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Tuesday, September 14, 2021

Tax Reform - Did You Think It Would Include a Tax Subsidy for Local Newspapers?

Newspaper with headline tax break for newspapers

This week the House Ways and Means Committee began marking up a tax reform bill to improve equity in our tax system, make modifications to have the system better comport with societal and environmental goals, and generate revenue to cover new spending particularly for infrastructure.

The list of changes under review includes several tax measures that were not included in President Biden's Build Back Better Greenbook. These differences include:


The markup (so far) also removed a significant equity proposal from the Greenbook. This missing item (at least at 9/14/21) is the repeal of the step-up in basis at date of death. A longstanding and significant exclusion for the wealthy that is hard to justify other than for some issues with small businesses which the Biden plan has a solution for. Will it get into a final bill? 

But this post is about tthe proposal at Sec. 138517 of the markup - "payroll credit for compensation of local news journalists." This is a refundable credit for the newspaper employer on up to $12,500 of wages per eligible employee per quarter at 50% of wages. It lasts for five years. A local newspaper is "any print or digital publication if the primary content of such publication is original content derived from primary sources and relating to news and current events" serving the needs of the local community, with at least one local news journalist residing in that community and the publisher has 750 or fewer employees during the quarter.  And there are a lot more rules and the wage deduction has to be reduced by the credit claimed. And like the employee retention credit (ERC) of the CARES Act and ARPA, the related party rule of §51(i)(1) applies.

I was surprised to see this proposal for a few reasons including:

1. Where did this come from? Well, I found H.R. 3940 and S. 2434, Local Journalism Sustainability Act (117th Congress) which also proposed such a credit. These bills also propose up to a $250 annual credit for subscribing to a local newspaper. As of 9/14/21, these two bills have 60 sponsors from both parties. So, some individual tax proposals out of hundreds offered each year made it into the markup.

2. This is an old issue! Back in June 2010 I came across a discussion draft by the Federal Trade Commission entitled: "Potential Policy Recommendations to Support the Reinvention of Journalism." I always intended to write a paper about it and similar enterprises and industries that were adversely impacted by the Internet, e-commerce and digitilization. The 2010 FTC report of 47 pages (which I printed in 2010 but would not do so today as a digital file would work fine) mentions "tax" 100 times (both about proposals and existing tax breaks for newspapers). I did not yet write the article (but I did write over 150 other articles since June 2010), but I still have the report (and readily found it!). An article on my Tax Notes State list of topics is to write about responsible and taxation where I would include an analysis of whether the tax law should give breaks to help struggling industries, among other tax design considerations.

That is an interesting question perhaps.  Should the government help industries that do not keep up with changes in how the world works? Many businesses watch the trends and change.  I recently listened to a wonderful book by Ursula Burns, the first female, Black CEO of a Fortune 500 company (Where You Are Is Not Who You Are: A Memoir, 2021)). Among many fasinating stories in her autobiography is how Xerox had to reinvent itself due to changes in technology. 

I think governments should review laws when major changes in how we live and do business occur to be sure the laws are up to date and not holding up progress. Are tax breaks or other subsidies needed? Maybe. It would be good if there were some criteria to help in these situations. We can all think of businesses affected by change including local bookstores, music CDs, 8-track players, local radio stations, and makers of computer diskettes.

Note: The 2010 FTC discussion draft does include the idea of a tax credit for newspapers for every journalist they employ (page 18).

Is this currently proposed tax credit for some local newspapers needed? A few considerations:

1. Equity - Does it treat similarly situated taxpayers similarly? No. Not all newspapers will qualify due to the definitions and the related party limit on wages. Also, looking more broadly, not all forms of local news distribution are eligible. For example, it doesn't apply to a local news radio station. And it doesn't help other struggling businesses.

