November 29, 2006

DC's Budget Deficit: That Didn't Take Long...

As the primary election campaign for the Mayor of Washington DC heated up this past spring, then-candidate (and now-mayor) Adrian Fenty took a stance that clearly separated him from the rest of the Democratic field-- he took a no-new-taxes pledge. It was a myopic, politically expedient move, from a guy who (many thought) was just saying it to differentiate himself from the rest of the Democratic candidates, and plenty of people (including Talking Taxes) said so at the time.

Funny thing, though-- Fenty won the election, so now he has to live up to this promise. And it's taken a grand total of three weeks since his election victory to show how short-sighted his stance was. A front-page story in the Washington Post this week notes that the city's latest budget projections show a $300 million shortfall over the next two years. (To put this in context, the city's total tax collections were a hair under $3 billion in FY 2006-- so we're talking about a per annum shortfall of about 5 percent of tax collections)

This doesn't mean the sky is falling, of course. Budget shortfalls happen all the time, and sometimes they can be closed quite easily. But these latest projections are a sobering reminder that you never know what's coming around the bend fiscally-- and that it's simply irresponsible for any elected official to take half of his/her fiscal policy options off the table before the next crisis emerges. Fenty's pledge may yet come back to haunt him.

Property Tax Caps: Better Than Nothing?

There is widespread and bipartisan agreement among Illinois policymakers that the state's property taxes are too high-- and that the solution to the state's fiscal imbalance has to include a tax shift, away from local property taxes and towards some other source. The most obvious candidate for this alternative revenue source is the state's income tax, which is among the lowest in the nation.

But implementing such a tax shift has been a task beyond the abilities of Illinois lawmakers so far. A few years ago, lawmakers have enacted a temporary, stopgap solution for Cook County (which contains Chicago and counts for close to half of all the property value in the state), which puts a 7 percent cap on the amount by which a homeowner's taxable value can grow each year.

Sounds like a tax cut for homeowners, right? But since it's not funded by the state, Cook County has to make up the revenue loss by hiking property tax rates on what's left of the tax base. That means businesses and renters pay more. It also means that Cook County homeowners whose home values aren't increasing by 7 percent a year pay more-- hardly a defensible tax reform strategy.

But there's one arguably good thing about the 7 percent cap: people whose homes are worth a lot more from one year to the next will see a smaller resulting property tax hike than they otherwise would. Of course, the cap gives this break to everyone who's in this boat, from the poorest to the wealthiest. But it does undeniably restrict the impact of the real estate boom on certain homeowners.

It's also undeniable that a tax cap is a pretty blunt instrument for achieving this goal. And you can question whether "tax cuts for every homeowner whose home is worth a lot more" is the right goal to begin with.

So is the 7 percent cap better than nothing? The Illinois Civic Federation thinks so. In a November 27 press release, they recommend extending the temporary cap when it expires next year. To their credit, their release states prominently that the cap "is not a replacement for comprehensive property tax reform," and that in the long run it should be allowed to expire. But for now, they think that "the benefits of the [cap] outweigh its costs in terms of the portion of the tax burden shifted to non-homestead and slowly-appreciating homestead properties."

Anyone who was around for the state tax revolts of the late 1970s and early 1980s (and I wasn't among them) will tell you that short-term legislative inaction in the face of rapidly growing property taxes is a recipe for long-term dumb tax policy solutions. And it's entirely possible that absent the temporary caps that have been in force since 2004, Illinois homeowners would have broken out the pitchforks by now in a way that would make the state's already-abysmal education funding system even worse.

But I think the real outcome has just been that Illinois leaders have been able to avoid dealing with the property tax issue altogether. Newly re-elected governor Rod Blagojevich clearly just wishes the issue would go away. This "not on my watch" mentality is making things easier for those Cook County homeowners who are lucky enough to live in the right neighborhood-- but is making things worse for low-income families who already were coping with one of the most regressive tax systems in the nation.

