Tax regulations issued in 2011

I deliver tax update presentations throughout the year (see http:www.21stcenturytaxation.com for a list of upcoming presentations - live and webcasts). In 2011, I started keeping a chart of federal tax regulations issued during the year. The chart provides the cite and link to the regulations, a brief overview and the relevant Code sections addressed.  I hope this may be of use to you.  It can be found here - http://www.cob.sjsu.edu/nellen_a/2011regs.html.

I plan to continue this in 2012.

Happy New Year!   (please check this blog on New Year's Day for a 2011 tax policy recap and a looking forward for 2012)

Deliberative Democracy and Tax System Improvements

In June 2011, What's Next California and a few others sponsored a Deliberative Polling with over 400 Californians participating (see my 6/26/11 post and information and links from Stanford's Center for Deliberative Democracy and this brief summary). One of the topics for which participants were polled before the discussion and after was tax and budget issues. What's Next California has a video (from PBS Newshour) on the tax issues discussed and changes in polling. For example, support for some type of a split roll for differences between how residential and non-residential property is taxed changed from 52% in support before the group discussion and 72% afterwards. Support for subjecting services to sales tax and lowering the sales tax rate changed from 38% before to 45% afterwards.

And, this was a weekend for discussions that included more than tax issues. I was there that weekend. I think great process on helping people understand complicated tax issues was a great start, but was just a start.

I think for both federal and state tax reform, a significant obstacle is that most people do not have a good understanding of how the system works. For example, many individuals believe the income tax has to have a mortgage interest deduction. But do they know how generous the current deduction is (up to $1.1 million of debt, a mortgage on a vacation home and home equity debt that can be used for personal purposes although interest on your credit cards is not deductible), they do not see how it is worth more to individuals in higher tax brackets and whether they would be better off with lower rates and/or a higher standard deduction. It takes a lot of information to get at understanding just this one issue.

I encourage you to take a look at the tax video or the entire PBS video (1 hour) - here.

Some ideas:

1. More information provided with tax forms to explain policy supporting various parts of the system. For example, when you pull up Form 1040 online, there are links for each item to provide background on the rule, its "cost" and how it is used among the income quintiles.
2. Having elected officials explain the rationale, with data, for all proposed tax changes, who benefits, the cost, and alternatives.
3. An informative taxpayer receipt (see 4/17/11 post). (I'm still working on this topic - more later.)
4. Simplifying existing rules.

btw - there is a presentation on the June deliberative polling event on January 3 in San Francisco - here.

btw - if you watch the full video, around the 32 minute mark, a young participant says that if it isn't easier to understand and isn't fun, youth won't want to be engaged or interested in voting. I hope that is not true! But, I'm willing to add that to the list above - let's make it fun! Any ideas?

What do you think?

Tax Complexity Due to Multiple Provisions and Future Benefits

This morning I was looking at a tax update presentation of mine from May 2010 to get some information on the enactment of the FATCA (Foreign Account Tax Compliance Act) provisions that were added by the HIRE Act (Hiring Incentives to Restore Employment Act (HIRE) (P.L. 111-147; 3/18/10)). I was reminded of a part of the HIRE Act that won't provide a benefit until employers file their 2011 income tax forms. The key part of the HIRE Act was a temporary payroll tax exemption for employers who hired an unemployed worker in 2010. If that worker is employed a consecutive 52 weeks and his/her wages for the second 26 consecutive weeks equaled at least 80% of his/her wages for the first 26 consecutive weeks, the employer can claim a $1,000 income tax credit. This is an all-or-nothing credit. That is, if the worker was employed only 51 weeks, no income tax credit. The credit is claimed on Form 5884-B, New Hire Retention Credit.

Sources of complexity described above:

1. Will employers remember to claim the $1,000 income tax credit? This ties to a provision enacted in 2010 which provided a payroll tax exemption in 2010. The income tax benefit can't come until 2011 (an eligible worker was one hired after 2/3/10, so can't have 52 weeks continuous employment until 2011).
   
2. Will employer income tax records have the necessary data? The original tax benefit is in payroll records, the 2011 income tax credit needs to pull that payroll information into the income tax calculations. There is a reminder on Form 3800, General Business Credit, in that line "aa" lists the worker retention credit (it is line "aa" because a - z are already taken with other business credits! (another source of complexity in the law - too many special provisions)).
3. Will the tax prep software help? Probably. Many of the problems of complexity are lessened (but certainly not excused) through good tax prep software. To be sure eligible employers claim the worker retention credit in 2011, their tax prep software should ask a question about it to reminder the employers to pull this data out of their HR and payroll records.

