For more on corporate taxes, see Kyle's recent study "U.S. Multinationals Paid More Than $100 Billion in Foreign Income Taxes."
The Tax Policy Blog
From today’s Portsmouth Herald:
WATERVILLE, Maine - Dog and cat breeders are unhappy about a new $25 tax on the sale of puppies and kittens, saying it imposes an additional burden on legitimate dealers. The tax takes effect in October.
The state imposed the levy to pay for spaying and neutering programs for dogs and cats that belong to low-income Mainers. The new fee could raise as much as $34,000 a year, most of it from puppy sales, according to Susan Hall of Spay Maine, a group that supports the tax. Hall said the tax will help reduce suffering by animals.
Some breeders say they are already put at a disadvantage by competitors who fail to register their businesses with the state and don’t collect or turn in sales taxes on the animals they sell. They say the "backyard breeders" and "puppy mills" probably won’t pay the new fees either, putting legitimate breeders at a further disadvantage.
The tax is not charged on spayed or neutered pets, but that’s of little consolation to breeders, who say animals that can’t reproduce are less valuable.
The primary goal of such a program is to limit the population of dogs and cats via a tax on their sale, and in the process, raise funds to finance the government’s role in the population control procedure. (Note the fact that the tax is not levied on spayed or neutered pets.)
We will give the politicians from the State of Maine credit for one thing – they are at least acknowledging that taxes matter and deter consumption and production in the market for animals. Too bad they have thus far failed to realize that fact in the taxes they impose on businesses, workers, and consumers throughout the rest of their economy.
Maine was ranked 42nd out of the 50 states in 2004 in the Tax Foundation’s State Business Tax Climate Index. From its analysis of Maine: "Estimated at 13.0% of income, Maine’s state/local tax burden percentage has ranked as the nation's highest each year since 1997, and remains well above the national average of 10.1%. Maine taxpayers pay $4,309 per-capita in state and local taxes."
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.
Amid the record prices at the pump, four New York State lawmakers are advocating a temporary suspension of the state’s sales tax on gasoline. As today’s Buffalo News reports:
Four Republican Assemblymen called Monday for the State Legislature to return to session this week and suspend the state portion of the sales tax on gasoline in time for Labor Day weekend. Joining Assemblymen Jim Hayes, R-Amherst; Jack Quinn, R-Hamburg; Joseph Giglio, R-Gowanda; and Brian M. Kolb, R-Canandaigua, at a news conference at a Noco Express Station at Maple and Sweet Home roads, Amherst, were representatives from Noco Energy Corp. and the AAA of Western and Central New York. "Our proposal is to suspend the 4 percent state sales tax on gas and diesel fuel from Labor Day weekend to New Year's Day," said Kolb, chairman of the Assembly Republican Program Committee. "Our plan would save New York motorists an estimated $216 million." The assemblymen noted that the sales tax on gasoline at the pump is a "tax upon a tax," since the state already imposes taxes on fuel at the wholesale level. At current prices, lifting the 4 percent sales tax would save motorists about 10 cents a gallon.
Unlike most states that charge only an excise tax on gasoline (i.e., a tax per gallon consumed regardless of price), New York charges a basic sales tax on gasoline, which means that your gas tax liability per gallon will rise as the price rises. This does allow, however, for the state to somewhat limit the negative impact faced by most other states with regards to gas tax revenue as a result of these higher prices. With regards to this proposal, though we generally support measures that lighten tax burdens, temporary relief from the gas tax -- like sales tax holidays for back-to-school -- is highly non-neutral. And unless it is accompanied by a reduction in government spending somewhere, which is unlikely, taxpayers will end up paying for it somehow at some time.
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.
A report released Monday by the Government Accountability Office said that the confusing tax code, specifically how it pertains to education credits, ends up costing many college students. While Title IV was designed to give substantial government-backed incentives for higher education, the law’s complexity creates nightmares for many college students and parents looking for the best tax plan each year. As the report suggests:
Among the limited number of tax returns available for our analysis, 27 percent of eligible tax filers did not claim either the tuition deduction or a tax credit. In so doing, these tax filers failed to reduce their tax liability by $169, on average, and 10 percent of these filers could have reduced their tax liability by over $500. One explanation for these taxpayers' choices may be the complexity of postsecondary tax provisions, which experts have commonly identified as difficult for tax filers to use.