It's time for Illinois lawmakers to stop treading water and come up with a real property tax swap solution.

November 28, 2006

Russia's Flat Tax and Economic Growth: A Little Myth-Busting

In the wake of President Bush's recent love-in with Estonia's flat-rate income tax, you'll likely hear anti-taxers once again floating the canard that Russia's move to a flat-rate income tax helped save their economy.

Of course, some would argue that Russia's economy still needs plenty of saving. But for anyone who sees a supply-side miracle in Russia's recent tax changes, check out this excellent report from Brookings economists Clifford Gaddy and Bill Gale. Gaddy and Gale find that:
The increase in compliance that followed the 2001 reform is more likely attributable to changes in the administration and enforcement of tax laws than to lower rates.
In particular, income tax revenues shot up after Russia enacted its flat tax not because the tax rates were flattened, but because at the same time, they started regular withholding of income taxes at the source. Withholding is a thing we take for granted as part of the normal functioning of our income tax-- but it's easy to imagine how much of a boost regular withholding would have on a country's income tax.

Kudos to Gaddy and Gale for cutting through the rhetoric on this point.

Bush on Estonia's "Transparent" Flat Income Tax

Via the TaxProf Blog:
President Bush is touring Estonia this week, and apparently is quite smitten with that country's flat-rate income tax. He told reporters "I appreciate the fact that you got a flat tax, you got a tax system that's transparent and simple." As the AP article notes, this became a bit of a talking point for him over the course of his visit-- he went out of his way to mention it to reporters again.

The AP article uncritically accepts this version of what simplifying tax reform ought to be:
Back home, Bush has pledged to simplify the tax laws in the United States, which he calls a complicated mess. One idea is a flat tax, which taxes all income at a single rate and gets rid of deductions. Yet comprehensive reform of the U.S. tax system has gone nowhere in Congress.
Yeah, that's "one idea." But it's hardly the only way-- or even the best way-- to clean up the tax code. When anti-tax folks wave around copies of the Internal Revenue Code to dramatize how complex the tax code has become, they're not waving pages and pages of graduated tax rates. They're waving a book full of loopholes. Special targeted deductions, exemptions and credits that are designed to benefit specific groups for specific reasons. The first step toward a rational income tax should be to weed out unnecessary or outdated tax breaks.

Administering and enforcing these special tax breaks is a nightmare for tax administrators, and applying for them is a pain for the beneficiaries. By contrast, having a graduated income tax doesn't add even a line to the tax forms, and adds virtually nothing to the size of the tax code.

The mantra of "flat= simple" is a clever trick, and one that advocates of paring back progressive tax systems frequently rely on. But it's also a red herring. CTJ's 1996 report, The Hidden Entitlements, gives a laundry list of some of the most egregious loopholes-- a great starting point for anyone truly interested in tax simplification. This argument holds at the state level, too-- check out this ITEP report on progressive income tax simplification options.

I get the sense that progressives are sometimes afraid to back tax simplification as a policy goal, simply because anti-taxers have so successfully (and misleadingly) equated simplicity with flatness in their rhetoric. But, as both the CTJ and ITEP reports show, the best simplicity-enhancing tax reforms are often the most progressive ones. For example, eliminating the host of special tax breaks for capital gains income that now exist, and taxing this high-end income source at the same rate as the salaries and wages most of us rely on, would eliminate entire schedules from the federal tax forms-- and would have little or no impact on most American families.

Progressives, take note: tax simplification is your friend!

Should There Be Taxes In Virtual Reality?

I am apparently a little behind the times, because I was surprised to learn that 1.4 million people currently play an online virtual reality game called Second Life, which basically provides a virtual universe where a person can, in a sense, live a second life.

