The Tax Policy Blog

Courtesy of MSN Money, a handy how-to guide for taxpayers looking to dive into the trough of tax preferences for solar energy production in the recently passed energy bill:

"For anybody who has ever considered installing a solar system, Washington is telling you to do it now," says Rhone Resch, president of the Solar Energy Industries Association in Washington, D.C.

The law both increases tax credits for commercial solar installations and offers individual homeowners a credit for the first time in 20 years. (An earlier personal-use solar credit was in effect from 1979 to 1985.)

Homeowners get a ... limited credit. They can put in a photovoltaic system (roof panels that take in energy from the sun and turn it into electricity) and/or a solar-powered hot water system (for hot water heaters, radiant floors or radiators), and get a federal tax credit worth 30% of the systems' cost, up to a credit of $2,000 per system.

...[I]f you install both eligible solar systems in your house, you can knock $4,000 off your federal tax bill.

There are so many economic problems with these tax credits—and with the pork-laden energy bill more generally—that it's hard to know where to begin. For one, they're temporary, likely shifting the timing of solar investment rather than boosting it overall in any long-run sense.

Second, they have the potential to dramatically complicate the federal tax code at precisely the time when the President's Advisory Panel on Federal Tax Reform is supposedly charged with finding ways to simplify it.

Third, they likely reduce overall social wealth as they distort investment decisions in energy production away from methods that make economic sense and toward tax-preferred methods.

For more on the many, many flaws of the recent energy bill, see previous posts here, here, and here.

In his classic piece on the politics of regulation (PDF), economist Bruce Yandle describes how vested interests ("bootleggers") and moral crusaders ("Baptists") often tacitly join forces to bring about bad policy, since both stand to benefit from it at public expense.

Ireland's new plastic bag tax provides a vivid illustration of Yandle's theory. In March 2002 Ireland enacted a nationwide tax of nine pence (15 cents) on the use of plastic grocery bags, to be collected by retailers. Predictably, in just five months the tax cut plastic bag use by 90 percent.

The public face in support of the tax—the "Baptists"—were largely Irish environmental activists, who argued that the tax was necessary to discourage plastic bag littering.

So who were the "bootleggers"—that is, the vested economic interests who tacitly collude with the "Baptists" to push for the tax? Interestingly it appears to have been large grocery retailers, who benefited from a large increase in sales of branded "re-usable" grocery bags, something that likely gave them a competitive edge over smaller retailers unable to afford such complimentary items:

Tesco Ireland, one of the country's main supermarket chains, said it welcomed the government initiative... Tesco Ireland's environmental manager, Jim Dwyer said: "Customers are telling us they broadly welcome the introduction of the levy.

"We have seen a marked change in customers' behaviour in anticipation of the new levy, reflected in the significant increase in sales of our re-usable bags."

Unfortunately, it's unclear that the plastic bag tax led to any net environmental gains. For one, plastic bag production is highly energy efficient, so it's not obvious that the reduction in littering outweighs the boost in carbon-based pollution required to manufacture and ship the heavier and more energy-intensive paper and re-usable carriers that replaced them.

Not to mention the deadweight social loss from the tax itself. Plus the cost of complying with it.

Economists have long railed against the inefficiency of doling out incentives to politically connected industries. Increasingly, legal scholars in the field of tax practice are joining the chorus against economic development incentives as well.

The latest comes from Prof. James Maule (Villanova), who provides a comprehensive debunking of California's latest attempt to appease the film industry with taxpayer-funded giveaways:

It really is a shame when politicians fall over each other trying to dish out subsidies to their favorite industries. Although direct subsidies aren't unusual, tax subsidies are becoming ever more popular, because politicians think they're easier to slip past the taxpayers who foot the bill...

All of the jurisdictions who play this game, using taxpayer money to "entice" privileged industries to relocate their business, have run afoul of both a conceptual and a practical principle.

Conceptually, governments ought not to engage in business engineering. They've done enough damage and made enough mistakes with social engineering. The free market principle means "free of government interference" even if government involvement would be beneficial to some citizens. Only when business or other activity threatens the health or welfare of the jurisdiction should a government step into the market...

[T]here's another problem with targeted tax incentives. In order for the tax burden of the film industry, for example, to be reduced, the tax burden of other taxpayers must be increased...

Economic growth isn't nurtured by states fighting with each other for a piece of the existing pie. If there is growth in the film industry, it's because more people want to see films... Tax incentives have nothing to do with this growth.

The chief benefit of this proposal is that it provides yet another opportunity to point out to those who advocate using tax law to engage in social and business engineering, rather than simply to raise revenue for legitimate government activity, the dangers of opening the door to these sorts of tax law provisions.

Once the tax law is used to promote some supposedly worthy social policy objective, it will be used to promote every social policy objective, worthy or not, and to promote all sorts of activities, regardless of their importance, economic value, or social worthiness.

Ultimately, those with money, access, and power find ways to acquire more money and power through these indirect subsidies, and those without money, access, or power continue as the chumps of the elite.

We whole heartedly agree. Read the full piece here.

