Social Security tax, the proposal should be for a permanent MWPC. However, I think that reason is a bit misleading in that there is already an Earned Income Tax Credit that provides significant relief from regressivity of the Social Security tax for low-income wage earners.

Hopefully there can be a well-informed discussion in Congress on whether extension of the MWPC and Economic Recovery Payment is the best type of stimulus and considering the points above.

What do you think? What would be the best use of $74 billion to help the economy?

Tax Gap in Congress

In case you missed, the Washington Post ran a story on 9/9/10 - "Capitol Hill employees owed $9.3 million in back taxes last year, data show" by T.W. Farnum. It details (without names) how much in back taxes is owed by people who work for Congress including in the Office of Government Ethics. Here is an excerpt:

"638 employees, or about 4 percent, of the 18,000 Hill workers owe money.
The average unpaid tax bill is $12,787 among the Senate's delinquent taxpayers and $15,498 among those working in the House."

What is surprising to me is how many government jobs (apparently most) do no require the applicant to show that they are up to date in paying their taxes. When I worked for the IRS years ago, I had 3 years of tax returns audited as part of the hiring process. I'm not saying that every government job applicant needs to be audited, but there should be a requirement to check that they have filed their federal and state income tax returns. State applicants should be required to also show they paid their use tax!

Also, we should be asking those running for federal, state and local offices to show they have paid their income and use taxes. I mean "we the public" should be asking.

Why not also have an annual check to be sure workers are up to date with tax filings and if not, offer help in getting them filed - referrals to VITA sites, for example.

When paid return preparers register to get their PTIN this month, they will need to confirm that they are current with their filings. At some point, the system won't issue the applicant a PTIN if they have not filed their federal tax return.

Two bills have been introduced in the Senate to address this problem. S. 3790 would make people with "seriously delinquent" tax debt ineligible for federal employment. S. 3791 would "require Members of Congress to disclose delinquent tax liability, require an ethics inquiry, and garnish the wages of a Member with Federal tax liability."

I think these bills are good ideas. As Congress talks about reducing the tax gap, they should be sure that their members and those working to create and support federal laws are following them. Lead by example. And, there are approaches available to most delinquent taxpayers, such as installment agreements, to get past due taxes paid.

What do you think?

Tax Reform: Lessons from the Tax Reform Act of 1986

The Senate Finance Committee has scheduled a hearing for September 23, 2010 - Tax Reform: Lessons from the Tax Reform Act of 1986. Former Congressmen Gephardt and Archer will testify along with John Chapoton and Randall Weiss, who per The Hill (9/17/10) were assistant secretary of Treasury for President Reagan and Joint Committee on Taxation economist between 1977 and 1989, respectively.

Sounds like something some academics would plan! Are there lessons we have today from the 1986 Act versus those we learned soon after it passed? Are the lessons ones of process or the types of changes? I think there are some process lessons. For example, there were some Treasury studies leading up to reform. Those studies had some bold ideas (including discussion of a VAT in Chapter 10) - many of which could be revisited. I revisited the 1986 Act for lessons learned back in 2007 in a short article in the AICPA Tax Insider - Strategy for Major Tax Reform.

Here are some lessons on types of changes that come to mind:

• Include inflation adjustments anytime there are tax brackets or exemption amounts, such as for the AMT.
• Phase-in some changes to give the IRS more time to issue guidance. For example, the Section 469 passive activity loss limitation regulations are still not finalized! Many of these temporary regulations were issued before the 3-year expiration was enacted in 1988. So, 22 years later, we still have an odd set of lengthy regs consisting of temporary and final regs that are difficult to get through.

What lessons come to mind for you?

Blogging and Tax Obligations

I'm a little late to this story - but it is interesting and raises some questions about e-commerce and Internet activities and possible tax consequences and whether old rules make sense for 21st century practices.

