More Tax History on the Web - from Joint Committee on Taxation

Discussions of tax reform tend to become repetitive decade after decade. For example, there have been discussions from at least the early 1980s on a possible federal VAT and it has been discussed every decade since (see "VAT Mania"). While government studies and reports can be found in federal depository libraries (such as at San Jose State), it isn't always easy. When more of this information can be added to the web - and particularly if easy to find, that is great! It is interesting to see what was being studied and debated decades ago.

Well, the Joint Committee on Taxation just announced this week that it has posted all of its reports since it was created back in 1926. Per their announcement (Press Release 03-11):

"The staff of the Joint Committee on Taxation (the “Joint Committee”) today announces that it has posted to its website, www.jct.gov, copies of most known Joint Committee publications from 1926, when the Joint Committee was created, through the present. The postings provide Congressional offices and the general public with a more complete and searchable set of documents relevant to the evolution of the Internal Revenue Code, than the Joint Committee previously had made available on its website."

This is a lot of information. One report I took a look at was tied to the Revenue Act of 1926. It notes that the duties of the JCT are:

(1) To investigate the operation and effects of the Federal system of internal revenue taxes.
(2) To investigate the administration of such taxes by the Bureau of Internal Revenue or any executive department, establishment, or agency charged with their administration.
(3) To make such other investigations in respect of such system of taxes as the joint committee may deem necessary.

The report briefly described 18 tentative projects. Number 18 involved cutting down on the number of "trivial" cases that went before the Board of Tax Appeals. Number 14 continues to be an interesting issue that comes up in discussions of estate tax reform. It reads:

"REFERENCE NO. 14.-LOSS OF REVENUE THROUGH GIFTS AND TRUSTS
A report on the extent of legal tax evasion through gifts and trusts as permitted under the present act.

"Note.-The revenue act is based not only on the principle of taxing the annual income of an individual or corporation, but it also taxes, in general, the appreciation in property accruing over a period of years in the year in which such profit is realized. When gifts are made or trusts established it is possible, however, to legally evade the tax which would normally accrue to the Government on the sale or other disposition of the property.

"A comparison of the taxes paid by John D. Rockefeller and John D. Rockefeller, Jr., and by Henry Ford and Edsel Ford is sufficient to show that the loss in revenue from this exception is great. A study indicating the total loss in revenue from this exception to a tax on realized appreciation in property will be valuable."

You can find the link to the reports here.

Sales Tax Holiday in Missouri (and elsewhere) - A Tax Oddity

I have written about this before and included it in my list of "tax oddities" - states offering "holidays" when sales tax is not owed on certain items. Generally, they last just a few days and only apply to specified items.

Thomson Reuters has a list of the holidays - here. The Tax Foundation has an extensive report (July 2011) that lists state holidays and explains why the holidays are poor tax policy.

States not only lose revenue, retailers have extra recordkeeping and reporting burdens, inequities result - as just a few of the problems. But, there is also the problem that whenever anything is carved out for special tax treatment, it is usually complicated to define what gets the special treatment and what does not.

A recent example is Missouri which offers a sales tax holiday in early August to help families purchase school supplies (the "Back to School Sales Tax Holiday"). And this is another example of the oddity - it doesn't matter what your income level is - everyone gets the tax savings. That means there is less of the benefit to go to those who really need it because the state gave some of the benefit to people who don't need it.

Here is an explanation of the sales tax holiday from the Missouri Department of Revenue - Section 144.049. As indicated in that explanation, the holiday includes personal computers that do not exceed $3,500.

Well, a question was raised by a retailer as to whether an iPad and e-book reader would qualify for the sales tax holiday. So the Missouri Dept. of Revenue had to devote time and resources to answering this question. The answer is in LR 6870 (7/29/11):

1. "The definition of personal computers includes the Apple iPad and Apple iPad2 because they are akin to a laptop computer and are used to perform functions traditionally associated with a personal computer."
2. "Book readers that download off the internet are not personal computers because they are not akin to laptop, desktop, or tower computer systems, and are not used to perform the functions traditionally associated with personal computers."

Why the difference? Missouri law (Section 144.049(2)) defines a "personal computer" as:

"a laptop, desktop, or tower computer system which consists of a central processing unit, random access memory, a storage drive, a display monitor, and a keyboard and devices designed for use in conjunction with a personal computer, such as a disk drive, memory module, compact disk drive, daughterboard, digitalizer, microphone, modem, motherboard, mouse, multimedia speaker, printer, scanner, single-user hardware, single-user operating system, soundcard, or video card."