The worker retention credit is not the only tax benefit that spans a few years. Another one is Section 1202 that provides a tax break to non-corporate shareholders who have "qualified small business stock" (QSBS). The general rule provides that if the QSBS stock is held over five years and sold at a gain, 50% of the gain is not taxable for regular tax purposes. As part of a few economic stimulus provisions enacted in 2009 and 2010, this percentage was changed to 75% and then to 100% (for stock purchased before 1/1/12). The tax benefit won't come until over five years from the purchase date. Again, tax prep software will help by asking the questions - is the stock sold QSBS and when was it acquired?

Complexity problems:

1. Having to maintain records over a span of years to be sure the tax benefits are obtained.
2. Mixing of different records such as the payroll/HR records for an income tax benefit.
3. Varying effective dates. For example, the dates for the payroll tax exemption are not identical to the dates to qualify for the retention income tax credit. Also, the QSBS benefit is either 50%, 75% or 100% depending on when the QSBS was acquired.
4. Funding short-term tax breaks with permanent provisions, such as was done with the payroll exemption and retention credit funded by FATCA which is a permanent provision in the law. The complexity lasts beyond a temporary time period.

Solutions:

1. Only enact temporary tax provisions for a really good reason (such as to stimulate the economy and avoid a longer recession).
2. Avoid multiple possible solutions such as was done with the various economic stimulus provisions. Identify two or three best stimulus provisions and enact them and no others.
   
3. Pay for temporary tax provisions with temporary tax increases that are as simple as possible such as ones that do not add new rules, but modify existing ones.
4. Have provisions last an entire tax year, such as by having the effective date be for the tax year starting on or after 1/1/11.

What do you think?

Tax Reform: Status, Needs & Realities -Conference on Feb 3, 2012

TEI and SJSU are once again holding a 1 day Tax Policy Conference to provide an opportunity for people to get up to speed on the inevitable tax reform of some degree that will happen at the federal and California levels due to deficit issues, complexity, inequities, inefficiences, and competitiveness.

The 2012 conference will be February 3, 2012 at Techmart, 5201 Great America Parkway, Santa Clara, CA. We have a great slate of speakers including Joshua Odintz who recently left Treasury where he worked on various tax reform projects. We also have Dean Andal, formerly with BOE and the State Assembly, Fred Silva with California Forward, Gina Rodriquez with CalTax, Greg Turner with COST and several more.

We will cover federal activities and prospects and delve into the Camp territorial proposal, we will also explore some reforms suggested for California including upcoming ballot proposals. There will also be time for attendees to share ideas and provide input.

For a detailed agenda and to register - please see http://www.tax-institute.com. Registration fees are $150 general and $75 for government/non-profit attendees.

Time to adjust gas tax

The federal and California gasoline excise tax are each 18 cents/gallon and have been at these low rates for many years (see CRS table). At the federal level, the tax doesn't generate enough to support the needs of the Highway Trust Fund (see posts of 7/28/08, 9/5/08 and 6/17/10). We drive less when gas prices rise and there are more people driving fuel efficient cars (I only put gas in my Prius about every 5 weeks but drive about the same as before I had this car).

The Institute on Taxation and Economic Policy has released a report on the gas tax and the need for states to increase the rate.

I agree. The amount should be adjusted for inflation from what was set at 18.4 cents/mile at the federal level in 1994 with an annual inflation adjustment built into the law. Perhaps it should also be raised beyond inflation adjustments, at least in California where we have ambitious greenhouse gas emission reduction targets.

Here are the recommendations of the ITEP:

• Increase gas tax rates
• Adjust the rates to tie to increased rates of construction costs
• Create targeted credits to assist low-income taxpayers

We also need to rethink the cents/gallon approach because with more fuel efficient cars, we are driving the same (or maybe even more), but paying less gas tax because we buy less gas. While cents/mile approaches have been approached, they are difficult and perhaps intrusive to implement. While my lightweight Prius isn't causing much road damage, I still benefit from maintained roads and items are delivered to me via trucks and my garbage is picked up weekly by very heavy trucks so I am contributing to wear and tear on the roads and should be paying more to maintain them. Perhaps garbage fees should include a road maintenance fund.

What do you think?

