July 31, 2007

Nevada Elections: For Sale, $200K Or Best Offer?

Nevada anti-tax activists are taking another swing at an effort to impose a California-style property tax cap in the Silver State. Their goal is to get a ballot initiative on the November 2008 ballot which would cap property tax rates at 1 percent of a home's value and restrict the annual growth of property taxes to 2 percent a year.

The initiative process has been bad-mouthed for the ease with which rich out-of-staters can bankroll the process, turning what's supposed to be a triumph of the little man into a tool for corporations and the wealthy to get their way. So far, the new Nevada tax cap effort sure makes it seem that the bad-mouthers are right:
[S]upporters are flush with a $200,000 contribution to help ensure a measure qualifies for the November 2008 ballot. The $200,000 from a thus-far anonymous contributor, which is already in the bank gathering interest, will allow the group to hire professional signature gatherers rather than rely solely on volunteers, she said.
But the cost estimate to get the necessary signatures is about $400,000, which is why a serious solicitation effort is now under way to match the $200,000... Two previous efforts to qualify a measure for the ballot failed when an insufficient number of valid signatures of registered voters were collected. The efforts were both done primarily with volunteers.
Could there be any more stark way of displaying the anti-democratic tendencies of the modern ballot initiative than this? One guy--one guy-- is buying a spot on the November 2008 ballot.

Of course, even if these folks are able to purchase space on the 2008 ballot for their property tax cap initiative, they'll still have to convince the public that it's a good idea. And the good news is that if proponents' rhetoric stays as dumb as it currently is, they'll be facing an uphill battle:
Las Vegas resident Gerry Lock, a self-described escapee from the San Diego area, said he supports the proposal and has donated $100. The Locks benefited from Proposition 13, which took effect in 1978.
"There were people at the time who were being priced out of their homes," Lock said.
So (a) if Prop 13 was so hot, why did this guy have to "escape" from California, and (b) the real question proponents of a prop-13 clone have to answer is, why is a 1% property tax cap the best approach to keeping people from losing their homes?

Voters have come a long way on this issue since the late 1970s, as the failure of Prop 13 clones in other states has shown. If the Nevada anti-tax movement's Daddy Warbucks is able to get his misguided tax cap on the ballot, it will be fun to see if advocates of the Prop 13 clone can come up with some actual principled arguments in favor of their plan.

My money (considerably less than $200K) says they can't.

July 30, 2007

Burman: End Capital Gains Tax Breaks

The ongoing brouhaha over private-equity tax dodges has, in general, focused narrowly on the question of whether employees of private-equity firms such as Blackstone should be eligible for the special 15 percent top federal income tax rate on capital gains, which is less than half the 35 percent top rate for salaries and wages. Citizens for Tax Justice has argued convincingly that private-equity folks are abusing the capital gains loophole, and that their income should be taxed as regular wages at the 35 percent top rate.

But as the Urban Institute's Len Burman reminds us in today's Washington Post, there's a much bigger question lurking in the background: why should capital gains be taxed at a lower rate than salaries to begin with?

The most frequently-cited rationale for such a tax break is its impact on investment. Burman makes two points here:

1) the most obvious incentive this creates is for people to disguise their wages as capital gains. Burman argues that systematically undertaxing capital gains gives wealthy Americans "a huge incentive to make income look like capital gains rather than wages." If a cosmetic change can result in a tax break, people are likely to go for it. This point was being made long before Blackstone became a household name, but seems especially prescient now.

2) To the extent capital gains tax breaks actually are inluencing anyone's behavior, they're encouraging people to do things that the market, on its own, says are unproductive. Here's Burman:
Wealthy individuals invest enormous sums in schemes to convert ordinary income into capital gains, often making investments that would make no sense absent the tax savings. Capital is drawn away from productive investments, hurting the economy. Similarly, the highly talented people who dream up tax shelters could, in a better world, do productive work.
In short, there are plenty of reasons to think that the main investment incentives created by the lower federal capital gains rate are for wealthy people to (1) fake it and (2) do something just for the tax break.

As Burman also notes, there are other reasons to question capital gains tax breaks, not least of which is their horrendous impact on tax fairness. CTJ's most recent capital gains estimate shows that the wealthiest 1 percent of Americans enjoyed more than two-thirds of the benefits from this tax break in 2005.

Of course, eliminating capital gains tax breaks from the federal income tax aren't on anyone's political radar right now. But Burman deserves kudos for reminding us that there's an underlying tax inequity here that goes far beyond the alleged malfeasance of the private equity folks.

July 29, 2007

Cannibalistic Gambling in Indiana

As more and more states turn to legalized gambling as a less-unpopular alternative to conventional taxes to help pay for public investments, some observers are starting to wonder: is there a limit to how much gambling Americans will indulge in?

The folks who operate Indiana's Belterra Casino sure think so. In the immediate wake of legislation passed by the Indiana legislature this spring, which allows two Indiana racetracks to install up to 4,000 slot machines, the company that owns Belterra, Pinnacle Entertainment, announced that they are "postponing indefinitely" a planned expansion of the casino. Here's the complete explanation from Pinnacle's first-quarter 2007 financial statement:
The Indiana legislature recently authorized the installation of 2,000 slot machines at each of two racetracks in the Indianapolis metropolitan area. The Company has postponed indefinitely its planned construction of a 250-guestroom addition at Belterra due to the significant expansion of gaming in this market. The Company's Belterra casino is approximately two hours from Indianapolis, which is the third-largest market for Belterra, after Cincinnati, Ohio and Louisville, Kentucky. The $45 million of capital investment that had been planned for such expansion will be redeployed to other markets.
The implication is that there is a point at which Indiana's appetite for gambling will become saturated-- and that Indiana has maybe reached that point.