To bad for the Kindle, Nook and other readers that aren't really a computer. But can't these items be school supplies?

Missouri law defines "school supplies" as "any item normally used by students in a standard classroom for educational purposes, including but not limited to textbooks, notebooks, paper, writing instruments, crayons, art supplies, rulers, book bags, backpacks, handheld calculators, chalk, maps, and globes. The term shall not include watches, radios, CD players, headphones, sporting equipment, portable or desktop telephones, copiers or other office equipment, furniture, or fixtures. School supplies shall also include computer software having a taxable value of three hundred fifty dollars or less."

Sounds like the Kindle or Nook could be a school supply. BUT - the sales tax holiday only applies to supplies that do not exceed $50 per purchase!

What about buying an iPad during the 3-day sales tax holiday but having the parent use it rather than the school child? What if both use it? I could not find any prohibition on this. And, it would be difficult to enforce. Another problem with such holidays - they are easily abused. And trying to find some way to enforce that the items purchased must be used by school children is difficult.

A better approach - use an approach similar to the free or reduced lunch program states likely already use. It requires the family to file a form indicating need. These families could be given vouchers/coupons/gift cards to use for school supplies.

What do you think?

Affiliate nexus, California and Amazon - the saga and oddities continue

A few unusual things have occurred since California enacted its "Amazon" - affiliate nexus law (ABX1 28; Chapter 7) at the end of June 2011. I mean unusual in that I don't think we have seen them in other states that have enacted these so-called "Amazon" laws aimed at trying to get remote sellers with affiliates in the state (generally people who get a commission for advertising the seller's website). (For background, see my 7/4/11 post, 7/19/11 post, and this short article.)

Here are some of these unusual things:

1. Amazon got approval to try to obtain signatures to try to get a referendum on the ballot so that voters can decide to repeal the affiliate nexus law. They need to get 504,760 signatures by 9/27/11. See item #1489 on the California Secretary of State website - here.
   
2. The Los Angeles Times reports that Amazon has invested $5.25 million to get the signatures ("Amazon ups the ante in Internet sales tax fight," 8/23/11). This is a lot of money!
3. Jobs and small businesses - both sides of the debate say it is about protecting jobs and small businesses! The Los Angeles Times article ("Amazon ups the ante in Internet sales tax fight," 8/23/11) refers to a group called More Jobs Not Taxes. At their website, they say they were formed to opposed the Internet tax law that will "hurt small businesses, kill jobs and undermine chances for any economic recovery in California." I'd guess that the reference to hurting small businesses is because Amazon and perhaps other Internet vendors cancelled their affiliate arrangements in California which means many will earn less commissions. Is it a job killer? I don't see that. And there are many small businesses operating in California that find it difficult to compete with Amazon because many of Amazon's customers don't know that they owe use tax when they buy taxable items form Amazon or any out-of-state vendor who does not collect sales tax. For example, see information from the American Booksellers Association (here) and Stand With Main Street (here). These groups say that not having online sellers collect sales tax is hurting small, main street businesses (the opposite of what the More Jobs Not Taxes group says). The California Retailers Association also supports the affiliate nexus law (see their 6/20/11 press release). This group says the law promotes jobs (the opposite of what the More Jobs Not Taxes group says).
   
4. The Health and Human Services Network of California is pushing a grassroots effort to get 2,000 signatures of people telling Amazon to collect the California sales tax - part of a "Think before you click" campaign. As noted in a KQED report (8/15/11), they also call for a boycott of Amazon.
   
5. A Los Angeles Times article of 8/25/11 - "California lawmakers try to head off Amazon sales tax referendum,"reports that the Senate Appropriations Committee is taking action to modify the original legislation to make a referendum impossible, thus ending Amazon's effort to get voters to overturn the law.

All of this is really odd and unfortunate. It will not lead to effective laws, an equitable and transparent tax system, and good use of money!

AND - it seems to continue the confusion many taxpayers have that when they buy taxable goods from Amazon or other out-of-state vendors, that no tax is owed. This is not correct - these customers must self assess and pay the use tax, which most can do right on their California income tax form. I'd guess that most people who sign the petition to get the referendum on the California ballot think they are signing to eliminate sales tax on these sales (rather than to just ensure that they must collect use tax rather than having the state try to get Amazon to collect it for them).