What's perhaps even more surprising is that within this universe there is a virtual economy, in which a person have a "job" and use their earnings to buy a piece of "land" or a "house" from another person who is playing the game. Even more remarkably, the virtual dollars used in the game can be exchanged for real money and vice versa. A person who wants to live the life of a baron in virtual reality could exchange actual dollars for the virtual money, enter the game and "pay" someone to build him a castle. The builder, who in reality is being paid to do the programming to create a virtual castle, receives the virtual money which can then be exchanged for real money. So real economic transactions are taking place in the virtual world.

Should such transactions be regulated or even taxed? An article (subscription required) from The New Republic asks this question and suggests that since other types of games (think of gambling) are in fact regulated it shouldn't be out of the question. People who play virtual games seem to oppose any such idea - after all, what's the fun of escaping into the virtual world if things like taxes are going to follow you there?

But at least in theory, a virtual economy can become developed enough that it warrants regulation and taxation. Consider the possibility of using investments in the virtual world as tax shelters. Maybe there are a lot of people who want to buy virtual houses, castles, mansions, palaces or whatever crazy things people dream up but cannot create through programming on their own. It might be more than work than a single programmer can do. It might actually require a whole firm of virtual architects and builders. What if I invested in this profitable company and just left my money there... for thirty years. Assume this virtual universe can only expand as more and more people all over the world obtain access to internet connections and can escape from their own dreary realities to the virtual world. That means there may be an expansive business climate in the virtual world for years to come.

Now imagine that during these thirty years my virtual stock in this company paid hansom dividends but I never took them out of the virtual economy (meaning I never exchanged the money for real money). Instead I just kept putting the virtual money back in virtual investments. Only after thirty years do I decide to "sell" my virtual investments and then convert all the virtual dollars to real dollars.

I have just achieved a massive tax shelter. Being able to take some money and put it in investments for years without paying taxes on the interest or profits until you take the money out -- well, that's basically what an Individual Retirement Account (IRA) is for. And remember, an IRA is LIMITED. You cannot contribute more than $4,000 a year (the limit rises with inflation). It's limited because the tax advantage would be too great if it was not. Normally interest or profits are taxable each year simply because they're income and it would seem fair to tax it just as we tax income from wages. IRAs are the exception and are allegedly designed to increase savings, but in reality they mainly serve to help wealthier people shelter investments from taxes.

Investments in the virtual economy could mean an unlimited tax shelter of this type - if the virtual economy truly takes off. In theory there could also be questions of whether employees at a virtual firm are subject to labor laws, whether or not one can be liable for civil damages for loss of income in the virtual world, and whether or not money could be laundered through virtual investments or banks.

So far now, people will laugh at the very notion of taxing virtual transactions. Let them laugh. "There they go again, trying to find some new crazy way to tax the hell out of us!" But if the virtual economy grows - and it probably will - don't be surprised if this issue comes back up.

November 24, 2006

Paulson Says the "T" Word (Without Really Saying It)

Wonders never cease. Treasury Secretary Henry Paulson said this week that there might be room for a renewed emphasis on fully funding Social Security, and that all options are on the table. The Washington Post has the interview here.

It shouldn't be big news that Paulson says there are "no preconditions" for talks on Social Security reform. After all, rationally discussing all available options is what sane people do when confronted with a problem.

But of course, the last six years have not been a time for rational discussions, or for keeping all options on the table. The President in particular has been adamant that tax hikes simply cannot be part of the debate over funding Social Security. Even now, the White House website's Social Security page tartly announces in boldface type that when it comes to reforming Social Security,
"President Bush has pledged to work with Congress to find the most effective combination of reforms. He will listen to any good idea that does not include raising payroll taxes."
In other words, when you've been living in Bizarro World for six years, returning to reality is worth celebrating a bit. Check CTJ's website soon for a detailed analysis of options for reforming the funding of Social Security.

Sunshine and Lollipops? Or More of the Same?

