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:
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:
This week's map shows state excise tax rates on spirits.
Click on the map to enlarge it.
To download this data as a spreadsheet and view state-specific footnotes, click here.
View previous maps here.
On April 15, Texas Governor Rick Perry called for substantial cuts to the state’s “margin” tax, a complex tax partially based on gross receipts that we have been critical of since its inception. According to State Tax Notes (subscription required), the plan would:
When the tax was originally put in place, the exemption was set at $300,000; but after an outcry from businesses, it was raised to $1 million and has stayed there since. Perry would make this higher exemption permanent at $1 million.
Some legislators have criticized the move, which would take money out of the state’s rainy day fund. The fund currently has $7.9 billion in balances, and the worry is that if the fund is too low, they will be forced to raise taxes or cut spending in a fiscal crisis (check out CBPP’s paper on rainy day funds). On the other hand, if the fund reaches its statutory limit of 10 percent of total revenue (around $13 billion), additional revenues will flow into the general fund, where they will ostensibly be spent.
Those caveats aside, this reform is a step in the right direction. Moreover, I’m happy to see that Governor Perry recognizes that the margin tax should be the focus of reform in Texas’ tax code. Past years have seen quixotic calls to eliminate property taxes in the state, which may need reform, but are nowhere near as distortionary or complex as the margin tax. Cutting property taxes may be popular, but property taxes are also generally found to be the least destructive taxes to growth.
| State Gross Receipts Taxes as of January 1, 2013 | ||
| State | Name of Tax | Range of Rates |
| Del. | Manufacturers’ & Merchants’ License Tax | 0.1006% - 0.7543% |
| Ohio. | Commercial Activities Tax (CAT) | 0.26% |
| Tex. | Margin Tax | 0.5% - 1% |
| Va (a) | Business/Professional/Occupational License Tax (BPOL) | 0.03% - 0.58% |
| Wash. | Business & Occupation Tax (B&O) | 0.13% - 3.3% |
| (a) Virginia’s tax is locally levied and rates vary by business and jurisdiction. Source: Commerce Clearing House; state revenue departments; Tax Foundation. |
||
The problem with the margin tax is that it is fundamentally a gross receipts tax, which is like a sales tax that is problematically levied at all stages of production. These types of taxes pyramid as products move through production stages. For example, if you build a car under a gross receipts tax regime, the rubber in the tire would be taxed when it came out of the tree and was sold to the tire company, then again when the tire company sells the tire to the car manufacturer, then a third time when the car manufacturer sells to the consumer.
With each additional transaction, the tax becomes imbedded in the price of the product, a feature which is an affront to the principle of transparency. Gross receipts taxes are also not neutral in that they have lower effective rates on industries with fewer stages of production and higher effective rates on industries with more stages of production. Sometimes businesses will vertically integrate their production processes just to reduce their tax burden, even if doing so doesn’t make any economic sense. These are just some of the reasons that gross receipts taxes only comprehensively exist in five states (table above).
The margin tax is a very poor part of Texas’ otherwise very stellar tax system. While full repeal should be the goal, virtually any move to limit the tax is desirable.
UPDATE: Rep. Hilderbran has introduced bills along the lines of Perry's reforms numbered HB 213 and HB 500.
More on Texas here.
Follow Scott Drenkard on Twitter @ScottDrenkard.
The city of Philadelphia, Pennsylvania has often been chastised for the way in which it assesses property values for purposes of property taxation. Next year, however that will change. The city has undertaken an ambitious reform program that will alter the way property values are assessed, resulting in a property tax base and rate change.
In the past, city property values failed to reflect true market value and there was a lack of horizontal equity in the system (that is, similar properties weren’t valued similarly and thus had drastically different tax liabilities). Assessments were not conducted on a regular basis resulting in drastically misvalued property. For example, the last partial assessment of property was completed in 2004 and was only based on a fraction of full market values.
Ideally, a property tax system reassesses properties at regular intervals to ensure that property tax liabilities reflect market values—and to prevent a drastic hike in tax burdens when a reassessment is finally done after a number of years.