Mainstreet Fairness, Small and Equity

The House Judiciary Committee hearing of November 30, 2011 on federal legislation to allow states meeting certain simplification requirements to collect sales tax from remote vendors highlighted a key issue. The issue is whether such legislation should exempt small sellers and if yes, what is the appropriate de minimis level. At the hearing the suggestions for "small" seller were basically $100,000 of sales and $30 million of sales, with nothing in between (other than the $500,000 in S. 1832). How can the definitions be that disparate?

While there are good reasons for exempting small businesses from certain rules, defining small is challenging. The federal tax law has numerous definitions (see "The Many Sizes of "Small," AICPA Corporate Taxation Insider, 10/28/10).

The reasons for suggesting a low dollar amount for "small" ...

• Ensure that the bulk of e-commerce sales are subject to the tax.
• Reality that there are third party collection agents and software that make it easier for small businesses to collect sales tax from all customer.
  

Reasons for a larger dollar amount for "small" ...

• To ensure that small businesses have greater likelihood of succeeding against large vendors.
• Costs to comply may exceed tax to be collected.

$30 million for small - saying that sellers below this threshold cannot collect sales tax from customers is puzzling. These are decent size companies that likely engage in many sophisticated transactions that are more complicated than setting up a system to collect sales tax in all states with customer (or at least those that meet the simplification requirement of the legislation).

One item I did not hear mentioned at the hearing (I watched the archived webcast) was that some good number of sellers, such as on eBay, are not in a business and would not be registered to collect sales tax. Customers will still need to maintain records of such purchases and self-assess the use tax.

I have a short article in the AICPA CPA Insider on the hearing and the small/equity issue - "Repeal of Quill Hinges on Defining Equity."

What do you think the sales level should be to define any small business exempt from collecting sales tax in states in which it doesn't have a physical presence?

More on proposals to reverse Quill

Amazingly, there are three bills in Congress to allow certain states to collect sales tax from remote (non-present) vendors. The last bill introduced S. 1832 has the support of Amazon and the chair of the California Board of Equalization (among others). Unlike the typical bill we have seen in recent years, it allows states that have adopted the Streamlined Sales & Use Tax Agreement (SSUTA) as well as those who have not but have made specific simplifications in their systems to be allowed to make remote vendors (above a de minimis level) collect sales tax.

There are a variety of issues and considerations here. I was recently interviewed by BNA about this topic. You can find the Q&A here - California's Delay in Online Collection Law Sets Stage for Federal Solution, With or Without Streamlined System.

For links to the federal proposals and background on the nexus and affiliate nexus issue - click here.

BOE ideas for reducing the use tax gap

Today I came across a memo from the California Board of Equalization dated June 2011 that lists many suggestions for reducing the use tax gap. That is, the use tax owed but not collected by vendors or remitted by buyers to the state. Some of the ideas:

• Use information from shipping companies to identify people buying out-of-state
• Media campaigns
• Ask vendors to include information on invoices about use tax
• Provide buyers easy way to pay when they buy
• Use tax amnesty for past purchases
• Require CPAs and tax preparers to complete CE on sales and use tax law
• Require return preparers to explain use tax and ask clients if they have a liability to report

Several of these are good ideas, such as asking vendors to include use tax information on their invoice. Or perhaps it should be a URL to the BOE website. I support finding a way for the buyer to pay the tax right away - such as having the state charge their credit card at the same time the vendor does. The vendor would not need to report such sales because the use tax was already paid.

What do you think?

Interesting tax development(s) of 2011

I spend a lot of time throughout the year reading, writing about and presenting on federal, multistate and California updates. This week I'm presenting webinars on California tax developments and a quarterly federal update (see http://www.21stcenturytaxation.com for details on that if you're interested). In presenting on or writing on annual updates, I try to find themes from everything that has occurred and even see if there are a few developments of particular significance - that might change tax practice or a tax system in a significant way. I'll share with you what I think and encourage you to post a comment on whether you agree and what you think was most significant taxwise for 2011.