A better approach to all of this:

• California should work with Congress to enact legislation (currently S. 1452, the Main Street Fairness Act) which would allow for a uniform approach for states to collect sales tax from remote vendors. Amazon has stated that it supports this approach (see Mark Hachman at PCMAG.com of 7/26/11)
  
• California should consider adopting the Streamlined Sales & Use Tax (which it would be required to do under S. 1452 if it wants to be able to collect from remote vendors).
• Continue to educate people about the use tax. Even under S. 1452, small vendors would be exempt so there would still be a requirement for consumers to self-assess and pay use tax. This will be easier though starting in 2011 when most can use the look-up table (see proposed table at last page of this BOE document).

And, there are even easier ways to collect the tax - have it collected at the same time the buyer's credit card or Paypal account is charged for the taxable purchase. Retailers would no longer have filing and collection obligations, customers would not have to worry about use tax recordkeeping and reporting and states would get their money quicker (for more on that, see my blog post and testimony - here).

What do you think?

VAT Hearing by House Ways & Means and Relevance for Tax Reform

A July 26 Ways and Means Committee hearing focused on consumption-based tax systems. Although there are a few different formulations for a consumption tax, the committee only addressed two - the "fair tax" (a national retail sales tax) and the value-added tax (for example, the "flat tax" which is also a consumption tax, was ignored).

There are lessons we can learn from the over 130 countries that use a VAT. I think there is also some benefit to states if they replace their out-dated, cumbersome sales tax regime with a VAT. Also, perhaps other countries can have lower corporate income tax rates because they have a national VAT.

I have a short article published today in the AICPA Corporate Taxation Insider on the VAT discussion at the July 26 hearing and the relevance to tax reform in the US - "VAT Lessons for U.S. Tax Reform."

And for a list of tax reform hearings in the 112th Congress - see this list here.

What do you think about a VAT for the US?

US Chamber of Commerce Seeks Tax Restructuring and Entitlement Reform

This month (August 2011), the U.S. Chamber of Commerce sent a letter to the Joint Select Committee on Deficit Reduction (created by the debt ceiling legislation PL 112-25, Section 401) stating that "Congress must reform entitlement programs and fundamentally restructure the U.S. tax code to bring revenue and spending back into alignment."

The Chamber doesn't provide specifics, but states that tax reform is needed "to improve efficiency, transparency, and simplicity to drive economic growth and job creation." ... and address "how the current tax laws act as an impediment to worldwide competitiveness, a deterrent to saving and investment, and an obstacle to innovation and entrepreneurship." They also suggest that reform should "lower overall marginal tax rates, to encourage saving and investment, to foster global competitiveness, increase capital accumulation, attract foreign investment, and drive job creation."

Interesting points:

• That they are calling upon this committee to restructure the tax law.
• That they are saying that spending reductions/reforms should not be just on discretionary spending (which is a relatively small category of federal spending), but should instead look at entitlement of Social Security and Medicare.
• They are starting with tax principles to help shape the reform - efficiency, transparency and simplicity. This would mean that they would support reduction and elimination of some number of special deductions, exclusions and credits. They are also calling for elimination of special rules that benefit one industry over another. They want "the marketplace, and not the tax system, to allocate resources" (neutrality and economic efficiency).
  

I think this is a good, bold move. The Chamber says it speaks for about 3 million businesses of all sizes. The federal tax system has become too complex, which increases compliance costs for businesses and individuals. The AMT and too many phase-outs and special rules makes it difficult for taxpayers to know the tax consequences of their activities.

But, the special committee must vote on its report by November 23, 2011 - that doesn't give them much time. Yet, there are various proposals including from President Obama's deficit commission (here), and others (I have links to most here). And there have been several hearings this year on tax reform (see list here). Entitlement reform will likely be a bigger challenge thought than tax reform. We'll see.

Forbes post on "asking the right tax questions"

I am grateful to CPA and blogger Peter Reilly now blogging for Forbes in addition to his Passive Activities tax blog, for letting me be a guest blogger on his site today. I have a blog there on the need to look at the spending in the tax law when looking at cutting spending or generating revenue. I explain though why it is harder to cut the spending in the tax law rather than the spending in an agency's budget even though the net effect to the treasury is the same.