Check out the IRS page showing how complicated education can be be when filing a tax return. There are sections devoted to the Hope Education Credit, Lifetime Earning Credit, Qualified Tuition Program, Early Distributions from IRA, Coverdell Education Savings Account, Tuition and Fees Deduction, Student Loan Cancellation and Repayment Assistant, Student Loan Interest Deduction, and Reductions for Scholarships, Grants, and Fellowships, Education Savings Bond Program, Employer-Provided Educational Assistance, and Business Deduction for Work-Related Education. You may need Forms 1098-E, 1098-T, 1099-Q, 1099-4, 2106, 2106-EZ, 5329, 8815, 8863, and/or W-9S. On the bright side, it's a great time to be an accountant.
Instead of an IRS public awareness campaign on how to best maneuver through the current complex tax code that frustrates millions every year, why not overhaul the tax code and make it fair and simple for everyone? This way, everyone could do their own taxes, and the benefits received from government educational assistance would not vary depending upon who had the money to hire their own accountant.
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.
Nashville Mayor Bill Purcell is hoping that a half-cent sales tax increase for the city on the ballot will pass this November. Why? In part, to transfer some of that money to the elderly in the form of tax cuts on property, wheel, and sales tax. As today's Nashville Tennessean explains:
Tax breaks for Nashville seniors — which Mayor Bill Purcell wants to fund with a half-cent sales tax increase — are being questioned by some who say they may not stand up in court even if the tax hike passes at the polls.
Members of the grass-roots group Tennessee Tax Revolt "are talking seriously" about challenging Purcell's proposed elderly tax relief program on constitutional grounds, leader Ben Cunningham said. However, the group has not made a final decision on whether it will sue.
The mayor wants to give seniors breaks on sales, wheel and property taxes using some of the $57.5 million that would be raised from a half-cent sales tax increase, which voters are casting ballots on now. That would increase Davidson County's combined state and local sales tax rates to 9.75 cents on the dollar.
Most likely, the mayor is seeking to prop up his vote total with the demographic that tends to actually show up at the polls—the elderly. And while most would agree with the basic unfairness of this proposal, one could question the recent prescription drug benefit passed by Congress and signed by the President on the same grounds. It essentially redistributes money from one age group to another, mainly for political reasons.
In reality, the elderly already receive an effective sales tax break compared to everyone else because businesses across Nashville commonly offer discounted prices on a range of goods to senior citizens. For every dollar of these discounts, retailers effectively lower the base at which the purchase is taxed, thus providing seniors with a roughly 9 cent tax break.
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.
There are generally two ways for states to alter their tax codes to encourage new labor and capital: by penalizing out-of-state companies or by rewarding in-state investment. Taxes levied on imports are a classic example of the former. Tax cuts, credits or subsidies are a classic example of the latter.
In Cuno v. DaimlerChrysler, the Sixth Circuit Court of Appeals ruled that the Commerce Clause of the U.S. Constitution restricted the state of Ohio from offering a reward for in-state investment. The Court reasoned that Ohio’s investment tax credit (given to companies who installed equipment or machinery for use in Ohio) coerced Ohio companies into investing in Ohio, as opposed to other states, and thus discriminated against interstate commerce. Is this reading of the Commerce Clause—one that would forbid rewards for in-state investment—consistent with its original impetus? The short answer is “no.”
In his preface to Notes of Debates in the Federal Convention of 1787, James Madison recounts the reasons behind the calling of the Constitutional Convention. It turns out that a lack of a congressional power to regulate commerce was one of the major reasons that the states decided to hold the convention. The frustration was over discriminatory taxes levied on products shipped from other states:
“[One] source of dissatisfaction was the peculiar situation of some of the States, which having no convenient ports for foreign commerce, were subject to be taxed by their neighbors, thro whose ports, their commerce was carried on. New Jersey, placed between [Philadelphia] & [New York], was likened to a cask tapped at both ends; and [North Carolina], between [Virginia] & [South Carolina] to a patient bleeding at both arms. The Articles of Confederation provided no remedy for the complaint: which produced a strong protest on the part of [New Jersey]; and never ceased to be a source of dissatisfaction & discord, until the new Constitution superseded the old.” (Adrienne Koch, ed., of Debates in the Federal Convention of 1787, at 7).
Madison did not report on any frustration over the encouragement of industry through rewards for in-state investment.
