Delaware Governor Jack Markell recently proposed a one cent increase in the state’s gasoline tax. The state currently levies a 23 cent tax on each gallon of gas—one of the lowest in the Northeast region. Governor Markell...
The Tax Policy Blog
Today Tax Foundation economist Elizabeth Malm participated in a lively debate with Jared Bernstein, Senior Fellow at the Center on Budget and Policy Priorities, about the future ability of North Carolina to retain talent, recruit industry, and finance needed infrastructure. To watch an archived video of the debate, click "See event details" in the box below.
Hosted by the Institute for Emerging Issues, in partnership with the Civitas Institute and the NC Budget and Tax Center, this debate informed attendees about how North Carolina’s tax reform initiative fits into the broader national discussion on economic growth and sustainability. Kelly McCullen, Senior Correspondent and lead political anchor for UNC-TV, served as moderator for the event.
The U.S. Senate yesterday voted 69-27 to approve the Marketplace Fairness Act, which gives states the power to collect sales taxes from out-of-state businesses (primarily Internet and catalog retailers). Opponents were senators from states without a sales tax and most of the Tea Party caucus Republicans. Most conservative and libertarian activist organizations opposed the bill; supporters included state officials, large retailers, and Amazon.com.
The question now becomes what will happen in the House of Representatives, and what will need to be attached to or modified in the bill for it to be considered. (In the Senate, the bill was discharged out of committee due to opposition by Finance Committee Chair Sen. Max Baucus (D-MT).)
Here are some key Tax Foundation materials on the Marketplace Fairness Act:
- Our summary of the Marketplace Fairness Act.
- Our graphic of what's in and what's missing from the Marketplace Fairness Act.
- Our recent podcast on the Marketplace Fairness Act.
- My appearance on NPR yesterday, where I discuss the bill and the longer-term implications for tax policy, alongside a small Internet-based business and two tax software providers (those companies are seeing dollar signs thanks to this bill).
- My most recent testimony to Congress on the bill.
- New evidence that the University of Tennessee estimates for uncollected Internet taxes are excessive: it's more like $3 billion, not $11+ billion.
- The Senate hearing on the Marketplace Fairness Act, which derailed when the proponents' star witness admitted he was collecting based on an incorrect "origin-based" standard.
- The latest action on state-level "Amazon" taxes.
- Our larger report analyzing the constitutionality and wisdom of state-level "Amazon" taxes.
As young people who work in a 75 year old organization, we cherish every connection we have to the Tax Foundation’s early years -- especially to the people who worked in our original headquarters in New York City.
So I was saddened to learn that one of those early scholars, Gordon Paul Smith, just passed away in Carmel, California. He was 96 years old.
I enjoyed listening to Gordon talk about his days at the Tax Foundation in the mid-1940s. He landed his first job out of graduate school as a junior analyst at the Tax Foundation and was given the task of working on our annual book Facts and Figures on Government Finance – that was only the 3rd edition. He liked the book so much he was still ordering copies until we published the 36th and final hardbound edition just a few years ago.
Like so many of the young scholars who cut their teeth at the Tax Foundation, Gordon’s experiences would last him a lifetime. To mark our 65th anniversary, Gordon wrote me a note recounting his experience at the Tax Foundation:
"I reflect on the wonderful memories of the close relationships I had and enjoyed with the Foundation beginning over a half century ago. As a young man fresh out of graduate school joining the Tax Foundation as a member of its research staff, it was the Foundation who, without any doubt, truly set the course for my career in business and government ever since. I am grateful. Always have been."
The standards that guided Gordon Smith all those years ago are the same standards that guide us today.
Our thoughts and prayers go out to his wife Ramona and their family.
Economists Elizabeth Malm and Kyle Pomerleau, both co-authors of the Tax Freedom Day 2013 report, were in Trenton, New Jersey yesterday, bringing the good news of the impending arrival of Tax Freedom Day to the Garden State. The event was organized by the New Jersey chapter of Americans for Prosperity, and also featured remarks by AFP-NJ's Steve Lonegan.
This week's map shows inheritance and estate tax rates and exemptions as of January 1, 2013. Estate taxes are levied on the estate itself prior to transfer; inheritance taxes are levied on the transfer of wealth based on the recipient's relationship to the decendent. New Jersey and Maryland are notable for having both an estate tax and an inheritance tax.
Click on the map to enlarge it.
View previous maps here.
This morning, Good Jobs First released a second edition of their Grading Places: What Do Business Climate Rankings Really Tell Us?, wherein Peter Fisher offers critiques of the State Business Tax Climate Index and public policy rankings of other organizations. This piece is a rehashing of critiques Fisher proffered in his first edition in 2005, with additions for some new indices that have been created since then. We actually already include a response to Fisher’s 2005 edition in our literature review section of the Index, which is worth reading (starts on page 7), but I feel obliged to comment here as well.
