One point of contention in the North Carolina tax reform debate has been the fate of one particular tax expenditure—the uncapped sales tax refund for nonprofits. The refund applies to "sales of taxable tangible personal...
The Tax Policy Blog
The controversial 3-cent telephone excise tax—first passed in 1898 as a temporary "luxury tax" to help fund the Spanish-American War—has an unlikely new opponent: peace activists opposing Bush administration foreign policy. From the Seattle Post-Intelligencer:
For Seattle peace activist Bert Sacks, the monthly act of resistance adds up to only 59 cents. Symbolically, however, refusing to pay the "war tax" on his Qwest phone bill represents a pocketbook protest against what he sees as misuse of U.S. military power.
"I object to the U.S. government policy of using famine and epidemic as tools against civilian populations. That's wrong," says the retired engineer, who has fought for a decade to get economic sanctions against Iraq lifted.
Sacks is one of thousands of Americans believed to be refusing to pay the federal taxes attached to their monthly phone bills -- money that helps fund military operations overseas. Many are taking the step as a protest against the war in Iraq.
"We oppose the policies of 'pre-emptive war' and an 'endless' war on terrorism, which led to the Iraq war, which violate human rights and international law, and which have cost us hundreds of billions of dollars while our states and cities face unprecedented deficits, and cutbacks of vital services and programs," reads the statement on a Web site called www.hanguponwar.org.
Although many activists have been withholding the phone tax since the Vietnam War, the act of disobedience is making headlines again as more Americans began to question the rationale for the Iraq war...
The federal excise tax on phone usage dates back to 1898. It was adopted under the War Revenue Act as a temporary levy to help fund the Spanish-American War. The war ended in October of that year. The tax was repealed in 1902 but didn't stay gone for long. It was reintroduced during World War I and was subsequently used to help fund the nation's military activities during World War II, the Korean War and the Vietnam War.
The tax was given permanent status in 1990. It raises about $6 billion a year for general federal expenditures, including military spending. (Full piece here.)
Legislation was introduced in the House this year to repeal the infamous phone tax (see more on H.R. 1898 here).
Over the years we've written a lot on the topic. See here for our Background Paper on the history of the phone tax. See here for our Special Brief on the tax. See page six here for a shorter Tax Watch piece on it.
Are YMCAs really any different from for-profit health clubs they compete with? In our recent Special Report on the charitable tax deduction we argue that they aren't, making a subsidy to them at taxpayer expense hard to justify.
Apparently the Tennessee state appeals courts agrees, as it's threatening the yank away YMCA's tax exemption on the grounds that it gives them an unfair competitive advantage over similar for-profit health clubs. From WREG in Nashville:
NASHVILLE, Tenn. The Y-M-C-A of Middle Tennessee is trying to retain it's tax-exempt status.
But the state appeals court has ruled for the nonprofit to do so, it must first prove that children are allowed to use its Uptown Nashville facility.
The Y-M-C-A has been involved in a nine-year battle with a group of private health clubs who say the Y-M-C-A's state tax exemption gives the organization an unfair advantage in competing for members.
State law says that a family wellness center must be accessible to people of all ages to be tax-exempt. (Full story here.)
The winner of the first ever Survivor, Richard Hatch, has been charged with avoiding taxes on his $1 million winnings from the show and will face trial beginning next month. The latest in this case from the Miami Herald:
The man who won $1 million on the first Survivor show is facing a January trial date on tax evasion charges, reports The Associated Press.
U.S. District Judge Ernest Torres denied three motions filed by lawyers for Richard Hatch, the Newport man who sometimes competed naked on the CBS reality show.
According to a spokesman for the U.S. attorney's office, Hatch's lawyers had asked the judge to delay the trial and force federal prosecutors to divulge how much money Hatch supposedly owes the government.
Torres scheduled jury selection for Jan. 10. (Full Story)
The problem of paying taxes on winnings is common, as we saw with the famous case last year of Oprah fans who were forced to pay taxes when they received cars she gave away. Many have asked if shows can simply pay the taxes for the recipients instead. The answer is yes -- but then recipients must also pay taxes on the “income received” from the show paying the taxes for them. At that point, shows could also pay those taxes, but then recipients must pay tax on that income, and so on.
The question is: Does the back-and-forth of tax liabilities ever stop (assuming tax law provisions don't take effect such as the exemption for cash gifts up to $11,000)?