This isn't the end of the world for Pinnacle: as they sniffily note, their investment will be "redeployed to other markets"-- but should give pause to lawmakers in Indiana who are banking on the new slot machines to help pay for property tax rebates later this fall.

And for lawmakers in neighboring Illinois and Kentucky who are espousing gambling as a painless source to their tax system's woes, this news should make them seriously rethink their strategy.

July 24, 2007

Surprise - A Bush Tax Cut Policy that Went to Pharmaceutical Companies and Didn't Help Working Americans

The New York Times today reports that pharmaceutical companies are paying corporate taxes at far below the statutory rate of 35 percent and are not creating new jobs for American workers despite taking advantage of an important break on their taxes enacted in 2004.

The 2004 tax break law enacted by Congress and the President shortly before the election included a provision providing an amnesty allowing companies to repatriate offshore profits and pay only a 5.25 percent tax instead of the usual 35 percent corporate tax. The drug companies brought around $100 billion back, used the tax break, and promptly began to lay off American workers.

And it's not like the drug companies have stopped trying to avoid their taxes now. The article says that Eli Lilly paid only about 6 percent in U.S. federal taxes on its profits of around three and a half billion dollars last year.

Part of the problem is that many large corporations manipulate "transfer pricing" which is basically the accounting that must take place when divisions of a corporation that are based in different countries "sell" and "buy" products or services to and from each other. In theory, if an American division of a company buys something from its division in another country, then that purchase can be deducted for American federal tax purposes. The foreign division has revenue and may have a profit, but in theory it's the business of the foreign country to tax that.

The problem is that a drug corporation could transfer its patents and trademarks to a division in a low-tax foreign country with little transparency (a tax haven) and then that division can "charge" the American division for the use of these "intangibles." The accounting can be done in such a way that the American division appears to have no profits after making these payments, and all the profits appear to go to the division in the tax haven.

One approach that would address transfer pricing directly might change how we decide which country gets to tax corporate income in the first place. We could move to a system in which we taxed corporate income based on which country sales are in (or a combination of sales, payroll and assets) since that might be a simpler and more transparent way of apportioning taxes on multinational corporations.

July 19, 2007

NYC Congestion Charge: Dead for 2007?

New York City Mayor Michael Bloomberg's plan to reduce traffic congestion in the city by charging a steep toll for drivers to enter the core of Manhattan may not be quite dead for the year-- but it's pretty close. The New York Times has the story.

State Assembly members who opposed the plan said Bloomberg didn't make enough of an effort to explain it to them:
[L]egislators complained that he had failed to answer basic questions about the proposal, which has never been tried on a broad scale in any American city.
But Bloomberg was having none of this:
In a tense meeting on Monday, testy exchanges erupted between the mayor and the Democratic state senators he was trying to win over. At one point, according to several people present, Mr. Bloomberg told the senators that his administration had sent plenty of information about his plan in the mail, and that it was not his fault if they had not read it....The mayor moved from meeting to meeting in the Capitol, his expression grim, and he declined to take questions from reporters. He did take a shot at his critics on WROW-AM radio in Albany on Monday morning, saying, “Anybody that says we didn’t have enough time to look at this is ridiculous.
“They don’t read the mail or they don’t read the newspapers,” he said, adding that it would be difficult “to not know about congestion pricing if you can read.”
Which is both true and not true. The basic 411 on the Bloomberg plan has been all over the papers-- everyone knows commuters would get dinged to the tune of $8 every time they drive into the city during peak hours. But the all-important details remain a bit fuzzy, at least to this distant observer.
But the Times article hints that this is a red herring: the real reason for the congestion pricing flap is that elected officials on both sides are thinking politically. The perception is that Bloomberg is in a hurry to push this plan through in time to burnish his credentials as a green-friendly presidential candidate in 2008:
Democrats in both chambers blamed the mayor for trying to rush a complex plan through the Legislature — the proposal was first mentioned in April, in an Earth Day address by Mr. Bloomberg.
And some Dems in the legislature are seeking payback for Bloomberg's backing their opposition in the last election:
Senate Democrats were particularly upset when the mayor, who recently left the Republican Party, told them he was “not political.” Several tartly asked him why he had then supported their Republican opponents.
All of which is too bad. As we've noted before, there are definitely reasons to like (and to dislike) Bloomberg's plan. Politics should not be among them.

July 16, 2007

Lessons To Be Learned from London’s Congestion Charge

In early 2003, London imposed a highly successful ₤5 ($10) [now ₤8 ($16)] ‘congestion charge,’ a daily fee for driving or parking on public roads within the central city aimed at reducing traffic congestion during peak workday hours, 7 a.m. to 6:30 p.m. As New York’s Mayor Bloomberg has now proposed a similar charge for parts of Manhattan, it’s worth it to take a look at some reasons why London’s program worked and if it would be a viable option for New York City. New York’s plan would be similar in charging most drivers $8 to enter Manhattan south of 86th Street from 6 a.m. to 6 p.m. weekdays.