From today’s Detroit Free Press:

Michigan simply can't take a chance on business tax cuts that would put its universities, schools and other important programs at risk. The Single Business Tax supports about a quarter of the state's general fund, and even in these hard-pressed times, that is not too much to ask of employers. Their corporate well-being depends as much as everyone else's on having criminals locked up, future employees educated, and basic health and safety standards maintained. It is foolish to pursue tax cuts that jeopardize those basic values.

One needs to look no further than the employment figures for Michigan to understand that the state is in economic turmoil. The unemployment rate is 7 percent as of July, while the United States as a whole had a rate of 5 percent. The number of new jobs in Michigan compared to the overall U.S. economy is more telling, however. Since July of 2004, the U.S. economy has added 2.5 million jobs, while Michigan only 26,000.

Michigan must work to fix its fledgling economy, and alleviating the tax burden on corporations is a solution which requires significant attention. The Single Business Tax (SBT) is inimical to business in the state and is significantly retarding the efforts of companies to grow in the state. Worrying about the amount of public expenditures should be a secondary concern to fixing the basic economic conditions in the state.

Today at a Fed conference, Federal Reserve Chairman Alan Greenspan continued his clear message that the U.S. Congress and President Bush should push policies that lower trade barriers and promote sound fiscal policy.

Members of Congress and the American people need to realize that this will help lead us down the path of economic prosperity, not doing what is politically expedient in order to win the next election.

As today's New York Post reports:

Creeping trade protectionism and bloated budget deficits pose a risk to the United States' long-term economic vitality, Federal Reserve Chairman Alan Greenspan warned Friday.

"Developing protectionism regarding trade and our reluctance to place fiscal policy on a more sustainable path are threatening what may well be our most valued policy asset: the increased flexibility of our economy, which has fostered our extraordinary resilience to shocks," the Fed chief said in a speech to an economic conference (in Jackson, WY), sponsored by the Federal Reserve Bank of Kansas City.

Full Story

We continue to wonder, however, why politicians will forever sing the praises of Mr. Greenspan in front of the cameras, yet only sparingly follow his advice when actually making policy.

Car companies are increasingly using discounts, employee prices and rebates to attract customers in order to move cars in the exceedingly competitive automotive industry. It is sensible to think a rebate that lowers prices would also lower the sales tax paid by consumers, but apparently this would be a false assertion. From the Washington Post:

Under the laws of the District and most states, including Maryland and Virginia, a rebate is treated "as a form of cash payment [to the seller] so it doesn't affect the transaction price," said George E. Hoffer, professor of economics at Virginia Commonwealth University.

Tax collectors are reaping the benefit of increased automobile sales and the tax revenue paid on the full price of the vehicle, not the actual price paid by consumers. The Post article continues:

Jack Gillis of the Consumer Federation of America, said his group has had several complaints recently from car buyers who noticed that they had been taxed on a higher amount than they had paid. "That's outrageous," Gillis said. "Sales tax always has to be based on the actual sales price. With a rebate, that's price less the rebate. What's the next step -- you go ahead and charge tax on the MSRP [manufacturer's suggested retail price] even though you've negotiated $5,000 off the price?"

Consumers be aware. When receiving discounts from sellers tax collectors could be reaching in your pocket for more than their fair share

Long before the Supreme Court decided that retailers had to have physical presence in a state before it could be required to collect sales or use tax, the Supreme Court ruled that it didn’t take much to establish physical presence. In Scripto v. Carson, decided thirty years before Quill v. North Dakota, the Supreme Court had to decide whether a Georgia retailer with no offices in Florida could nonetheless be required to collect use tax on sales made in Florida. The Supreme Court ruled that the Commerce Clause nor the Due Process clause stood in the way of such a requirement, meaning that retailers could be physically present in a state through those acting on their behalf (i.e. their agents).

Scripto, a maker of writing utensils, used 10 wholesalers (or brokers) to solicit sales from within Florida. These brokers were not full-time employees of Scripto, but were independent contractors paid on a commission basis. The state of Florida tried to assess Scripto for uncollected use tax on sales made by the brokers in Florida. Scripto, naturally, challenged the assessment, arguing that it had no plants, employees, or offices in Florida, and thus insufficient nexus with Florida to obligate it to collect use tax on Florida sales. Scripto lost at the trial and appellate level in Florida state court.

The U.S. Supreme Court agreed with the rulings of the Florida courts. Justice Clark, writing for the Court, held that the difference between regular employees and independent contractors was “without constitutional significance.” If the Court permitted such distinctions, Justice Clark argued, it would be opening the states up to a flood of tax avoidance techniques. Rather, he wrote, “…[t]he only incidence of this sales transaction that is nonlocal is the acceptance of the order.” The functional reality was that Scripto had a very real (and regular) presence in Florida that required the collection of Florida use tax on its sales.

The Scripto case is important because it revealed that the Supreme Court, in tax cases under the Due Process and Commerce Clause, will care more about function rather than form. In other words, the activities conducted on Scripto’s behalf by the brokers were more important to the Court than the fact that the brokers were not technically employees of Scripto. This ruling continues to impact retailers today, with the California Court of Appeals recently relying partially on Scripto to rule that Borders Online could be forced to collect California use tax because its sister organization, Borders Books and Music, performed certain functions on its behalf. Understanding Scripto is crucial to understanding the agency theory of nexus.