2. Simplicity - No. Lots of definitions and special rules.

3. Neutrality - No. Local newspapers will likely make some decisions to maximize the credit they can get from the paper.

4. Economic growth and efficiency - Yes and no. I think there are benefits of a strong local newspaper for an informed populace. Is this federal tax credit (subsidy) the way to get there? Could the funds be used to help more types of local news distribution?  Compared to other proposals in the markup, the cost is low. The Joint Committee on Taxation says the cost is $1.3 billion over 10 years (but in effect for only 5 years) (JCX-42-21 (9/13/21)).  Query: Is it low because we didn't enact this proposal 10 years ago with the FTC noted it?  Is this low cost worth the experiment to see if it helps local newspapers?

5. Purpose - I don't see any rationale provided for the proposal. Without any purpose or goal stated, how do we know if it worked? It would be good to identify what help is really needed? Do subscribers need assistance to buy the local paper? Is a different distribution system needed?  A different funding model? I think that is the big issue hurting newspapers - advertisers found wider reach for their ads on social media and help wanted ads and for sale ads have other online outlets. Newspapers need advertising revenue to survive and that dropped.

Will this end up in the final tax reform bill? Should it?

What do you think?


Sunday, August 29, 2021

More Necessary But Overlooked Tax Changes

tool box that spells out needed tax reforms
Well, back to what I started with a June 21, 2021 post where I'm sharing my ever-growing list of what I think are necessary but usually overlooked tax changes. It would be terrific to see these in the next tax reform bill or even some picked up in other legislation. I hope you'll review my first list and this one, check back for future posts (I have more reform ideas on my list) AND please post a comment with your reaction and your tax reform ideas.

  • Reform the personal income tax to its basic framework where reasonable deductions to produce income are deductible (they are not limited to 2% AGI or disallowed for 8 years (2018 through 2025)).

  • Modernize §197 to include 21st century intangibles – see page 5 of my 2017 article.

  • Update §170(f)(11) on qualified appraisals to expand situations where an appraisal is not needed because there are public listings of value, such as for most virtual currencies.

  • Update §7503, Time for performance of acts where last day falls on Saturday, Sunday, or legal holiday – Some language here is outdated, such as reference to “internal revenue district.” Also, to avoid confusion regarding state holidays or those celebrated in the District of Columbia, consideration should be given to just using the national list of holidays at 5 USC 6103. This change will avoid confusion particularly when a DC or state holiday falls on the weekend so is possibly celebrated on Friday or Monday instead. For example, see Notice 2006-23 where the IRS had to clarify tax due dates where Patriots’ Day (relevant in Maine, Massachusetts, New Hampshire, New York, Vermont, Maryland, and DC) fell on Monday April 17, 2006 (Patriot’s Day is the third Monday of April and an April 15 Saturday makes April 17 Monday the date with Patriot’s Day then making the due date for those states April 18 Tuesday).

  • Update §7523, Graphic presentation of major categories of Federal outlays and income, to not only include them in the 1040 instructions but have them on the IRS website, those of elected officials and other agencies. Consider having a more interactive tool to help taxpayers understand all federal taxes they pay, info on the taxes, marginal rates, etc. See Nellen, “Time to move Sec. 7523 budget information into the Digital Age,” AICPA Tax Insider, 11/8/12.

More later ...

What do you think? and please post your tax reform ideas in the comment box. Thanks!

Saturday, August 14, 2021

Vehicle Miles Traveled Tax Study Versus Action

paint roller painting a road

Seven years ago I blogged about California's new legislation to study a vehical miles traveled (VMT) tax as an alternative to the gasoline excise tax (10/4/14 post). Oregon had already been studying one.

In July 2015, a Senate Finance Committee working group - working on tax reform, discussed a VMT in its report on infrastructure in reference to issues with the gasoline excise tax and Highway Trust Fund. Basically, with people driving more fuel efficient cars including electric cars that don't use any gasoline, not enough money goes to the HTF. And the gasoline excise tax has been 18.4 cents per mile since 1993!  It is not adjusted for inflation and hasn't been increased. The HTF has needed General Fund contributions since at least 2008 (the 2015 Senate report notes that over $65 billion had been transferred since 2008).

