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.
In FY 2005 the average resident of a state with a lottery spent close to $200 on lotteries, with many spending considerably more. Studies have shown that the poor spend a disproportionate amount on lotteries. At the same time, Americans are not saving enough for retirement.
A recent Forbes.com article proposes a solution to both problems: a personal retirement savings account lottery. The profit—the portion of the ticket price that the state currently keeps and spends on programs such as education and historic preservation—would instead go into a personal savings account:
Some 20 million Americans spend at least $1,000 a year on lottery tickets. For these heavy purchasers the new tickets would increase their personal savings by $500 a year. Invested over 40 years, these savings tickets would generate an expected retirement nest egg of $200,000.
While this plan would remove the implicit tax from the lottery and therefore decrease tax complexity and increase transparency, it would probably not be popular with pro-lottery politicians. In FY 2003 lotteries provided 2% of total state own-source general revenue, and legislators would be reluctant to give this up.
Even in states that earmark lottery revenue for specific projects, legislators can simply shuffle funds and use lottery revenue for their preferred programs. Reliance on lottery revenue allows them to avoid raising politically unpopular income, sales or property tax rates. Lotteries would likely lose much of their political appeal if legislators were constrained by laws requiring them to deposit revenue into personal accounts.
However, this plan is still better than the current system:
Yes, it is true that we've robbed Peter to pay Paul. We've taken money generally earmarked for education and put that into retirement accounts for the lottery players. We think this is reasonable. The lottery is a strongly regressive tax, and the earmark for education is really a chimera. The government has to pay for education in any case. So the state lottery business is just a disguised tax, levied on people whose share of the national tax burden is already high enough.
Lottery players’ best bet, though, is to skip the lottery entirely and instead save or invest their money for retirement. As Tax Foundation Fiscal Fact No. 45, “Lottery Taxes Divert Income from Retirement Savings” shows, the payoff will probably be much higher—for individuals and for sound state tax policy.
The next time U.S. lawmakers criticize Venezuelan president Hugo Chavez for reneging on valid contracts that the Venezuelan government has signed with U.S. firms, he can just hold a mirror up to the U.S. Congress.
The House of Representatives has just voted to renege on contracts that the U.S. government signed with oil companies. That’s exactly what Chavez did, and Bolivian president Morales has followed suit.
Neither Chavez nor Morales nor the House of Representatives has suggested that the contracts they want to “renegotiate” were signed under false pretenses. Of course, the payments agreed to in the long-term contracts would have taken into account the possibility of steep price drops or rises.
The actions of the two South American presidents are more draconian and more likely to damage their economies in the long run than anything the House of Representatives has voted to do. But that’s a difference in degree, not in principle.
Every year more than two million people visit historic Gettysburg. They go to see the famous Civil War battlefield, reflect on the past, learn about their heritage and, of course, play the slots.
Slots? We made that part up, but it might be true soon, and if you think it sounds strange, you’re not alone.
A developer has announced plans to build the Crossroads Gaming Resort and Spa about a mile from Gettysburg National Military Park. This plan has many residents, anti-gambling groups and historic-preservation groups up in arms. Angry citizens attended public hearings held on the matter by the Pennsylvania Gaming Control Board and formed a group called No Casino Gettysburg solely to block the project. While the Chamber of Commerce supports the casino proposal, the Pennsylvania House of Representatives passed an amendment opposing the plan.
The casino plan won’t be a sure thing until the Pennsylvania Gaming Control Board begins granting Category 1 gaming licenses, possibly in September. Read the full story in USA Today.
What makes this issue a tax policy matter is that the casino plan is not merely a controversial decision by a corporation; it is an act of state government. It all started in 2004 when the Pennsylvania legislature passed Act 72, The Homeowner Tax Relief Act, which authorized over 60,000 slot machines at racetracks and other locations, taxed at 34%, ostensibly to raise money for education and thereby lower property tax rates. As we’ve previously written, (here, here and here) Act 72 is poor tax policy—complicated legislation that increases tax complexity and takes a roundabout route to tax relief.