Payment - The London system allowed for extreme ease of payment which most certainly helped its appeal. The charge could be paid on a daily, weekly, or annual basis in advance and also on the day of travel into the city, before, during or after your trip. Additionally, there were a number of methods and places to pay the fee from retail outlets and kiosks, to telephone, internet and text messaging options. New York has the resources and sophistication necessary to implement all the methods, and should in order to allow travelers the most pain-free payment possible.

Revenues - In London, approximately 80 percent of revenues acquired from the tax each year are earmarked for transportation system improvements in the city including expansion of subway service and bus lines. The fund dedication was a major selling point for the program. Improvements to the public system made it a more desirable option as driving became more costly, and expansion to new areas ensured that lower-income households had proper access which eliminated some regressive effects. The New York plan clearly proposed public transit improvements accompanying the charge and this process would be necessary on a continued basis. An expansion of the public transit system must accompany any congestion charge program if you rightly assume that the fee will encourage more people to use public transit.

Enforcement - Londoners have also become strangely accustomed to the thousands of tiny cameras positioned around their city which enable the congestion charge program to be easily administered. Cameras at entrance points into the charging zone recorded snapshots of each cars license plate. At the end of the day, these images were then compared to generated lists of who had paid the fee, making it simple to identify those who had evaded the law. This could be the most contentious point among Americans who have consistently opposed systematic invasions of privacy, no matter what the benefit. The New York plan did include the proposed installation of such a security systems, but it is unclear how much support exists for this method.

The London congestion charge did prove that such a tax actually works to decrease traffic levels while still being affordable. The number of private vehicles in central London dropped 27% from 2002 to 2003 while the number of buses, taxis and bicyclists all increased significantly indicating a shift to more traffic friendly forms of transportation. Average speeds during high congestion hours have risen 17%, from 8.9 mph to 10.4 mph. Minutes of delay experienced dropped 30% from 2003 to 2005. The program did face lower revenue flows than were initially projected, but this was mostly due to success in reducing the number of drivers. Furthermore, the congestion charge has been met publicly with approval and benefits outweighing the costs almost 2 to 1.

While the implementation process would be complex and new to New York, the congestion problems and potential benefits from reduction could be significant enough to outweigh initial discomforts. The New York proposal has many of the same features that made the congestion charge successful in London. Although it seems highly unlikely that Bloomberg’s proposal will pass this month given lack of support from the General Assembly, I think it remains a viable option for the future in New York or other US cities.

For more information on the London Congestion Charge see:

Leape, Jonathan. "The London Congestion Charge." Journal of Economic Perspectives, 20 (4). Fall 2006, 157-176.

July 13, 2007

The Definition of "Rich"

The Hill ran a story today that makes us want to pull our hair out. The Democrats, the story goes, can't decide at what income level a person is rich and not in need of more tax breaks. Clearly, if we're going to address health care, education and other priorities, at very least we need to close some tax loopholes and let some tax breaks expire. But whose loopholes or tax breaks should be on the table? The common response is to say only those that go toward the "rich," but no one can agree on who is rich.

John Kerry, during his 2004 presidential campaign, often spoke of ending the Bush tax breaks only for those with incomes above $200,000.

According to IRS data, in 2004 only 2.3 percent of taxpayers had adjusted gross income over $200,000. Now some members have been talking about doing away with tax breaks only for families with incomes above $250,000. Based on the IRS data, we recently estimated that only 1.7 percent of taxpayers had adjusted gross income over $250,000 in 2004. Presidential candidates Obama and Clinton are apparently using $250,000 as their threshold now, whereas Edwards is sticking to the old $200,000.

But it gets worse. Senator Chuck Schumer of New York seems to think taxes should only be raised for people with incomes of over $400,000. (We're not even going to bother to estimate what fraction of a percent of the population that includes.) Some of the Presidential candidates really prefer to duck the question altogether when asked. Edwards told a reporter he didn't know what a rich person was, while New Mexico Governor Bill Richardson said that the term middle-class is “about a lot more than money” but is “anybody who has to work for a living.” This is quite possibly the most ridiculous thing we've heard from the Democratic candidates so far. (Well, I guess I'm not counting Gravel.)

Casual conversations with Hill staff suggest that there is massive misunderstanding on this issue. When you ask someone in Washington, DC, what percentage of the American public they think makes $200,000 a year or more, they're likely to give you a number vastly higher than the correct number.

Part of the problem is that many elites who are influential (either because they work on the Hill or write for newspapers) live in big cities with a high cost of living. I understand very well that $200,000 just "doesn't seem rich" to people who live in the most expensive neighborhoods of the most expensive cities like Washington and New York. Fine, these cities are expensive. But why the rest of America should have to accommodate our living in these cities is completely beyond my understanding.

No "Good Will" for Blackstone's Tax Hijinks

As public anger over the tax avoidance techniques used by private equity companies continues to grow, David Cay Johnston is (justly) stoking the fires even more, with an outstanding piece in today's New York Times describing a clever, outlandish and completely legal tax maneuver by one of the most high-profile of these companies, the Blackstone Group.

The headline: Blackstone "has devised a way for its partners to effectively avoid paying taxes on $3.7 billion, the bulk of what it raised last month from selling shares to the public."

At the heart of the story is the concept of "good will" and how its tax treatment has changed in the past two decades.

