As of December 4, 2013, 22 states are full members of the Streamlined Sales Tax Project (SSTP), while two states are associate members and 26 states and the District of Columbia do not participate in the project.
Lawmakers in Ohio continue to believe that tax credits are the way towards economic growth, which they tend to measure merely in the number of gross jobs that are created by the credit. The latest from the Cleveland Plain Dealer:
The Ohio Tax Credit Authority approved tax incentives for 13 companies on Monday, including General Motors, Whirlpool and two Cleveland-area businesses.
The largest incentive went to General Motors Corp., which was approved for a tax credit capped at $23 million over a seven-year term. The catch: The company must go through with a renovation and expansion of a transmission manufacturing facility in Toledo and stay in operation there for at least 14 years.
The renovation would allow GM to manufacture new Powertrain transmissions. According to the state, 2,000 jobs could be at risk without the upgrade because the type of transmission currently manufactured at the facility will become obsolete within five years.
The $413 million project would include a 400,000-square-foot addition to the existing facility.
The committee also approved a tax break for Whirlpool Corp. valued at $6.3 million over a 15-year term to help expand the company's location in Clyde.
Whirlpool bought Maytag Corp. in March and plans to close facilities in Iowa, Illinois and Arkansas.
The project is expected to create 553 jobs with an average pay of $15 per hour. (Full Story)
Lost in the talk of how many jobs will be brought to Ohio from various subsidies and tax credits to certain businesses, most of the lawmakers conveniently ignore what any student is taught in their first day of introductory economics: there is no such thing as a free lunch.
When tax credits are implemented for certain companies, taxes must be raised on other businesses and individuals, or government spending must be cut. That is, unless a state believes that the tax credit will be revenue-enhancing for its own state because the growth will largely come at the expense of the rest of the country.
Either way, specific tax credits for certain companies are nearly always bad public policy from a national economic welfare perspective. And it is really nothing more than central planning – the government controlling the allocation of resources – which as we have seen in countries that tried it before, inevitably fails and is prone to extreme levels of corruption.
On June 22, the House voted 296 to 156 in favor of Chairman Bill Thomas’s estate tax bill, the Permanent Estate Tax Relief Act of 2006.
“Permanent” might strike the average reader as an odd choice for the title. No tax law has ever been permanent because each Congress has the right -- and apparently feels the duty -- to change every rate and rule in the code.
But “Permanent” is a well chosen word in this case because the bill aspires to replace estate tax laws that are about to give taxpayers a wild ride. Current estate tax law has been like a boring roller-coaster since 2001, with rates gently sloping down each year and exemptions slowly creeping up. The terrifying part of the ride is set to begin in 2010 with a thrilling dive to total repeal, followed by a neck-jerking restoration of the old 55% in 2011. We recently blogged on the awful consequences of these sudden, dramatic changes.
The Thomas bill would smooth this out somewhat by establishing rates of 0%, 15% and 30% that would not change from year to year, and exemption levels that would only change with inflation.
“Relief” is also a well chosen word for the title, to contrast it with “Repeal,” a word that was part of the last estate tax bill the House passed, over a year ago now. Republicans and a few dozen Democrats have championed repeal for many years, so settling for “Relief” strikes some of them as settling for too little. Economist Bruce Bartlett, author of a recent book bashing President Bush, is one of the most articulate voices for total repeal.
For more on the federal estate tax, be sure to see our recent report here.
Under current law, the federal estate tax is set to expire in January 1, 2010, only to return one year later in 2011. This convoluted structure creates a 12-month window during which wealthy estate holders can completely avoid estate taxation if they happen to die during that period.
Because of the heavy burden estate taxes impose on large estates, it's easy to see how this window creates perverse incentives for families with elderly or unhealthy estate holders near the end of life. The difference between a death on December 31, 2010 and one day later on January 1, 2011 could mean millions in estate tax liabilities—raising the specter of a wave of truly disturbing moral and ethical dilemmas faced by families and doctors, simply because of poorly designed federal tax policy.
In a new article in Economists' Voice, Australian researchers Joshua Gans and Andrew Leigh give a sense of the severity of this issue by exploring a similar situation faced by Australian estate holders in the late 1970s. In July 1979, Australia abolished its estate tax. Gans and Leigh pose the question, "What happened to reported deaths just before and just after Australia's estate tax repeal?"