Proponents of Act 72 and the Gettysburg casino plan seem to believe, as many legislators in other states do, that gambling taxes—which are non-neutral, complex, and often hidden in the form of state lotteries or video lottery terminals—are preferable to straightforward tax increases or decreases.
Gambling has never been so patriotic.
Eurostat—the official statistical arm of the European Union (EU)—released new data on taxes as a percentage of gross domestic product (GDP) in EU countries. Overall, the data reveal that taxes in the EU account for 39.3 percent of GDP.
Overall taxes are down .2 percent from 2003. The report attributes this decline to tax cutting in Italy and Germany.
The former communist countries in Eastern Europe generally have the lowest tax burdens in the EU. Lithuania (28.4 percent), Latvia (28.6 percent), Slovakia (30.3 percent) and Poland (32.9 percent) are among the countries with the lowest tax burdens. Ireland—which levies the lowest corporate income tax rate in the OECD (12.5 percent)—also has a low tax burden (30.2 percent).
Central and northern EU countries tend to have the highest tax burdens. Sweden is number one at 50.5 percent, followed by Denmark (48.8 percent), Belgium (45.2 percent) and Finland (44.3 percent). Other notables include France (43.4 percent), Italy (40.6 percent), and the United Kingdom (36.0 percent).
Japan and the U.S. have a much lower tax burden (approximately 14 percent lower, according to the report) than EU countries. This is a bit ironic, considering that Japan (39.5 percent) and the U.S. (39.3 percent) have the highest combined corporate income tax rates in the OECD (a trend that we reported in this fiscal fact).
An interesting story on tax fraud comes to us from Nevada courtesy of the Reno-Gazette Journal:
An Incline Village man was indicted Wednesday on felony charges that he created a church, with himself as its minister, to hide his income and avoid paying taxes, the U.S. attorney's office said.
A federal grand jury indicted Paul S. Jensen on three counts of making false claims and three counts of tax evasion, said Natalie Collins, spokeswoman for the office.
According to the indictment, Jensen filed for tax refunds with the IRS in 2001 and 2002 for $117,956, claiming he and his wife had no income during that period. Collins said they actually had an income of $534,206.
He also was charged with failing to pay the tax he owed for 2000 through 2002, she said.
The line with churches, charities, and taxes often becomes tricky given the complicated nature of the income tax code. And the more complicated the code becomes and the higher the tax rates you have, the more attempts at fraud will appear, thereby requiring an ever-increasing IRS enforcement staff.
For more on the complexity of the tax code, visit our section on the topic.
In a classic use of a "Pigouvian" tax, the Chinese government has slapped a 5 percent excise tax on disposable wooden chopsticks supposedly aimed at slowing deforestation in the Chinese countryside. From Yahoo News:
Walk into any Japanese noodle shop or restaurant and chances are you'll be eating with a pair of disposable wooden chopsticks from China — but not for long. In a move that has cheered environmentalists but worried restaurant owners, China has slapped a 5 percent tax on the chopsticks over concerns of deforestation.
The move is hitting hard at the Japanese, who consume a tremendous 25 billion sets of wooden chopsticks a year — about 200 pairs per person. Some 97 percent of them come from China.
Chinese chopstick exporters have responded to the tax increase and a rise in other costs by slapping a 30 percent hike on chopstick prices — with a planned additional 20 percent increase pending.
The price hike has sent Japanese restaurants scrambling to find alternative sources for chopsticks, called "waribashi" in Japanese.
"We're not in an emergency situation yet, but there has been some impact," said Ichiro Fukuoka, director of Japan Chopsticks Import Association. (Read the full story here.)
Since taxes affect relative prices, which in turn affect the costs and benefits of different cultural habits, there may be an unexpected consequence: the rise of the western-style fork.
If that sounds implausible, recall the well-documented cultural impact of the 18th Century British window tax—i.e., narrow house fronts and bricked-up windows that characterize classic British architecture to this day.