A little background: when one corporation buys another, it pays not only for the acquired company's buildings, machines and so forth, but also for its so-called "intangibles" or "goodwill." These intangibles include such things as the purchased company's trademarks, trained workers, customer lists, and the expectation that its customers will continue their habit of buying its products. In a word, goodwill can be thought of as a company's reputation.

For many companies, this intangible "goodwill" is a pretty big chunk of the company's value. A company like Blackstone doesn't have any factories or valuable machinery, for example; most of what makes them valuable is their expertise, experience and reputation.

In general, a company can write off the value of its assets over time. A company's factories and machinery gradually depreciates in value, and companies get to write off the annual loss in its value as a cost of doing business. But companies can't write off their goodwill. This makes a fair amount of sense: take a company like Coca-Cola. Its factories and bottling machinery will deteriorate over time. But its reputation for making tasty soda pop will remain undiminished (unless they start making insane marketing decisions). So you shouldn't be able to write off the value of something that isn't losing its value.

But, as a result of a poorly-thought-out tax change enacted in 1993, there is one condition under which companies are allowed to write off goodwill: when they inherit the goodwill as the result of purchasing another company. And legally, that is exactly what has happened with the Blackstone IPO: when the private company Blackstone went public, it basically created a whole new company. The new (public) Blackstone basically bought the assets of the old (private) Blackstone for $4.75 billion. Of that, it's estimated that about $3.7 billion was goodwill.

(Goodwill can be calculated as a residual: if Blackstone is worth $4.75 billion, and you can only identifying tangible assets (buildings, machinery, etc.) worth $1.05 billion, then the remainder of the sales price must be goodwill.)

So the newly-public Blackstone gets to write off their goodwill, all $3.7 billion of it. There are rules, of course: the deductions have to be spread out over a 15-year period, in the same general way that tangible assets are depreciated over time. But eventually, they'll write it all off.

Of course, the underlying assumption (that Blackstone's existing goodwill will all be frittered away 15 years from now, leaving a worthless husk behind) is absurd. Unless the new leadership at Blackstone drives the company into the ground, the value of its goodwill will likely not diminish at all. But for tax purposes, they get to pretend it will.

Johnston has done a terrific service by publicizing this arcane and hard-to-understand loophole. (I've read the article a few times and I'm still not 100% sure I get it.) But the real story isn't that one much-vilified company-- Blackstone, the Wal-Mart of 2007-- has found yet another seedy tax dodge. It's that Congress actually approved this absurd tax break back in 1993.

When Congress was considering enacting this tax break in 1992, CTJ's Robert McIntyre identified one of the most disturbing implications of such a move in a Washington Post op-ed, asking "Does it really make sense to give Wall Street new incentives to bring back the merger mania of the 1980s?"

And he was right. It helps that the company most visibly taking advantage of this unfair tax break is already public enemy #1. But Congress should be asking itself why a tax incentive for mergers makes sense in general, rather than focusing solely on the malfeasance of Blackstone. And this is the one shortcoming of Johnston's article-- he's so intent on (correctly) skewering Blackstone that he doesn't discuss the question of where this tax break came from and whether it should be repealed. But that's a minor quibble in the context of an article that will hopefully do a lot to raise the visibility of this arcane, but important, tax issue.

July 12, 2007

Limiting State Taxes to Companies "Physically Present" in the State: Don't Be Fooled, It's Not as Reasonable as It Sounds

Congress Could Help States Rely on Sales Taxes for Remote Sales

The growing popularity of online retailing over the past several years created a lively debate over the proper role of the government in the online marketplace. One of the most contentious areas of debate revolves around the application of sales taxes to internet sales. Current interpretations of the U.S. Constitution do not allow a state government to require out-of-state companies (companies that are not "physically present" in the state) to collect sales taxes when they sell products or services to residents of the state. These "remote sales," which are often telephone, catalogue, or internet sales, generally go untaxed as a result.

More than a third of all state revenues come from sales taxes currently. These sales tax receipts are forecast to decline in the following years as more and more people switch from shopping at physical stores, which can be required to collect sales taxes, to online retailers based in other states, which cannot be required to do so. This double standard not only deprives state residents of sales tax revenue, but greatly disadvantages physical stores, who must charge higher prices as a result of the sales taxes they pay.

The Supreme Court's 1992 ruling in Quill V. North Dakota was the most recent explanation of this rule. The Court found that mastering the complex sales tax system for every state and county in the union would be an unfair burden on business. However, this same ruling also provided the solution: Congress could grant states the power to require remote sellers to collect sales taxes, and states could facilitate this by simplifying and standardizing their sales taxes. Since the decision, fifteen states have joined the Streamlined Sales and Use Tax Agreement, which unifies the sales tax statues in member states. Senator Michael Enzi (R-WY) has introduced the bill required to give states this new power. There is no good justification for allowing the status quo to continue. Senator Enzi's bill would bring a great deal of fairness to state tax systems.

Congress Might Make It Harder for States to Tax Income of Businesses from Remote Sales

That limitation holds for sales taxes. But when it comes to corporate income taxes (or other types of business activity taxes), the U.S. Supreme Court has never said that the business in question must be "physically present" in the state to be subject to taxation. Business interests have tried to establish such a rule in the courts, but have failed so far, and the Supreme Court recently refused to hear two cases where this argument was made.