Here's their answer, from the article:
The 1970s saw a campaign to abolish estate taxes in Australia. For the better part of 30 years, those taxes had been relatively steady (with thresholds constant despite considerable inflation). Estates worth less than $100,000 were tax-exempt if passing to nonfamily members, and estates worth less than $200,000 were exempt if passing to family members. The highest rate was 27.9 percent, which applied to estates worth $1 million or more. During the last tax year in which the estate tax applied, we estimate that 9 percent of decedents paid the estate tax.
The abolitionist movement was finally successful in June 1978, with the Australian parliament passing legislation to entirely abolish estate taxes a year later. Since the Australian tax year runs from 1 July to 30 June, any person dying on or before 30 June 1979 was subject to federal estate taxes, while any person dying on or after 1 July 1979 was entirely exempt from estate taxes.
The Magnitude of the Effect Using data on the number of deaths by day, we were able to test for impacts on deaths in the last week of June 1979 and the first week of July.
Figure 1 shows our main finding. It charts the number of deaths during the final week of June and the first week of July. In the last week of June, when federal estate taxes still applied, the number of deaths dropped sharply; before rising in July, immediately after the tax was abolished.
Our econometric analysis (comparing June-July deaths in 1979 with June-July deaths in other years), suggests a significant effect on deaths with about 50 reported deaths shifted from the last week in which the estate tax applied to the first week of its abolition, with most of the effect occurring within three days of the policy change. Of course, as we use formal death records, it is possible that the effect we observe reflects misreporting of the death date, rather than changes in the actual timing of deaths.
While this number of deaths appears small in absolute terms (the population of Australia in 1979 was just 15 million), it adds up to around 5 percent of all deaths being shifted out of the eligibility range. Since only 9 percent of all decedents paid estate taxes, this indicates a very high elasticity among eligibles. Over half of those who would have paid the estate tax in its last week of operation managed to avoid doing so. (Emphasis in original.)
As the House Ways and Means Committee holds hearings today discussing tax policies to make the U.S. more competitive in the global marketplace, the issue is particularly relevant to Northern Ireland, which is a distinct part of the United Kingdom.
Northern Ireland is bordered to the south and west by Ireland, who now has a 12.5 percent corporate tax rate which has led to a flood of foreign investment into the country—including some investment at the expense of its neighbors. As a result, Northern Ireland is seeking to lower its own corporate tax rate to match that of the Republic of Ireland. From the Belfast Telegraph:
Chancellor Gordon Brown has said his mind is not closed to change on the issue of fiscal incentives for Northern Ireland.
He referred to the question of tax breaks for business during a Press conference as he was rounding off his one-day visit to Belfast yesterday.
His itinerary included meetings with business leaders and political parties, and he faced several calls for an economic boost for the province.
He told reporters at Parliament Buildings that he wanted "to assure people that what we can do economically we will do".
Pressure has been building in recent months for a range of fiscal incentives such as a cut in the rate of corporation tax in Northern Ireland from the UK-wide rate of 30% to the 12.5% in the Republic of Ireland.
In April, the Government agreed to carry out an independent study into the potential for tax breaks to boost the province's economy.
Following his meetings with political parties in Stormont yesterday Mr. Brown said the Government was keen to give economic support to the peace process.
"We will continue to look at anything that will be of benefit to the economy of Northern Ireland," he added.
If a country desires a corporate income tax, it should have as broad a base and as low a rate as possible to ensure economic neutrality between industries. Unfortunately, the United States’ corporate income tax has neither.
The U.S. statutory corporate income tax rate is as high as 35 percent. At the same time, the corporate tax code is riddled with exemptions, credits, deductions, and other special provisions—many of which have no economic rationale except to appease special interests and rent-seeking industries.
Let’s hope this morning’s hearing will lead to the first steps toward a U.S. corporate income tax system that has lower rates, a broader base, and fewer economic distortions.
In recent years, the basic tax policy question facing federal lawmakers has been whether to repair the federal income tax, or abandon it and move toward one of the consumption-style tax systems favored by most economists.
