Annette Nellen: All Publications, Events and Press

Closing Tax Gap

Articles — Thu, 14 Aug 2008 16:26:00 -0400

Since the early 1980s, there has been a plethora of recommendations about how to reduce the tax gap. Many changes have been enacted, yet the gap grows. Proposals requiring additional information reporting or withholding are usually overlooked despite evidence that these techniques result in a low tax gap for wage earners. However, a significant information reporting rule was enacted in 2008. Its enactment though, seems to be more a result of its revenue potential than its role in a comprehensive tax gap reduction strategy.

Below, we'll review the tax gap and the recently enacted credit card information reporting provision, and explain reasons for the slow approach.

Tax Gap History more

Grabbing Remote Vendors

Articles — Thu, 31 Jul 2008 10:56:00 -0400

As far back as 1872, when Montgomery Ward issued its first mail-order catalog, vendors have sold to customers without being physically present in the customer’s state. Although sales taxes have existed since the 1920s, we have no effective system for collecting sales-and-use tax on sales by remote sellers.

Today we’ll look closer at the history of the remote sales tax issue, clarify New York’s law change and note possible solutions.

Interstate Sales Tax History

As a 1965 congressional report noted: “The present system of State taxation as it affects interstate commerce works badly for both businesses and the States.” (State Taxation of Interstate Commerce Report No. 952, 9/2/65, Vol. 4, (the… more

A Tax Commission for California? How It Can Be Made to Work

Articles — Mon, 28 Jul 2008 13:32:00 -0400

Both Governor Schwarzenegger and Assembly Speaker Bass have stated that they would like to form a bipartisan commission to find ways to improve California’s tax system. They seek to modernize our tax system, make the state more economically competitive, and have a system that produces stable revenues.

These are great goals. California’s tax system was designed decades ago in a manufacturing era when borders were important and tangible goods ruled. Our tax system was not designed for the current information age with its mobile capital, worldwide-based workforce, and goods and services transferable over the Internet. Serious work is needed to bring our tax system into the 21st century.

A tax… more

Rethinking IRAs

Articles — Thu, 17 Jul 2008 06:33:00 -0400

A Department of Labor retirement guide notes: “For many Americans, retiring in this new century is a mystery.” They’re living longer, they’re more personally responsible for their own retirement savings and they have many more savings options than previous generations did, which exacerbate the confusion. In June 2008, a House Ways and Means Subcommittee hearing explored options for expanding IRA participation. This article presents data about the mystery and IRA participation, highlights of the hearing and considerations for reform.

For general information about IRAs see IRS Publication 590 (PDF) and IRS FAQs.

Data In 1974 when IRAs were created, … more

California's Tax Loopholes That Aren't

Articles — Fri, 11 Jul 2008 07:25:00 -0400

The package of six tax increases that passed in the Budget Conference Committee this week includes two described as loophole closers. Who can argue against closing a loophole? Unfortunately, the two provisions proposed to be changed aren't loopholes.

A loophole is the ability to use a rule in an unintended way. It may be due to poor wording or an incomplete definition in the law. For example, assume a state has a lower property tax rate for agricultural land to help farmers. However, the definition of agricultural land is so broad that the owner of a residence on 10 acres just needs to plant 20 fruit trees… more

Taxing Some Services Could Help if It's Fair and Simple

Ron Tang — Sun, 29 Jun 2008 06:39:00 -0400

California State Board of Equalization Chair Judy Chu believes it is time to address our deficit and modernize our sales tax by applying it to services. Her call to modernize our sales tax would be a good start in addressing an underlying cause of our budget problems.

Taxing services is not an outlandish idea. Most states already tax more types of services than does California.

Taxing services is also not a bad idea. Lifestyle changes have led us to spend less on goods subject to California sales tax and more on non-taxable services. For example, two-earner households have greater needs for laundry… more

Not Flat

Ron Tang — Thu, 26 Jun 2008 08:04:00 -0400

PL 86-272 provides that if the only in-state activities a business has is the solicitation of orders for tangible personal property that is approved and filled from outside the state, the state may not impose a net income tax on the business. States set the rules, within due process and commerce clause constraints of the U.S. Constitution, for businesses that sell services or intangibles.