However, Congress created a physical presence rule legislatively in 1959, banning states from taxing the income from the sale of physical goods to a state resident if the business itself is not "physically present" in the state. That law is still on the books, and Senators Chuck Schumer (D-NY) and Mike Crapo (R-ID) are sponsoring legislation to extend this rule to other types of sales (like the sale of services). The legislation, called the Business Activity Tax Simplification Act of 2007 (or BATSA) mirrors bills that have been introduced for several years.

While the "physical presence" rule might sound sensible, it actually includes a maze of loopholes and leads to all sorts of absurd results. For example, say a company takes orders from a location in State A and ships its products from State A. It could sell 90 percent of its products to customers in State B and send hundreds of trucks and thousands of salespeople into State B but it still can't be taxed by State B. Another indefensible result of the "physical presence" standard is that some corporate income is never taxed at all.

Perhaps most alarming to state taxpayers, extending the "physical presence" rule would also mean giving even more tax advantages to large out-of-state corporations that are selling services to people in the state over in-state business owners, who can't hide behind this rule to reduce their tax bills.

For more information on the "physical presence" rule and how it can harm state residents, see the ITEP paper on this topic.

July 10, 2007

Key Committee Chairman in House to Use Strange Maneuver to Block Carbon Tax

John Dingell (D-MI), chairman of the House Energy and Commerce Committee announced last week that he would propose a carbon tax that would add 50 cents to the total cost of a gallon of gasoline -- just to prove to the world how unpopular it is. Dingell told reporters that he expected to receive criticism that would put an end to further discussion of a carbon tax.

Dingell's experiment seems a little skewed to say the least. If Congressional leaders really were considering a carbon tax, they would likely step forward cautiously, taking time to educate the public and build their case that a crisis is developing which warrants this type of tax, working behind the scenes all the while to address members' concerns, and then at the right moment the legislative proposal would be unveiled in detail. Dingell's bid is clearly a move to rile up as much opposition as possible to a policy he opposes, which he will point to in the future as precedent or proof that the carbon tax is politically unpalatable. He is, after all, from the Detroit suburbs.

Which is unfortunate because a carbon tax is at least worth debating. There are some significant problems with the concept. As with any tax on consumption, a carbon tax burdens people of low incomes disproportionately, making this tax regressive. But it's worth considering whether Congress could take steps that would balance out these aggressive effects and use the carbon tax as a way of reducing the emissions that cause global warming.

Dingell, who is to produce some sort of climate change legislation sometime soon, apparently favors the cap-and-trade concept, which would require Congress to set an overall limit for total emissions and then perhaps auction off permits to pollute that would keep total emissions under that limit. The permits could then be traded from those companies that find they're able to reduce pollution quite easily to those companies that find they need more permits to continue operating at a profit. In theory this could lead to a more efficient outcome, but many economists have questioned whether the level of bureaucracy involved and the need for detailed rules will make it difficult to create a cap-and-trade program that is successful.

Strike One for "Congestion Pricing" in New York City

New York City Mayor Michael Bloomberg's plan to enact "congestion pricing"-- that is, an $8 fee drivers would pay for entering the core of Manhattan by car-- has hit a serious road bump. The New York Times reports that the state Assembly has come up with an alternative plan for solving the city's transportation crunch. Turns out the Mayor had it all wrong: what's needed is a tax cut, not a tax hike. The Assembly wants to use a carrot instead of a stick:
[T]he new proposal, sent to Assembly members on Sunday night, would attempt to ease traffic congestion with tax credits for businesses that encourage employees to telecommute, for employees who use car pools and for commercial drivers who enter Manhattan before 6 a.m. and after 9 p.m.
Opponents of the Mayor's plan have two main beefs: an $8 fee is more regressive than most any other tax you'll see, and the fee shouldn't be implemented until there are more generally available public transit alternatives available for New York City commuters. But a Bloomberg representative says the second charge is hokum:
A spokesman for Mr. Bloomberg said that the mayor’s plan called for large-scale improvements to the city’s mass transit system before the start of congestion pricing. “None of the other potential plans provides a revenue stream to fund $30 billion in mass transit improvements over the next two decades,” the spokesman, John Gallagher, wrote in an e-mail message.
The regressivity charge is being contested as well. Here's another quote from the Bloomberg camp:
“It’s not regressive, because those who drive to work make 33 percent more than those who take the subway to work from the four boroughs outside of Manhattan.”
(Of course, in the tax world, averages aren't everything: even if Manhattan commuters tend to be wealthy, the $8-a-day fee will be felt most acutely by however many low-income commuters end up paying it.)

The New Yorker's Elizabeth Kolbert agrees that a congestion charge wouldn't be regressive, but she's not relying on statistics to prove the point. Rather, she thinks low-income people wouldn't be hit by the congestion charge because driving into the city has already become costly enough that fixed-income families aren't doing it:
In fact, the poor don’t, as a rule, drive in and out of Manhattan: compare the cost of buying, insuring, and parking a car with the seventy-six dollars a month the M.T.A. charges for an unlimited-ride MetroCard.
This refreshingly out-of-touch position ignores the question of whether public transit options are currently available for commuters living in various New York suburbs. Now, don't get me wrong-- Kolbert may be correct in her assertion (she offers no proof, so it's hard to tell!). But just about everyone, including Kolbert herself, is making the case that no matter what tax-related measures are enacted to curb congestion, they will need to be accompanied by an effort to make public transit options more generally feasible, which is basically an admission that public transit isn't all that great right now.