Economist Alan Auerbach of the University of California at Berkeley has posted a useful primer on the choice between consumption and income taxes to the NBER website. From the abstract:
It has now been nearly three decades since the publication of two important volumes that laid out many of the details of how one might implement a progressive consumption tax. Over the years since, many contributions have analyzed the mechanics of the different variants of consumption taxation, the potential efficiency and distributional effects of their adoption, the issues of administration and transition from the current tax system, and the problems relating to certain types of transactions. But much of what we “know” is not part of the general policy discussion and there are important issues that the literature has recognized but still not resolved.
The aim of this paper is to lay out the key economic issues involved in deciding whether and how to adopt a consumption tax and to discuss what theory and evidence have told us and could tell us about these issues.
Harvard economist Martin Feldstein has published an excellent new non-technical article on the economic costs of taxing investment income in the new issue of Economists' Voice. The piece argues forcefully for reduced taxation of capital income on efficiency grounds. From the piece:
Thanks to recent tax reforms, the marginal tax rates on investment income in the United States are significantly lower today than in the past, which correspondingly reduces the economic losses caused by the tax system. That’s the good news. But there is also bad news.
The first piece of bad news is that tax rates on the income from saving and investment remain much higher than they would be in any rational system of taxation. The second piece of bad news is that these taxes continue to seriously distort the economy with a large resulting loss of real income. The third piece of bad news is that many economists grossly underestimate the efficiency cost of our system of taxing capital income because they think that if the taxation of capital income does not cause a big reduction in saving, it is not a problem. They are wrong, as I will explain.
A Little Tax HistoryBack in 1963 the highest marginal rate of personal income tax was 93 percent. A taxpayer in the top bracket got to keep only seven cents out of every extra dollar that he earned. I used to work for one of those taxpayers: Ronald Reagan. His experience of the adverse effects of such high tax rates on his decisions and on those of his Hollywood friends is an important reason that we have much lower marginal tax rates today.
Even as recently as 1980 the top income tax rate was 70 percent on interest and dividends, and 50 percent on wages and other personal services income. Today the top statutory federal marginal income tax rate is 35 percent, although the effective marginal tax rate for many high income taxpayers is over 40 percent when the Medicare payroll tax, the phase-out of deductions, and state tax systems are taken into account. In many well-off two-earner families, at least one of the two faces a marginal social security payroll tax as well, bringing that individual’s total marginal tax rate above 50 percent.
Today’s statutory tax rates on capital income consist of: a corporate tax rate that is down from 46 percent in 1980 to 35 percent now; a 15 percent maximum tax rate on capital gains (which in 1980 could reach more than 40 percent as a result of tax add-ons and offsets); a 15 percent tax rate on dividend income; and a 35 percent maximum rate on interest income. Recent legislation extended the lower rates on dividends and capital gains until 2010, after which they could revert to 35-plus percent if Congress does not pass new legislation...
But it would be wrong to conclude from the recently reduced tax rates on dividends and capital gains and today’s much more modest rate of inflation that the tax on capital income is now low. The full tax on capital income includes not only the taxes paid by the individual investors but also the corporate income tax. When these taxes are combined, the result is still a marginal tax rate that is high—albeit not as high as in the 60s and 70s—and that is thus capable of doing a great deal of economic harm.
Read the full piece here (PDF).
Elton John is not feeling any love tonight from the Fulton County Assessor’s Office as they have just hit him with a property tax bill that he feels is $16,000 too high. The Grammy-award-winning singer has decided to challenge in court what he claims is too high of an assessment of the property value on the penthouse he owns in the Atlanta suburb. From WSB-TV in Atlanta:
Singer Elton John has filed a lawsuit against the Fulton County tax assessors office, saying the county overvalued his penthouse condominium.
The tax assessors office placed a value of $4.6 million on John's 12,000-square-foot condo on Peachtree Street in Atlanta's trendy Buckhead neighborhood.
But that value is $900,000 too much, the singer's experts say. If he prevails, John would save $16,000 a year in taxes. If he loses, he can expect to pay $77,250 a year.
But money is not the issue, said Craig Klayman, a tax consultant hired to represent John in his lawsuit.