A few weeks ago, a story in a Philadelphia paper made it sound like the city was imposing a $300 tax on bloggers.* What the city actually does is impose a business license tax. Many cities impose business license taxes. In Philadelphia, the tax is called the Business Privilege Tax. According to the stories,* the city obtained information per information sharing arrangements with the IRS about people in the city who had reported business income (such as on a Schedule C). The city then contacted those who had not paid the BPT. This is not unusual - many cities do this.

The stories about the tax and comments from readers include that this is business unfriendly, a hardship and unnecessary as the businesses already pay federal and state taxes.

That raises the question and observation - what about local governments? How do they get revenue to provide the key services that individuals want on a daily basis - police and fire protection, no potholes in the roads, open libraries, parks and more?

I think these two topics - city business license taxes and personal blog sites (not those operated by a business, such as a hardware store), raise some 21st century tax issues, such as these:

1. The Internet enables people to operate a variety of businesses out of their homes, such as blogging that might generate revenue from ads or selling an e-book you wrote. When these types of activities do not involve anything other than a computer and Internet connection, what additional city services is the person obtaining that warrants a business license tax? Of course, this can soon get to a fine line because local governments do help or actually provide the electricity, but it is likely minimal. Given new types of businesses and how to operate them, I think cities should be sure their business license tax is only applicable when the business has a location that is not a personal residence and no customers visit that residence. Some cities likely need to also rethink 19th and 20th century rules, such as requiring home businesses to get a "home occupation permit" (see City of Fremont). Why do they need to know if a tax compliant home-based business without any visiting customers has a permit?
2. Should an individual who runs a personal blog but also has ads running on it that generate revenue, owe self-employment tax? Is generation of the ads enough to say you are really self-employed when you are running a blog, say, on preparing meals in a Julia Child cookbook? Of course, there is no argument that the income is subject to income tax (income from any source derived is subject to income tax), but is the fact that a visitor to you site clicked on the Amazon link and placed a large order mean your efforts writing the blog produced business income? Real estate rental income is usually not subject to SE tax, should this passive blogging income fall into the same application? Of course, some bloggers might be treating their blog as a business in which case they should pay SE tax and file a Schedule C and get to deduct business expenses. I think the IRS should provide some guidance on when the personal blogger is subject to SE tax and should be filing a Schedule C (rather than just reporting the affiliate revenue as miscellaneous income). [For more on SE tax policy considerations, see my June 2010 AICPA Tax Insider article on the topic.]

What do you think about city business license taxes and taxes applicable to personal blogging?

* Link to the 8/18/10 story in the Philadelphia Citypaper "Pay Up" by Valerie Rubinsky + link to The Philadelphia Inquirer article by Robert Moran, "Is Philly Taxing Bloggers?" 8/24/10, with clarifications on the story.

Regulating Paid Tax Return Preparers

Since at least 2002, the IRS National Taxpayer Advocate (NTA) has pushed for regulation by the IRS of "unenrolled" preparers (individuals who are not attorneys, CPAs or Enrolled Agents). Several studies have found intentional and unintentional (sloppy and uninformed) errors by tax preparation offices. The IRS held public hearings in 2009 and issued a 57-page report of findings in December 2009 on the need to and how to regulate all paid preparers. Parts of the plan have been rolling out for the past few months and registration is expected to start this month (September 2010)!

The reach is quite broad. Anyone involved in preparing a federal tax return even if they are not the signing preparer will need to register and pay the annual $64.25 fee. If that person is not an attorney, CPA or EA, they will also need to have at least 15 hours of continuing education annually and pass a test relevant to the type of returns they prepare. So, as currently drafted, individuals who are not CPAs or EAs but work for people who are, will need to become a "registered tax return preparer" (RTRP) - a new designation we will likely be seeing after a registered person's name. Such individuals also become subject to rules of conduct established by the Treasury Department (known as "Circular 230").

