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Highest Property Taxes In The Country

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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.

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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.

To this day, a company in question must be benefiting from the services which the state provides in order to be subject to sales tax levies. The Due Process clause has been interpreted for tax liability purposes as meaning the state must “give something for which it can ask return.” The Supreme Court has ruled that taxation of remote retailers is unconstitutional unless they have nexus or a physical presence within the state’s boundaries. But in the era of widespread e-commerce, the lines between a physical and virtual presence are blurring. Companies that buy and sell goods within a state are making use of that state’s infrastructure whether or not they physically own operations in the state.

The most recent Supreme Court decision to address this issue, Quill Corp. v. North Dakota in 1992, upheld previous limitations to the circumstances under which the state may collect taxes from a remote retailer. According to the Court, the Dormant Commerce Clause prevents states from placing undue burdens on interstate sales which was violated by North Dakota’s sales tax of Quill Corporation. Tax laws are so complicated and widely divergent between the 7,400 tax jurisdictions in the U.S. that the Court ruled it unreasonable for retailers to have to account for all the technicalities. It’s important to mention, however, that many observers including the chief executive of Netflix note the improvements in tax software in recent years have dramatically reduced the practical complexity of accounting for different tax policies.

Legal realities haven’t kept states from trying to tap this potentially large revenue source, upwards of $18 billion per year according to an estimate from the University of Tennessee. An organization of more than 20 states known as the Streamlined Sales Tax Project (SSTP) created in 2000 has been trying to streamline their tax codes enough so that determining tax liability is less burdensome. This will help convince Congress to change the law and allow states to tax internet sales, bypassing the Court decision. It’s probably fair to say they’ve only had limited success so far. This is due both to the difficulty of adopting a commonly accepted definition of taxable goods and services that doesn’t benefit some states while disadvantaging others and the difficulty of getting such a bill through Congress.

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 Texas, are reviewing whether Amazon’s in-state operations should really be exempt from taxation.

Unfortunately, the prospect for expanding the tax base has dimmed as the State Board of Equalization in California has ruled that entities that refer customers by links to Amazon do not trigger nexus under California law. This is true even though the sites benefit financially from their relationship with Amazon, garnering a percentage of the sales made from the sponsored links.

New York has already passed a law requiring remote retailers to collect sales tax on purchases made in the state which Amazon has challenged, saying it unfairly targets Amazon. Amazon has a number of affiliates and advertisers that benefit financially from Amazon sales within the state (other companies such as Overstock.com cut ties to its New York affiliates rather than have to face sales tax liability). New York law states that companies that enter into financial arrangements with Amazon are considered Amazon vendors for sales tax purposes. The question is whether they are acting as agents of Amazon or whether they are primarily out for their own financial interests. It will be up to the courts to decide whether affiliates trigger nexus in New York or whether it’s back to the drawing board for advocates of equal tax treatment of e-commerce.

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Tax Cuts, As We All Know, Increase Revenues??

One of the most difficult tradeoffs policymakers have to make is in the level of taxes to collect vs. the level of services to provide. High taxes are generally politically unpopular, though if accompanied by a strong mix of valued government services, they are often considered to be worth the price. In contrast, a government that collects relatively little in taxes may be popular among its citizens come tax time, but the meager level of government services that comes with low taxes is rarely celebrated. Of course, since the federal government is free to run a deficit, sometimes this tradeoff can be delayed, as current spending can be paid for with higher taxes (or significantly reduced spending) at a much later date. Nonetheless, the tradeoff can never be avoided entirely. None of this is controversial.

Enter John McCain. According to Senator McCain,

“tax cuts, starting with Kennedy, as we all know, increase
revenues”.

If true, the Senator from Arizona has found a way around one of the most dreaded problems facing our lawmakers. No longer must we weigh the pros and cons of higher taxes vs. better services. No, in McCain’s world, lower taxes and better services are a natural pair. In fact, according to McCain, the tradeoff between taxes and services that policymakers have wrestled with for centuries is not only unnecessary, but also nonexistent:

“historically, when you raise people’s taxes, guess what, revenue goes down”. – Senator John McCain

Lower taxes aren’t just the easy way to get more revenue – they’re actually the only way!

The Laffer Hypothesis: Show Me The Money?

If only it were that easy. What McCain is referring to is the infamous “Laffer Curve”, or “Laffer Hypothesis”. Under this hypothesis, it is asserted that U.S. tax rates are so high that investment and overall economic activity has been greatly stifled. So stifled, in fact, that since individuals and businesses are paying so much of what they earn to the government, the incentives to take risks and work hard have been effectively removed from the economy – as a result, markedly less taxable economic activity is being than would otherwise be the case. With less taxable activity, there is less tax revenue. Under these extreme circumstances, lowering tax rates should actually boost economic activity to the degree that tax revenues will increase.

