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The 21st Century Taxation Blog

Annette Nellen was a New America Fellow until the summer of 2008. She continues to blog at http://21stcenturytaxation.blogspot.com/.

The Slow Approach to Closing the Tax Gap

The federal tax gap is about $345 billion per year!  Reasons for this gap has been studied by the IRS, GAO and others for decades. Many proposals have been made, yet few have been enacted. President Bush's 2009 budget proposal included 16 tax compliance proposals.  Some of these have been inserted into tax bills as revenue generators. For example, the proposal to require brokers to include stock basis information on 1099s has been included in a few bills, but not yet enacted.

I call this the "slow approach" to reducing the tax gap: study it continuously, generate lots of ideas for reducing the gap, but avoid comprehensive legislation with a plan for reducing it. Political and budget reasons seem to be the cause for the slow approach.  PAYGO has many benefits, but one of them doesn't seem to be to enact legislation that only raises revenue (no new tax breaks). So, we see tax gap proposals come to the table only when revenue is needed to enact new or extended tax breaks.

Beijing's New Polluter Pays Car Tax - Good Idea?

Tax systems get used for a lot more than raising revenue for the government. They are also often used to help change behavior and to make prices reflect costs of "negative externalities." If you want to discourage something, raise the tax on it.  If you want to encourage something, lower the tax or offer a special deduction or tax credit.

One activity we want to discourage today is greenhouse gas emissions, such as CO2 from burning fossil fuels - like the gas in your car. So, despite some elected officials calling for ways to lower the cost of gasoline, we should really be looking to increase the cost because:

  1. The higher cost will encourage people to drive less or find other ways to use less gasoline.
  2. What we pay for gas at the pump is not the true cost. When we drive and burn gasoline, we cause air pollution, create GHG emissions that contribute to global warming, wear out roads, and cause congestion. These activities have costs - such as cleaning the air or refurbishing roads. When that cost is not included in the price we pay, the government doesn't get the money needed to deal with the problems - the negative externalities of driving.

Beijing seems to have the idea right. It was reported in several news outlets that on August 13, Beijing announced that there would be a much higher sales tax on large cars and a lower tax on smaller cars (see abcnews.go.com)

States Reaching to Find Sales Tax Nexus

In April, New York changed its sales tax law to try to make a few large vendors subject to sales tax collection - most notably, Amazon.com.  The new law creates a rebuttable presumption that a vendor is soliciting business and thus required to collect tax if, per an agreement, they compensate New York residents for directly or indirectly referring potential customers. Referrals may be made through a website or other means. The presumption only applies to sellers with over $10,000 of sales to New York customers made via the referrals in the prior four quarters. Sellers may rebut the presumption by showing that the residents did not solicit sales in New York for them. (Bill Summary, p. 10)

Amazon's "Associates Program" causes it to have many associates who may be New York residents. Amazon filed a lawsuit as soon as the law went into effect challenging the new law as unconstitutional. It also started collecting the tax!

Another company that fell under the law change is Overstock.com. Their remedy was to cancel its agreements with its New York affiliates who were helping Overstock.com advertise.

Easy Fix to Help Federal and State Budgets (and Health Care)

I have written about this topic before - policymakers lament trying to find dollars to help get more people health care, yet millions of workers reap overly generous tax benefits when their employer pays all or part of their health care coverage.  These generous tax benefits represent dollars from the federal and state budgets that could be used for other purposes. And, the problem is even worse because having so many insured employees not directly involved in how much their health care coverage costs tends to make them get too much health care at times, which drives up costs for everyone.

Here are prior posts:

On 7/31/08, the Senate Finance Committee held a hearing on Health Benefits in the Tax Code: The Right Incentives.

Each of the three witnesses commented on the exclusion for employer-provided health insurance. Joint Committee on Taxation Chief of Staff Edward Kleinbard noted:

Dealing with the Decline in Gas Tax Revenues Due to the Decline in Driving

The Department of Transportion announced today that we drove 9.6 billion fewer vehicle-miles traveled (VMT) in May 2008 compared to May 2007. While that is good for reducing carbon emissions, it is bad for the Highway Trust Fund. When we use less gasoline, less gasoline excise taxes are collected.

According to Transportation Secretary Mary E. Peters: "By driving less and using more fuel-efficient vehicles, Americans are showing us that the highways of tomorrow cannot be supported solely by the federal gas tax."

Our current federal gasoline excise tax is 18.4 cents per gallon. It is not adjusted for inflation. It has been known for some time that adjustments would eventually need to be made in the rate or HTF funding approach as MPG of cars increased. Various studies have been done to get an idea of the problem and possible solutions to provide more funds for the HTF to maintain and build roads.