In other words, for commuters living in areas that simply don't have easily available public transit, it doesn't really matter that public transit is already cheaper than owning a car. If it's not available, the price doesn't matter.

In the end, both of the charges levelled against Bloomberg's plan are worth worrying about. Even if Bloomberg's and Kolbert's arguments are right, there are almost certainly plenty of low-income workers who commute into the city, and these folks will get hit hardest by an $8 congestion charge. The regressivity problem could partially be remedied by offering a low-income tax credit or rebate, although it's hard to see who would administer such a program given that you'd want residents of New York, New Jersey and Connecticut to be eligible.

The second charge is equally problematic (although not exclusive to Bloomberg's plan). Virtually any American born in the twentieth century was born and raised in a world that worships the car. Far from taking steps to encourage an urban, public-transit-based lifestyle, American public policies have always made it relatively easy to live (and work) wherever people want. From this perspective, the sudden imposition of punitive fees for those who have chosen the green spaces of the Jersey suburbs over city living arguably is pulling the rug out from under suburbanites in a way they had no reason to expect.

This isn't to argue that the congestion charge is the wrong approach, and is certainly not to say that the Assembly's tax-cutting alternative is the right answer. There's a growing belief that American consumers won't change their carbon-consuming behavior until they get hit with a pretty big stick (tax-wise, that is). This means that Americans who have organized their lives around commuting will likely face higher gas taxes and more "congestion charges" in the near future, and that's probably a necessary thing. But policymakers need to think seriously about how to avoid soaking the poor at the same time-- to say nothing of creating a universally available public transportation infrastructure.

No AMT Solution This Year?

The New York Times reports that Democratic leaders in Congress will likely duck a permanent fix for the individual Alternative Minimum Tax (AMT) this year, and will instead most likely enact another temporary "patch" to keep middle-income families from owing AMT liability.

The stakes are clear: as CTJ has estimated in the past, close to a fifth of all taxpayers will pay the AMT in 2007 if Congress does nothing this year. And in states like Connecticut and Maryland, that number will approach 25 percent.

And, as CTJ has also noted, there's a terrific option available for fixing the AMT problem: increase the AMT exemptions, and pay for it by eliminating a capital gains tax break that now dilutes the AMT's fairness. The result would be a much fairer tax system at virtually no cost to the US Treasury.

But in their wisdom, neither house of Congress has chosen this approach to AMT reform. Democrats want to increase the regular income tax rates for a small number of the wealthiest Americans and use the revenue to pay for a permanent AMT exemption increase (as well as various progressive tax cuts for lower-income working families). Senate leaders (by which we mean Finance Chairman Max Baucus) want to do a temporary AMT exemption increase, paid for by "closing loopholes."

Baucus' more cautious approach is politically grounded:
[Under the Baucus plan] Democrats wouldn't have to go into next year's election after having tried -- and likely failed -- to raise income taxes on wealthy taxpayers -- those making $500,000 or more -- back to almost what they were before President Bush took office... the tax-writing Finance Committee's chairman, Sen. Max Baucus, D-Mont., is up for re-election next year in a state whose voters overwhelmingly favored Bush in 2004...Many Democrats, including party leaders,
appear comfortable with Baucus's temporary fix rather than forcing a politically
risky vote to raise taxes when the idea isn't going anywhere in the Senate.
''If you have anything close to a marginal district, I wouldn't touch it with a 10-foot pole,'' said Rep. Paul Ryan, R-Wis.
The sad thing is that the real deal-breaker for Baucus and his ilk-- hiking the top marginal tax rate on the wealthiest Americans back near where it was pre-Bush--isn't even necessary to pay for the needed AMT fix. CTJ's plan demonstrates that simply eliminating one gaping loophole in the AMT, the lower tax rate for capital gains, would be almost sufficient to pay for a permanent AMT fix. No red-flag hikes in the marginal tax rate needed.

Of course, hiking taxes on capital gains will raise some red flags too. But from both a political and policy perspective, paying for AMT reform by eliminating a single huge tax loophole for the wealthiest Americans makes a lot more sense than simply jacking up the top income tax rate. This approach seems (to these non-politically-savvy eyes) more palatable to both House and Senate tax writers than the current "reform" options.

July 09, 2007

Florida: Proposition 13 Redux?

Survivors of California's "Proposition 13" tax revolt know that good intentions can go bad pretty fast. In particular, the lesson Californians have learned is that when you force unaffordable local property tax cuts, locals usually can't just reduce their total revenues by the full amount of the cut. Some of the property tax cut will have to be made up through hikes in other taxes or fees. And the most likely outcome is that the revenue will be made up in a way that's less visible- instead of one big tax, a lot of little nickel-and-dime stuff.

There's evidence emerging already that this is exactly what's going on in Florida, as local governments deal with the state-mandated property tax cut passed in a June 2007 special session. Florida Today has the story:
Facing a property tax shortfall of $4.1 million, city leaders may start enacting a minor tax on residents for drinking water,taking showers and filling swimming pools.
After more than an hour of debate recently, the Melbourne City Council decided to pursue a new 10 percent utility tax on water sales.
This is nothing new in Florida, of course. Local government collections from utility taxes on electricity, water and other utilities are estimated at about $1 billion for fiscal year 2007. Even in Florida, that's some serious money.