As the President signs the latest tax cut bill today, much discussion has centered on the economic growth consequences—both short-run and long-run—of such tax cuts, as well as the revenue implications. Many economists have discussed to what extent, if any, static analysis of the extended tax cuts overstates their foregone revenue costs.
For those unfamiliar with the issue or those merely seeking further reading on the topic, we‘ve assembled a collection of articles (some technical, some general) on the issue of “dynamic scoring.” We’ve attempted to provide a balanced compilation of the literature, focusing on the main players in the dynamic scoring debate over the past thirty years, including Alan Auerbach, Martin Feldstein, and Arthur Laffer.
Note this collection includes only literature that is freely available on the web, and excludes many academic articles available only through services such as JSTOR.
Dynamic Scoring: An Introduction to the Issue, by Alan Auerbachhttp://emlab.berkeley.edu/users/auerbach/dynamscor.pdf
Static vs. Dynamic Scoring, American Enterprise Institute Event (November 2003), includes video, transcripts, and summary of event, which included, among others Auerbach, Martin Feldstein, Bill Gale (Brookings), Kevin Hassett (AEI), Douglas Holtz-Eakin, and Benjamin Page.http://www.aei.org/events/filter.all,eventID.662/event_detail.asp
Overview of Revenue Estimation Procedures and methodologies Used by the Joint Committee on Taxationhttp://www.house.gov/jct/x-1-05.pdf
Dynamic Scoring: A Back-of-the-Envelope Guide (fairly technical using economic growth theory), by Greg Mankiw and Matthew Weinzierlhttp://post.economics.harvard.edu/faculty/mankiw/papers/dynamicscoring_05-1212.pdf
Dynamic Scoring: Alternative Financing Schemes (technical), by Eric Leeper and Shu-Chun Susan Yanghttp://www.nber.org/papers/w12103.pdf
Macroeconomic Implications of Federal Budget Proposals and the Scoring Process, by Peter Orszaghttp://www.brook.edu/views/testimony/Orszag/20020502.pdf
The Role of Dynamic Scoring in the Federal Budget Process: Closing the Gap between Theory and Practice, by Rosanne Altshuler, Nicholas Bull, John Diamond, Tim Dowd and Pamela Moomauhttp://www.aeaweb.org/annual_mtg_papers/2005/0107_1430_1302.pdf
Methodology and Issues in Measuring Changes in the Distribution of Tax Burdenshttp://www.house.gov/jct/s-7-93.pdf
The Effect of Taxes on Efficiency and Growth, by Martin Feldsteinhttp://www.nber.org/papers/w12201
The Laffer Curve (Wiki entry)http://en.wikipedia.org/wiki/Laffer_curve
On the Analytics of the Dynamic Laffer Curve, by Jonas Egell and Mats Perrsonhttp://www.iies.su.se/publications/seminarpapers/682.pdf
CBO Testimony on Federal Budget Estimating (May 2002)http://www.cbo.gov/showdoc.cfm?index=3422&sequence=0http://www.cbo.gov/showdoc.cfm?index=3511&sequence=0http://www.cbo.gov/showdoc.cfm?index=3384&sequence=0
The Case for Dynamic Scoring, Bruce Bartlett (2002, National Review Online)http://www.nationalreview.com/nrof_bartlett/bartlett050602.asp
Dynamic Scoring: Not So Fast!, by Rudolph Pennerhttp://www.taxpolicycenter.org/publications/template.cfm?PubID=9698
Greenspan Comments on Dynamic Scoring (testimony from 2002)http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=107_house_hearings&docid=f:81696.wais
Bernanke Comments on Dynamic Scoringhttp://www.taxfoundation.org/legacy/show/1462.html
The House Ways and Means Committee produced a nice summary of the tax reconciliation conference report. http://waysandmeans.house.gov/media/pdf/taxdocs/050906longsummary4297.pdf
This weekend the Boston Herald reports on a proposed change to federal telephone taxes being considered by the Federal Communications Commission that could lead to a steep tax increase on the housing facilities of the nation's colleges and universities:
A plan to make federal phone taxes a flat fee for every phone number and computer modem could cost the nation’s colleges an extra $320 million and prompt some to do away with dormitory phones or raise tuition and fees, opponents say.