In an attempt to fix the system, the city launched what is known as the Actual Value Initiative after concerns arose in 2010 over how the Board of Revisions and Taxes managed the assessment procedure. The responsibility was removed from the Board and a new entity, the Department of the Office of Property Assessment, was established to take over this role. The department began to reassess all property in the city in 2011 to ensure that assessments reflected the true market value of properties.
Unfortunately, because of the outdated and inaccurate procedures, the city is now forced to overhaul the entire system resulting in a painful transition process that will change the property tax bill for a number of property owners. Concern has arisen over the drastic increase in liability many homeowners will see. Though Mayor has proposed lowering the rate to 1.32 percent from 9.77 percent next year to account for the larger tax base (it will increase from $36 billion to $98 billion), tax liabilities for many residents will likely be higher. They Major has argued setting aside $30 million in tax relief for those hit hardest by the changes. To ensure transparency and fairness, residents will be able to appeal their assessed values. As many as 22,000 homeowners have already done so.
Other localities can learn from Philadelphia. Property assessments should be undertaken at regular intervals to ensure valuations reflect market values. When a system becomes outdated, inefficient, and inaccurate, at some point it must be updated, and it’s likely that the transition will be painful. In order to prevent such a situation, it’s better for local governments to ensure accurate property assessments occur at regular intervals.
More on Pennsylvania here.
I'm pleased to announce that we are today honoring five states for tax information transparency. In a new report, we reveal the results of two tests we ran in March: (1) we counted how many clicks it took to find 2012 income tax rates from the agency’s website homepage, and (2) we assessed whether the state had made available (and findable in a spot check by our analyst) the 2012 and 2013 tax rates, tax table, and tax forms.
For clicks, in five states (Indiana, Kentucky, Minnesota, New Jersey, and North Carolina), it takes taxpayers five clicks to find this information from the homepage. Taxpayers in three states (Colorado, Massachusetts, and Pennsylvania) can get it in two clicks. And while nearly all states had most of the 2012 and 2013 tax information, our analysts were able to find all of this information only in five states (Colorado, Illinois, Pennsylvania, Utah, and Virginia; some of these states have one-rate taxes, making tax tables unnecessary). The vast majority of state revenue websites do not yet provide 2013 tax rate information even though 2013 income tax is currently being withheld from taxpayers’ paychecks.
Transparency can be a difficult thing to quantify, and we admit that these two tests are not a perfect proxy. However, poor transparency of basic tax information imposes real costs on taxpayers. The time and money an individual spends complying with taxes prevents them from productively spending these resources elsewhere. Ideally, a taxpayer should be able to quickly and easily locate and understand all taxes owed and with that information make informed allocative decisions and budgeting plans. We are consequently pleased to recognize:
Each passed both tests (three clicks or less for finding information and having all 2012 and 2013 information available online). We hope all state tax authorities will follow their lead in making basic information easily accessible to taxpayers.
See full information for each state here.
The Tax Policy Center recently released a report comparing the United States’ overall taxation on wage income to other OECD counties. It claims that even after the tax increase on January 1st on top incomes from 41.8 to 47.9 percent, the United State still compares well within the OECD. They argue that income taxes affect a country’s ability to compete for workers and conclude:
“The United States compares favorably among major OECD countries, particularly for the majority of Americans who live in states with top income tax rates lower than California’s or with no state income tax at all.”
This analysis is correct: looking at the rates throughout the OECD [see chart above], the United States’ average top marginal income tax rate falls in the middle. Workers probably see the United States as a good deal compared to countries like Denmark which imposes a top rate of more than 60 percent on income.
However, this analysis leaves out a unique aspect of the U.S.’s individual income tax. A significant portion of “pass-through” business income is subject to the individual income tax in the United States. This makes the recent tax increase more than just a hit to wages for Americans. This recent tax increase hits a significant portion of business income in America and as a result will be especially detrimental to the economy.
“Pass-throughs” are non-corporate firms in which the profits of the business are “passed-through” to the owner. The owner then pays the individual income tax. This is in contrast to a traditional corporation where the profits are taxed at the corporate level at the corporate rate before they are dispersed to shareholders to be taxed again at the individual level.
In the United States, these forms of businesses, subject to the personal income tax, are growing in prominence.