The answer is yes. This back-and-forth creates what mathematicians call a "convergent geometric series", which means we can neatly summarize what shows like Survivor or Oprah would have to pay to cover all tax liabilities:
Total Paid by Show = Winner's Take-home Amount / (1 – tax rate)
So if CBS had wanted to pay Richard Hatch $1 million (before taxes) and pay his taxes, they would've had to write a check for approximately $1.4 million, assuming a tax rate of 30 percent.
As the year comes to a close, taxes are always on the minds of individuals who are at the margin of making an economic decision. This is because nearly every January 1st some statute in the federal tax code is amended. Take for example this story from USA Today on consumers postponing their purchases of hybrid cars in order to capture a huge tax bonus that begins in January:
Buyers of the popular Toyota Prius hybrid, after waiting months to get their cars, now are telling dealers to keep them until next month so the buyers can qualify for what's likely to be a much bigger hybrid tax break in 2006.
"I've got cars on the ground that I'd had (on) order for 18 months, and the customers want delivery after the first of the year," says Debbie Tufts, new car sales manager at Rudy Luther Toyota in Golden Valley, Minn.
"We have seen it around the country," Toyota spokeswoman Nancy Hubbell says.
Stating Jan. 1, buyers of gas-electric hybrid vehicles get tax credits that could lower their income tax bills as much as $3,150, according to an analysis by the American Council for an Energy-Efficient Economy.
The IRS hasn't set the amounts, but the size of the credit depends largely on the government's fuel-economy rating of the vehicle in city driving. Prius' 60 mpg city rating makes it likely to qualify for the maximum, ACEEE says. That's why it's mainly Prius buyers putting their vehicles on hold. Ford Motor and Honda say they haven't noticed the phenomenon with their hybrids, and Toyota hasn't seen it with other Toyota and Lexus hybrids.
But hold on, there’s a catch -- you can’t wait too long:
Waiting too long could backfire. The juicy tax credit begins to phase out after an automaker sells 60,000 of the hybrid vehicles. Toyota forecasts that Priuses sold the first three quarters of 2006 will qualify for the full credit. Automakers who sell fewer hybrids will be able to entice buyers with the credit into 2007 or beyond.
This guessing game for consumers on when is the best time to buy a new car is fallout from the energy bill that was signed into law earlier this summer. For more on the energy bill’s deficiencies and how it creates more complexity and instability in the federal tax code and more uncertainty for consumers and producers, check out our previous takes on the issue here, here, here, here, here, and here.
To check out video of the Tax Policy Blog's appearance on Kudlow & Company back in July on this issue of the energy bill, click here.
In response to pressure from consumer and business groups, New Zealand's Climate Change Minister has shelved plans for a proposed carbon tax, slated to go into effect in 2007. From the New Zealand Herald:
The Government has dumped its planned carbon tax, but more targeted tax could still proceed.
The u-turn on the $360m a year tax was announced today by Climate Change Minister David Parker....
Mr Parker said rising oil prices had already partly achieved the intended effect of the tax in the transport sector and officials had advised the tax would not cut emissions enough to justify its introduction...
Critics have said costs would have to be passed on to consumers, with petrol and power prices among items likely to be hiked.
Business leaders welcomed the move. But it was attacked by the Green Party, whose co-leader Jeanette Fitzimons said: "What is clear is that the Government views the rise in New Zealand’s carbon emissions as inevitable and that they are only going to try and slow the trend, rather than reversing it."
A Government review of climate change policies has found the tax is unworkable in its current form. (Full story here.)
As noted in our previous post on the carbon tax, the levy was expected to raise the annual tax burden of New Zealand consumers by $50-$150 per year. The tax would've made New Zealand the first country to write Kyoto protocol guidelines into its tax code.
Since many of New Zealand's trading partners, including China and Australia, aren't constrained by the Kyoto Protocol, lawmakers feared the new tax would chase away foreign investment—a pretty well-justified fear.
Will federal tax reform affect the size of the federal government? That's one of the five tax reform questions tackled by economist Michael J. Boskin in an article in the latest issue of Economists' Voice.
Here's his partial answer, which is excellent:
It is important to control spending for its effect on tax burdens and economic performance. The economic harm done by taxes distorting private decisions to save, invest, work, etc. goes up with the square of tax rates. Doubling tax rates quadruples the cost. The marginal cost is proportional to tax rates. Hence, each dollar of additional revenues costs the economy about $1.40...