States tend to take broad approaches. A 2007 Illinois Department of Revenue ruling notes that "as a general rule, the Department interprets the concept of nexus as broadly as possible (No. IT 07-0033… more

Gross Receipts Taxes

Ron Tang — Thu, 22 May 2008 10:34:00 -0400

In recent years, concern over declining corporate tax collections, aggressive tax planning and state revenue needs have led a few states to consider and even enact a gross receipts tax (GRT) on companies that do businesses within its borders. On the surface, a GRT is simple since it allows no deductions. The broad base allows for a very low rate that can make the tax more palatable. Further, all businesses are typically subject to the GRT, with the result that all businesses contribute something to state coffers.

Yet, many oppose the GRT because of its inherent flaws, one being that it… more

Goodbye State Tax Deduction

Ron Tang — Thu, 08 May 2008 00:52:00 -0400

The 1984 Treasury Department report (PDF) that laid the foundation for the base broadening and rate reductions of the Tax Reform Act of 1986, called for complete repeal of the itemized deduction for state and local taxes. Citing similar reasons, the 2005 final report of the President’s Advisory Panel on Federal Tax Reform also called for repeal. Yet, there are also proposals to make permanent the ability to deduct either state income or sales tax (for example, HR 3592, 110th Congress).

Below we’ll get some background on the state and local tax deduction and then… more

Gross Receipts Taxes

Ron Tang — Thu, 24 Apr 2008 06:21:00 -0400

Recent tax reform efforts in Ohio, Texas and Michigan have led to an increase in the number of states imposing gross receipts taxes (GRT). Let's take a closer look at GRT and some important legal issues surrounding it.

Overview

The Multistate Tax Compact defines a GRT as "a tax, other than a sales tax, which is imposed on or measured by the gross volume of business, in terms of gross receipts or in other terms, and in the determination of which no deduction is allowed which would constitute the tax an income tax" (Article II (PDF)).

In 2005, Ohio enacted a… more

New Taxes And Tax Policy

Ron Tang — Thu, 10 Apr 2008 10:54:00 -0400

In recent years, there have been enactments and proposals for a variety of new taxes at both the U.S. state and local levels. A key impetus for these changes is the need for more revenue to fund state and local governments. While existing taxes could be increased to generate revenue, other sources have been considered for a variety of reasons. This article looks at a few recent examples and how they stack up under the principles of good tax policy.

Examples

Sources of new tax revenue are sometimes tied to activities that lawmakers believe may have some type of adverse social policy… more

The 50th Anniversary Of Public Law 86-272

Ron Tang — Thu, 27 Mar 2008 07:29:00 -0400

Public Law 86-272, addressing circumstances under which a multistate business may owe state income taxes, was enacted as a stopgap measure on September 14, 1959. For the past several years, efforts to reform this law have raised issues similar to those of 1959. This article provides a brief history and the issues surrounding PL 86-272 and poses the question -- when the 50th anniversary milestone is reached, will PL 86-272 be in its historic form or a new form (and what might that be)?

1959 Supreme Court Decision

In February 1959, the U.S. Supreme Court issued its opinion in Northwestern Cement v.… more

Don't Link School Spending To Oil Companies' Profits

Ron Tang — Fri, 21 Mar 2008 08:33:00 -0400

Last week, a bill was proposed by a majority of Assemly Democrats to impose extra taxes on oil companies to help prevent pink slips for teachers. A March 12 vote, mostly along party lines, failed to garner the required two-thirds majority for passage of a tax increase.

But Assembly Speaker Fabian Núñez has said he does not plan to give up on the idea.

Despite the importance of not laying off teachers, failure to pass was a good result. The bill, ABX3 9, is not the solution for keeping teachers employed or solving California's budget problems.

Budget problems cannot be solved with taxes… more

Annette Nellen in Orange County Register | California Lawmakers Want to Tax Downloads

Communications — Sun, 16 Mar 2008 11:01:00 -0400

New America in the News:

California Lawmakers Want to Tax Downloads (Orange County Register)

Democrats would revise the definition of what's taxable instead of proposing a new tax that requires GOP support. . .

So what do you think will happen with downloads?

"You're just going to have a bigger use tax problem," admits Annette Nellen, a San Jose State tax professor who nonetheless supports taxing downloads.

Nellen likes the tax, in part, because increasing revenues isn't her biggest concern – rationale tax policy is. A fellow at the New America Foundation, Nellen has been urging the state to broaden its sales tax because she says a "consumption tax" should tax all the things we consume – goods and services, products and downloads.