Unfortunately for McCain, the evidence against the Laffer Hypothesis is staggering, and few if any serious economists believe the hypothesis to be applicable to the U.S. tax code in its current state. The Department of the Treasury authoritatively showed this to be the case in this 2006 report. That report shows that in each of the four years following the 1981 and 2001 tax cuts, revenue markedly declined. In contrast, following the 1993 tax increases, revenue increased. Simple as that. It seems that the tradeoff does in fact exist: if you want more money to go to funding government services, you’re going to have to pay more in taxes. This really shouldn’t be all that surprising.

Not Just No Revenue … No Growth, Either!

While the Treasury report just cited is more than enough to refute the Laffer Hypothesis on its own, there is also a wealth of literature examining the hypothesis’ premises. Specifically, that literature looks at the merits of what is known as “supply-side economics”, or the school of thought that cutting taxes for businesses and wealthy investors (the “suppliers”, as opposed to the “consumers” in the economy) will markedly improve economic growth. In the American political landscape, this rationale for tax cuts has been equally if not more important than the issue of what will happen to government revenues.

Unfortunately, however, this rationale has been proven to have little if any merit. Ironically, not only have so-called “pro-growth” and “pro-investment” tax cuts been demonstrated to be incapable of raising revenues, they have also been shown (at least in their most recent manifestations) to be incapable of promoting growth or investment. The Center for American Progress (CAP) and the Economic Policy Institute (EPI) recently teamed up to add to the body of literature on this point with their report, “Take a Walk on the Supply Side: Tax Cuts on Profits, Savings, and the Wealthy Fail to Spur Economic Growth“.

In their report, CAP and EPI find that investment growth, as well as overall economic growth, were much stronger in the years following the 1993 federal tax hike, than in the years following the 1981 and 2001 tax cuts. Numerous other indicators suggest a similar finding: median household income, wages, employment growth, and of course, the federal budget, were all in much better shape following the 1993 tax hike than during either of the periods that followed “pro-growth” tax cuts.

Of course, tax policy isn’t the only determinant of economic performance. But if the supply-side argument has any merit, we shouldn’t have seen the economy surge so dramatically following “anti-growth” tax hikes, and fizzle in an equally dramatic fashion in the wake of “pro-growth” tax cuts. At the very least, we would have expected these opposing sets of tax policies to have brought these three periods closer into line with each other. Simply put, when the supply-siders got their chance in 1981 and 2001, they failed to produce results, and dug the nation deep into debt.

Backed by the Politicians, Refuted by the Experts

But aside from all the empirical evidence regarding the Laffer Hypothesis (the CAP/EPI report, as well as another EPI Report from Harvard Economist Jeffrey Frankel already cover that ground more than adequately), the other important point for today’s debate is what to make of various politicians’ inexplicable belief in this thoroughly disproved hypothesis. The allure of putting more money into the taxpayer’s pocket (via tax cuts) while at the same time putting more money into the government’s coffers (through increased economic activity and the associated higher tax revenues) is apparently irresistible, as evidenced by the following quotes taken from Frankel’s paper:

“The increase in revenues should be financed not by new and higher taxes, but by lower tax rates that would produce more money for the government by stimulating higher earnings by corporations and workers”
- President Ronald Reagan

“Some in Washington say we had to choose between cutting taxes and cutting the deficit. That was a false choice. The economic growth fueled by tax relief has helped send our tax revenues soaring. That’s what’s happened”
- President George W. Bush

“The deficit would have been bigger without the [2001] tax relief package”
- President George W. Bush

“It’s time for everyone to admit that sensible tax cuts increase economic growth, and add to the federal treasury”
- Vice President Cheney

More quotes of a similar vein can be found in Frankel’s paper. Also contained in that piece are valuable quotes directly from each of these administrations’ chairmen of the President’s Council of Economic Advisers. The statements of these highly trained economists reflect a remarkably different opinion on the Laffer Hypothesis:

“The height of supply-side hyperbole was the ‘Laffer curve’ proposition that the tax cut would actually increase tax revenue because it would unleash an enormously depressed supply of effort . [this has been] proven to be wrong”
- Martin Feldstein, chairman of the Council of Economic Advisers under President Reagan

“Although the economy grows in response to tax reductions, it is unlikely to grow so much that lost tax revenue is completely recovered by the higher level of economic activity”
- Glenn Hubbard, chairman of the Council of Economic Advisers under President George W. Bush

“Subsequent history failed to confirm Laffer’s conjecture that lower tax rates would raise more tax revenue. When Reagan cut taxes after he was elected, the result was less tax revenue, not more”
- Greg Manikew, chairman of the Council of Economic Advisers under President George W. Bush

The conflict between these two sets of quotes reflects deep divisions between the politicians and the experts with which they surround themselves. John McCain fits this pattern perfectly. Since McCain is not President (at least not yet), he does not have his own Council of Economic Advisers to refute his wild claims regarding tax cuts. He does, however, have Douglas Holtz-Eakin as his Senior Policy Adviser. Holtz-Eakin is a Princeton-trained economist and former head of the Congressional Budget Office. He also is on record as explicitly rejecting the Laffer Hypothesis.