If you're on as many progressive email lists as I am, you've heard plenty of "sunshine and lollipops" prognostications in the past two weeks about how the new Congress will change our direction on a host of issues. And there's no question that on issues ranging from the environment to campaign finance to Social Security, it's a brand new day. But for those advocating sanity in federal fiscal policy, it's hard to be too ecstatic over November's election results. While it's great that the tax writing committees in Congress will no longer be headed by folks who blindly support the President's anti-tax agenda (or who have their own, even worse version of such an agenda), this is hardly a revolution in tax policy. Or rather, the revolution is on ice for two more years.

The new leaders in both the House and Senate have indicated that they're not going to seek immediate repeal of the Bush tax cuts (incoming House Ways and Means Chair Charlie Rangel clearly sees this as a politically unrealistic goal between now and 2008) and that they're even willing to keep pushing for more ill-advised "reforms" (incoming Senate Finance Chair Max Baucus has made it clear in the past that he'd love to repeal the Alternative Minimum Tax (AMT) and pare back the estate tax). And it's not yet clear what role the newly ascendant, centrist "Blue Dogs" will play in formulating tax policy-- or what stance they will take on repealing the Bush tax cuts.

To be fair, the incoming Dems have the deck stacked against them. The GOP leadership has been making all the politically easy decisions (cutting taxes) and none of the hard ones (making the books balance by cutting spending or hiking other taxes) for six years. They've allowed the AMT to become a looming threat for upper-middle-income families that will cost close to a trillion dollars to fix. And, anticipating the possibility that they'd lose the 2006 elections as badly as they did, they've cemented in place the very worst of the Bush tax cuts (capital gains/dividends rate cuts) through 2010. Nothing the Democratic leadership can do to fix our finances over the next two years is going to be remotely popular, and any of the most responsible actions they can take will leave them (however unfairly) open to the "tax and spend" charges that Republicans have learned to tar them with in the past.

And, of course, there are still plenty of reasons to rejoice. For the first time in a dozen years, advocates of fiscal sanity will be able to make their case to Congressional leaders and have at least some confidence that these folks are actually listening to them. Rangel in particular has made it clear that while he's not going to make a career out of tilting at windmills (or, as he put it, picking "green bananas"), he's also willing to listen to just about any sensible idea for tax reform. In the committee chambers and on the floor of Congress, there is room for debate again.

And that, at least, is something to celebrate.

November 22, 2006

Why We're (Cautiously) Optimistic About the Next Congress

November Election a Stunning Victory for Progressive Taxation

On Tuesday, November 7, the Democrats took both chambers of the U.S. Congress, gaining six seats in the Senate and at least 29 seats in the House (some recounts are pending). No Democrats lost a seat.

Perhaps less noticed are the consequences for tax policy. Of the 24 incumbents who ran for reelection and lost, 23 received a failing score on CTJ's Congressional Tax Report Card published on October 16. (The only one with a passing grade was Rhode Island's Senator Lincoln Chafee, who received an 80%.)

Also, of the 24 who ran for reelection and lost, 21 actually scored a zero on CTJ's report card. (The exceptions are Senator Chafee, Ohio's Senator Dewine with 20% and New Hampshire's Representative Charles Bass with 17%).

CTJ's report card looked at six key tax votes in the House and Senate. Five are bills that were enacted into law. They included the big 2001 tax cuts, the 2002 corporate tax cuts, the 2003 capital gains and dividend breaks, the 2004 corporate tax giveaway, and the 2005 tax cut bill (which was actually enacted in early 2006). The bill that was narrowly rejected was the 2006 effort to repeal the estate tax.

While it is too early to know if the new members will strongly support progressive taxation, these results are extremely encouraging. They signal that voters are not blindly supporting any type of tax break regardless of who it benefits or what it means for our nation's fiscal health.

Tough Choices Ahead on AMT, PAYGO

But that doesn't necessarily mean easy sailing for progressive taxes and fiscal sanity. The Democratic Congress that takes power in January will inherit massive deficits and regressive tax breaks (income, capital gains, dividend and estate tax and other types of tax breaks) that won't expire until 2010. Any attempt to repeal them now would surely be vetoed by the President.