Under the proposal, the federal Universal Service Fund fee would shift from the current pay-as-you-use percentage of long-distance calls to a flat $1 tax per month on every phone number.
Because of the number of lines colleges and universities have, the plan would pose a particular blow, many say, resulting in a net annual increase of at least $320 million in taxes at the nation’s 4,325 post-secondary institutions.
“The reality is that extra USF costs for colleges and universities would be passed along to students and their families, either in terms of reduced service or higher bills,” said Linda Sherry, co-chairwoman of the Keep USF Fair Coalition, a consortium of 115,000 groups opposed to the proposal.
If the Federal Communications Commission approves the plan, the average college could see its phone bill soar to $82,999 per year from $8,971, an increase of 892 percent, the coalition estimated. (Read the full piece here.)
Of course, the most likely consequence of such a tax increase might be a further acceleration of the trend toward cellular service and away from landlines.
In a unanimous 9-0 ruling, the U.S. Supreme Court this morning ruled that the plaintiffs in Cuno v. DaimlerChrysler did not have federal standing to bring a lawsuit over the constitutionality of Ohio's investment tax credit. In writing for the unanimous Court, Chief Justice Roberts said:
"(B)ecause state budgets frequently contain an array of tax and spending provisions, any number of which may be challenged on a variety of bases, affording state taxpayers standing to press such challenges simply because their tax burden gives them an interest in the state treasury would interpose the federal courts as virtually continuing monitors of the wisdom and soundness of state fiscal administration, contrary to the more modest role Article III envisions for federal courts."
Indeed, this mirrors one of the arguments we made in our second amicus brief in the case, where we warned against making the federal courts the forum for generalized state tax policy grievances.
While state courts will continue to hear claims against tax incentives on a variety of grounds (some more compelling than others), the Sixth Circuit's opinion in Cuno--which took an axe to a problem that requires a scalpel--is now partially vacated. This ruling is a victory for the concept of tax competition and for those state lawmakers who want to make their state's tax system more competitive--even if we don't always agree with their chosen means to reach that end.
We've posted a new op-ed this morning from Tax Foundation chief economist Patrick Fleenor. The subject? How a Texas proposal to boost cigarette taxes is likely to end up boosting illegal cigarette smuggling and tax evasion rather than revenues. Here's an except:
Here's a puzzle for lawmakers: If the same percentage of Texans smoke as nationwide—20 percent—why are sales of tax-paid cigarette sales so much lower in Texas? The answer: Texans are smoking millions of bootleg cigarettes smuggled into the state to avoid the tax of 41 cents per pack. A tractor-trailer holds 200,000 packs, so the profit margin is awfully tempting.
Now the Texas Legislature has voted to hike the cigarette tax by a dollar a pack, adding $200,000 to the profit in that trailer full of bootleg cigarettes. If the biggest cigarette tax hike in Texas's history passes, the smugglers will be all smiles.
Bootleg cigarettes Texas has a long history of cigarette tax evasion. Serious problems began in the early 1950s, but they got much worse after the state hiked the tax to 18.5 cents per pack in 1972 (about 87 cents in today's dollars). Smugglers brought them in by the truckload from low-tax states, from Mexico and even from ocean-going ships, affixing counterfeit tax stamps and selling them retail.
Texas' response was to spend more on enforcement. That yielded some violent clashes with smugglers but didn't solve the problem. By the mid-1970s, federal authorities estimated that Texas' daily influx of bootleg cigarettes was more than 700,000 packs.
This law enforcement nightmare discouraged legislators from additional tax hikes during the mid-1970s and early-1980s. This allowed the era's high inflation to effectively reduce the tax, and therefore the smugglers' profit, by more than half. By 1983 a federal report found that cigarette bootlegging in the state had declined dramatically.