First, themes that emerge from federal and state tax developments of 2011 (in my opinion):

1. Due diligence reminders - several cases and IRS actions remind practitioners of the need to be sure clients have proper documentation such as for charitable contributions and the need for reasonable and timely documentation of hours to prove that a person is a "real estate professional" if they are claiming benefits of being one.
2. Tax planning remains challenging due to items expiring at the end of 2011 and the likelihood nothing will be renewed until sometime in 2012 (including the AMT patch). And the 2001/2003/2010 tax cuts expire at the end of 2012.
3. Continued focus on the tax gap - but Congress repealed some of these measures this year (the extra 1099 reporting added by 2010 health care legislation and the 3% government contractor withholding). And 1099-K reporting started in 2011 (Section 6050W) on credit/debit card and Paypal reporting. I expect that this provision will do little towards the tax gap but will make it difficult for Congress to enact better tax gap measures that will really get at the tax gap because they have to carve out from any new 1099 reporting requirement, payments made by credit/debit card or Paypal to avoid duplicate reporting.
4. State and multistate tax actions - there has been continued movement to economic nexus for income tax by more states, legislative activities to broaden sales tax nexus with questionable constitutionality; some efforts to provide guidance on taxation of coupon deals (such as Groupon) and cloud computing. State legislatures focused on accountability for special credits and deductions - more so than in the past.
5. Federal tax reform - over 25 hearings on the subject were held by the Senate Finance Committee and House Ways and Means Committee. I'm sure they learned a lot, but a lot of it were obvious things about complexity and burdens on small businesses. It is time now to take all of this testimony, identify goals for reform, and start writing legislative language.
   

Next, the most significant developments, I think:

• The continued rollout by the IRS of the regulation of paid return preparers including the exam that 1040 preparers who are not active CPAs, attorneys or Enrolled Agents must pass to continue to be eligible to prepare 1040s. I have been including this topic even in my updates to CPA groups because I think they are going to soon have clients asking them if they are a "Registered Tax Return Preparer" so they need to know what that even means.
• I think we are going to see a major reduction in the number of special tax credits, deductions and exclusions ("tax expenditures") to help pay for a lower corporate tax rate and to pay for keeping some rate cuts for individuals and to help pay down or multi-trillion dollar deficit and debt.
  
• 2011 actions may lead Congress to finally enact legislation to effectively overturn the 1992 Quill decision to allow states with the right kind of simplification measures in their sales tax to collect sales tax from remote vendors. I think the bill that will be taken up is S. 1832 - the Marketplace Fairness Act which is supported by Amazon and California BOE chair Horton. States are in need of revenue and the feds can't offer much assistance due to its one revenue problems. So, passing S. 1832 will be one way to help get money to states because compliance by vendors will be much higher than the very low compliance by consumers self-assessing use tax.

What do you think?

The New Marketplace and Relevance to Tax

A year ago, eBay announced its acquisition of Milo which provides online information on prices and availability in local stores. This should aid in the merger of online and in-store shopping and use of mobile applications. It potentially brings about a new meaning of “marketplace.” With the acquisition, Mark Carges, CTO and senior VP, global products, eBay Marketplaces stated: “Since eBay is an online marketplace and doesn’t compete with brick-and-mortar stores, adding local store inventory to the eBay marketplace is a natural extension of what we’ve been doing for 15 years – bringing buyers and sellers together to access the largest selection available anywhere.” (12/2/10 press release)

Here is a recent article from Internet Retailer, "Updated Milo app enables mobile checkout and in-store pick up" by Kevin Woodward, 12/6/11 on the use of Milo for shopping ease.

On 12/6/11, Amazon issued a call for people to help it get price information. A press release of 12/6/11 is entitled - "Is That Deal Really A Deal? Use the Price Check by Amazon App to Make Sure." It calls upon consumers to download the free "Price Check" app for the iPhone and Android and use it to check prices against what Amazon and its sales partners offer. There are four ways a consumer can input a price into the app for verification: (1) scan the product's bar code, (2) take a picture of the item for a photo match, (3) speak the name of the product into your device, or (4) type in the product name.

This all seems to get Amazon more data for helping to set its prices - and to help make sales. For example, you are in a physical store and want to see if you can get a better price at Amazon. So you use the price check app. Being connected to the Internet, you can also, of course, order the product from Amazon right then. So you get to see and touch what a store is trying to sell you, but if you find a better price at Amazon, you can purchase it right then - you, of course, won't get to take it home with you. The first two lines of the press release offer encouragement for consumers (with the right technology) to help Amazon (and help yourself at the same time):
"As an added incentive, on December 10^thAmazon is giving customers using Price Check an additional 5% discount (up to $5) off the Amazon price on up to three qualifying items in toys, electronics, sporting goods, music and DVDs."
"Shoppers can also start submitting in-store prices with the Price Check app, ensuring they are really getting a deal and allowing all Amazon customers to get the lowest prices year-round."