What the Democrats really need to decide is how far to go in extending tax breaks that help the middle-class (as they often pledged to do during the campaigns) and also how to pay for them. Charlie Rangel (D-NY), who will become the chairman of the House Ways and Means Committee that will initiate tax policy, has talked of making permanent the research and development credit (which is currently part of the tax extenders that must be renewed every couple years), making college tuition permanently deductible and preventing the alternative minimum tax (AMT) from affecting middle-class families. The last point is one that would get wide agreement in principle but a conflict could easily erupt over how it should be paid for.

The AMT is basically a backstop to the federal income tax designed to ensure that wealthy people with deductions, credits, capital gains or other tax advantages are not able to avoid paying their fair share. Unless it is changed, the AMT will start affecting more middle-class and upper-middle-class people because the exemptions built into it are not indexed for inflation and because the Bush tax breaks generally lowered taxes without changing the AMT.

The tax reconciliation bill Congress passed early this year included a "patch" for this problem, increasing the exemption levels through 2006 and extending a rule allowing taxpayers to use non-refundable personal credits to offset the AMT. Extending this patch for one year is estimated to cost $40 billion and providing a permanent fix could cost nearly $1 trillion over a decade.

Whereas the outgoing Republican leadership saw no problems with deficit-financed tax breaks, the new Democratic leadership has pledged to restore pay-as-you-go (PAYGO) rules, meaning any new entitlement spending and any new tax breaks (including changing the AMT) must be paid for. Democratic leaders have discussed ways to offset tax breaks by increasing compliance and closing corporate loopholes. The big unanswered question is whether Democrats - perhaps with the help of moderate Republicans - will be able to reconcile their desire to move forward with some tax breaks with their pledge not to increase the deficit.

One of the best rhetorical weapons used by critics of the President's tax breaks is that they are not paid for. The President is digging us in a hole by giving away tax breaks to rich people. It would sure be a shame if Democrats ceded the high-ground forgetting about PAYGO, which is the only budget process reform that has ever effectively reduced deficits.

November 07, 2006

Privatizing Tax Collection?

The IRS is contracting with private debt collection agencies that are given the task of locating delinquent taxpayers and requesting payment. While many critics in Congress and elsewhere have raised concerns over possible privacy violations, there is actually a much greater reason for concern: The private collection agencies are being paid to do something the government could do more cheaply and effectively.

One of the appropriations bills passed by the House of Representatives before adjournment included a provision that prohibits the IRS from taking this action, which was originally authorized in the tax cut legislation enacted by Congress and the President in 2004. The Senate has not yet passed its version of the appropriation bill (one of many that the lame-duck Congress will attempt to work out when it returns to Washington in a week). As of now, the IRS is moving ahead with its plans. The sponsor of the provision, Rep. Steve Rothman (D-NJ), as well as the National Treasury Employees Union cite the risk of identity theft or other improper uses of taxpayer information, as well as the widely shared belief (shared even by the IRS Commissioner) that federal employees could do the job more cost-effectively.

The privacy concern is a legitimate one but is probably dealt with under the restrictions placed on the private collection agencies. Their tasks are only to locate and contact taxpayers, obtain financial information about them and ask them to pay their debt either in full or in installments. They cannot enforce payment in any way and taxpayers can opt to work with IRS employees instead after they are contacted. The private agencies cannot contact the taxpayer's employer, bank or neighbors.

The much greater concern is that this is a ridiculous waste of money. IRS Commissioner Everson admitted in a hearing before the House Appropriations Committee in March that using the collection agencies will actually cost more than using federal employees. But it was basically assumed that Congress would not want to fund an expansion of IRS staff. The program was supposed to be started with an appropriation of $54 million (which would be blocked by the Rothman amendment) and then the private agencies would be paid out of a revolving fund of tax revenues that are collected in the program. But the private agencies will receive commissions of up to 24 percent of what they collect, while it's argued that IRS employees could collect the same debts for a cost of just 3 percent of what they collect.