The Pressing Need to Rethink Our Existing Tax Rules for Retirement Savings

On 6/26/08, the House Ways & Means Committee held a hearing on Individual Retirement Accounts (IRA) due to concern over underutilization and reasons why many small businesses did not offer some type of IRA plan for workers. The GAO report on the topic was highlighted. Subsequent to this hearing, a few other committees held hearing on retirement savings and a report was released by Ernst & Young on people not having enough to live on in retirement.

There are some troubling data and realities about IRA participation and inadequate retirement savings. For example:

Proposed Tax Increases in California: Overlooking the 21st Century

California legislators continue to struggle with how to close the $15 billion budget gap even as the year has begun and the budget deadline has passed. On July 8, the Budget Conference Committee developed a plan that restores some proposed cuts and proposed a package of six tax increases. Five of the increases involve the individual income tax and corporate franchise tax while the sixth calls for efforts to collect some of the state's uncollected taxes (reduce the tax gap).

A problem with aiming to close a specified budget shortfall is that it is too easy to look at the amounts various changes could raise and massage it until you hit your needed number. Math wins out over strategy. while the committee has reasons for each of the five tax increases, they are fairly weak, such as - we had these high rates in the past. Why does that mean they make sense for California's economy and society now?  What about cutting back on tax deductions, exclusions and credits that are too generous or poorly targeted such that they benefit taxpayers who don't need a benefit?  What about shaping our tax laws to support our economic, societal and environmental goals? For example, policymakers are working to find ways to get California to reduce its GHG emissions. So, why not enact a carbon tax?

Our Flat World (except for domestic interstate commerce)

Ease of cross-border business activity has led to what Thomas Friedman describes as a flat world. However, our quagmire of state nexus rules leaves domestic commerce in a non-flat world.

States tend to take broad approaches in finding multistate sellers subject to income or gross receipts tax in the state. The 1959 federal law known as PL 86-272 provides guidance for sellers and states regarding when a state can impose income tax obligations on a seller of tangible personal property. A lot more businesses today, relative to 1959, sell something other than tangible personal property and so have no federal statute to rely on to know when they may owe income tax in a state.

Some states take the approach that an economic connection is enough - that a physical presence in the state is not needed before a seller is subject to state income tax. And, rules can vary from state to state leading to the possibility of double taxation of some income.

The 1959 law needs to be updated. It was intended to be temporary (!), but was never updated. Congress has looked at a few possibilities over the past several years, but nothing has come close to enactment.

Taxing Digital Products - Let's Also Use the Technology to Modernize Collection

When today's forms of taxes were created decades ago, there wasn't any technology to consider in making computations and collection easy. But that is not true today. While some states are slowly modernizing their laws to address new ways of living an doing business that are partly due to changes in technology, the technology as a tool of tax compliance and administration is often overlooked.

Tennessee enacted various tax law changes which the governor signed on June 5, 2008, including expanding its sales tax to include most digital goods provided the tangible equivalent is something already subject to sales tax. [SB 4173 enacted as Public Chapter Number 1006]

"The retail sale, lease, licensing, or use of specified digital products transferred to or accessed by subscribers or consumers in this state shall be subject to the tax levied by this chapter on the sales price or purchase price thereof at a rate equal to the rate of tax levied on the sale of tangible personal property at retail by the provisions of § 67-6-202."

The law defines various types of digital goods and notes a few exemptions. To determine where the buyer resides, the new law provides:

Health Care Spending versus Extending 2001/2003 Tax Cuts - Tough Issues

On June 16, the Senate Finance Committee sponsored a Health Reform Summit.  The presentations focused on costs and possible improvements to the delivery and insurance system.

CBO Director Peter Orszag's first part of his testimony helps put the immense financial problems facing us in the next few years in perspective.  He says:

"The single most important factor influencing the federal government’s long-term fiscal balance is the rate of growth in health care costs. The Congressional Budget Office (CBO) projects that, without any changes in federal law, total spending on health care will rise from 16 percent of the gross domestic product (GDP) in 2007 to 25 percent in 2025 and 49 percent in 2082, and net federal spending on Medicare and Medicaid will rise from 4 percent of GDP to almost 20 percent over the same period.1 Many of the other factors that will play a key role in determining future fiscal conditions— including the actuarial deficit in Social Security and a decision about extending the 2001 and 2003 tax legislation past its scheduled expiration in 2010—pale by comparison over the long term with the impact and challenges of containing growth in the cost of federal health insurance programs." 

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