"I just don't see how the county can justify that number," Klayman said. "It's just too high looking at what everybody else is valued at." (Full Story)
All across the country, the way assessments are performed, as well as the occasional corruption among those who perform them, is a controversial issue. This high degree of subjectivity in assessments is likely to be one reason why, in a recent Tax Foundation poll, property taxes were viewed by Americans as the “least fair” of state and local taxes. The problem of subjectivity in assessments, as well as the ability for an appeals process, can lead to high compliance costs as people spend time and money fighting back against what they perceive to be an unfair tax bill.
This appeals process can also create a circle of reassessments because, as part of an appeal, owners will often cite their neighbors’ lower tax bills. The government can remedy this inequality in two ways: it can lower your taxes or raise your neighbor’s taxes. (And if the neighbor knows of the appeal that ends up raising his taxes, it is going to be a long, long time before the two neighbors speak to one another again.)
In 2005 the cost of complying with the individual income tax—the cost of filling out paperwork, hiring accountants, and gathering documentation—rose to over $265 billion. And that's just at the federal level; state income taxes add a significant compliance cost of their own.
California, in an attempt to make paying state income taxes easier for residents, has launched a pilot program called ReadyReturn, in which the California Franchise Tax Board prepared 50,000 of the simplest tax returns—for single, childless, low-income taxpayers with no special deductions or credits—and mailed them to the taxpayers, giving them the option of signing the returns or redoing them.
As we’ve written before, the ReadyReturn plan would not accomplish its goal (most of the 50,000 prepared returns were thrown away), and the costs—financial and otherwise—would be high. Now, a coalition of concerned citizens and groups, including the California Chamber of Commerce, has launched a web site to stop ReadyReturn and ask the legislature not to approve an extension of the program, which is scheduled to expire after this tax season.
The Small Business & Entrepreneurship Council, a member of the coalition, stated in its Weekly Briefing (not available online):
"ReadyReturn" is risky and represents an inherent conflict of interest with tax collector also acting as tax preparer. … In addition to the concern over conflict of interest, there are serious concerns regarding taxpayer privacy. Identity theft is the fastest growing crime in America and a software glitch or bureaucratic error involving "ReadyReturn" could be catastrophic for taxpayers. With the added substantial technology infrastructure and government bureaucracy needed to run "ReadyReturn," the program will end up costing taxpayers untold amounts as well.
The best way to reduce the staggering costs of tax compliance—at the state or federal level—is to simplify the income tax code to the point where taxpayers can easily and quickly calculate their own tax liabilities. Fundamental tax reform in the form of a consumption or flat tax could also dramatically reduce tax complexity and compliance costs.
Click here for more on tax compliance costs.
One of the problems with any income tax is that it entices individuals to accept compensation through non-taxed means, some of which are referred to as “fringe benefits.” But England is taking aim at employers who compensate their employees indirectly by throwing office World Cup parties. From Financial Director:
Workers enjoying World Cup parties put on by their employer could be hit with a nasty tax bill, according to Blick Rothenberg, a tax specialist firm based in London.
Under income tax rules, employers who invite staff to social functions have to declare the hospitality to HM Customs & Revenue if the cost per worker amounts to more than £150 over the course of a year.
While Christmas parties are generally exempt because it is unusual for employers to spend that much per head, Blick Rothenberg said the extra expense of World Cup hospitality could take some workers over the limit.
If the hospitality for the year exceeds £150 staff would then [be] charged income tax at their highest marginal rate on the whole value, not just the excess.
Employers have the option to take on the expense, but the firm said many may choose not to.
While this may raise individuals’ tax burdens, this policy is consistent with the theme of neutrality in an income tax system. Neutrality means that all sources of compensation should be treated equally by the tax code. But what constitutes income is truly a question that is difficult to answer, and even if it is answered, the amount of income may still be difficult to measure. This is one major reason that many economists have looked for other tax bases, like consumption.
Under the existing income tax system in most countries, including the United States, there are a myriad of ways in which employers compensate their employees so as to avoid income taxation. These benefits are often difficult to measure (and enforcing taxation of them is also difficult, even if they could be measured) and can range from plush offices with a great window view to the privelege of sitting in the company’s luxury box at local sporting events.
For more on issues concerning the federal income tax, check out our section devoted to the topic.
In the debate over state-run lotteries, a common question is whether lotteries are a regressive tax—that is, whether they place a heavier tax burden on the poor than on the wealthy. Many studies have attempted to prove or disprove this, and the majority of experts believe lotteries are regressive.