Everson said that the real factor preventing Congress from simply hiring more IRS employees to do the job is the federal budget process. The budget rules would require that Congress recognize the cost of expanding IRS staff (and that cost would show up as an expenditure each year) but not the much larger amount of revenue that the new employees would be bringing in after they are hired.

The idea of using private collection agencies is not new. There was a pilot program in 1996 that was ended early because it resulted in only a few million collected while the direct costs and the costs of using IRS employees to establish the program were both more than that. To the IRS's credit, this program is probably better than the 1996 version: the private agencies were paid a fixed fee in 1996 instead of a commission based on what they collected, and they were really just reminding debtors about the taxes rather than trying to work out resolution.

Nonetheless, there is reason to be skeptical and the Government Accountability Office has now gotten into the act. About a month ago the GAO issued a report questioning the way the IRS is evaluating the private debt collection program and said one concern is that " will not compare the results of using PCAs with the results IRS could get if given the same amount of resources, including the fees to be paid to PCAs, to use in what IRS officials would judge to be the best way to meet tax collection goals."

In other words, the IRS's evaluation won't include the commissions paid to the private agencies as program costs.

Colleen M. Kelley, the President of the National Treasury Employees' Union was a little more blunt, calling the program "a direct handout to the private sector, which won't generate an appreciable return to the Treasury and will cost taxpayer's money."

November 06, 2006

Let the Sunshine In!

When it comes to corporate accountability and ensuring that the public is informed of corporate negotiations advocates have long claimed that sunshine is the best disinfectant. The Times (Gainesville, GA) writes a very compelling opinion piece that describes why corporations and state and local governments shouldn’t be able to make deals behind closed doors far from the state’s open records law.

Georgia’s Sunshine law provides for public knowledge through both open records and open meetings.

“Georgia’s Open Records Law provides the public with broad access to governmental records and documents. The public has a right to see, inspect and copy all public records….Georgia’s Open Meetings Law requires that state and local governmental bodies conduct their business so citizens can review and monitor their elected officials and others working on their behalf. The Law requires that government meetings be open to the public. The Law also requires governmental bodies to provide reasonable notice of all meetings.”

Some business leaders in the state fear these sunshine laws. They say that keeping business practices confidential is more important than public disclosure. Yet clearly the state has been able to attract businesses and factories even with the sunshine laws in place.

Sunshine laws are an important tool in the public disclosure toolbox. The public has the right to know how their tax dollars are being spent. For more on this basic component of accountable development check out this reform fact sheet from Good Jobs First.

November 03, 2006

Tax Preparers and Buggy Whip Makers

If you're reaching retirement age, you can apply online for Social Security. You can also apply for unemployment benefits or renew your driver's license online in some (maybe most) states. We live in a technological golden age for people who want their interactions with the government to cost little in terms of time, money and inconvenience.

So, you say to yourself, I think I'll file my taxes online now and be done with paper forms and the mailing. Surely the government can set up some online forms that I can use easily, especially since my taxes are relatively simple - it's not like I've got trust funds, stock options or a tax shelter in Bermuda or anything that would make my taxes complicated.

So why is it that when you try to use Free File, instead of just getting one simple online form you're presented with a long complicated list of online tax services provided by private companies with complicated fees and endless advertisements for things that have nothing to do with getting your taxes done?

It appears that a small group of people who are paid to prepare people's tax forms don't want to lose any of their business. Even though the most straight-forward and obvious answer would be for the government to provide a single online portal where you could do all your taxes, these private companies have clearly lobbied to get in on the action and blocked the government from doing that.