A big current issue is whether someone working for a CPA, who is already quite regulated by their state licensing board and the IRS and any professional organization they belong to, such as the AICPA, should have to become an RTRP. The AICPA has argued no, but this week, the National Society of Accountants argued yes. The NTA has also argued that anyone involved in preparing the return, even if they don't sign it needs to be registered.

What is the relevance to good tax policy? A few ideas come to mind. First, is the principle of simplicity. If the tax law were not so complicated, we probably would not have so many paid preparers and so many unintentional errors. A complicated tax law also raises the question of just what should be on a test to determine if someone should be preparing another's tax return? Such a test should be open book - does the preparer know how to use appropriate tax research tools to resolve tax issues? Do they have a broad and deep enough knowledge of the tax law to be able to identify the tax issues that need to be researched? When the IRS described the content of the likely tests, they did so by form number rather than by Internal Revenue Code section, thus implying (in my mind), less understanding of the tax law would be necessary to pass the exam. For example, when people study for the CPA exam, they are not studying tax forms, but the tax law itself. [See page 53 of the IRS' 57-page report for the list of tax forms likely to be addressed on the tests.]

Another tax policy consideration is a minimum tax gap. I don't think the proposed system will cause unscrupulous preparers to change behavior. They will just become (or continue to be) paid preparers who do not sign the return so remain off of the IRS radar screen (until the taxpayer gets audited and leads the IRS to the preparer). Recall some of the awful stories that have been in the papers in the past year about the first-time homebuyer credit claimed on paid preparer returns where the taxpayer did not qualify (see my 2/27/10 post). If Congress and the IRS want to reign in these unscrupulous preparers, they really need to (unfortunately) add a very large penalty to the tax system to be imposed on taxpayers who file a return they paid someone to prepare and did not get that preparer to sign the return and list his identifying number. Such a penalty would keep taxpayers away from unscrupulous preparers who would then go out of business.

Also, a complicated tax law, even with testing that many preparers are likely to pass, is still going to result in errors on returns.

I've got an article on this topic in the AICPA Tax Insider (9/9/10) - here. The article has links to IRS information on this topic.

What do you think? Is the proposed regulation system the best way to go? What might be better?

President Obama's New Stimulus Proposals & Tax Policy

Over Labor Day Weekend, President Obama announced new plans to help stimulate the economy (9/8/10 post to White House blog + Wall Street Journal, 9/6/10 "Obama to push tax break"). The plans include:

• Research tax credit - eliminate the 20% regular credit that uses a base period of 1984 - 1988 and just have the simplified credit but increase the credit rate from 14% to 17%; make this credit that has been temporary since 1981 permanent. [White House fact sheet]
• Equipment expensing - allow businesses to fully expense equipment in the year of purchase through 2011 (so rather than extending 50% bonus depreciation, move to 100% expensing). [White House fact sheet]
• Permanently extend tax cuts for middle class individuals. In the press release, President Obama indirectly acknowledges that he means 98% of individuals when he refers to this group of taxpayers (he refers to efforts to hold up his plan by those who want to also extend the cuts for the "wealthiest two percent of Americans").
• Wants Congress to pass the small business jobs bill that includes a broadened exclusion for qualified small business stock (IRC Section 1202).
• Additional support for middle class families including making the American Opportunity Tax Credit permanent.

While President Obama is proposing these measures as economic stimulus, given that a few are permanent, it goes beyond that goal. Would these changes move our tax system into the 21st century and meet principles of good tax policy? Overall, I don't think so.