I think a lot of shopping will become one of checking prices (which if you are already on your computer, we have been doing for sometime) and seeing who can get it to you cheapest. Perhaps in-store shopping will just be when we want it right away. And given that we are more prone to wanting instant gratification, will keep brick-and-mortar stores in business. I think such stores though may need to find ways to bundle goods and services. For example, buy the equipment here and we'll show you how to use it or we will come to your home and set it up.

Tax relevance:

• Borders become less relevant as consumers buying online may not even know where the product or service originated. But states are moving to market sourcing for goods and services so sellers do need to know the location of the buyer. Mobile and stationary electronics will likely need to have a location default in them unless states do want to source a sale, for example, to Illinois because the California buyer was at the Chicago airport waiting to board a plane. That seems too difficult to track and audit.
• Build the sales tax assessment and collection feature into the selling websites - states need to create a "sales tax app." It will collect the sales tax at the same time the buyer clicks to buy the item with the same funding source (Paypal or credit card, for example). This should become the standard for sales tax collection. Sourcing will have to be worked out, but technology should also be able to handle that. If purchasing on your mobile device, it knows where you are and can default to pay the state's sales tax for the jurisdiction you are in AND if your state's sales tax rate is higher, it can charge the difference to your state's tax authority (unless it is a meal consumed on the premises).

Eventually, sellers will not need to deal with sales and use tax because:

• All sales would be run through the "app" so the tax is collected and remitted to the appropriate state at the same time the goods or services are purchased. Auditors would just need to verify that the technology is working.
• Sales tax bases should be broadened for many reasons (such as equity and simplicity) but would also make it easier for the app to work - full amount charged to consumer is subject to sales tax.
• States should move to exempting purchases by businesses (to eliminate pyramiding of the tax). So another verification for the app would be the type of buyer - consumer or business. But, some buyers have dual roles. So, a VAT would be better. Everyone is charged sales tax and if you are a business, you keep records to apply for a sales tax refund. But, technology should be capable of even avoiding this paperwork by a dual check - let the buyer and seller both have to enter whether the purchase is for business or consumption.

Other ideas? What do you think?

California and Incentives for Job Creation and Innovation

On 12/5/11, the California Assembly Revenue & Taxation Committee held a hearing on job creation and innovation (see prior post). I had the opportunity to testify. A few points I offered:

• California has one of the most generous research tax credits among the states and an underutilized jobs credit. Identify why these provisions are not promoting job creation and innovation to the desired level. For example, in 2009, $400 million was set aside for a $3,000 per new job tax credit for employers with employees with less than 20 employees. In November 2011, only $75 million has been used.
• Conform California law to more favorable depreciation rules of federal MACRS and Section 179 expensing. Encourage Congress to allow the IRS to update depreciable lives, such as for computers and semiconductor manufacturing equipment which generally is too long (5 years). In addition, encourage Congress to modernize Section 179 to apply to both tangible and intangible assets. While there should be discussion of whether any special rules, such as tax credits, should be in the law (they tend to add complexity and inequities and inefficiencies), there are considerations in designing the base that affect the economy. For example, to calculate taxable income of a business, depreciation needs to be calculated. If equipment can be depreciated using double-declining balance over 3 years, that has a different economic impact and affect on interstate and international business competitiveness than straight-line over 10 years.
• Encourage Congress and the IRS to improve the federal research tax credit including making it permanent.
• Develop a plan to phase out the sales tax on business purchases of manufacturing and R&D equipment. This might be funded by broadening the sales tax base for consumers to include consumption of personal services and digital goods, and to repeal the elective approach to apportionment (adopting the single sales factor approach due to its economic development foundation).
• Be ready with incentives for corporations to utilize cash in California should the federal government enact a repatriation tax break.

I had 18 recommendations which you can find here.

Four items in particular I found interesting about the hearing:

1. Three people testified via Skype - we could see and hear them well and they could hear us and participate. It did go down once for a few minutes, but technicians restored the connections.
   