At issue is a question that reaches the core of our politics: Which goods and services can be most efficiently provided by government and which can be most efficiently provided by the private sector? There are those on the right who would say almost everything is best provided by the private sector but that claim doesn't withstand the facts. For example, it has been noted that while the cost of healthcare is rising, expenditures on Medicaid and the traditional Medicare program have risen more slowly than those of HMOs, partly because there is less administration and billing in a single-provider program.

Arguably, online tax services are another area where the government could more efficiently provide a service. New technology, provided by or at least sponsored by the federal government could create a new advance for taxpayers - a simple, online portal where most everyone can get their taxes done for free and without hassle. The problem is that we have a political system that allows special interests - in this case tax preparation companies - to block this advance for their own gain, resulting in a less efficient outcome for our society as a whole.

Now it's probably the case that the rich will always need tax preparers in some manner - and that the extremely rich will need the best tax attorneys money can buy. When you have a lot of income from a lot of different sources, you can't just file the 1040 and forget about it. But for the rest of us, technology ought to do away with the need for any written forms and any adding and subtracting of figures - either by the taxpayer or by a paid tax preparer. It may be unfortunate for the tax preparers that serve middle-class clients. But frankly, we can't protect the jobs of people working for tax preparation companies any more than we protected the jobs of buggy whip makers.

Conservatives might be quick to point out that buggy whip makers lost their jobs because of advances made in the private sector whereas what's proposed here threatens to use the government to push out private sector companies. So what? That only is of concern if you assume that the only legitimate advances in efficiency are those made solely in the private sector, and that government is incapable of providing the most efficient outcome.

In comparison to the free market rhetoric of today's politics, it may sound radical to say the government can do anything more efficiently than the private sector, but this proposal is not radical. The idea originated with the Republican Chairman of the Senate Finance Committee, Charles Grassley (R-IA), hardly an economic radical. Grassley is becoming unhappy with the IRS's Free File Program and has asked to GAO to determine whether it would be feasible for the IRS to provide free online tax preparation.

He has also written a letter to the IRS Commissioner in light of a report from the Treasury Inspector General for Tax Administration (TIGTA). The report finds, among other things, that 39 million taxpayers became ineligible for free online tax filing after the consortium of companies providing the online services renegotiated their contract with the IRS last year and included an income limit (AGI no greater than $50,000) for free service. (Grassley points out that this occurred the same year the IRS ended its TeleFile program which allowed some taxpayers to file over the phone for free.)

The TIGTA report also finds that the income limits caused many people to eschew online filing (participation dropped by 23 percent in 2006) even though most people sending in paper returns actually prepared them on a computer. If those people had just filed online, TIGTA says the IRS would have saved over $100 million in processing costs. The Taxpayer Advocate Nina Olson (who supports the idea of the IRS providing a portal for free online filing) says the fees that now apply to some people aren't unaffordable, but it just "rankles them" that they would have to pay in order to pay their taxes.

Grassley has also complained that those who are able to use the service are assaulted with advertisements for all sorts of products that are not needed to get your taxes done, ranging from high-interest refund anticipation loans to one offer of a tax preparation franchise for $15,000. Some of the companies charge fees for things like resetting a password or obtaining additional forms needed to complete taxes.

When the new Congress meets for the first time next year, they might be looking for something they could accomplish that would be relatively simple and that would win praise of ordinary Americans everywhere. They should consider making hassle-free online tax filing available for all.

November 02, 2006

Battle Continues Over 501(c) Organizations' Election Activities

Campaign season would not be complete without allegations of illegal attempts to influence elections. Public Citizen has asked the IRS to investigate the U.S. Chamber of Commerce, which has publicly boasted of spending millions from 2000 through 2004 to elect business-friendly state supreme court justices, attorneys general and members of Congress, yet has reported far less political spending on its tax forms. In fact, for 2000 through 2003 the Chamber didn't report any political spending despite stating publicly that it dumped $6 million on state races in 2000 and planned to dump $40 million on state and federal races in 2002.