Unfortunately, lawmakers' memories are woefully short when it comes to the harmful effects of excessive taxation. Since 1985, tax hikes have raised the state's cigarette tax to its current level of 41 cents per pack. Predictably, smuggling has surged and tax-paid sales have declined.
Tax evasion is by no means the only crime that will rise in the wake of a much higher cigarette tax. Cigarettes are often the product of choice for thieves since they're quickly sold for cash in the black market. Other states that have hiked their cigarette tax rates by a dollar, as proposed in Texas, have endured crime waves that threatened innocent shopkeepers, truck drivers and clerks and even resulted in numerous murders.
Texas legislators may have thought that the big tax reform package would raise necessary revenue while causing the least harm to the economy. Unfortunately, by ignoring lessons from the past, they have included a cigarette tax hike that will worsen what has always been one of the state's most troublesome taxes.
Read the full piece here. Read an extensive earlier paper on crime and cigarette taxes from the author here (PDF). For more on cigarette taxes and smuggling, see our "Cigarette Taxes" section.
An excellent article appears in this morning’s Washington Post by Jeff Birnbaum on a Maryland businessman lobbying for repeal of the estate tax.
Whenever the chief executive of a big shareholder-owned auto retailer sees Jack Fitzgerald, he goes out of his way to say hello. But Fitzgerald, owner of Bethesda-based Fitzgerald Auto Malls, knows that the guy is not just being nice. He wants to sweet-talk Fitzgerald into selling his thriving business, which Fitzgerald does not want to do.
But he may have no choice. Fitzgerald's 40-year-old chain, which operates dealerships in Maryland, Pennsylvania and Florida, is too large for him to pass easily to his heirs without their being crushed by the estate tax. As a result, Fitzgerald, 70, has become a part-time lobbyist, meeting with members of Congress and peddling his own version of estate-tax repeal.
Unfortunately, Fitzgerald, though amiable and determined, is learning the hard way what generations of executives before him have come to know: The nation's capital is a difficult place for any one man to make things happen. Even though Fitzgerald is a native Washingtonian -- having grown up not far from the Capitol -- and is well-liked by many lawmakers, changing laws is a frustrating exercise. He isn't likely to succeed this year, lawmakers and analysts say.
Still, Fitzgerald, like the good salesman he is, remains optimistic. "I think there's an interest in making some sort of deal," he said. "But it has taken a lot of my time -- too much time." (Full Story)
Recall that Birnbaum is most famous in tax circles for being the co-author (along with Alan Murray) of the classic Showdown at Gucci Gulch, which tells of the struggle between lobbyists and lawmakers in passing the Tax Reform Act of 1986. It is highly recommended as it is one of the greatest books ever written on the meatgrinding that goes into writing tax law.
Two important state court rulings were made this week in tax-related cases:
In North Carolina, a local court judge ruled against a group of taxpayers that were challenging a tax incentive package that North Carolina lawmakers offered to Dell Corporation in exchange for opening a new plant. The taxpayers claimed that the tax incentives violated the state and federal constitutions—specifically the equal protection clause of the North Carolina Constitution and the Commerce Clause of the Federal Constitution.
Dell countered that the claims were without merit, and that the taxpayers lacked standing to bring the suit. A local judge this week agreed with Dell, and the case will likely be appealed. The Dell case is closely related to the Cuno case, in which we filed two amicus briefs in the U.S. Supreme Court last year.
In Alabama, a local court judge recently ruled (registration req'd) that Alabama could not impose its corporate income tax on the Union Tank Car Company merely because it leased its railroad cars to customers that used them periodically in Alabama. The judge reasoned that Union did not have any offices or equipment in Alabama and had only one Alabama-based customer in the period at issue.
This case is another example of a state court wrestling with the idea of nexus, i.e. when does a taxpayer have to pay tax to a state? Courts in different states continue to reach different answers on this issue—which we highlighted in Background Paper No. 49—which leads many to support federal legislation to impose uniform nexus standards for state corporate tax purposes. Our analysis is that corporate taxation is only justified if a business has a physical presence in a state.