But McCain isn’t taking Holtz-Eakin’s word for it. Aside from the quotes from John McCain cited earlier, further deference to the Laffer Hypothesis from the McCain camp has been evidenced by the candidate’s choice of Arthur Laffer, the chief proponent of the Laffer Hypothesis, as one of the campaign’s special economic advisers.

This whole asinine situation brings to mind McCain’s previous admission that “the issue of economics is something that I’ve never really understood as well as I should”. Perhaps, given his inadequacies in the subject area, he would be better off deferring to those who do understand it. More “pro-growth” tax cuts targeted to the most fortunate members of society, like McCain’s, are the exact opposite of what is needed.

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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…

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Why Virginia Won’t Hike Its CIg Tax

Earlier this week, Virginia Governor Tim Kaine proposed doubling the state’s cigarette tax from 30 to 60 cents per pack. Once upon a time, this would have been a pretty substantial hike. But with the wave of cigarette tax hikes nationwide over the past decade, this proposal would best be described as bringing Virginia’s tax more in line with what the rest of the states currently do. As the Campaign for Tobacco-Free Kids reports, the nationwide average cig tax is now $1.19 per pack.

The Republican-led House quickly announced that it was having none of this. Their reason? Economic development:

[Virginia House Speaker William] Howell and [U.S. House member Eric] Cantor argued that a cigarette tax hike would send the wrong signal to other states, which might be more inclined to raise their cigarette taxes. That could lead to job losses in the tobacco industry, especially in Virginia.

The most obvious response to this rationale is that they’re trying to close the barn door after the horses have gotten out. State lawmakers have looked–and continue to look, right now– to cigarette taxes as their favorite source of new tax revenue for years now. The idea that other states are waiting for the official sanction of tobacco-producing states before further jacking up their cig taxes is pretty far-fetched.

But the more interesting question is why Howell views the tobacco industry as the most vital component of Virginia’s economic development strategy going forward. (To say nothing of why Cantor, who after all is a member of the US Congress, not Virginia’s legislature, is weighing in on this point.) Tobacco consumption has been falling for decades nationwide. Not just on a per capita basis either– we’re just collectively purchasing fewer and fewer smokes every year, as public knowledge of the immense healthcare costs associated with smoking increases.

It’s a dying industry, a relic of the past. So why should Virginia, a state that has enjoyed a real technology boom over the past decade, want to reinforce the role of this industry in its economy? The Washington Post’s Pete Earley has a disheartening, but probably apt, answer: because Virginia lawmakers got paid to think this way. As Earley notes, virtually every member of Virginia’s tax writing committees in the House and Senate regularly take campaign contributions from the tobacco industry. You don’t have to be a Rod Blagojevich for these contributions to have a subtle influence on how you think and vote on economic policy issues.

At a time when we’re contemplating spending billions of dollars to prop up the US auto industry, it’s hard to get too sniffy about efforts to keep the Virginia tobacco industry going. But as Virginia confronts a major budget deficit, every dollar of tax revenue not collected from the tobacco industry is coming from somewhere else. And by refusing to consider hiking the cigarette tax on economic development grounds, Virginia lawmakers are basically asserting that any other interest that could be taxed– whether it’s manufacturers, small retail businesses, or individual wage-earners and consumers– are less vital to Virginia’s long-term economic growth than are tobacco farmers. And it’s hard to see any other explanation for this backwards approach to economic development than campaign contributions. As the late, great Mark Felt apparently never really said, “follow the money.”

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Still Waiting on Your Rebate Check?

November 28, 2008 will stand as a day to remember for thousands of U.S. residents. While “Black Friday” usually brings consumers and shop-a-holics much needed joy, this year it might bring some taxpayers unnecessary heartache. As it stands right now, more than $266 million in tax rebate and regular tax refund checks are circulating through the mail system and eventually returned to the IRS because of bad mailing addresses. Can you contact the IRS and give them a correct mailing address? Absolutely……the catch, I’m afraid, is that you only have until November 28th to claim your money.

Most of the money that has not been delivered is from rebate checks. Now if you are like me, you were tracking that check and awaiting its arrival. Granted, it was not a lot of money (the average rebate around $583), but it was still some money. You would think during this economic flu that those owed money would be as proactive as they could be in obtaining any cash that is rightfully theirs.

If you are still waiting on a rebate check, you should go to the IRS’s “Where’s My Stimulus Payment?” online tracking tool. Once there, you can check the status of your stimulus check and receive instructions on how to update your mailing address. If you are not so internet savvy, they you can also do the same by calling the IRS at (866) 234-2942.

The IRS MUST mail out the remaining rebate checks by December 31st. This is why the IRS has established the November 28th address change cutoff date to ensure that it can update its records and meet the final mailing deadline.

If you haven’t received your check, you need to hurry…..don’t let this year’s “Black Friday” take on a completely new meaning.

Cheers!
Taxus

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This Week’s IRS "Hall of Shame" Inductee: Larry Williams

Father of actress (and former girlfriend to Heath Ledger) Michelle Williams, Larry Williams is being investigated for at estimates $1.5 million dollar tax evasion. A former stock market trader, Mr. Williams is currently residing in Australia as the U.S. Government tries to extradite him back to the United States.

As unusual as this is, the $1.5 million dollar debt isn’t related to his daughter’s fame, as many start-relative tax debts are. Larry William’s debt stems from monies earned from his book and seminar tour from 1990 to 2001.

And, surprise surprise, he thinks he can beat the IRS. It’ll be interesting to see this one play out…

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The Frivolous Tax Argument: Often Heard, Seldom Sold

At time, debtors in the tax resolution industry don’t seem to understand the gravity of their situation. Since owing the IRS is a rarity, and talking about it with someone who knows what they are talking about is even rare, there is a lot of misinformation and excuses made for tax debt.

The biggest mistake people often make is not taking their debt seriously enough and submitting weak excuses why they should not have to pay, or shouldn’t have to pay the full amount. To the IRS, these are considered “frivolous tax arguments.”

The name sounds more innocuous that it is. Submitting frivolous tax arguments can hurt your case, a lot. It may disqualify you from certain resolution options, it may extend the time the IRS has to collect on you, it may make collections against you stronger, and it will surely piss off the IRS.

The Arguments
So, the first step in not submitting a frivolous tax argument is knowing what they are.

1. Arguing that the Federal Income Tax System is voluntary. Someone cannot be forced to file.
(Wesley Snipes took this route. Worked out pretty well for him, huh?)

2. Arguing the meaning of “income”: “taxable” versus “gross.”

3. Arguing the meaning of certain terms used in the IRS Manual:

• Argument 1: Taxpayer is not a “citizen” of the United States, thus not subject to the federal income tax laws
• Argument 2: The “United States” consists only of the District of Columbia, federal territories, and federal enclaves
• Argument 3: Taxpayer is not a “person” as defined by the Internal Revenue Code, thus is not subject to the federal income tax laws
• Argument 4: The only “employees” subject to federal income tax are employees of the federal government

4. Arguing through use on the Constitution:

• Argument 1: Taxpayers can refuse to pay income taxes on religious or moral grounds by invoking the First Amendment
• Argument 2: Federal income taxes constitute a “taking” of property without due process of law, violating the Fifth Amendment
• Argument 3: Taxpayers do not have to file returns or provide financial information because of the protection against self-incrimination found in the Fifth Amendment
• Argument 4: Compelled compliance with the federal income tax laws is a form of servitude in violation of the Thirteenth Amendment
• Argument 5: The Sixteenth Amendment to the United States Constitution was not properly ratified, thus the federal income tax laws are unconstitutional
• Argument 6: The Sixteenth Amendment does not authorize a direct non-apportioned federal income tax on United States citizens

5. Arguing through fictional legal claims:

• Argument 1: The Internal Revenue Service is not an agency of the United States
• Argument 2: Taxpayers are not required to file a federal income tax return, because the instructions and regulations associated with the Form 1040 do not display an OMB control number as required by the Paperwork Reduction Act
• Argument 3: African Americans can claim a special tax credit as reparations for slavery and other oppressive treatment
• Argument 4: Taxpayers are entitled to a refund of the Social Security taxes paid over their lifetime
• Argument 5: An “untaxing” package or trust provides a way of legally and permanently avoiding the obligation to file federal income tax returns and pay federal income taxes
• Argument 6: A “corporation sole” can be established and used for the purpose of avoiding federal income taxes

To read more on frivolous tax arguments, see the IRS article: “Frivolous Tax Arguments in General”

Now that you know what the frivolous tar arguments are, you need to know what you stand to risk if you file one. Check back next week for “The Frivolous Tax Argument: What You Stand to Loose”

Further Reading:
Myth: Taxpayer is not a “citizen” of the United States, thus
Myth: Wages, tips, and other compensation received for personal service are not income, thus
Myth: Filing “Zero” Reduces Your Tax Liability

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MORE HELP IN CHOOSING A TAX PRO

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