The question is, how can this tax swap be justified on fairness grounds? Lawmakers have demonstrated an (arguably sensible) aversion to taxing what they consider "necessities" such as food and utilities. The city of Melbourne is about to take exactly the opposite step, taking a path that many other Florida municipalities have already followed.

Of course, a tax on water consumption will hit businesses too. But that was also true of the property taxes the city will no longer be able to collect this year as a result of the state's actions in June. So this can't really be justified as an effort to make businesses pay more-- not that any city council member in Melbourne would have said so anyway.

The truth is most likely that Melbourne is taxing water because it's the tool that is available to them. They're doing it because the alternative is painful cuts in the services the city provides to its constituents.

This may be smart politics, at least for state lawmakers. But it's dumb policy-- and it's a policy that will inevitably make Florida's tax system even more unfair.

July 08, 2007

Live Earth: What About a Carbon Tax?

This weekend's "Live Earth" concert, designed to raise public consciousness about the earth's environmental woes (or something), is history. An as-yet-uncounted number of greens around the world have signed on to the "Live Earth Pledge," which commits right-thinking people around the planet to change a few light bulbs and forward some emails.

But as the Christian Science Monitor points out today, the Live Earth pledge is a bit light on the public policy solutions that will be needed to slow down what is generally seen as a human-influenced climate change pattern:
[A] carbon tax is not even suggested in the seven-point pledge that everyone who watches the Live Earth broadcast will be asked to sign.
This is (correctly) troubling to the Monitor primarily because the Live Earth recommendations include some pretty substantial reductions in CO2 emissions, but don't give us a meaningful way of achieving these important goals:
The Live Earth pledges do call for... a new treaty that would reduce greenhouse
gases by 90 percent in rich countries within a few decades.
Any such treaty with that kind of demand for a swift drop in CO2 output would require the kind of radical change in lifestyles that a stiff carbon tax would bring. Consumption taxes, after all, are often designed to wean people off bad behavior, such as smoking.
Anyone over 18 who attended last year's "Save Darfur" rally in front of the US Capitol in Washington, DC probably noticed the disjunction between the surplus of good intentions and the dearth of policy solutions presented at the rally-- and the unwillingness of the Live Earth people to at least talk about the carbon tax issue sounds like more of the same, to these ears. Resolution followed by inaction is arguably worse than no resolution at all, if the result is that young idealistic Americans lose faith that their resolutions can have an impact.

There are, of course, reasons to be uncomfortable with a carbon tax as a policy solution, not least of which is the disproportionate impact such a tax would have on the poorest families. And, as the Monitor's editorial points out, the elected officials among us have almost universally refrained from sticking their necks out on this issue. But the folks at Live Earth aren't running for office, and have very little to lose by at least mentioning the possibility of a carbon tax as part of the solution. Let's hope they use this opportunity to at least mention the "t word" in their discussion of how to cure our collective carbon addiction.

July 05, 2007

Could a New Federal Law Allow You to Choose to Fund Only Peaceful Programs with Your Tax Dollars?

In the previous post I addressed the practice of protesting the war by refusing to pay federal income taxes in part or in whole. I argued that this was simply not a viable form of protest. Some activists have probably foreseen that many would feel this way and have thus proposed a bill that would allow us to choose to have our federal income taxes spent only on non-military government spending. The thinking seems to be that this would achieve the same result (avoiding funding the war) as effectively or even more effectively than refusing to pay one's federal income taxes.

Unfortunately, even if this legislation is enacted, there is little reason to believe it would achieve anything concrete. Proponents of the legislation seem to know this,
saying outright that it "will have no direct effect on spending priorities." It seems the real point is to allow people to act in keeping with their moral or religious convictions rather than to have any impact on the U.S. involvement in war, which is fair enough. The bill, H.R. 1921, the Religious Freedom Peace Tax Fund Act, is sponsored by Congressman John Lewis, a great progressive hero and someone who knows a thing or two about acting on conscience. It would allow you to indicate on your tax form that you want your tax payments to go into a Peace Fund, which would only be used to support non-military programs.

But even if you simply want to know your own money is not going towards war, even that limited goal cannot really be accomplished in this way. Let's say this bill was enacted and a Peace Fund really was created. Everyone's tax dollars are fungible. If 20 percent of taxes went into the Peace Fund, the federal government could just use that money to fund health programs (which currently take up about 20 percent of federal expenditures) and use everyone else's tax dollar to support military and other programs. Now maybe if 70 percent of taxpayers opted for the Peace Fund, that would have a major effect on U.S. policy, but then again, if 70 percent of people opposed funding war then we'd have a President and a Congress that would end the war in Iraq and not get us into any future ones.

But even putting that aside for a moment, remember that federal taxes are not just limited to federal income taxes. Everyone who works also pays federal payroll taxes. These are supposed to fund Social Security and Medicare, but that's not exactly how it works out. Social Security is actually running a surplus, meaning it's taking in more in payroll taxes than it pays out in benefits, but the Social Security surplus is being used to fund all other government programs, including the military. This is really just more evidence that all taxpayer dollars are fungible and that it's difficult to separate funds into distinct pots of money with restricted purposes.