Fisher’s main conclusion is that we should throw out all business climate rankings because they "contradict" each other. This argument is a non-sequitur. States score differently in different indices because the indices measure different things. Our Index is a measure of how well each state conforms to the principles of sound tax policy: simplicity, neutrality, transparency, and stability.
Fisher additionally pits the COST/Ernst and Young business tax burden study against our Index, ostensibly to claim that we should weight our property tax variable more heavily to comport with their findings on burdens (they generally find property taxes to be a major business tax cost). The problem here is that we do not claim to measure business tax burdens. We measure and rank tax structures, and this because the size of a tax is less important than the economic distortions it creates. This is a fundamental error in Fisher's understanding of tax policy. As a side note, economists also generally find property taxes to be the least destructive taxes to growth.
Follow Scott Drenkard on Twitter at @ScottDrenkard.
State Senator Bill Monning (D-Carmel) of California recently introduced a bill to tax sugar-sweetened beverages at a rate of a penny per ounce, ostensibly with the goal of reducing obesity across the state. I’m curious to see how this bill will be received though, as Californians have shown with their ballots that they don’t care for soda taxes. Citizens of Richmond and El Monte, California voted on a penny per ounce soda tax in November 2013, and 67 percent of the voters in Richmond and a shocking 77 percent of voters in El Monte voted the tax down. I wrote a comprehensive analysis of why soda taxes are poor tax policy and wrong for California last year, but here I will review a few of the highlights.
Soda taxes distort personal choice- The role of the tax code is to collect revenue for necessary government services, not micromanage the economy. Personal choices like diet inputs are truly personal. When you start to use the tax code to encourage some behaviors and discourage others, you often run into unintended consequences.
One recent study showed that taxes on sugar sweetened beverages reduce consumption of the taxed beverages, but adolescents perfectly substitute in the same amount of lost calories with other food and beverages. Another recent study showed that households that drink beer just switch to consuming more beer when soda is taxed. The result is approximately 2,000 extra consumed calories among beer drinkers—which moves in the opposite direction, and brings concerns of switching one public health problem for another.
The tax being considered is higher than taxes on beer and wine- California taxes beer and wine at 20 cents per gallon, and this proposal would tax soda at $1.28 per gallon. The proposed soda tax is actually higher than taxes on beer in any state. Here are two figures from our recent report:
Soda taxes do not correct for externalities- An excerpt from last November:
Some proponents of soda taxes claim that obese Americans create “externalities,” or shared costs, in the health care market. The story goes that obese people use more health care services than slimmer individuals, and these health care costs are shared through the socialized insurance pools of Medicare, Medicaid, and third party insurance providers. An appropriately priced tax, they argue, would force obese individuals to bear the full cost of the unhealthy habits that they currently shift onto others in the economy.
However, proponents of this line of logic are quick to jump to increasingly economically distortive public policy measures like taxation. The shared cost problem they describe only exists because of the socialized and regulated nature of the nation’s health care system and could be more easily remedied through reforms in Medicare, Medicaid, and third-party insurance pools. A simpler and more straightforward approach would be to allow insurance companies to charge higher premiums for obese individuals, a practice that is generally illegal at present. This would directly address obesity as the source of shared health costs as opposed to clumsily taxing soda, which is just one of many caloric inputs. It would also allow consumers to alter their eating patterns as they see fit, as opposed to providing a one-size-fits-all diet regulated by the tax code.
More on California here.
Follow Scott Drenkard on Twitter @ScottDrenkard.
The Marketplace Fairness Act, currently under consideration by Congress, would give states the authority to collect sales tax on Internet purchases by requiring collection by out-of-state retailers. In return, the Act requires states to take steps to simplify their sales tax systems. What does the bill require and what does the bill leave out?
The California Supreme Court gave a victory to taxpayers yesterday, unanimously ruling (PDF) that the City of Long Beach must recognize class claims to refund illegally collected telephone taxes. We filed a brief in the case, McWilliams v. City of Long Beach, where the city refused to refund the tax unless each taxpayer individually requested a refund. Our brief noted that class claims foster accountability and that state law requires government revenue agencies to adopt a fair and transparent refund process that disgorge illegally collected revenue.
Congratulations to the Court and to the people of Long Beach!
The U.S. Senate this week is voting on the Marketplace Fairness Act, which would grant each state the power to require collection of sales and use taxes by sellers with no physical presence in the state (primarily catalog and Internet-based sellers). Tax Foundation Vice President Joseph Henchman blogged on the legal background to the issue yesterday, and was part of Scott Horsley's NPR story on All Things Considered later in the afternoon.