With the high price of gasoline in an election year for most lawmakers, many state legislators are pondering whether or not to temporarily repeal their states excise and/or sales taxes on gasoline. From CBS News:
With a gallon of gas breaking $3 and voters unhappy, elected officials in a number of states are taking a sudden, sharp dislike to gasoline taxes, proposing to eliminate the levies that are a mainstay for road programs - or at least suspend them for the summer.
Governors have floated ideas to trim or suspend state gas taxes in Maryland, South Carolina and Connecticut. State legislators are pushing similar measures in Georgia, New York and Nevada. The proposals are winning vocal support from Republicans and Democrats alike, though none have yet become law.
"We think it would have real bottom-line benefit to a lot of working families who are struggling with the price of gas," South Carolina Gov. Mark Sanford said on Wednesday, when he proposed suspending the state's 16.8 cent-per-gallon tax for three months.
Critics say the proposal is a mistake, questioning whether drivers would actually see the tax cut, the potential to undermine necessary road and transportation programs and the larger environmental impact. (Full Story)
Given that the goal for lawmakers is to try to lower prices at the pump by alleviating these taxes, the obvious economic question becomes – who currently bears the burden of the tax? What some politicians seem to not understand is that lowering the tax by a given amount does not automatically lower the final retail price by that same amount. It all depends on who bears what economists refer to as the “economic incidence.”
And economic incidence all depends on elasticity, or the measure of sensitivity that buyers and sellers have to price changes. If buyers are not very sensitive to the price of gasoline, while suppliers are highly sensitive to the price, then eliminating the tax should significantly lower the price at the pump because the consumers are currently bearing the load of the tax burden. Under this scenario, revenue that would have flown to government mostly goes into the pockets of consumers.
However, if buyers are more sensitive to the price of gasoline than suppliers, then consumers are not going to be helped much by an elimination of the tax, and most of what would have been government revenue will flow to the producers.
Economic theory suggests that suppliers are more sensitive to price (i.e. the after-tax price they receive) in the long-run than the short-run. That is, in the short-run, they cannot move supply as quickly as they can in the long-run. For tax policy, this would suggest that permanent reductions in the tax on gasoline would be more effective at lowering the price at the pump than would temporary repeals.
Having a solid understanding of the economics of gas prices is essential for policymakers because poor policy like mandating that the reduction in the final price at the pump exactly equal the amount of the tax cut (thereby ignoring tax incidence) could result in shortages and therefore gas lines.
For more on gas taxes, visit our newly created section on the topic.
With the U.S. economy stumbling along in March 2002, Congress passed a tax bill aimed at stimulating business investment. A key provision allowed companies to expense 30 percent of the cost of new capital investments in the first year—something economists call "accelerated depreciation."
In most cases, accelerated depreciation gives a tax cut to companies. By letting companies write-off more of things like vehicles and equipment now rather than later, it reduces a company's taxable income. That lowers their tax bills and makes capital investments a better deal, encouraging them to invest.
However, there was a catch: the 2002 provision was temporary, expiring just two years later at the end of 2004.
In general, these temporary tax cuts are less powerful than permanent cuts. Why? Because it's costly—both in time and money—for companies to re-juggle their assets in order to position themselves to benefit from tax changes. Temporary bills often don't last long enough to have much impact.
Unfortunately, according to a new paper from the Federal Reserve Board it appears the temporary 2002 tax provisions suffered from this flaw. The authors find little evidence that the temporary cuts boosted business investment—providing yet another argument for long-term corporate tax reform, rather than short-term Keynesian tax incentives designed to juice up the U.S economy:
Our empirical examination of the details of expenditure patterns before, during, and after partial expensing... suggests only a very limited impact of partial expensing on investment spending, if any. In addition, other evidence, including examination of a sample of corporate tax returns and of survey data, provides only limited support for the effectiveness of partial expensing.
Read the full paper here (PDF).