From 1980-2008, the number of these “pass-throughs” grew from 10.9 million to 31.8 million, nearly tripling. In fact, “pass-through” businesses generated more net income than traditional corporations in 2008, making up 61 percent of all business income. According to Treasury data, 50 percent of all pass-through income was subject to the top tax bracket in 2007. So as a result, the tax increase from 41.8 percent to 47.9 percent is going to fall hard on pass-through business income.
What makes this tax increase worse than TPC claims is that it will exacerbate the competitive disadvantage these firms have with businesses throughout the world. The top tax rate that these “pass-through” businesses now have to pay is much greater compared to their competitors in the OECD that pay an average 25 percent corporate tax rate.
It is vital that one considers that the individual income tax will become an increasingly important factor in whether our tax system is competitive as “pass-through” businesses continue to become an increasingly prominent share of business income. Consequently, income tax rates should be considered just as important as the corporate tax rates when looking at the competitiveness of U.S. business. Unfortunately, the TPC report completely neglects to mention this important point.
Economists care about decisions at the margins. We ask questions like the cliché “when will producers make more guns and less butter?” The answer is that economic actors will seek opportunities where marginal costs are lower, or marginal benefits are higher, or some combination of the two.
By that same token, marginal income tax rates affect the decision of employees as to whether they will seek additional responsibilities at work in exchange for higher incomes. As marginal rates increase in progressive income tax codes, take-home pay is less for each dollar, and the incentive to work is less. We have good empirical data that backs up this theoretical claim.
Vermont just introduced a bill that has a sneaky little trick to raise taxes on the high income earners without raising statutory marginal rates. After you cross a threshold, all your prior income is subject to higher rates. From the bill:
[…]for a taxpayer with taxable income in the highest bracket, the tax shall be calculated as if all of his or her income in the lowest bracket was taxed at the rate in the next highest bracket and the remainder of his or her income was taxed under the remaining brackets and rates as specified.
According to Art Woolf, an economist in Vermont writing in the Vermont Economy Newsletter (subscription required):
If you earn a dollar over $397,150, your Vermont income tax bill will increase by about $1,800. That’s a marginal tax rate of 180,000 percent, probably the highest in the world.
That’s a pretty substantial marginal cost.
More on Vermont here.
Follow Scott Drenkard on Twitter @ScottDrenkard.
The American Civil Liberties Union (ACLU) has succeeded in obtaining a series of documents from the Internal Revenue Service (IRS), with a frightening find:
The documents the ACLU obtained make clear that, before Warshak, it was the policy of the IRS to read people’s email without getting a warrant. Not only that, but the IRS believed that the Fourth Amendment did not apply to email at all. A 2009 “Search Warrant Handbook” from the IRS Criminal Tax Division’s Office of Chief Counsel baldly asserts that “the Fourth Amendment does not protect communications held in electronic storage, such as email messages stored on a server, because internet users do not have a reasonable expectation of privacy in such communications.” Again in 2010, a presentation by the IRS Office of Chief Counsel asserts that the “4th Amendment Does Not Protect Emails Stored on Server” and there is “No Privacy Expectation” in those emails.
The IRS then lost U.S. v. Warshak, which held (unsurprisingly) that the IRS did have to abide by the Fourth Amendment and needed warrants to read e-mails. The ACLU wants to know (as should all good Americans) whether the IRS has changed its practices or whether it continues to advise agents to read e-mails without warrants. The ACLU says the most recent IRS manual has not changed its pre-Warshak guidance.
The Hill asked the IRS for comment, but they declined.
President Obama released his proposed 2014 budget today, and as we learned last week it contains numerous tax increases. Most of these have been proposed before either by the President or his party, such as the 28 percent limitation on the value of itemized deductions, the Buffett Rule, and higher taxes on carried interest and oil and gas production. There is also a 94 cent increase in the federal cigarette tax, which Obama hasn’t done since 2009, and a movement to chained-CPI that would push people into higher tax brackets faster over time. Plus, there is the move to "reform" the international corporate tax system by raising taxes on American companies operating abroad, which is opposite the reforms occuring in every other major country.