Tax reforms that more closely tie the payment of taxes to expenditures will promote a more effective and efficient government... If everybody pays at a common rate, it will be harder to expand government and raise the rate, because a larger fraction of potential voters will have a stake in limiting the spending.
The more progressive the tax system becomes and the more concentrated among the few taxes become, the easier it is to expand government at the expense of a minority paying the bulk of costs. This was Milton Friedman’s most important insight when he first proposed a flat tax in Capitalism and Freedom.
This aspect of the case for a flat tax has unfortunately almost been lost in recent decades, as attention has focused on the important goal of simplicity... (Full piece here.)
This is, of course, a point we've repeatedly made in our research on the number of Americans who pay zero federal income tax—a figure that's estimated at 42.5 million in 2004 (see here for more on non-payers). This research is part of our Putting a Face on America's Tax Returns project, which you can learn more about here.
The federal tax deduction for state and local taxes was amended two years ago by adding an option for taxpayers to claim the deduction based upon the sales taxes they paid that year in lieu of the income taxes they paid that year. But this provision was only temporary and is set to expire at the end of the year, creating uncertainty for some and a rush to buy big-ticket items for others. From the Tacoma News-Tribune:
Rep. Brian Baird (D-Vancouver) has some advice for Washington shoppers in the market for big-ticket items like a car or boat: buy now, before a federal tax break expires Dec. 31.
Congress has put off until next year consideration of a bill that includes an extension of the current break that allows Washington residents to deduct sales tax payments from their federal tax bills.
Baird said he expects Congress will extend the sales tax deduction eventually, possibly in February.
“But there are no guarantees,” he warned. “If you buy a car or a boat by the end of the year, you might end up saving some money.”
When Washington residents file federal income tax returns in April, they may deduct state sales taxes paid during 2005. Unless Congress acts, the deduction might not be available in 2006. (Full Story)
Stability is a key feature of any good tax system. As we’ve noted before in our report, “The Cost of Unstable Tax Laws”:
Two different types of costs are imposed on the U.S. economy when taxpayers face uncertainty about tax laws. First, uncertain tax laws (or the uncertainty of pending tax legislation) interrupt, distort, or stifle economic activity. Second, uncertainty adds to tax law complexity, which forces the private economy to expend valuable resources on the economically sterile exercise of tax research and planning, as well as tax compliance and litigation.
In 1988, Professor Jonathan Skinner of the University of Virginia, using data from 1929 through 1975, calculated that uncertainty with regard to the federal taxation of wage and investment income costs the U .S. economy 0.4 percent of national income per year. For example, applying Professor Skinner's cost figure to 1993 national income, the widespread taxpayer uncertainty that accompanied the tax changes embodied in the Revenue Reconciliation Act of 1993 cost the U .S. economy an estimated $20.5 billion.
Download the full study here.
A proposal in Maine to institute a “water tax” on large water bottling companies has apparently failed. It appears that supporters of the proposal were unsuccessful in collecting a sufficient number of valid signatures to reach Maine’s November 2006 statewide ballot. Even though the proposed water tax seems to be washed up, business leaders remain concerned about Maine’s statewide business climate. According to the Bangor Daily News:
"We need to understand what just happened," said Thomas Brennan, northeast natural resource manager for Nestle Waters, which owns Poland Spring. "It [the water tax] represented a real threat to our ability to do business in Maine, and it came out of the blue. We need to make sure it's not going to happen again.
Representatives of [Nestle Waters] the world's third-largest bottler said, however, that they remained "shellshocked" by the proposal and plan to discuss the business climate in Maine with state officials before moving forward with plans to open a third bottling facility. Poland Spring officials had predicted the tax could drive the company out of Maine, taking with it up to 600 jobs.” [Full Story]
Concerns regarding Maine’s business climate are well founded. According to the Tax Foundation’s latest State Business Tax Climate Index, Maine’s tax climate is among the worst nationally - ranking 42nd. Hopefully, policymakers in Maine will use this opportunity to recognize the uncompetitive nature of their tax system.
For additional Tax Foundation research on state policy issues, click here.
A new Congressional Budget Office study (PDF) released last week takes a hard look at projected trends in federal spending, debt and taxes over the next half-century. The picture is less than rosy. From the executive summary:
Driven by rising health care costs and an aging population, federal spending for Medicare, Medicaid, and Social Security will claim a sharply increasing share of the nation’s economic output over the coming decades.