The problem is that the Chamber of Commerce, a non-profit organization under section 501(c)(4) of the tax code, gets special tax treatment for its expenditures on those activities that are NOT related to influencing elections and is only allowed influence elections so long as that is not their primary activity. In other words, if Public Citizen is right, the Chamber avoided reporting these activities in order to save on taxes.

This is only one example of the disputes over non-profits and political activities. It gets nastier when the conversation turns to those organizations subject to section 501(c)(3). They're not supposed to engage in political activities at all (that is, they're not supposed to spend money or raise money helping candidates win elections) because they get even better treatment under the tax code. Contributions to 501(c)(3)s are deductible, and the taxpayers clearly don't want tax breaks used to subsidize a particular candidate's campaign.

But some 501(c)(3)s, especially churches, have a hard time knowing exactly what activities are political and therefore forbidden. Americans United for Separation of Church and State has warned churches that voters' guides being distributed to them by the Christian Coalition may cross the line. The guides present the results of questionnaires given to candidates that require them to give simple, one-word answers no matter how complicated the issue is and no matter how biased the language of the question is. They also sometimes list responses based allegedly on a candidate's public statements even though he or she actually did not respond to the questionnaire. Americans United warns that these tactics, some of which the IRS has warned specifically against, may cause a church that distributes them to endanger its 501(c)(3) status.

As we have mentioned here before, the IRS needs to have clearer rules on what constitutes political activities are not permissible for non-profits. Organizations may be intimidated from even speaking out on political issues - which they are entitled to do. But so far there have been very few that have actually lost their tax-exempt status due to violations of these rules. According to OMB Watch, no violation was found in most of the IRS investigations of 501(c)(3) organizations carried out in 2004. Only 58 entities were found to have engaged in partisan activity that year (out of more than a million tax-exempt entities) and in only three of those cases were the violations serious enough to cause the IRS to revoke tax-exempt status.

Nonetheless, some believe that the tax code should include special privileges for churches that want to engage in politics. OMB Watch reports that just before Congress adjourned to hit the campaign trail, Senator James info (R-OK) introduced S. 3957, a bill to allow churches to speak out on "public issues, election contests, and pending legislation made in a theological or philosophical context." In other words, Inhofe believes that ministers should be able to tell their congregations who to vote for or what positions to support and get tax breaks for doing it. What's odd is that this privilege would only be granted to churches and not other 501(c)(3)s, which would effectively discriminate against other organizations. One hates to be cynical but it's hard to avoid the conclusion that the conservative Senator believes churches are more likely to endorse candidates of his party than are other types of non-profits. A similar bill was introduced in the House, the so-called "Houses of Worship Free Speech Restoration Act." Although it didn't get anyway this session, it is sure to come back.

Fiscally Irresponsible Congressmen Not Welcomed in Governors' Mansions

The President's policies are starting to become radioactive and Republican members of Congress seeking higher office are starting to feel the effects. Those in gubernatorial races are having a particularly difficult time convincing voters they can manage a state's budget because of their association with the President’s fiscal policies and the staggering national debt. In Wisconsin, Rep. Mark Green is facing an uphill battle to unseat incumbent Governor Jim Doyle. After criticizing Doyle’s tax and spending policies, the governor’s campaign responded that “Green has been a rubberstamp for President Bush and Republicans in Congress who have transformed the largest surplus in history into the largest deficit in history.” Colorado’s Rep. Bob Beauprez is receiving similar criticism as he trails behind his opponent, Bill Ritter, in that state’s gubernatorial race. In Iowa, Secretary of State Chet Culver is leading Rep. Jim Nussle, who is certainly associated with the President’s fiscal recklessness because of his position as Chairman of the House Budget Committee.

Of course, there are federal issues people are paying more attention to than tax and fiscal policy (like the war and immigration). But it's nice to see that the greatest reversal in our fiscal health in decades is thoght to be worth a mention also.