Please take a look - here. And, of course, check out Peter's fine posts!

PL 86-272, UDITPA and the CPA Exam

The CPA exam change getting the greatest attention is the addition of questions on International Financial Reporting Standards (IFRS). But, another one of interest is that starting July 1, 2011, there will be questions on Public Law 86-272 - the income tax nexus law enacted in 1959! Also added - Uniform Division of Income for Tax Purposes Act (UDITPA) which has been around since 1957!

While these are very old laws to finally be added to the CPA exam (which already has plenty of varied content), I think it must be due to the growing importance of these rules to businesses of all sizes that today can easily engage in interstate commerce. I wonder though why the content is described so narrowly. For example, why not add:

• Nexus concepts for state income tax purposes.
• Basic rules and concepts for determining state income tax of a multistate business.

But another question - isn't the exam already complicated enough? The multistate rules added (even though just income tax and apparently just for sales of tangible goods to which PL 86-272 applies), are quite complicated. I suspect that the questions have to be fairly general. Do they adequately measure understanding of these important tax concepts?

References:

• List of 7/1/11 changes from the AICPA - here.
• Complete list of exam content - here.

What do you think? How would you word a question on PL 86-272 and UDITPA for the CPA exam?

California Property Taxes in the News

I found two interesting stories in the news this week about California's property tax and the famous "Prop 13." These stories are (1) Los Angeles Mayor Villaraigosa calling for a change to Prop 13 for non-residential property to help generate revenue to help fund education and (2) greater scrutiny being paid to whether non-profit organizations located in California are entitled to a property tax break. Details and tax policy observations ....

1. Mayor Villariagosa spoke to the Sacramento Press Club on 8/16/11. He stated:

"Let’s apply Prop. 13’s protections to homeowners and homeowners alone. And let’s strengthen those protections. We could take half the money we generate to fund schools and use the other half to cut taxes for homeowners – and, you know what, we can spur the housing market in the process. Phase it in over time to soften the impact on business and call it the Homeowner and Public Education Protection Act!"

He observed that this change could generate between $2.1 and $8 billion per year. He also suggests some other changes including taxing some services and reforming the corporate income tax.

He also said there is a need "to modernize and rationalize our tax laws – and yes, even to eliminate taxes that don’t make good economic sense."

The details on his proposed property tax change are not included. I would guess it could be changing the definition of change in ownership, increasing the tax rate, or modifying the valuation formula. One policy aspect of the California property tax system that warrants a look is equity. A business that has owned property for a long time will have a lower property tax bill than a business that recently acquired property even though both pieces have the same market value. That creates competitive disparities. Another policy consideration is neutrality - that tax rules should not affect business decisions. But, certain business restructurings might be done primarily to avoid a property reassessment - in violation of the neutrality or economic efficiency principle.

I'm curious as to what he has in mind to return some of the additional property tax revenue to homeowners. That statement concerns me because homeowners already get so many tax breaks in the federal and state tax rules.

As I've blogged about and written about several times - such as here, the California tax system needs modifications to modernize it and enable it to better meet principles of good tax policy. So, I think it is good that the Mayor is raising these points. He is also taking a bold step in not only calling for reform (which might be done in a revenue neutral manner although that would still need a 2/3 vote) but is calling for generating additional revenue to better fund education.

2. Property tax of non-profits - the New York Times had an article on 8/14/11 - "California Scrutinizes Nonprofits, Sometimes Ending a Tax Exemption." The article notes that "assessors in each of the state’s 58 counties make the final decision on exemptions, after determining whether that property is used in a way that is of “primary benefit” to California." The article notes that it is not always easy to determine whether a charity provides a benefit to California, such as because some of that benefit might be indirect. For example, it notes an organization that fights tuberculosis in Mexico, which provides an indirect benefit to California by limiting spread of this disease. With counties looking for revenue, the exemption is getting extra scrutiny.

This exemption highlights a tax law design challenge. When something is exempt, the law becomes more complicated in trying to define that exemption, which is usually not easy. Are there policy reasons to justify a property tax exemption for non-profits? They do use public services (such as roads, courts, fire and police). As a non-profit, they have income tax breaks in that they are not subject to income tax unless they have unrelated business income. Non-profits do not get employment tax breaks, so why a property tax break?