My observations:

• Research tax credit - I think this is a good move. It simplifies the law by having only one formula for calculating the credit. It brings certainty to this temporary measure that has been extended at least 12 times. It last expired on 12/31/09 so businesses have been waiting over 8 months to know if it will be extended for 2010. While they might believe that it will be given that it has been retroactively extended in the past (other than one year), companies cannot make that assumption on financial statements which causes challenges. Also, when companies are looking at where to locate R&D operations, the US doesn't look too good relative to countries with permanent R&D incentives. Since the credit only applies to R&D labor in the US, a permanent credit sends a strong message that the US does want to have these high-paying jobs here.
• Temporary expensing of assets - this really is a timing adjustment rather than a new tax deduction. Relative to 50% bonus depreciation, full expensing is easier. One thing I wonder is whether such an incentive might cause a significant increase in equipment purchase only to drop off thereafter which would hurt companies that provide the equipment. Expensing might be a starting point to further business tax changes such as changing from an income tax to a consumption tax, such as a business activity tax (BAT). [For more on BAT, see Tax Notes article by Bill Barrett.]
• Permanent tax cuts for 98% of individuals described as the middle class - I think this is too expensive and unrealistic. I really don't believe that a married couple making up to $250K (or unmarried person making up to $200K) is the middle class. Given our large, unending deficits and debt, I don't think it makes sense to extend a temporary tax cut to such a large group of individuals. Also, the dollars not used for such a broad tax cut could be better targeted to provide real economic stimulus on a temporary basis without jeopardizing forever the ability to reduce the deficit and pay down the debt.
• Temporary 100% exclusion (rather than 50%) for qualified individuals who acquire "qualified small business stock" during the stated time period. I think this could be effective stimulus if it encourages people to want to invest in qualified businesses. High income/wealth individuals can best afford to make these investments, but I think this is still better stimulus than an across the board capital gains tax cut (such as the President wants to give to 98% of individuals), because it is targeted to encourage new investment.
• Permanent American Opportunity Tax Credit - I think this is too generous in that it helps a married couple with up to $180,000 of income get cash to pay for a child's college tuition. I think equity could be better served by using the money to help those who can truly not afford to get a Bachelor's, Master's or doctorate to do so rather than giving cash to people who can afford to send their child to college and beyond. Also, this credit is focused on those individuals fortunate enough to complete college in four years. Today, data on graduations is tracked using a 6-year graduation rate, yet this credit only covers the first 4 years of college. I have more on this one in a recent article in the AICPA Tax Insider - here.
• PAYGO - the only tax cut above that doesn't need to be "paid for" is the extension of tax cuts to 98% of individuals. That is the legal reality under the PAYGO rules, although not the budget reality (after all, there is no free lunch!). The other provisions, need revenue offsets (tax increases). So, it is not possible to provide a full analysis of the proposals until the entire tax package is available - we shouldn't forget that! [For more on PAYGO: Congressional Research Service report, PricewaterhouseCoopers article, and White House OMB information.]

What do you think?

Georgia, Tax Reform and Outdated Tax Systems

I'm falling behind in some of my tax readings (!) so almost missed this appropriately titled op ed for this blog - from The Atlanta Journal-Constitution: "A 1930s tax code can’t cut it in 2010" by Alan Essig, 8/27/10. The author points out a few areas where the Georgia tax system has not kept up with changes in the economy and society since the 1930s, including the sales tax base. This is a similar problem in many states including California where the sales tax base assumes that consumption = tangible personal property, even though personal services, intangibles (such as digital downloads) and entertainment are significant consumption items.

Georgia recently set up a tax reform committee (see my 6/11/10 post and 1/8/10 post). Here is the committee's website. The committee's full name is the Special Council on Tax Fairness for Georgians. Sounds good. The website has links to background materials and date for upcoming meetings. The committee's report is due to the governor in January 2011.

More on expiring tax cuts

It looks like interest in extending tax cuts for one more year for everyone is catching on per a USA Today article - "More Democrats lean against tax increases for the rich," 9/2/10. As I've noted before, for both tax policy and better stimulus reasons, I think Congress needs to work harder to target any tax cuts if they want to use this large amount of money to help the economy.