One tool used to analyze lottery data is sales records in various zip codes. If there is a strong enough correlation between high sales and low per capita income in a certain zip code, the lottery is said to be regressive in that area.
While zip-code studies are useful to a certain extent, there are limitations. First, lottery players often purchase tickets in zip codes in which they do not reside, e.g. many people purchase tickets near their workplaces.
Second, sales/zip-code data are sometimes interpreted incorrectly. The misinterpretation hinges on a misuse of the word “regressive.” A regressive tax is one that falls disproportionately on low-income individuals and takes a larger percentage of income from low-income taxpayers than from upper-income taxpayers. Regressivity measures the percentage of income spent on taxes, not the dollar amount.
If a person who makes $15,000 a year purchases $3,000 worth of lottery tickets, she will spend 20 percent of her income on the lottery—quite a large portion (about one-third of that amount will be in the form of implicit lottery taxes). However, if an individual who earns $1,500,000 a year spends the same amount, it will be a drop in the bucket—a mere .2 percent of her income. Taking into account only the dollar amount spent misses the point.
Our current federal income tax is progressive, meaning rates rise as income rises—the opposite of regressive. Many experts have argued for a flat tax, with one rate for all, but virtually no one would argue for a regressive income tax, where rates rise as income falls; such a tax would be seen as unfair and unduly burdensome to the poor.
Some people mistakenly believe a tax must impose a higher dollar amount on the poor in order to be regressive. For example, a recent Lottery Post article states:
National studies frequently show ... that the dollar amount spent on lotteries generally does not fluctuate much over income brackets.
However, the article is titled, “Study proves lottery not 'regressive tax'.” If people in different income brackets spend the same amount on the lottery, then the implicit lottery tax (the portion of proceeds kept by the state) is regressive. Therefore, this study actually shows that the lottery is regressive.
For more information on lottery taxes, click here.
An editorial appearing in the most recent Forbes magazine advocates the implementation of taxes on carbon emissions in an effort to combat global warming while at the same time trying to keep our lives simple. From Forbes (free registration required):
An inconvenient truth, not adequately addressed by Al Gore in his movie, is that environmentalism makes life complicated. If SUVs are bad and wind power is good, then we must levy a tax on gas-guzzlers and hand out tax credits for windmills. Those in the business of selling windmills are very happy with this arrangement (see story by Naazneen Karmali), but in no time our fears of global warming have caused our economy to become littered with subsidies, credits, deductions, tax surcharges, earmarks and research boondoggles. Here's a way to make life simpler: Chuck out all energy legislation, replacing it with a one-sentence statute that levies a tax on carbon emissions. Let's do it big--30 cents a pound. So that people can adjust, start it at 1 cent and increment the tax by a penny a year from now to 2036. (Full Story)
If the goal of a carbon tax is to combat global warming, there exists one major problem: enforcement. In the global marketplace, a healthy climate would be a public good where all countries benefit. Therefore, even if the entire world may benefit on net from a global carbon tax, without a proper enforcement mechanism, each autonomous country may have an individual incentive to not sign onto the tax given that everyone else has signed on. This tragedy of the commons is solved only by an allocation of property rights or via government enforcement. But who owns the rights to the global climate? And would some governments have authority over other governments, and if so, how? Would this enforcement be via military force, trade sanctions, or merely diplomacy?
All of these questions need to be addressed before any serious attempt at combating global warming through tax policy, or even through a cap and trade system, is made at the individual country level.
An article yesterday from Smartmoney.com offers what it calls, "10 Things Your Rental Car Company Won't Tell You." Not surprisingly, the growing tax burden imposed on rental car companies by state and local governments made number one on the list.
From the article:
1. "We're a tax magnet." As with the rest of the travel industry, business is up for car rentals and expected to climb even higher after having remained fairly flat for several years. But customers are already paying more, due to an unprecedented slew of taxes and fees.
However, that extra money doesn't go to the rental car companies but into city and state coffers, where it's used to fund municipal projects. For example, in 2005, car rentals in Arlington, Texas, were hit with a 5% tax to help pay for the new Dallas Cowboys stadium. Car rentals get tapped as fundraisers because local politicians won't feel the repercussions at the voting booth. "They're taxing people who are flying in from someplace else," says Hertz spokesperson Richard Broome. "These people can't and don't vote locally, so there's no harm for them."