Tax reform should look at all special rules to determine if they are still appropriate and if yes, are they designed to meet their underlying purpose?

For more on the welfare/non-profit exemption in the California property tax, see Section 267 of the BOE Assessor's Handbook (178 pages!) - here.

What do you think?

Warren Buffett and Income Tax Progressivity

Warren Buffett is in the news this week for calling for increased income taxes on very high income individuals, such as himself (New York Times op ed of 8/14/11 - "Stop Coddling the Super-Rich"). He notes the very high income of a very small percentage of the US population. Specifically he states that about 237,000 households reported income exceeding $1 million in 2009. Buffett says they should have a higher tax rate than other individuals and the roughly 8,300 filers with income in excess of $10 million should have an even higher rate. He says the rate should be higher not only for earned income, but also capital gains and dividends.

He raises an important discussion point. How wide of a range of tax rates should a progressive income tax have? In California, the highest tax rate kicks in at about $95,000 of income for a married couple. That is fairly low. For the federal income tax, a married couple in 2010 hit the highest rate of 35% at about $374,000. Less than 2% of filers see that rate. But within that top 2%, there is really quite a range of income levels. I agree with Buffett that consideration should be given to make the system more progressive given the reality that there is quite a different between $400,000 of income and over $10 million of income. Perhaps the reinstatement of the higher tax rates in 2013 should apply to these very high income levels.

Arguments against greater progressivity include that high income individuals do pay more taxes (because they have more income) and very high tax rates can be confiscatory. High tax rates provide a greater tax benefit for deductions, but this could be addressed by converting some itemized deductions to credits.

What do you think?

What is "tax reform"?

Senator Grassley sent a letter to President Obama on August 11 noting some differences in how he thinks President Obama defines "tax reform" and how he defines it. Per Grassley, President Obama's version of tax reform includes:

• Requiring those who "can afford it" to "pay their fair share."
• "Closing loopholes, special interest tax breaks and corporate subsidies."

Senator Grassley notes his concerns that current talk about tax loopholes and tax expenditures leaves some to think that all tax expenditures are loopholes. He notes that tax expenditures are rules "intentionally enacted by Congress for certain policy goals." He also notes that "tax reform in a global economy is a serious task."

Well, I think there are good points being made in all of this that need to be funneled into a better aproach to tax reform. This is the point of this 21st Centuty Taxation website and blog - how to effeciently and effectively move tax systems into the 21st century.

While Senator Grassley is correct that tax expenditures were intentionally enacted to serve certain policy goals, they are not subject to regular review so remain even when the policy goal is no longer needed. Also, they often get enacted for the wrong reasons. For example, there usually is no discussion of why certain benefits for those paying for higher education should get some benefits via the tax law rather than through programs established in the Department of Education. Also, where was the discussion on creating a child credit rather than just increasing the dependency exemption or standard deduction?

We need to both modernize our tax system and ensure it meets principles of good tax policy. Applying those principles of the overall tax system and individual provisions can identify where improvements are needed. It is likely that this analysis would lead to reform or even elimination of some tax expenditures (of which there are about 250 in the tax law). Tax system modernization would consider how we live and do business today and what are appropriate tax rules for taxing income and consumption AND how administrative processes can be modernized to make better use of today's technology.

What do you think?

Spending in the Tax Code - Needs to be addressed in deficit reduction

I've blogged on this several times, but it is back in the news, so I'll mention it again. There is and has been a need to reduce spending and adjust revenues to improve the tax system. An editorial on Fox News (8/8/11) with quotes from two knowledgeable and objective sources - Len Burman and Maya MacGuineas, reminds us that there are benefits and a need to reduce "tax expenditures." These are the numerous number of special deductions, exclusions and credits in our federal (and state) income tax system that are not needed in defining the income tax base.

Burman notes that a tax credit can (and has) been used to avoid a label of spending and to reduce scrutiny on the particular item.

For example, if an elected official wants to help parents, they could create a program for lower-cost child care or increase funding for an existing child care program. That gets a lot of scrutiny and on a regular basis - every year when that federal agency with the funds seeks budget approval. However, create a child care credit or expand the existing one and it may just slip into a tax bill and never get looked at again. Either way - there is a regular "cost" in the budget.

There are many tax deductions and credits and exclusions that can be removed or cut back, such as the mortgage interest deduction (7/3/11 post) and taxing some percentage of the employer-provided health insurance exclusion, and others.