“The IRS has reported an EITC improper payment rate above 20 percent since Fiscal Year 2003. While the estimated EITC improper payment rate has declined over the years, the estimated payments made in error have increased from at least $9.5 billion in Fiscal Year 2003 to at least $11.6 billion in Fiscal Year 2012.”
This is a one-year overpayment rate of 25 percent (!) and a total of about $132.6 billion since Fiscal Year 2003.
Even more, the report states that the IRS has yet to establish annual goals to reduce improper payments below 10 percent, violating an Obama-era law to reduce improper payments.
The Earned Income Tax Credit is a refundable credit which families can claim if they have earned income and are under a certain income threshold. For tax year 2012, the maximum income limit for a single parent with two children was $41,952 with a maximum benefit of $5,236. The program is designed to increase the credit’s value as your income increases, and then gradually phase-out to zero once your income hits a maximum threshold. In fiscal year 2012, the program cost the government about $59 billion and covered 27 million people; one of the largest welfare programs by reach and cost.
Theoretically and empirically, the claim is that this design will increase labor force participation compared to classic welfare programs and the minimum wage, while giving extra income for low-income families. For this reason, it is popular on both sides of the aisle; Right and Left.
However, the EITC is still haunted by the fact that it is extremely complex. With a 60-page handbook and rules that are anything but simple, a lot of this error could be attributed to this complexity. The IRS itself has made this connection, stating that “EITC complexity leads to improper claims by taxpayers—some intentional but many inadvertent—and to improper denials by the IRS.” Even worse, the population for which the EITC is meant for is even less likely to understand complex rules or speak English.
However, as popular as the program is, or as effective as it may be, the amount of error caused by its complexity is concerning. Just because the program is popular, and considered effective, does not mean it is immune from criticism. Another program that covers millions of Americans and was plagued with payment error for many years was the Food Stamp Program. In 1998, the error rate was over 10 percent nationwide. But due to a series of reforms that greatly simplified the program, the error rate is now 3.8 percent as of Fiscal Year 2012 even in the face of record caseloads.
If a 25 percent error rate, costing more than $11 billion per year does not indicate a need for reform, I don’t know what does. Lawmakers, regardless of their view on the EITC, need to take a serious look at this program. If they are truly concerned with helping those in need and think the EITC will help, the first thing to fix is the program’s immense complexity.
The U.S. Senate this week is voting on the Marketplace Fairness Act, which would grant each state the power to require collection of sales and use taxes by sellers with no physical presence in the state (primarily catalog and Internet-based sellers). The Senate approved a cloture vote yesterday, wresting the bill away from Sen. Max Baucus (D-MT), who is skeptical of the bill.
Update: The vote will now occur on May 6. Check out our table graphic here.
Confused about this issue? Here's the run-down from when I testified to Congress on the bill last year:
- After the bitter experience of the Articles of Confederation, the Constitution empowered Congress with the responsibility to rein in state tax overreaching when it threatened to do harm to the national economy.
- Consequently, states were not permitted to tax items in interstate commerce at all, from the Founding until approximately the 1950s.
- Since then, as formally adopted by the U.S. Supreme Court in the Complete Auto decision (1977), states may tax interstate commerce so long as the tax is non-discriminatory, fairly apportioned, related to services, and applies only to businesses with substantial presence (nexus).
- In a series of decisions, most recently the Quill decision of 1992, the U.S. Supreme Court explained that “substantial nexus” for sales/use tax purposes means physical presence of property or employees. The Court ruled that it exceeds to state powers for them to be able to demand use tax collection from companies that are not physically present in the state.
- States have sought to overrule the Quill decision, either legislatively (“Streamlined”) or through defiance (“Amazon” tax statutes). The defiance approach in particular has caused significant disruption and uncertainty to the economy. The "lost" revenue for states from untaxed Internet transactions is somewhere around $3 billion nationwide.
- Every state with a sales tax also imposes a use tax, levied on taxable items upon which no sales tax has been paid. In other words, use taxes seek to thwart competitive pressure from other states with lower tax rates. Taxpayer compliance with these protectionist use taxes is minimal. (Use tax, with a few exceptions, is imposed on the consumer and not the seller.)
- Congress has passed a number of statutes limiting the scope of state tax authority on interstate activities (“preemption”), carefully balancing (1) the ability of states to set tax policies in line with their interests and that allow interstate competition for citizens over baskets of taxes and services and (2) limiting state tax power to export tax burdens to non-residents or out-of-state companies, or policies that would excessively harm the free-flow of commerce in the national economy.
- When a resident of a state purchases from a brick-and-mortar retailer, they generally must pay sales tax. When the same resident in the same state purchases the same product from an online retailer, they often do not pay sales tax.