2. The business rep panel for the most part suggested that California needs to get rid of the elective apportionment and go to just single sales factor apportionment. I agree and had the opportunity to note that, today, the corporate income tax has become an economic development tool. Thus, if we want to use it to encourage companies to locate employees and property in the state without having their tax bills go up, we offer single sales factor apportionment. But, at the same time to tell companies that do not locate payroll and property here, we want your CA taxes to be lower too, we are just fools (I didn't say fools, but that is what we are).
3. Professor Robert S. Chirinko, University of Illinois at Chicago, shared some of his research findings on the benefits of jobs credits. In a nutshell, that research found that there were no benefits. He also noted that such provisions can have some negative impact because when enacted, the incentives are not usually immediately effective so employers delay hiring until the effective date.
4. The Legislative Analyst's Office seems to have modified its view on the California research. James Nachbaur, an economist with the LAO presented a background paper on the credit. In a 2003 report, the LAO stressed that a key purpose of a research credit is to address spillover effects, but that the federal credit already handles that so why would a state also offer a credit? The 12/5/11 report notes that 2003 comment, but does not emphasize it. I think this may be because since 2003, corporate income taxes have become more of an economic development tool meaning that we should view a state research credit primarily in terms of whether it causes companies to engage in R&D in the state rather than elsewhere.

The hearing information should be posted to the committee's website soon.

What do you think?

CA Revenue & Taxation Committee holding hearing at SJSU on 12/5/11

The California Assembly Revenue & Taxation Committee is holding a hearing on the San Jose State University campus on Monday, December 5, 2011. Details:

REVENUE AND TAXATION
PEREA, Chair
9:30 a.m. to 12:30 p.m. - San Jose State University
Student Union, Second Floor - Music
One Washington Square
San Jose

CALIFORNIA'S HIGH TECH SECTOR: PROMOTING JOB CREATION AND INNOVATION
THROUGH SOUND TAX POLICY

The agenda:

1) Introductory Remarks by Henry T. Perea, Chair (3 minutes)

2) Introductory Remarks by Tim Donnelly, Vice-Chair (3 minutes)

3) Tax Policy, Job Creation and Innovation: Perspectives from the Industry
(45 minutes)

a) Corey C. Owens, Associate Manager of Public Policy, Facebook

b) Jim Hawley, Senior Vice President & General Counsel, TechNet

c) Jon Haveman, Chief Economist, Bay Area Council Economic Institute

d) Gail Maderis, President & CEO, BayBio

4) Tax Policy, Job Creation and Innovation: Perspectives from Tax Experts
(60 minutes)

a) James Nachbaur, Economist, Legislative Analyst's Office

b) Robert D. Atkinson, President, Information Technology and Innovation Foundation

c) Dan Berglund, President & CEO, State Science & Technology Institute

d) Robert S. Chirinko, Professor of Finance, University of Illinois at Chicago

e) Annette Nellen, Professor of Accounting and Finance, San Jose State University

5) Public-Private Partnerships (60 minutes)

a) Mohammad H. Qayoumi, President, San José State University

b) Carol Mimura, Assistant Vice Chancellor for Intellectual Property & Industry Research Alliances (IPIRA), University of California, Berkeley

c) Elizabeth Seifel, President, Seifel Consulting, Inc.

d) Kim Walesh, Director of Economic Development, City of San José

6) Public Comments (15 minutes)

7) Chair's Closing Remarks

I'm glad to hear the part about promoting "sound tax policy" - that's always good. How much should the tax law be used as a tool to try to promote job creation and innovation? Well, it should at least not be structured to hinder job creation and innovation. I'll be testifying on how tax policy should be considered in tax design. One point I like to make is that the taxing jurisdiction's economic, societal and environmental goals should be known and the tax law should not work counter to such goals. For example, in 2009, California adopted single sales factor apportionment which is generally good for in-state businesses, but at about the same time, increased the sales tax rate which hurts in-state companies buying equipment.

Well, back to drafting testimony!

Governor Brown and possible rate increse proposal

The Mercury News reports that on Friday (12/2/11), Governor Brown may propose sales and income tax rate increases to address continuing budget problems. The income tax rate increase would likely be for individuals with over $250,000 of income. ["Gov. Jerry Brown to add income tax increases to budget plan" by Harmon, 12/1/11]

Expected budget shortfalls are $4 billion for the current year and $13 billion for next year.

These are both unfortunate proposals. Some problems:

• Our sales tax rate is already too high relative to other states and for meeting the equity principle. The base should be broadened rather than increase the rate.
• Our personal income tax is volatile. That problem is exacerbated with even higher rates.

There are other solutions:

• Broaden the sales tax base to include digital goods and services purchased by consumers (not by businesses) (exclude non-elective medical services)
• Enact an oil severance tax.
• Increase the excise tax on gasoline.
• Move to only having a single sales factor apportionment formula.
• Reduce tax expenditures, such as the interest deduction for a debt on a second home or a mortgage greater than $500,000; phase-in the changes.

What do you think?