Even if taxation reached levels that were unprecedented in the United States, current spending policies could become financially unsustainable. An evergrowing burden of federal debt held by the public would have a corrosive and potentially contractionary effect on the economy.
As the U.S. tax system is now configured, federal revenues will grow faster than the overall economy. Under current law, taxpayers will face higher rates, with detrimental consequences for work, saving, and economic growth.
If taxation is restricted to the levels that prevailed in the past, the growth of spending on programs for the elderly will have to be reduced substantially. Limiting the growth of outlays for defense, education, transportation, and other discretionary programs would not be enough to ensure fiscal sustainability.
Likewise, economic growth alone is unlikely to bring the nation’s long-term fiscal position into balance. Moreover, issuing ever-larger amounts of debt or dramatically raising tax rates could significantly reduce economic growth.
Here's one of many interesting charts in the study (click to enlarge):
Here's another I like to call "choose your own adventure" (click to enlarge):
And the budgetary elephant in the room, looming increases in Social Security spending (click to enlarge):
A BBC news report this Saturday offers a vivid example of how tax policy affects investment decisions by firms, especially in global markets where small differences in tax climates can tip the balance in favor of one nation over its neighbors.
Apparently oil giant Shell is scaling back planned oil exploration in the North Sea following a steep increase in Britain's tax on oil profits. From the story:
The company had planned to hire three drilling rigs, but has decided to reduce the number to two.
Shell said it took the decision after a review prompted by the chancellor's decision to increase a charge on profits from 10% to 20%...
Shell, which has interests in about 50 oil and gas platforms in the North Sea, had planned to bring in the additional rigs to cover new exploration projects in the coming years.
The company said: "We had tendered for three rigs but after an investment review following the announcement of an increase in supplementary corporation tax we have unfortunately only been able to commit to two rigs at this time.
"We are disappointed by the government's recent decision and we are continuing to evaluate the impact that the proposals might have on our business."
Shadow Scottish Secretary David Mundell said the chancellor had already been warned of the possible "dire consequences" of the tax move.
"This news confirms our worst fears - Gordon Brown's massive tax hike is going to prove bad for Britain and bad for Scotland," said the Conservative MP. (Full story here.)
For more on international corporate tax climates, check out our recent Special Report: "The U.S. Corporate Income Tax System: Once a World Leader, Now A Millstone Around the Neck of American Business."
The new issue of Economists' Voice (Volume 3, Issue 1) features several excellent articles on the current tax reform debate, including a lead essay from Edward Lazear and James Poterba of the President's Advisory Panel on Federal Tax Reform.
In it, Lazear and Poterba roundly denounce the idea of implementing social policy through the tax system—using credits, deduction and exemptions to encourage or punish behavior in markets—something that has become conventional wisdom in Washington in recent years:
The Panel concluded that an efficient tax system should remove distortions to the extent possible, and that “social engineering” through the tax code should be avoided when possible.
It is possible to argue that some activities should be encouraged by the tax system, either because they create social externalities or because there are other distortions in the economy that could be offset by appropriate tax remedies. Such arguments are usually difficult to support with empirical evidence, and they lead to special privileges and a myriad of tax breaks that are likely, on balance, to reduce the efficiency of the tax system.
Given the political process that determines the tax code, special provisions are likely to depend more on an interest group’s lobbying efforts than on careful estimates of social externalities or other considerations.
Probably the single most important source of poorly designed tax policy is the idea that the tax system should serve as a system of penalties and benefits to guide markets toward policymakers' goals, rather than a system to raise revenue for necessary government programs while interfering with markets as little as possible.
Implementing social policy through the tax system—rather than direct spending programs which are more transparent and subject to democratic controls—is routinely defended in Washington policy circles, despite the fact that it is widely criticized by economists like Poterba and Lazear as a source of gratuitous complexity and inefficiency in the tax system, and is subject to wide abuse by rent-seeking interest groups.
Let's hope more tax policy professionals start taking the arguments of Profs. Poterba and Lazear seriously.
For many homeowners, December is not only the time to enjoy holiday festivities and gather with their families; it is also the time to face their dreaded property tax bills.
In addition to actually paying the tax, property owners often spend considerable time deciphering the bills. Uderstanding property taxes is not easy, especially in the 38 states that levy both state- and local-level taxes.
Nevada is one of these 38 states, and, to help taxpayers understand both the basic principles and the nuts and bolts of the state’s property taxes, the Nevada Taxpayers Association recently published a booklet titled Understanding Nevada’s Property Tax System. It explains various aspects of Nevada's state-level property tax system and includes a glossary of terms commonly used in property tax calculations in many states.