"Our tax base hasn't kept up with how we do business and how we live," she said, and that means state revenues will naturally dwindle unless something is done.

"The way we consume things have changed, but we still have a 1930s tax base," she said. . .

What's Your Tax System IQ?

Ron Tang — Wed, 12 Mar 2008 02:00:00 -0400

While tax season tests our technical tax knowledge daily, here is an opportunity to take a break and test your knowledge about our federal tax system.

Answers to this quiz can be found at the bottom of this article.

Questions IRS tax revenue collections for fiscal year 2006 were approximately $______ trillion. The individual income tax was the largest portion of these tax collections, representing ___% of the total. For 2005, _____ million individual tax returns were filed showing combined taxable income of $_____ trillion. 108; 2.8 124; 3.5 134; 5.1 149; 6.8 For… more

Obstacles To Taxing Services -- Are They Insurmountable?

Ron Tang — Thu, 28 Feb 2008 14:40:00 -0500

State sales tax bases have traditionally included only tangible personal property. Often services are either ignored completely in describing the tax base, or a small number of services are specifically targeted as legally taxable. One reason for exclusion is historical. Tangible personal property was the main consumption item back in the 1930s when many states started imposing a sales tax. However, in the past two decades, consumption of services has become significant.

Since 1990, the Federation of Tax Administrators (FTA) has tracked the number and types of services taxed in each state. Of the 168 services tracked, Hawaii, New… more

CA Event: How Do/Should We Tax?

Communications — Fri, 15 Feb 2008 13:34:00 -0500

A New America Event
02/27/2008 - 8:30am

California has a tax system largely fixed in place during the Great Depression, in an industrial economy-setting unconcerned with environmental sustainability. Two questions about this tax system are posed here: First, can California find ways to raise the revenue it needs in the 21st century that are a better fit with our high-tech, service-based economy than is the current system? Second, can California's tax/fee structure be used to meet the state's greenhouse gas emissions under its AB 32 guidelines?

On Feb. 27, 2008, the New America Foundation and the University of California Center in Sacramento hosted a half-day conference with experts discussing these pressing questions. An MP3 audio recording of the full event, as well as presentation materials and conference articles released at this event, are available below.

Tough Tax Questions for Presidential Candidates

Ron Tang — Thu, 14 Feb 2008 00:00:00 -0500

The current crop of Presidential candidates sound a lot like they did in prior years with promises of new targeted tax breaks, loophole closures, increased taxes on the rich and new spending programs. Have the candidates not read the doom and gloom budget reports from the Government Accountability Office (GAO), Congressional Budget Office (CBO) and others?

The fiscal agenda for the next President and Congress must include some very difficult decisions that go beyond just tweaking the tax system. Below, we’ll look closer at some key fiscal issues that have tax implications. Questions are posed that could help gauge how… more

'Spending Problem?' Some of it's Hidden in our Tax Laws

Ron Tang — Sun, 10 Feb 2008 00:00:00 -0500

Gov. Arnold Schwarzenegger's diagnosis of California's $14.5 billion budget shortfall: a "spending problem." His remedy: 10 percent across-the-board spending cuts. What about a second opinion?

A spending problem is a chronic condition that warrants more than unfocused across-the-board cuts. Eliminating unnecessary spending would be a more reasonable and lasting treatment. The first step is identifying that wasteful spending -- not always an easy task. The task is made even trickier when some of it is hidden in our tax laws. Removing the spending waste in our tax laws can provide partial relief for our spending problem, reduce the chance of recurrence… more

Corporate Tax Under the Microscope

Ron Tang — Thu, 24 Jan 2008 00:00:00 -0500

S corporations now account for two-thirds of U.S. corporate tax returns (see NTA report) and while designed for simplicity, they’ve become increasingly complex and harder for regulators to standardize and monitor.

As the number of small businesses has exploded, the number of S corporations formed has more than quadrupled since the last review (of 1984 returns) while the number with assets exceeding $10 million has increased 10-fold. Today’s S corporations are not necessarily small, and not necessarily easy to classify for tax reporting purposes.

In fact, the National Taxpayer Advocate’s (NTA) 2007 Annual Report to Congress (January 2008) identifies… more