But the tax increase that is most novel is the $3 million cap on tax-free retirement accounts. The administration figures this would produce a retirement annuity of $205,000 a year on average, and that is enough. Forget the fact that millions of savers have been sacrificing for years to save money under the assumption that these retirement accounts would not be capped. This is not a good precedent, and not the sort of thing that inspires confidence in our laws going forward. What if the cap is lowered? What if these retirement accounts are further raided to pay down the national debt?
Nor is this good for saving and investment, i.e. the kind that grows organically in the private sector. Obama proposes various public investment initiatives, with names like “Fix-it-First” and “Rebuild America Partnership”, but what America lacks is robust private investment and the personal savings to support it. The personal savings rate was 3.9 percent in 2012, down from more than 10 percent in the 1970s and 1980s (see first chart below). Private investment is in even worse shape. While it is up somewhat over the last four years, gross private domestic investment continues to be lower as a share of GDP than at any time since the Great Depression (see second chart below). Much of the investment collapse over the last four years has been the bursting of the real estate bubble, but even nonresidential investment continues to be well below the average since 1970.
Apparently, the $3 million cap would affect about 1 percent of retirement accounts, directly. But it would affect a much larger percentage of dollars invested, directly, and it would essentially affect all investors indirectly through lower asset prices. As after-tax investment returns go down, we can expect lower investment, lower saving, and through that, lower economic growth.
Follow William McBride on Twitter @EconoWill
My colleague Will McBride takes the larger look at President Obama's proposed 2014 budget, but I wanted to highlight one aspect of it: claiming "budget neutrality" for items that will actually increase the budget deficit over time.
For example, President Obama proposes funding a universal pre-K program with a 93 percent increase in the federal tobacco excise tax. Over ten years, these two policy ideas indeed balance out: $78 billion in tax revenue paying for $77 billion in spending.
But they only balance in the aggregate. The actual trend is a growing spending program financed by a shrinking revenue source (tobacco consumption is declining), as you can see when the numbers are broken out year-by-year.
|
|
2013 |
2014 |
2015 |
2016 |
2017 |
2018 |
2019 |
2020 |
2021 |
2022 |
2023 |
Total, 2014-2018 |
Total, 2014-2023 |
|
Early childhood investments |
…. |
* |
1 |
3 |
6 |
8 |
10 |
11 |
12 |
12 |
12 |
19 |
77 |
|
Tobacco tax financing |
…. |
-8 |
-10 |
-9 |
-9 |
-8 |
-8 |
-7 |
-7 |
-6 |
-6 |
-44 |
-78 |
Source: White House Office of Management & Budget, Fiscal Year 2014 Budget of the U.S. Government, Table S-2.
So while the two programs would reduce the deficit by $1 billion over the 2014-23 period, it actually increases the deficit starting in 2019 and growing thereafter. By 2023, the program will cost $12 billion each year but the tax will only be bringing in $6 billion, increasing the deficit by $6 billion a year.
The same thing occurs with his proposed $104 billion in addition surface transportation spending and $62 billion in job creation incentives, paid for by savings from the early end to the Iraq and Afghanistan conflicts. While over the ten-year window, this is $166 billion in spending offset by $167 billion in savings, it actually increases the deficit every year beginning in 2020 because ending those conflicts early are only one-time savings.
A better approach, for programs we like and want to have, is to fund it with revenue sources that we all pay. President Obama obviously tries his best to avoid that, focusing on smokers, high-income individuals, savers, corporations, and a few others to pay for programs we all use and enjoy. While that might be in someone's political interest, it's a bad way to fund growing programs that we all ought to be willing to chip in for.
Yesterday, Senate Budget Chairman Patty Murray launched a campaign for public comment on how sequestration was affecting the livelihoods of Americans. In her words, “our whole economy [is] threatened as these senseless cuts continue to mount.”
Today, I submitted a comment:
I live inside the beltway, which is virtually the only area that should be seeing strong impacts of the sequester. I have seen exactly none. It is true, this is not the ideal way to cut spending. The items that need addressing in the long run are entitlements, especially Medicare. However, both parties have proven in word and deed that they are not willing to take on the challenge of reforming those politically popular programs, and so I will gladly settle for this spending cut that amounts to 0.26 percent of GDP.