The CBO has a spreadsheet listing provisions that expire at the end of this year (as well as those that expired at the end of 2009 and were not (yet) renewed). I encourage you to take a look. The list is not detailed enough to indicate, for example, the cost of extending the lower capital gains rate to 97% of individuals (those with income under $250K if married or $200K if not married) versus also extending it to the other 3% (the group that has a lot of capital gains!).

I think the CBO list is one of several good tools that indicate that an across the board extension of all tax cuts is not a good idea. Once a temporary measure gets extended once, its likely to become either truly permanent or something that annually gets extended. One example of something that should be allowed to expire is the deduction for real property taxes for those who claim the standard deduction. Adding deductions to the standard deduction violates the purpose of the standard deduction, makes the law more complicated and more unfair (why allow non-itemizers to deduct real property taxes rather than something else)? If Congress believes the standard deduction is not large enough, they should increase it for everyone, not only for those with real property taxes. The CBO cost on this item is $26 billion over ten years.

That is just one example. I encourage you to take a look at the CBO spreadsheet.

If Congress and President Obama do decide to extend the 2001/2003 (and perhaps even some of the 2009 American Recovery & Reinvestment Act tax cuts) for one more year, why not add a requirement that all or some of the taxpayer savings be invested in some manner? For example, if you report capital gains in 2011 of more than $30,000 (or some other figure), you get the lower rate if you show you invested some portion of your proceeds in qualified small business stock or your local school (rather than buying other investments on the stock market). While this does complicate the tax law, this type of change would be for higher income individuals - which should be defined using lower dollar amounts than used by President Obama (I think his thresholds could be cut in half) - thus, the complication would be both temporary and affect less than 40% of individuals.

To continue tax cuts that are poorly targeted will not only increase the debt and deficit, but won't stimulate the economy. On the other hand, if the government collected those tax dollars, they could use them to stimulate the economy (hopefully). Another tax break that ends this year is the American Opportunity Tax Credit. As modified for 2009 and 2010, it provides a tax credit for individuals making up to $180K if married. At that income level, one should not need or receive taxpayer support to help send their children to college (for more on AOTC - here). This credit should not be extended in its current form, but modified to be better targeted to provide relief to those who need it (and when college aid is not given to those who don't need it, there is more available to provide to those who do need it).

What do you think? Should Congress just extend all tax cuts for one more year or only those it can target in such a way to address a true need or to truly help the economy?

More stimulus?

In a speech at the National Press Club yesterday, outgoing Chair of the Council of Economic Advisers, Christine Romer noted the need for more economic stimulus to help the economy. (Reuters, Bohan, "Romer: U.S. must find will for further stimulus")

If the President and Congress follow that advise, does it mean the tax law has to change? Prior economic stimulus measures have included temporary changes to the tax law including bonus depreciation, larger expensing deductions, greater gain exclusion percentages for qualified small business stock, longer NOL carrybacks and even larger credits for higher education expenses. I'm not convinced that it has all helped but has certainly made the tax law more complex. Also, taxpayers seems to want to keep temporary measures around forever which usually leads to continued temporariness due to the challenge of finding tax increases or spending cuts to pay for the tax breaks.

The American Recovery and Reinvestment Act included both tax changes and various spending measures. I'd like to see any additional stimulus be targeted to where it is most likely to do the most good which is probably in employing the unemployed. Paying for that will likely result in permanent tax increases as recently occurred with the Education Jobs and Medicaid Assistance Act (P.L. 111-226; 8/10/10) which included several tax law changes regarding international provisions.

I don't think extending all of the 2001/2003 tax cuts for one more year will help much either and Congress will have to find a way to pay for the cuts for those with income over $250K ($200K if not married). See my 7/31/10 post and 8/20/10 post on these topics on targeting those dollars to where they will best help the economy and even looking at the 2001/2003 tax cuts for those making less than $250K (which is a lot of income - why is President Obama so focused on providing tax cuts to people who don't need them?!)

What do you think - more stimulus? If yes, what and how to pay for it?