But there's a way for consumers to dodge some of these fees: Pick up your car in town, not at the airport... (Full piece here.)
Of course there's a better way to avoid these rising rental car taxes than to "dodge" them as the article suggests—encourage state and local lawmakers not to levy unjustified excise taxes on car rentals to begin with.
As we've written before, many of the rental car excise taxes that have been imposed around the nation in recent years are impossible to justify on any economic grounds. Most of them suffer serious design flaws, and fail to satisfy basic, widely-agreed-upon principles of sound tax policy.
Probably the most important flaw in most rental car excise taxes is that they don't closely link taxes paid with government services provided, violating what economists call the "benefit principle" of taxation.
In recent years, special rental car taxes have been levied to supplement teacher's salaries, build sports stadiums, and to fund other general government services that bear no relationship at all to the rental car industry. That's just poorly designed tax policy.
Government programs like roads, sports stadiums and theater arts centers that lawmakers argue will benefit all residents equally should be funded through broadly-based taxes. They should not be funded through high-rate, non-transparent, and politically expedient excise taxes on one particular industry.
Apropos yesterday's post on the economics of "soda tax" proposals aimed at trimming America's waistline, the Cato Institute's Radly Balko makes the case against soda tax proposals in their latest daily podcast.
The issue of line-item veto is on the table again, and the bill before Congress right now would include line-item authority for the president on both spending and tax matters.
From Tax Analysts:
As the House Budget Committee plans to mark up line-item veto legislation on June 14, the Senate will opt to move the line-item veto the following week as part of a budget process reform package, Senate Budget Committee Chair Judd Gregg, R-N.H., told reporters on June 13.
“Tomorrow we’ll be introducing a very extensive bill to help control spending and to help stop overspending,” Gregg said. Gregg and Senate Majority Leader William H. Frist, R-Tenn., are scheduled to unveil the proposal on June 14, although action on the bill likely would not come until the week of June 19, Gregg said. President Bush’s proposed expedited rescission authority would be included among the bill’s many money-saving elements, he added.
The line-item veto legislation would allow the president to send specific provisions from spending and tax bills to Congress for reconsideration. Congress then would have to vote on the proposed rescissions within 10 days without filibuster or amendment. (Full Story)
If Congress is going to give the president the line item veto authority, it should definitely include matters of tax law. One of the goals of those who champion the line item veto is to allow the president to rein in unnecessary spending. But “spending” also takes place on the tax side through the provision of special tax provisions for certain industries, companies, or geographies.
What is the difference between a direct subsidy on the spending side to a company that is poor spending policy and an equal tax deduction that is poor tax policy? Nothing, except that going through the tax code is often less transparent, and therefore easier for tax lobbyists to get inserted into law.
Governor Bush signed into law two interesting tax bills recently. One bill repealed the despised per-alcoholic drink tax and the other provided a property tax exemption to a bible amusement park.
Governor Bush signed a bill repealing Florida's tax on alcoholic drinks. The measure does away with the last of the per-drink tax, which has long been a bane of restaurants and bars, because owners say it costs them more to collect and remit than it brings in for the state.
And the Holy Land Experience biblical theme park near Orlando won't have to pay property tax under a bill Bush signed.
Park officials describe the five year old Holy Land Experience as more of a Bible-based history museum aimed at religious education. Visitors can enter a replica of Jesus' tomb, or see Jesus heal a blind man, climb the stairs of a faux Herod's Temple and travel down a re-creation of the Via Dolorosa.
Full story here.
The drink tax was levied on each drink served at a rate of 3.34 cents for 1 ounce of spirits or 4 ounces of wine, 1.34 cents per 12 ounces of beer and 2 cents for 12 ounces of cider. The rate structure alone made the tax difficult to administer.
The property tax exemption for the biblical theme park is difficult to justify from a neutrality perspective. All amusements parks should be taxed at the same rate so as not to create distortions in the market favoring one type of park over another. Even though the park is owned by a nonprofit group and has an educational theme, it should be taxed like all other parks. See a recent paper by Andrew Chamberlain on charitable deductions to learn more.