For more on property taxes in all states, click here.
This Week in Petroleum from the Department of Energy’s Energy Information Administration reported the current average retail price for regular gasoline is now $2.18. This represents a 3.8 cent per gallon jump from last week and the first increase in the national average of gasoline prices in 10 weeks. This week’s average price represents a 33.8 cent per gallon increase from the same period last year. With prices well below post-Katrina highs, but significantly above levels from last year, several states are now actively considering changes in their gas taxes.
Wisconsin's automatic gas tax increase took another step closer to being history on Wednesday morning. The state Assembly passed a bill that would do away with the tax designed to increase annually to match inflation. For the past 20 years, the tax -- among the nation's highest -- has increased April 1 of each year. [Full Story]
We estimate that drivers in Wisconsin pays an average of 51.3 cents per gallon of gasoline purchased – one of the highest gas taxes in the nation.
New JerseyGovernor-elect Jon Corzine recently indicated that he is now considering the option of raising the gas tax in New Jersey. According to the Newark Star-Ledger:
After vowing during his campaign that he would not raise the gas tax, Gov.-elect Jon Corzine said yesterday he will reconsider the idea now that gasoline prices have eased and the state's budget gap has ballooned to more than $5 billion. [Full Story]
Motorists in New Jersey pay an average of 32.9 cents per gallon in combined federal, state and local gas taxes. To read additional Tax Foundation research on gasoline taxes, click here.
As lawmakers on Capitol Hill debate whether to hike the U.S. tax rate on capital gains income, the Chinese government is moving in the opposite direction, exempting both foreign and domestic investors from capital gains tax in an attempt to boost the attractiveness of its equity markets. From Bloomberg:
China will exempt foreign investors in the nation's local-currency securities from paying capital- gains tax, the latest attempt to revive stock markets that have lost more than half their value in the past four years.
"This is good news for foreign investors as it removes all ambiguity on the issue of capital gains tax,'' said Sean Hu, who helps manage $400 million at Martin Currie Investment Management Ltd. in Shanghai. "This was a grey area in the past. It may encourage more investment.''...
"The tax relief would attract more foreign investors to invest in China's stock market, and leave them with more money to buy domestic shares,'' said Yan Ji, who helps manage the equivalent of $720 million at domestic asset manager First Trust Fund Management Co. in Shanghai.
The ruling places foreign investors on an equal footing with domestic institutions, which are exempt from capital gains and business tax, Yuen said. "Any other outcome would have an adverse impact on the further development of the QFII regime.'' (Full story here.)
Currently Congress is debating whether or not to extend the current 15 percent tax rate on capital gains and dividends, both of which are set to expire in 2008.
So what's the argument for keeping the lower rates? Many have focused on the distribution of the tax relief the cuts provide, and whether it's fair or not. But to economists concerned with growing the economic pie—rather than slicing it more carefully—there are two much stronger arguments.
One is the simple argument of Chinese lawmakers: taxing investment less leads to more investment, which makes workers more productive and raises wages.
However, a more subtle argument for extending the 2003 dividend tax cuts is that they get the U.S. one step closer to a consumption-based tax system in which capital would be exempted from tax altogether—a system nearly all economists agree would dramatically improve U.S. economic performance, allowing U.S. lawmakers to fight over the division of a much larger economic pie.
Italy is apparently following the lead of the State of Kansas, proposing to levy a tax exclusively on the profits of pornographic businesses. See previous posts here and here on the infamous Kansas porn tax.
Italy's government plans to use money raised from a new pornography tax to finance ways of encouraging Italians to have more children, according to the latest draft of the 2006 budget.
According to details of the proposal, submitted to parliament on Tuesday, by Daniela Santanche' of the post-Fascist National Alliance party, pornographic industry operators would face an additional tax of 25 percent on their incomes.
"The (porn) tax is important not for moralistic reasons, but because it is right to tax non-essential products at a time in which families are facing difficult economic conditions," Santache' told reporters. (Full story here.)
Besides being economically non-neutral, the proposed porn tax is doubly bad because it seeks to employ the tax code to promote specific social goals desired by lawmakers rather than raising revenue for necessary government programs. It may be that Italy needs a program to encourage child birth, but is the tax system really the appropriate vehicle for pushing this particular social policy?