- Many large Internet retailers are expanding the number of states in which they have physical presence, to enable next-day delivery, but that is not the case for many smaller sellers that remain in just one location and use common carriers to deliver purchases.
- There are approximately 9,600 jurisdictions in the United States that collect sales tax, a number that grows by several hundred each year. Subscription tax software is inadequate and can be expensive for occasional sellers, and few states provide adequate tax lookup or consolidated tax filing options. Sales tax can vary by product, by time, and by location in the state. In 7 states, local governments can have a different sales tax base from the state tax base.
- Congress has five basic options on how it may proceed:
- Reaffirm the physical presence rule for sales taxation, and by implication, the disparity of treatment between brick-and-mortar sales and Internet sales.
- Reaffirm the physical presence rule but adopt a new tax approach that mitigates the disparity of treatment between brick-and-mortar sales and Internet sales (such as an origin-based system or a national sales tax on online purchases).
- Modify the physical presence rule in the limited context of state collection of use tax from out-of-state sellers, by those states that have adopted simplified sales tax systems under minimal federal standards, to reduce the harm to interstate commerce. This trade-off would replace the check on state power provided at present by the physical presence rule.
- Repeal the physical presence rule without conditions on the states, granting states unchecked authority to export tax burdens and damage interstate commerce.
- Do nothing and risk the continued growth of unchecked and fragmented state authority to export tax burdens and damage interstate commerce.
The bill as proposed does that third option, although it's missing a few key things such as federal court jurisdiction, uniform definitions of terms, the option of blended sales tax rates for each state, and notification for sales tax base changes. More on that here.
Today's Weekly Map looks at state income tax collections per capita, for calendar year 2011. New York State, with its high marginal tax rates and wealthy tax base, collected the most - an average of $1,864 per resident. At the bottom of the list are seven states with no state income tax - Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Arizona collected the least income tax per capita ($444) of states that levied an income tax on wage income.
Click on the map to enlarge it.
View previous weekly maps here.
When considering the opportunity cost of an activity or transaction, economists conclude that there is no such thing as a free lunch. However, many companies offer their employees “free” perks of employment that do not cost them anything out of pocket. Bloomberg, Facebook, and Google are well known for the gourmet food and snacks that they offer for free to all of their employees. Other companies offer employees free access to a gym or an employee discount. But these freebies are not always as sweet of a deal as they appear.
These benefits to employment are called “fringe benefits” and are defined by the IRS as a form of pay for the performance of services. Fringe benefits are taxable unless exempt by law. Qualifications for exemption are specific, and companies and the IRS sometimes clash over the specifics.
“De minimis benefits,” which are defined as any property or service provided by an employer that has such a minimal value that the costs of tracking and accounting for the benefit would be unreasonable to administer, are an example of exempt benefits. However, the frequency of the provision of the good or service must also be considered when assessing the value of the benefits. The provision of coffee or the occasional meal would be exempt as a de minis benefit. However, as the frequency of meals increases the question of exemptions becomes more complicated.
Meals provided on the business premise must be provided for the employer’s convenience to be exempt. The convenience provided to the employer by providing the meal must be for a substantial business reasons besides provision of additional pay. Determining what constitutes “convenience” will depend on the facts and circumstances.
The IRS describes that meals to food service employees during or immediately before or after the employee’s shift would be considered to be provided for the convenience of the employee by allowing the employee to work through breakfast, lunch, or dinner shifts. Employers’ provision of meals to employees that respond to emergency call may also be exempt. A meal may be exempt if the nature of the business allows the employee insufficient time to eat off the business’ premise. If a lack of eating facilities exists in the surrounding areas near the business premise, employers may be exempt for providing a proper meal that would not have been available without the furnishing of the meal by the employer. The IRS also clarifies that meals offered to promote “goodwill, boost morale, or attract prospective employees” do not constitute convenience for the employer that is necessary for exemption.
Exemptions for fringe benefits are also complicated with common employee provisions of an athletic facility, an employee discount, or lodging. For example, the provision of a health club membership to a third party provider of an exercise and sports facility would be taxable as pay on an employee’s W-2, but an employee owned facility that operates using employee wages and predominately is used by employees and their family would likely be exempt. Also, the cost of the lodging is only excludable if it is a requirement for employees to properly perform their duties and responsibilities – such as an overnight camp cabin counselors. Additionally, employees may often receive an employee discount on purchases. However, only a limited amount of employee discounts are excludable from taxes.
As more companies offer in-house meals to employees and other similar perks, tax experts have been debating and often disagreeing on what constitutes convenience to the employer and whether the exclusions currently allowed are fair. Thus, before you indulge in your fringe benefits or envy your friend at Google, remember to double check your pay stubs or W-2 tax statements before you realize too late that there really is no such thing as a free lunch.
For further reading on fringe benefits, see below: