AP Money Minute: Bush Praises Tax Refund
President Bush and Congress agree on an economic stimulus package, Ford offers 54,000 buyouts and early retirements, and housing data continues to disappoint. (Jan. 24)
Doing Nothing’s a Good Thing
In this Marketplace commentary, Len Burman, director of the Urban-Brookings Tax Policy Center, says that extending temporary tax measures enables Congress
to avoid serious tax reform and hide deep problems.
Book Probes Tax issues Facing the Next President and Congress, Offers Policy Lessons
Eugene Steuerle’s Contemporary U.S. Tax Policy, second edition, details how federal tax policy since the 1950s has evolved and trains an expert’s eye on its considerable successes, shortfalls, and problems. He prefaces his account with an explanation of important tax policy principles and an overview of the main actors and their changing roles. Steuerle closes his engaging narrative with a perceptive analysis of President George Bush’s unsuccessful second-term efforts to use commissions to reform Social Security and to rewrite the tax code.
Property Tax Relief as one Tool for Beginning to Fix the Foreclosure Crisis
With any issue as visible and complex as the recent mortgage foreclosure crisis, you can expect a vast array of proposals for addressing the problem to arise. Unfortunately, at least at the federal level, many of those proposals have left much to be desired.
One of the more bizarre ideas to come out of Congress is an expansion of the “net operating loss carryback” provision. This proposal would allow companies taking a loss in either of the next two years to deduct that loss against taxes already paid at any time during the last four years (currently the deduction is limited to the previous two years). This is an inefficient and poorly targeted approach to the foreclosure problem because the deduction would be available to all companies – not just homebuilders and other housing-related businesses. It is also a troubling proposal because the breaks it provides have no strings attached to them. If there isn’t a demand for new homes, there isn’t going to be a demand for homebuilders regardless of whether or not the company gets a check from the federal government.
Another idea Congress proposed is a no-interest loan in the form of a refundable tax credit for first-time homebuyers that must be paid back over 15 years. Unfortunately, the credit will not be available to the buyer until after the downpayment has already been made, so its usefulness is seriously constrained.
Other tax changes are discussed in the link above, but overall it seems clear that Congress has missed the mark. Their collection of proposals raises one interesting question in particular: why are so many of the approaches to this crisis centered around tax cuts when nobody is arguing that the problem is a result of high taxes? As Bob McIntyre, director of Citizens for Tax Justice, recently said, “If we gave this issue to the agriculture committees, they’d probably give us farm subsidies, so if we give this problem to the tax-writing committees they give us tax breaks because that’s what they do. I’m pretty sure we have committees in Congress to deal with housing.” It’s always good for politicians to be able to offer up tax cuts, though.
But while for the most part Congress’ proposals are nothing more than the result of an over-eagerness to cut taxes, another one of their proposals actually did touch on one potential solution involving taxes. Property taxes are not the cause of the foreclosure crisis, but lowering property taxes on those homes most at risk for foreclosure seems like a sensible component of any broad strategy for reducing the number of foreclosures. Unfortunately, but perhaps unsurprisingly, even Congress’ efforts at providing property tax relief aren’t tremendously helpful – an income tax cut of no more than $350 per spouse (or roughly $150 under the Senate bill) for all homeowners who do not itemize is all they could muster. Additionally, since the cut comes in the form of a deduction, it’s value increases for better-off homeowners in higher tax brackets who are presumably at less risk of foreclosure.
In contrast to this meager amount of relief proposed in Congress, a bill introduced in Michigan (where the foreclosure crisis has been particularly devastating) takes works the property tax angle more aggressively (and arguably more productively) by offering a full exemption from the property tax for homeowners earning less than 200% of the federal poverty level. Homeowners earning up an income limit to be determined by the taxing district are eligible for a 50% reduction of their property tax bill. Taxpayers possessing assets worth more than an amount to be determined by each locality will be excluded from the relief, as will taxpayers whose homes are worth more than 300% of the median home price in their district.
By providing extensive relief to those least fortunate homeowners most vulnerable to foreclosure, rather than only offering more minor relief to a broad swath of taxpayers, the Michigan legislature has before it a bill much more likely of meaningfully impacting the foreclosure crisis. And by introducing a degree of progressivity into the property tax, this bill could make life just a bit easier for those individuals most likely to be impacted not only by the foreclosure crisis, but also by the recent economic slowdown in general.
Notably, this emergency bill is in addition to the state’s property tax circuit-breaker that provides tax credits to lower- and middle-income families based on the share of their income they are required to pay in property taxes. The emergency relief, then, isn’t something that even needs to be made permanent. A circuit-breaker is the preferred method for assisting those in need of relief in a normal housing market – but under the current, very abnormal housing market, this additional relief could play an important role in a broader plan designed to address the needs of Michigan homeowners.
As an interesting aside, one of the other primary benefits of this bill would be a standardization of the process for providing need-based property tax relief. Detroit has recently been plagued with reports that their “Hardship Committee”, appointed to decide who is in need of property tax relief, has been awarding tax benefits to wealthy, well-connected homeowners. The state bill would offer local committees less discretion in deciding who can see a tax reduction. This investigation into Detroit’s “Hardship Committee” by The Detroit News provides a very interesting read that discusses a stunning example of tax fairness being thrown out the window.
Economic Stimulus RX: More State Spending
With new Commerce Department data confirming that the US economy is growing at a level well below historical averages, policymakers are asking what else they can possibly do to jump-start the nation’s economic engine. In today’s New York Times, Louis Uchitelle points out that Congress has, so far, ignored one important tool in our collective economic toolbox: “chanel[ling] extra federal money to city and state governments so they can sustain their outlays for the numerous programs that otherwise would be shrunk.”
This argument is pretty basic– if states have to pare back their budgets, they’ll cut spending on education and transportation and will reduce state employment in these areas, so giving states emergency fiscal relief will allow states to keep these jobs– but it isn’t new. As Uchitelle points out, Keynesians have long argued that government spending can be an effective option for digging out of economic downturns. And this position has had an eloquent advocate already this year in Columbia University’s Joseph Stiglitz, who argued back in January that the best federal “stimulus” plan would include:
giving money to states and localities that are facing real financial constraints. Tax revenues are going down. Property values are going down. And most states have a balanced budget framework.
So if the revenues go down, they have to cut their expenditures. And this will depress the economy. So dollar for dollar, this will stimulate the economy enormously.
The common-sense point being made by both Uchitelle and Stiglitz is that government spending, just like private spending, boosts our economy. It’s a point that is too often forgotten by policymakers who (whether they realize it or not) are still in thrall to the Reaganite notion that nothing good ever came out of government. Folks in Congress who ought to know better have been falling all over themselves this year to put “extra” money in the hands of individual consumers, with the hope that they will spend it and thereby boost the economy, but have given little thought to the idea that state governments can provide a similar stimulus of their own.
There’s some hope from the ongoing presidential debate, according to Uchitelle, in that at least one party’s candidates are singing the Keynesian tune (if slightly off key):
The Republicans in particular are less than enthusiastic about Keynesian economics, with its use of government to rescue markets. They, and many mainstream economists, for that matter, argue that government is inefficient, bureaucratic, wasteful and unable to spend fast enough to counteract a downturn. The two Democratic candidates, in contrast, argue that a second stimulus package, if one is needed, should include federal subsidies to the states and municipalities, not to start new projects but to prevent cutbacks in existing ones.
But this idea certainly isn’t a central plank of either Democratic candidate’s platform. And even abstracting from these political difficulties, there’s a basic policy problem that makes the Uchitelle/Stiglitz solution a hard sell: what Uchitelle breezily refers to as “extra federal money” is in pretty short supply right now. Until someone at the federal level can stomach the notion of admitting that federal taxes are simply too low to meet our needs, any federal grants to state governments will essentially be paid for by borrowing money from our creditors overseas. The federal government can absolutely come to the aid of states through a new regime of stimulative grants– but the positive long-term impact will be less clear if this federal spending is paid for by our grandchildren.
President Bush Supports a Tax Hike
And you thought the day would never come: earlier this week, President Bush signed into law a bill that (gasp) increases federal taxes. The bill, HR 6081, known as the “Heroes Earnings Assistance and Relief Tax Act,” creates or extends a host of special tax breaks for military members and their families, which in itself is a move no sane member of Congress would oppose. But heretically, the bill pays for its tax cuts by closing an existing tax loophole.
The tax break in question, which Talking Taxes discussed in detail a few months back, allowed KBR, a former subsidiary of the Halliburton company, to avoid hundreds of millions of dollars in federal Social Security and Medicare taxes by pretending its Iraq-based employees were working for a Cayman-Islands based “shell company.”
Just as tax breaks for the military have no enemies (the House voted unanimously on this one), the KBR payroll tax dodge had no friends. So for any head of state not guided by the “no new taxes” mantra, signing this bill would be a no-brainer. But in this case, we’ll call it a pleasant surprise.
Now, as the NWLC’s Joan Entmacher asks, why can’t we get Congress and the President to apply the same logic to the egregious “carried interest” tax break for hedge fund millionaires?
Taxing Amazon.com Complicated by Tangled Forest of Tax Laws
Should states be able to collect state sales tax on internet purchases and catalogue sales that cross state lines? That’s the issue that’s currently confronting state governments around the country desperate for revenues in these poor economic times. In theory, it is grossly unfair for a purchase that is made online to be taxed less than an identical item purchased at a “bricks and mortar” store (individuals are technically subject to use tax on their internet purchases but it is almost impossible to enforce). But in practice, taxation of remote sales falls victim to legal barriers as well as decentralized tax policies.
The most recent Supreme Court decision to address this issue, Quill Corp. v.
Thus presents the Amazon.com dilemma. Its “wholly owned subsidiaries” own thousands of square feet of distribution facilities in several states according to the Wall Street Journal. Although they are legally separate, there is a debate as to whether they constitute a nexus. It’s fairly common practice for companies to establish “shell companies” to take advantage of tax loopholes that allow them to expand operations without expanding tax liability. Several states, including
Wells Fargo Tax Giveaway (Finally) Attracting Some Notice
Better late than never?
The truth of this saying may be tested in coming weeks, as lawmakers and regulators grapple with the question of how to fix an under-the-radar corporate tax break for a few large banks (the federal tax cut for Wells Fargo alone has been estimated at over $20 billion, and the new tax break overall could cost US taxpayers $140 billion) that seems to have been approved without Congress agreeing to it.
A Citizens for Tax Justice report from last week outlines the story:
When one company buys another company that has tax losses, the law prevents the acquiring company from using the purchased company’s tax losses. There’s a very sensible reason for this rule: to ensure that companies don’t purchase other companies simply as a tax dodge.
But a little-noticed September IRS administrative ruling creates a specific, temporary exemption from this rule for banks acquiring other banks whose tax losses are attributable to bad loans.
It’s not that often that a new tax cut gets implemented without Congress ever lifting a finger, but that’s what happened when the Bush Administration’s Treasury officials decided to reinterpret an existing law in a way that would cut taxes dramatically for a few well-off banks. Senator Charles Grassley, who’s accustomed to being at the steering wheel (or at least in the car!) when the tax policy express hits the road, is very angry about it, although he’s stopped short of saying that the Administration’s move is illegal.
Yesterday’s Washington Post has a detailed story discussing how this came about, and today’s Los Angeles Times has this story noting that the state if California stands to lose a couple of billion dollars of its own corporate income tax revenue to boot.
This is obviously an important issue for Congress– the bailout was unpopular enough before it became widely known that it was being hijacked to benefit a few big corporations, so Congressional tax writers have a real incentive to clean this mess up in a way that makes it clear the bailout ultimately benefits America’s economy, not a few fat cats.
But, as Citizens for Tax Justice notes in its analysis of the problem, this is also something state lawmakers need to worry about:
Because states with corporate income taxes almost universally base their corporate taxes on federal rules, federal tax cuts for corporations generally result in state tax cuts as well. When affected states have rules making it difficult to enact tax increases (as istrue of California, whose budget deficit is already in the billions of dollars), state governments find themselves practically unable to avoid costly corporate tax cuts they never wanted… At least eighteen states that tax corporate profits will likely take a hitfrom the new IRS ruling—and any state that taxes the profits of financial companies is at riskof helping to fund the next bank that chooses to purchase another financial company.
With state budgets already going up in flames, this is a problem state lawmakers don’t need. Stay tuned…
PNC Bank: Next in Line at the Bailout Trough
In the wake of revelations that Wells Fargo Bank stands to reap $20 billion in federal tax cuts from a probably-illegal tax giveaway imposed on us by departing leaders in the Bush Treasury Department, the most obvious question was which other large corporation would be next in line to cash in on this particular tax break. The answer: PNC, which just bought Ohio-based National City Bank.
As with the Wells Fargo case, the generosity of the tax break leaves one dumbfounded. As the Cleveland Plain Dealer asks:
How can PNC pay $5.6 billion for National City and get back more than $5 billion in tax breaks?
It’s a rhetorical question, of course: the Plain-D guys know that this tax break exists because of clever back-room maneuvering by Bush Administration Treasury officials. The short explanation: 20 years ago, Congress passed a law (as part of the justly-celebrated Tax Reform Act of 1986) that prohibited banks from buying loss-ridden banks as a tax dodge. While lobbyists pushed hard for Congress to undo this change for, well, the next 20 years, they were unsuccessful– until the Treasury Department decided to change the law themselves by issuing a notice saying that they’ve changed their interpretation of the law. Oversimplying a bit, Treasury officials have taken a law that says “this tax scam is not allowed” and basically crossed out the “not”.
Plenty of people are now paying attention to this anti-democratic outrage, not least among which are the members of Congress who view the creation of absurd tax breaks as their domain alone. (They’re right, for better or for worse.) But the real question remains: what can be done about this?
An incoming Obama Administration can (and should, if all else fails) simply rewrite the administrative regulations. Again resorting to a gross oversimplification, this means un-crossing-out the “not” mentioned above.
Alternatively, tax writers in Congress (who are peeved that Treasury usurped their authority on this one) could pass a law preventing banks from using this made-up loophole going forward.
A stickier issue is whether anything can be done to take away the tax breaks already claimed by Wells Fargo and PNC. If their purchases of unprofitable banks were driven by the tax break, it may seem unfair to take the tax breaks away retrospectively, but there’s enough unfairness to go around: Wells Fargo got a tax break that Citigroup didn’t, entirely because Wells Fargo tried to buy Wachovia right after Treasury’s announcement– and Citigroup had the bad luck to make its acquisition bid right BEFORE Treasury’s announcement. Ain’t nothing fair about that.
It would probably be best for Congress to tackle this one head on, even as it deals with allegations that the direct bailout costs (the much-ballyhooed $700 billion) are being doled out indiscriminately. Let’s hope they do!
Evaluating the National Retail Federation’s "Tax Holiday" Idea
Yesterday the National Retail Federation published an open letter to President-to-be Barack Obama urging that come January, Obama’s stimulus package should including a national “sales tax holiday,” three ten-day periods in 2009 during which states that normally collect sales taxes on retail purchases would stop collecting them.
A new Citizens for Tax Justice report takes the shine off this idea a bit, noting a few fairly important reasons why a tax holiday might be not the right answer for America at this time.
Among them:
- As with state sales tax holidays, it’s hard to know whether the benefits would go to consumers or retailers.
- To the extent consumers would be better off, the savings would go to even the very best-off families. No effort could be made to target these savings to families hit hardest by the current downturn.
- Even if Congress likes the idea, that’s not enough to implement it. Every state with a sales tax would have to pass legislation to make this work. And then every retailer in these sales-tax states would have to train workers and program computers to stop collecting state sales tax (but keep collecting local sales tax) during the holidays.
- Since the first proposed tax holiday would take place in March, the immediate effect of such a plan would be to… encourage people to spend less money right now, and wait until March. Which is an odd feature in a stimulus plan.
The CTJ report is here.