Shopping trends and taxes

I like to look at trends because they are interesting and many have tax implications.* Trends may indicate a need to update or modernize tax rules or systems. I'm a bit behind on blogging on this, but several weeks ago, there was an article in Fortune - Phil Wahba, "Major Wall Street Firm Expects 25% of U.S. Malls to Close by 2022," 5/31/17. Reasons included bankruptcies and continuing growth in retail e-commerce sales.

I remember when the US Census Bureau first started reporting retail sales for e-commerce in the 1990s and it was less than 1%.  They just updated data for 2015 and report that e-commerce retail sales represent 7.2% of total sales for 2015 (it was 6.4% in 2014).  That doesn't seem like a lot to me. In contrast, the US Census Bureau reports that for 2015, e-commerce sales of merchant wholesalers represented 30.2% of total sales (it was 28.1% in 2014).

Are retail e-commerce sales going to increase to the point were 25% of US malls will close in the next five years? Seems high to me.  I expect re-purposing where, perhaps, we might do more online shopping while at the mall looking at samples of what we can buy, and getting a latte and recharging our smartphones.  That would use less retail space. Malls might add more ways for people to hang out - activities, fairs, etc.

Tax implications?  A few:

• More online shopping can mean more uncollected use tax although I suspect a lot of the e-commerce growth will be with Amazon that collects tax in all states (at least on their direct sales).
• If malls turn into abandoned buildings or vacant lots, property taxes will go down. Is there another need for them?  With an aging population, perhaps the space gets turned into living spaces for older folks - single level, close to public transportation and medical facilities, etc.

What do you think? Will we see 25% of malls close? What will happen to the space?

*For some nostalgia, see this June 2008 blog post on some trends relevant to tax reform.

Global Trends Relevant to Taxation

I am a fan of identifying and analyzing trends, particularly as they may indicate areas where tax rules and systems may need to be updated/modernized. Today, I came across a January 2012 article by Chris Walsh of Vertex, on six global trends relevant to the tax world. The trends:

1. Global economic environment
2. Globalisation
3. Tax talent
4. Environmental issues
5. Legislative environment and "hyper regulation"
6. Technology

I encourage you to read the short article for all of the details.  For tax talent, Walsh notes that we may have a shortage soon given impending retirements. He also notes the need for tax talent with international tax understanding. This trend is good news for the growing number of full-time students in the SJSU MST Program.

The environmental trend is already here in the US with calls to reduce tax preferences for oil, gas and coal. President Obama also wants to bring back the Superfund taxes. Also, some type of carbon omissions tax could help us reduce our greenhouse gas emissions and raise money to pay down the deficit.

Two more trends I would add:

• Entrepreneurship. I think we will be seeing more young people start their own businesses, particularly ones that focus on the Internet or personal services. 
• Addressing growing inequalities.  The "occupy" groups are drawing attention to the growing income and wealth gaps between the 99% and the top 1%, as are reports from various think tanks and the OECD.

What do you think? Do you agree with the trends noted above? Any to add?

Trends and the Tax System - The Home Mortgage Interest Deduction

I think that a consideration of trends is helpful in reforming a tax system. For example, today's economy has become more global than in the 1960s when many of our international tax rules were put in place. Updating to reflect today's ways of living and doing business should be considered.

Today, USA Today reported on a trend of more people renting their homes than buying them, apparently due to both the economy and benefits of renting rather than owning. See Should you rent or buy your own home? by Christine Dugas. The article refers to a survey indicating that even some that can afford to buy a home are renting instead and fewer think it is part of the American dream to own a home.

There are tax policy reasons to reform the home mortgage deduction rules, perhaps this trend where more do not view home ownership as key to success, also helps drive success.

Earlier this year, the Tax Policy Center issued a report on the home mortgage deduction. They summarized the work of various studies that found that the deduction does not really increase home ownership. Instead, the bulk of the tax benefit goes to those in the top fifth of income levels and really just encourage them to buy a more expensive home. The report also notes that home ownership rates in countries without a mortgage interest deduction is similar to the US. (See Reforming the Mortgage Interest Deduction by Toder, et al (May 2010).)

In a report, Economic Survey of the United States, issued in September 2010 by the OECD, the value of the home mortgage interest deduction is questioned. The report notes that the deduction should be reduced or eliminated because it does not encourage home ownership, but only the ownership of more housing by higher income individuals. They suggest phasing out the deduction as Britain did over 12 years ending in 2000.

And, we should not forget that only about 1/3 of individuals even itemize and not all of these itemizers have mortgage interest.

And, the mortgage interest is not just on a loan to buy a home, but also allowed for home equity debt (up to $100,000 of debt) and on a second home! This deduction is one of the most costly in the tax law. Without it, or with a reduced deduction, the tax rate of renters and others could be lowered. The deduction also encourages over-investment in housing because its effective tax rate is zero compared to a much higher rate on corporate investment.

I think another trend is one caused by the home equity loan - borrowing too much!

The home mortgage interest deduction seems to viewed as an entitlement any suggestions to cut it back are maligned. But, it is used by less than 1/3 of individuals yet is one of the most costly provisions in the law - seems like a serious equity issue. And it does little to encourage home ownership.

Do you think it is time to reduce and improve the deduction as a way to keep lower rates or perhaps to help pay down the debt?

Trends as a Guide to Tax Reform

Last week, the Center for Disease Control and Prevention (CDC) reported that life expectancy has gone up, hitting a "record high in 2006 of 78.1 years."

This kind of trend data is relevant to tax reform discussions, but not often highlighted. Tax reform discussions could be better focused if we spent more time looking at how the world has changed since most of our current rules were enacted and how it will likely continue to change.

Several years ago I started gathering data on trends and using it to show where our tax law was outdated or working contrary to a trend, that is - contrary to reality. A few simple examples:

1. Longevity - this is clearly relevant in considering our Social Security system. When Social Security was created in the 1930s, life expectancy was lower than retirement age. That is clearly not the case today.

2. Who lives in poverty - In 1959, 35.2% of people age 65 and older were in poverty. In 1996, that percentage had dropped to 10.8%. (Leatha Lamison-White, Poverty in the United States: 1996, U.S. Department of Commerce, Bureau of the Census, Table C-2, page C-5). The federal tax law (as well as some state income tax laws) include exemptions and credits for being old.
Years ago it may have been appropriate to assume that most elderly needed a tax break, but that is not true today.

3. The US share of world GDP continues to drop. Our foreign tax rules were written decades ago when US companies had a dominant role in the world markets. Today, US companies face a far more competitive environment in a global economy and our tax rules may be hindering their ability to compete.

4. Intangible assets are more varied and important today than a few decades ago. Many tax rules, even ones written in the past 20 years may not make sense in our information age. For example, PL 86-272 enacted in 1959 to provide guidance on when a multistate business could be subject to income tax within a state, only applies to sales of tangible personal property. Also, Internal Revenue Code Section 197 written in 1993 provides a 15-year amortizable life for most acquired intangibles. That life is likely too long today due to rapid changes in technology.

For an example of the type of trends analysis that could help guide tax reform discussions, click here. What you'll find there is just a sampling of trends and their relevance to tax reform discussions.

What trends and tax system flaws would you add to this starting list?