This might be besides the point anyway, because the federal government's decision to enter a war seems unrelated to whether or not we have the revenue to pay for it. The Bush administration has no problem with waging a deficit-financed war. That means we will have to pay the cost eventually, when we pay down the national debt by cutting important government services or paying higher taxes or both. How can anti-war taxpayers avoid paying for the war in this indirect way? They probably can't.

At the end of the day, we're all paying for this war whether we like it our not. And that's the thing about democracy. You can't really opt out. If we oppose how our government is spending our money, then we need to organize, spread the word, vote and change the government's policy. It's difficult to imagine that we'll live in a system in which people can only fund those government programs they believe in and not the ones they oppose.

Should War Opponents Refuse to Pay Federal Taxes?

There are public policy issues that expand in importance until they affect every other item on the political agenda. The Iraq War is one such issue. Those of us who research and write about taxes or lobby Congress on tax issues may have felt that our work was unrelated to the war, but a group of anti-war activists have brought that into question in a public way.

The National War Tax Resistance Coordinating Committee encourages Americans to abstain from paying their federal income taxes, in whole or in part, to avoid funding the war. They're not the first to take this stand. They point to Henry David Thoreau's tax resistance during the war with Mexico. And they're not easily dismissed as Utopians or radicals. They make a fairly logical argument. If one can avoid military service because he is a conscientious objector of war, then maybe he should be able to abstain from paying for war. If I think a certain action is wrong and I refuse to do it, why should I pay for other people to do it?

But as we step away from philosophical arguments and towards the reality of how taxes are collected and used by our government, the case for this type of resistance unfortunately falls apart.

The first problem with this idea is that refusing to pay all or part of one's federal income taxes cannot possibly end or prevent a war. For one thing, the current administration has shown us that when making a decision about war, the government cares little how much revenue it actually has. The Bush administration is perfectly willing to wage a deficit-financed war, that is, a war paid for with the national credit card. Even if you take a micro view and just want to make sure your own personal income does not fund the war, you may find yourself out of luck. The IRS is able to access your wages and bank accounts and collect penalites, so there's no guarantee that your money won't end up in their hands.

There is another problem with this type of resistance that might not be immediately obvious to its proponents. If the practice of protesting through refusing to pay taxes became more widely accepted, it's not at all clear that the main beneficiaries would be those who support peace. There are plenty of right-wingers who with very little encouragement could stop paying taxes because they oppose federal health programs, housing programs, funding of public education (which many on the far right believe undermines the morals of the young) or foreign aid for impoverished countries.

On a deeper level this could do great harm to the underpinnings of our democratic society. We all seem to agree, implicitly, that decisions made through our democratic process are legitimate (if not always wise) and will be followed by all. We all generally believe that the people we elect at the local, state and federal levels will decide how fast we will all drive, how much pollution can be pumped into rivers, how many cops need to be on the streets, where highways should be built and how many lanes they should have, what rules passenger planes should follow to keep from crashing into each other, and countless other things that make life bearable. Few of us want to live in a world where those decisions are ignored by most people.

Now of course, there may be situations in which government decisions seem so unjust that these concerns can be put aside. If democracy and the rule of law are really just tools we use to keep from shooting at each other and stealing from one another, then what's the point if you believe the government itself is doing the killing? Opposition to the war could certainly take precedence over any worry over the long-term effects of tax resistance on Americans' belief in the democratic process, which seems pretty abstract in comparison.

But refusing to pay one's taxes and forcing the IRS to attach your wages and collect a penalty from you does not serve the moral purpose stated by proponents of this form of protest. The fact that one cannot end this war or even hasten its end in this way, combined with the greater damage that this practice could do to progressive causes if it becomes more accepted, leads us to conclude that tax resistance to the war is not a practical or even particularly moral alternative. There are ways to mobilize opposition to a given government policy, through organizing, through electoral means, and maybe even through other forms of civil disobedience in select situations. But tax protesting is not the answer.

July 03, 2007

Privatized Tax Debt Collection Lives On

Last week, before leaving for the 4th of July recess, opponents of the IRS's use of private collection agencies failed in their bid to effectively kill the program. As explained in the earlier post on this issue, there had been worries that supporters of the program would use procedural rules to to strip the provisions in the Financial Services appropriations bill that would limit funding for the program to $1 million, effectively assuring its death. And that's exactly what happened. According to BNA Tax Notes (sorry subscription required) the Democrats decided not to contest a point of order when it was clear that the parliamentarian would rule against them.

Part of the issue seems to be that the Joint Committee on Taxation projected that doing away with the program would result in a loss of revenues of $69 million next year, and over a billion if the program stayed dead for a decade. This is absurd. The traditional tax collectors at the IRS got an increase in funding, but as far as I know that was not "scored" to result in greater revenues even though it will increase revenues several times over.

The other problem apparently was that the issue was found to be in the jurisdiction of the Ways and Means Committee rather than the Appropriations Committee. Which is a little weird for sort of the same reason. Funding the tax collectors at the IRS - or for that matter, cutting the funding, which Congress did a lot of in the 1990s - does not fall under the jurisdiction of Ways and Means. Maybe it should, but whatever rule applies ought to apply consistently.

Now the ridiculous program lives on. We continue to pay private debt collectors 21 to 24 cents for every dollar they collect when IRS employees could do the same job for 3 cents on the dollar. And keep in mind that a provision to kill the program has been passed before when Congress was controlled by the other party. There are currently other bills in Congress to kill the program, and they should get a fair hearing.