As noted in the article, the savings from cutting back on tax expenditures can be used for deficit reduction and paying for lower tax rates. They could also be used to make the income tax system more equitable by increasing the standard deduction. Removal and reduction of tax expenditures would also make the tax system simpler and more transparent - two important principles of good tax policy.

For more on tax expenditures - see my short article from the AICPA Tax Insider - here.

What do you think?

Payroll tax cut should expire as intended - we need to stop the tax cut addiction

In an August 5, 2011 speech, President Obama stated:

"when Congress gets back in September, I want to move quickly on things that will help the economy create jobs right now –- extending the payroll tax credit to put $1,000 in the pocket of the average worker, extending unemployment insurance to help people get back on their feet, putting construction workers back to work rebuilding America. Those are all steps that we can take right now that will make a difference. And there’s no contradiction between us taking some steps to put people to work right now and getting our long-term fiscal house in order. In fact, the more we grow, the easier it will be to reduce our deficits."

There is also a story on this in the August 6 Wall Street Journal - "White House Renews Push to Extend Payroll-Tax Cut" (Peterson).

The payroll cut is in effect just for 2011 and is for employees. It reduces the employee's Social Security tax to 4.2% rather than 6.2%, but leaves the employer rate at 6.2%. Self-employed individuals get a similar break on their self-employment tax. The Wall Street Journal article notes that extending this cut will cost $112 billion.

Here are three concerns I have with the cut in 2011 and for extending it to 2012.

1. This reduction was intended to get more money in workers' hands so they would spend it and stimulate the economy. I have yet to find anyone who knows they got the cut. People are surprised when I mention it to them. Will a cut have much effect if people don't know their paychecks have a few extra dollars in them to spend? Of course, this is not just a few extra dollars. For individuals at the Social Security wage cap of $106,800, it is $2,136!

Where is the value in giving people up to a $2,136 tax cut if they don't know about it (certainly, doesn't seem to be much political value). The common response I get from people when I tell them about this cut is - Why would President Obama and Congress do this when we have such a large deficit? Great question!

2. How does reduced Social Security taxes for employees (not employers), with the Social Security funds backfilled from the General Fund to make up the difference, create jobs? I don't get that. I hope this is not because employers are to pay their employees less because of the cut - that seems odd.

3. Tax policy - what is the tax policy behind the reduced Social Security tax for employees and self-employed individuals? For one thing, this is not transparent. Most people don't know about the cut. Also, since the SS fund is being reimbursed by the General Fund, seems like a convoluted way to get a tax cut and fund Social Security.

I think part of the president's call for extending the tax cut is because politicians today just seem to love tax cuts and seem to forget that we can't afford them. This is one that should end on 12/31/11 as called for in the 2010 legislation that created it.

What do you think?

Rhode Island, Vermont, accountability and unified economic development reports

Rhode island enacted SB 5894 (Chapter 151) on June 30, 2011. This appropriations legislation adds some additional accountability measures for a few of its credits and other incentives, as well as modifies its unified economic development reports. The additional data to be collected by the state for some incentives are details of employees hired. Specifically:

"On or before September 1, 2011, and every September 1 thereafter, the project lessee shall file an annual report with the tax administrator. Said report shall contain each full-time equivalent, part-time or seasonal employee’s name, social security number, date of hire, and hourly wage as of the immediately preceding July 1 and such other information deemed necessary by the tax administrator. The report shall be filed on a form and in a manner prescribed by the tax administrator."

Here is the rewritten provision calling for the unified economic development report:

"42-142-6. Annual unified economic development report. – (a) The director of the department of revenue shall, no later than January 15th of each state fiscal year, compile and publish, in printed and electronic form, including on the Internet, an annual unified economic development report which shall provide the following comprehensive information regarding the tax credits or other tax benefits conferred pursuant to sections 42-64-10, 44-63-3, 42-64.5-5, 42-64.3-1, and 44-31.2-6.1 during the preceding fiscal year:
(1) The name of each recipient of any such tax credit or other tax benefit; the dollar amount of each such tax credit or other tax benefit; and summaries of the number of full-time and part time jobs created or retained, an overview of benefits offered, and the degree to which job creation and retention, wage and benefit goals and requirements of recipient and related corporations, if any, have been met. The report shall include aggregate dollar amounts of each category of tax credit or other tax benefit; to the extent possible, the amounts of tax credits and other tax benefits by geographical area; the number of recipients within each category of tax credit or retained; overview of benefits offered; and the degree to which job creation and retention, wage and benefit rate goals and requirements have been met within each category of tax credit or other tax benefit;
(2) The cost to the state and the approving agency for each tax credit or other tax benefits conferred pursuant to sections 42-64-10, 44-63-3, 42-64.5-5, 42-64.3-1, and 44-31.2-6.1 during the preceding fiscal year;
(3) To the extent possible, the amounts of tax credits and other tax benefits by geographical area; and
(4) The extent to which any employees of and recipients of any such tax credits or other tax benefits has received RIte Care or RIte Share benefits or assistance.
(b) After the initial report, the division of taxation will perform reviews of each recipient of this tax credit or other tax benefits to ensure the accuracy of the employee data submitted. The
division of taxation will include a summary of the reviews performed along with any adjustments, modifications and/or allowable recapture of tax credit amounts and data included on prior year reports."

This level of detail is unusual among states. A unified economic development report is to provide information to help lawmakers and others understand how tax incentives are being used. I think more is needed. The above description just sounds like a collection of data. Although it is more than would otherwise exist, without some analysis, it won't have much meaning.

The tax credits should have a stated purpose and some appropriate assessment measure. For example, if it is a jobs credit, collect data on number of net jobs added by those claiming the credit, state employment changes, as well as comparisons to prior years and to other states. Did the state have higher employment increases than states not offering a jobs credit?

Vermont has been preparing unified economic development budget reports for a few years (here). Vermont's March 2011 report notes:

"It is important to have clear, attainable and measurable goals (outcomes) in order to have meaningful measures of success (performance) for relevant programs and activities. The Administration and the Legislature must work toward establishing clear sets of measureable goals for all new programs including those related to economic development. A review of the current programs and their stated goals shows that a majority of programs still have only broad goals which are often difficult to measure."

The authors note that this is a difficult task as often the outcomes are worded too broadly. To help remedy this problem, the state offered 2-day workshops on the "basics of outcomes, measures and methodology."

It's not easy. If the lawmakers say the credit is to encourage use of renewable energy, how can that be measured? How can it be determined if the credit caused created use of renewable energy beyond what would have happened without the credit?

Typically, either very broad, nonspecific goals are stated or perhaps none are stated. No company would do this. They would not try a new marketing strategy without stating the goals and how to measure if it meets their goals. The same should apply for government spending which often comes in the form of tax incentives.

What do you think?

Debt ceiling and tax changes

The House passed a debt ceiling bill late August 1 (amendment to S. 325) by a vote of 269-161.* The Senate if to vote on August 2. The word "tax" doesn't show up in the 74-page amendment although the word "revenue" is used several times. The amendment calls for creation of a 12-member Joint Select Committee on Deficit Reduction that is to find ways to reduce the budget deficit by at least $1.5 trillion for 2012 to 2021.

Tax law changes should be part of the plan of the Select Committee. There are several tax deductions, exclusions and credits that do not need to be in the tax law and result in reduced revenue, and make the tax system more complex and inequitable. I've written about many of these in prior posts. They could include:

- Reduce the home mortgage interest deduction to only allow for interest on a principal residence with the debt capped at $600,000.
- Removal of deductions and credits for higher education and instead use part of the savings to fund Pell Grants for those who truly need financial assistance for college.
- Make 10% of employer-provided health insurance benefits taxable and gradually increase this to perhaps 20%. I think it really should be higher, but the system is not perfect and may cause some people to drop coverage which increases costs for others. The math will need to be explained to people so they see that it is still a good deal. For example, if your employer pays $10,000 of your health care coverage, $1,000 of that would be included in your income. If you are in a 20% tax bracket, the cost to you is $200. Still a good deal for $10,000 of health insurance benefits!
- Remove the child credit and use part of the savings to increase the standard deduction amount.
- Let the 2001/2003 tax cuts expire. Once the debt is paid down, consider modifying the upper rates to have brackets of over $500,000 and over $1 million (so reducing when the 35% rate comes into play).

What do you think could be changed in our tax law to help reduce continual deficits and help pay down the debt?

* For more on the amendment, see:
- White House fact sheet
- Wall Street Journal, "Uneasy House OK's Debt Deal", 8/2/11
- PwC news release