The investment tax credit struck down in Cuno is nothing like the discriminatory taxation of out-of-state commerce, prevalent in the 1780s, which led to creation of the federal Commerce Clause. Ohio’s credit gives a tax benefit for investment in Ohio, no matter where the machinery is purchased and no matter whether the company has a prior presence in Ohio. The credit does not seek to increase Ohio investment by laying a discriminatory tax on companies in other states. Rather, it merely gives a tax subsidy to any company that increases its Ohio investment.
In sum, Ohio’s investment tax credit creates nothing like the structural problems revealed by the trade wars among the states in the 1780s.
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.
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.
Economists have long argued excise taxes—taxes on specific goods rather than income or consumption generally—are poor revenue sources because they're highly non-neutral, and encourage smuggling and development of black markets.
According to a new study, border counties in West Virginia are getting a first-hand lesson in the flaws of excise taxation. West Virginia University researchers show the state's 6 percent food tax has shoppers scrambling across borders for cheaper groceries in neighboring lower-tax jurisdictions. From the Charleston Gazette:
It may only be 6 cents for every dollar spent, but the sales tax on food does indeed push border-county West Virginians across the state line to shop for their groceries, a soon-to-be-published study has confirmed.
West Virginia University’s Bureau of Business and Economic Research is wrapping up a review of the food tax, which was restored in 1989 after having been eliminated in 1981.
“There has been a significant decrease in retail activity in reaction to the tax,’’ said Mehmet Tosun, director of the bureau’s Public Finance Program. “The counties at the borders have suffered a loss of retail activity.’’
Nearly 54 percent of the state’s 1.8 million people reside in the 29 counties that adjoin another state. Of West Virginia’s five neighbors, only Virginia taxes food. That state recently reduced its tax from 4 percent to 2.5 percent, but also increased the overall sales tax rate from 4.5 percent to 5 percent and added public utility costs to taxable services.
After phasing out food from the sales tax between 1979 and 1981, cash-strapped West Virginia nixed the exemption and increased the overall sales tax rate from 5 percent to 6 percent in 1989. Tosun’s study aims to measure the impact of both moves.
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
The Miss America pageant is leaving Atlantic City, and who are they blaming? The New Jersey taxpayer, for refusing to increase your annual subsidy to the pageant.
They argue that $725,000 per year in government handouts is just not enough to make ends meet; and therefore, it is now seeking a more "friendly" venue that will give an even larger handout.
Despite the fact that we would oppose any level of subsidy for beauty pageants, we commend the state of New Jersey for refusing to increase that subsidy amount, and telling Miss America to take their fledgling production elsewhere. From CNN:
Representatives of the 84-year-old pageant told the city Thursday the franchise can't afford to continue losing money by producing the annual event at Boardwalk Hall and that it will either move it to a new city or go on the road permanently like the Super Bowl.
The pageant is in financial straits and last year lost its broadcast network TV contract with ABC. Pageant CEO Art McMaster said the show could save $1 million by finding a new venue that could pay a site fee and produce it for less money.
He told the Atlantic City Convention and Visitors Authority at a board meeting that the state's $725,000 annual subsidy to Miss America wasn't enough and he wanted the agency to release it from the last two years of its five-year contract.
So as Miss America begins to fade off into the sunset as an institution, we thought we'd answer that famous final question, "What would you do to make the world a better place?"
Our answer: A fairer, simpler tax system across all jursidictions, and spending taxpayers' money on necessary public functions, not beauty pageants.
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.
Apparently there's a tax policy scandal afoot in the UK. The issue: the British treasury deleted arguments in favor of a single-rate tax from a memo exploring British tax reform options. From the Stockhom Network's e-newsletter:
The Daily Telegraph, a British broadsheet, carried a front-page story on Monday revealing that key sections of a recent Treasury research document that detailed the advantages of a flat tax had been blacked out.
The newspaper subsequently obtained an unadulterated version of the report, which argued that the introduction of a flat tax could create a “mini-economic boom” and would increase “economic efficiency by reducing policy-induced distortions and allowing the market to function more naturally, improving the overall allocation of resources and encouraging labour supply”.
As George Trefgarne went on to argue in his Telegraph column, ‘Under the Freedom of Information Act, such excisions have to be approved by ministers or senior officials, so the inevitable conclusions are: first, that Treasury mandarins are privately taken by the flat tax idea; and second, the Chancellor fears that this could hand a powerful weapon to the Tories.’