I'm fairly strongly convinced that the reason Senate leadership is starting this "tell us what you think" campaign is that there has been virtually no visible signs of damage wrought by the sequester, and this campaign hopes to crowd-source some sympathy stories. I am also fairly certain this endeavor will not be fruitful, as well-paid government contractors are generally not the most sympathetic victims. I wish you luck.
Scott Drenkard
Economist
Tax Foundation
I’ll let you know if I get a response.
More thoughts on the sequester.
Follow Scott Drenkard on Twitter @ScottDrenkard.
On this date in 1895, the U.S. Supreme Court decided Pollock v. Farmers Loan Trust Co., striking down the federal income tax of 1894. The bill had passed as part of a general reduction in tariffs, although President Cleveland was no fan, letting it become enacted without his signature.
The tax – 2 percent on all income over $4,000 (roughly $90,000 today) – was America’s first peacetime national income tax. It was promptly challenged on the grounds that the Constitution requires direct taxes to be levied in proportion to each state’s population. The federal government had levied indirect taxes (such as on carriages, whiskey, and other specific products), but Pollock raised the question of whether the income tax was a direct tax or an indirect tax. Charles Pollock, a stockholder in Farmers Loan Trust, sued the company to stop it from paying the income tax (and notifying the government about who it paid income to).
In a 5-4 vote, the U.S. Supreme Court ruled that the income tax is a direct tax. Chief Justice Melville Fuller, writing for the majority, first showed a surprisingly keen awareness of economic concept of incidence:
Ordinarily, all taxes paid primarily by persons who can shift the burden upon someone else, or who are under no legal compulsion to pay them, are considered indirect taxes; but a tax upon property holders in respect of their estates, whether real or personal, or of the income yielded by such estates, and the payment of which cannot be avoided, are direct taxes.
However, he went further and analyzed the writings of the Framers, the tax writings of Adam Smith, the ratification debates in the states, and observations by early justices and members of Congress. From this he concluded that it was well understood that “all taxes on real estate or personal property or the rents or income thereof were regarded as direct taxes.”
Since direct taxes must be apportioned by state population under the Constitution, the 1894 law was void. While admitting that such a method of imposing income taxes would be considered unfair by many, its purpose was “to restrain the exercise of the power of direct taxation to extraordinary emergencies, and to prevent an attack upon accumulated property by mere force of numbers.”
Justices Edward White and John Harlan, dissenting, repeatedly disparaged “the views of economists” as irrelevant to the legal inquiry, instead noting that the early Supreme Court held that a tax on carriages was not a direct tax, and in dicta, that only taxes on land would be a direct tax. He urged that the Court defer to Congress with respect to its powers of taxation.
After a rehearing, the Court reissued opinions on May 20, 1895, extending its holding from just rental property income to income from bonds and stocks also, a fatal enough blow to strike down the entire income tax law. Justice Harlan dissented again (echoing Justice White’s views from the month before). Justice Henry Brown also rejected the idea that “the definitions of a direct tax given by the courts and writers upon political economy” were binding, showing (in my opinion) his bias by concluding that “the decision involves nothing less than a surrender of the taxing power to the moneyed class.” Justice Howell Jackson and Justice White also dissented.
The decision was highly unpopular, in part because the 1894 law was a hard-fought compromise that reduced tariffs and imposed the income tax, and the decision voided half of that political compromise. Champions of progressive taxation found their voice for the first time, arguing that the federal tax burden should be on “accumulated wealth” rather than consumption. Populists and Progressives pushed hard for other taxes on wealth and high incomes, leading to a federal inheritance tax (1898), a corporate income tax (1909), and ultimately, the Sixteenth Amendment (1913). That amendment conceded that the income tax is a direct tax, but removed the constitutional requirement of apportionment for income taxes.
Today's Monday Map shows state and local general sales tax collections per capita for each state during fiscal year 2010 (the latest for which data is available.) Washington State collected the most at $1,770; Delaware, Montana, New Hampshire, and Oregon are at the other end, having no sales tax.
Click on the map to enlarge it.
View previous Monday Maps here.
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