The 2015 report suggests a VMT as long-term option to fund the HTF. The working group noted that a VMT "has the potential to imprve the efficiency of highway financing because the tax can be calibrated closely to the costs that vehicles impose in terms of rod damage an dcongestion. Additionally, the tax coud be calculated based on time of day, congestion, type of road, type of vehicle, etc."

The Senate working group noted that it "take up to a decade to fully implement" a VMT. BUT, unfortunately, nothing was started!

I had this topic on my calendar for a while because I was going to note that the Build Back Better plan doesn't address the problems with the gasoline excise tax or suggest implementing a VMT.  A lot of study has already been done on a VMT by Oregon and California, academics and think tanks. We should move on it.

But new news - H.R. 3684, INVEST in America Act, the infrastructure bill passed by the Senate on 8/10/21 by a vote of 69-30, includes at Sec. 1630, a requirement that the GAO do a study on "per-mile user fee equity" within 2 years of enactment. This study would look at various issues of a per-mile user fee system including its effect on low-income individauls and the ability to access jobs and services.

Given use of the term "fee" and no reference to the gasoline excise tax, sounds like if such a fee were implemented, it would be in addition to the gasoline excise tax.

So, it is good that the concept of a VMT at the federal level is not completely forgotten, but more is needed to replace the out-dated gasoline excise tax with something more appropriate for funding the HTF. Let's see if something more comprehensive gets into the infrastructure bill. I think we need action rather than just more study.

What do you think?

Wednesday, August 4, 2021

Space Taxation

The recent tourism type travel of well-known billionaires Richard Branson (July 11) and Jeff Bezos (July 20) is a big deal. It also raises tax considerations. I'm talking about tax considerations beyond whether these wealthy owners of space exploration companies (Virgin Galactic and Blue Origin) engaged in any transaction at the height of there journey where the sourcing of the transaction is uncertain.

Congressman Blumenauer (D-OR), member of the House Ways and Means Committee announced on July 20 that he will proposed the Securing Protections Against Caron Emissions (SPACE) Tax Act. While the text is not yet available, he mentions in his press release "new excise taxes on commercial space flights carrying human passengers for purposes other than scientific research."

Blumenauer notes that we have excise taxes on air flights and the emissions that are generated (negative externalities). He suggests a two-tiered system. "The first tier would apply to suborbital flights exceeding 50 miles above the Earth’s surface but not exceeding 80 miles above the Earth’s surface. The second tier, which would levy a significantly higher excise tax, would apply for orbital flights exceeding 80 miles above the Earth’s surface." NASA flights for scientific research would be exempt. He doesn't address what the application to what we will likely see on future NASA flights - a commercial launch.

I've been fascinated with space exploration since I was a kid. For the 50th anniversary of Apollo 11 landing men on the moon, I wrote a tax-related article about it for Tax Notes State (Nellen, Tax Relevance of Tech News: Part 1 - Apollo 11 50th Anniversary, 7/18/19).

I addressed tax within these categories:

1. Federal Tax Rules - updating needed to existing rules such as IRC §863(d).

2. State Authority to Tax - address in an update to PL 86-272.

3. Apportionment and Sourcing - we have some case law here and Cal. Regs. 25137-15, Apportionment and Allocation of Space Transportation Companies. More is needed from all states and uniformity would be helpful.

4. Incentives - the R&D and manufacturing activities of commercial space exploration brings high qualify job to a state and should have a multiplier effect.

5. Excise Taxes - Similar to Blumenauer suggests, similar to other travel, excise taxes on the fuels and/or the tickets is appropriate.

6. Addressing Negative Externalities - the emissions, use of fuel, and creation of some space junk suggest a need for fees or taxes.

Finally, I suggest that a Space Tax Study Group be formed to study and suggest solutions for these federal and state tax issues and to do so sooner rather than later.

What do you think?

Sunday, July 25, 2021

California Lawmakers Miss Opportunity to Help Low-income Parents

3 cartoon figures demonstrating speak no evil, see no evil, hear no evil

Despite better ideas on how to truly help low-income parents of infants, California lawmakers took a route this July that spends a lot of money but doesn't sufficiently help the group in need of assistance. Why does this happen? There is plenty of data and a 2019 report from the Legislative Analysts Office pointing out that their law change won't provide as much help as it could have if better designed.

I'm talking about what started out in 2019 (SB 92, Chapter 34 (6/27/19)) as a two-year exemption (2020 and 2021) from sales tax for infant diapers and menstrual products. The state was required to transfer the lost revenue to local governments. SB 92 also required application of the accountability provision at Revenue & Taxation Code section 41 for the LAO to measure the effectiveness of the exemption in meeting the stated goal of promoting public health by increasing the affordability of and expanding access to diapers.

Prior to its expiration and before the LAO could complete its analysis, lawmakers extended the exemptions until July 1, 2023 and extended the due date for the LAO report to 7/1/22. (AB 85 (Chapter 8, 6/29/20)). Now, with AB 150 (Chapter 82 (7/16/21)), lawmakers have made the diaper and menstrual product exemptions permanent and cancelled the LAO report on the effectiveness of these exemptions.

I wrote about the weaknesses of the infant diaper sales tax exemption in 2019 (8/3/19 post), but repeat the highlights due to this recent example of missed opportunity to really help individuals in need which would end up benefitting us all via healthier babies, greater funds for low-income individuals, and less missed work.

While it may sound good to say you are helping public health and helping to make infant diapers more affordable, we need to ask more questions and apply critical thinking. In my earlier post, I noted that diapers cost between 11 cents per diaper up to 49 cents per diaper. Likely, the more expensive diapers are purchased by parents with more funds who don't need the sales tax savings (roughly 9 - 10% of the purchase price) and likely don't even notice the savings.* 

How much does this cost the state in lost revenue? Per the 2021-2021 tax expenditure report of the California Dept. of Finance, $76 million per year!

Prior to original enactment of the diaper exemption, the LAO told lawmakers that if they really wanted to help low-income families, providing greater subsidies to child care would be better. Per this 2019 report:

"the state can expand a program that addresses one of the biggest expenses parents face: child care. The state funds various types of subsidized child care for low-income families, but the number of eligible children typically exceeds the number of “slots” funded by the state. Due to this shortfall, the state fails to assist part of the targeted population and creates an inequity between those who receive slots and those who do not."

So, why isn't the $72 million per year used to really help low-income parents of infants? 

I think it is because we aren't asking enough questions such as: 

Which income group of parents gets the biggest savings from this tax break? It is the higher income taxpayers who spend more money on diapers and don't need the assistance (wasted spending).* Why are we subsidizing folks who don't need a subsidy?

Will reducing the cost of diapers by the 9 to 10.5 cents of sales tax per dollar help low-income individuals? Of course it offers some assistance, but we still have diaper banks in California and many struggle to pay the sticker price, not just the sales tax. 

What would provide better, more targeted help? Use the $72 million to help those who need it rather than those who do not. Provide diapers to child care centers who serve low-income workers.  I read a report last year on diaper banks for a Tax Notes State article on the need to fix the sales tax base. I learned that some parents get turned away from the child care center if they did not bring diapers for their child so then have to miss work to stay home with the child. Why not use $72 million to prevent this?

Why make the exemption permanent before its expiration date and before getting the analysis from the LAO on the effectiveness of the exemption?  Again, we all need to demand greater accountability from lawmakers regarding spending.

*I recently learned from reading an excellent book that I highly recommend reading (and hope all lawmakers read it) - Broke in America: Seeing, Understanding, and Ending US Poverty (2021), that some low-income individuals do end up spending more on diapers than would be charged if buying them in bulk from a big box retailer because they might not live near such a retailer and/or they don't have a lot of funds at once so buy the smaller package where the cost per diaper is higher.  Again, this calls out for doing better with taxpayer dollars than occurs with the now permanent California sales tax exemption on infant diapers.

What do you think?