Taxes

HEALTH REFORM: Breaking the (Tax) Code

Joanne Kenen — Fri, 07 Nov 2008 18:07:00 -0500

Fast or slow? Incremental or comprehensive? Right out of the gate or later? Kids or everyone? Those are just some of the questions President-elect Barack Obama needs to ask and answer about the size, pace, breadth and cost of health reform, which has returned to the national agenda with a prominence unmatched since the early 1990s.

Kristen Gerencher of MarketWatch has a good overview of the possible parameters of reform, written for an audience that pays attention to the economics of reform.

Several of the experts quoted in the piece called for a bipartisan approach—the road not taken in 1993-94. And some of the policy wonks argue that, campaign mantras aside, Obama would be wise to take a look at one aspect of Sen. John McCain's proposal: eliminating or perhaps capping (to protect lower income people) or gradually phasing out the employer tax exclusion. Taxing health benefits may not be popular with some Obama backers, and it may not even be popular with Obama himself, but many experts in health policy across the political spectrum think the idea has merit—on the condition that it be done as part of overall reform that extends meaningful and affordable quality coverage to everyone.

Princeton's Uwe Reinhardt, for instance, said one alternative would be to keep the benefit tax free for people whose income is below $75,000, tax half of it for those between $75,000 and $150,000, but treat it all as income for anyone in higher brackets.

The tax break is worth somewhere in the neighborhood of $200 million, noted New America health policy director Len Nichols. That's more than enough to cover all Americans. "My prediction is we are going to put the tax expenditure measure on the table, worrisome though it is to both business and labor, because the alternatives are not so pretty."

Where They Stand: John McCain on Higher Ed

Ed Policy — Wed, 03 Sep 2008 19:58:00 -0400

Fifteen months after launching his presidential bid, Sen. John McCain (R-AZ) started laying out his higher education policy agenda last month. In a news release, the Senator outlined his policy priorities but provided few details about his proposals.

With the Republican National Convention in full gear this week, Higher Ed Watch decided to take a closer look at McCain's higher education policy plans. He aims to do the following:

Simplify the Federal Financial Aid System

McCain believes that many eligible students do not seek out federal financial aid because they find the aid application process too complex and don't understand their options. He would address these concerns by:

Consolidating Programs: McCain proposes combining various federal grant and loan programs as a means to simplify their administration and help students better understand their eligibility for aid. While he doesn't get into specifics, it's likely that he would follow the Bush administration's lead and take aim at the campus-based student aid programs, which primarily supplement Pell Grants for low-income students. Critics say these programs are not serving the neediest students well because a disproportionate share of the funding is going to students at the wealthiest colleges.

Streamlining the FAFSA: McCain supports efforts to shorten the Free Application for Federal Student Aid (FAFSA) to make it easier for students to fill out.

Redesigning Tuition Tax Breaks: The Senator proposes consolidating the various higher education-related tax credits and deductions, including the Clinton administration's HOPE and Lifetime Learning tax credits. "The existing tax benefits are too complicated, and many eligible families don't claim them," McCain says. "By simplifying the existing benefits, I can ensure that a greater number of families have a lower tax burden when they are helping to send their children to college."

"Fix" the Federal Student Loan Program

The Senator calls for creating a "simpler and more effective" federal student loan program but provides little explanation of how to accomplish this goal. Unlike his Democratic opponent, who has called for eliminating the Federal Family Education Loan (FFEL) program and providing loans entirely through the U.S. Department of Education, McCain believes that continued lender participation in the federal loan program is vital. He would, however, "demand the highest standards of integrity" from participating lenders, presumably to prevent a repeat of the pay-for-play student loan scandal that Higher Ed Watch helped expose last year.

Make Higher Education More Transparent for Consumers

McCain believes that the Department of Education can help students make better informed decisions about their college choices by publicly releasing "in a clear and concise manner" reams of data that colleges report to the federal government. The government already collects huge amounts of data from schools but "does nothing with the information." The Senator, however, would not impose any additional reporting requirements on colleges, saying that "the answer" to higher education's problems "is not to impose more regulations." He favors shining a light on information that is already available.

Eliminate Earmarks for Colleges

As part of his campaign against pork-barrel spending, McCain would bar lawmakers from providing Congressional earmarks to colleges for research spending. "Earmarking is destroying the integrity of federally funded research," he says. He would spend a portion of the money saved to increase government spending on university research that is competitively awarded by federal agencies like the National Science Foundation.

McCain's proposals are as notable for what they include as what they leave out. For example, his plan does not call for any new spending on federal student aid. This is in sharp contrast to President Bush, who pledged during his presidential campaigns to significantly boost spending on Pell Grants.

Sen. Barack Obama (D-IL), McCain's Democratic rival, has already criticized McCain for failing to call for expanding student aid. In his speech to the Democratric convention, Obama cited this ommission as evidence that McCain doesn't understand "what's going on in the lives of Americans."

"How else," he asked, could McCain offer "an education plan that would do nothing to help families pay for college?" McCain has not yet responded to this attack, but to be fair, many student-aid experts are skeptical about whether Obama's proposal to significantly expand spending on tuition tax credits is the most effective way to increase college access and affordability.

Stay tuned to Higher Ed Watch in the weeks ahead for more analysis of the presidential candidates' higher education proposals.

The Economy and Education- Will the Budget Crunch Facing States Affect Education Spending

Heather Rieman — Thu, 31 Jul 2008 19:27:00 -0400

As the economy continues to weaken, many states across the country are starting to face a budget crunch that may affect funding for education. A variety of factors--including the housing market, fuel prices, and a slowdown in tax collections--mean that states are going to see fewer revenue increases than in previous years.

When states face economic downturns, there are real implications for students, teachers, and schools. States often try to protect K-12 spending during tight budget times. But states spend such a large portion of their discretionary spending on education (about 34 percent for K-12 and 11 percent for higher education) that it is difficult to make cuts entirely in other areas. Other large discretionary expenditures include Medicaid (17 percent) and corrections (11percent).

The Center on Budget and Policy Priorities found that during the end of the last recession (2002-2004), 34 states cut real per-pupil aid to school districts. Already this year 10 states have proposed or implemented funding cuts to K-12 education.

According to a report by the Center on Budget and Policy Priorities, in fiscal year 2009, 29 states have a combined budget shortfall of $48 billion. California, Arizona, Nevada, and Florida are particularly hard hit. We are already starting to hear stories about teacher layoffs in California; reduced summer school programming in Bethel, Conn.; a 10 percent budget cut for the Miami-Dade School District in Florida; fewer nurses and certified personnel for libraries in Mesa, Ariz.; and cuts to gifted and talented programs in Nevada.

The extent and severity of the budget problems vary widely, however, with some states facing much more severe funding issues than others. In energy- and agriculture-rich states, such as Montana, Wyoming, North Dakota, Alaska, and New Mexico, state revenues are actually increasing. However, higher energy and health care costs combined with lower property tax revenues doesn't necessarily mean that schools in those states are not feeling a pinch at the local level.

According to a recently released National Governor's Association report, The Fiscal Survey of States, 16 states are facing revenue decreases, and 23 states show no increase or decrease for 2009. When the economy is good, generally both state revenues and expenditures grow each year, because of inflation and population growth. Thus all 39 of these states are in for tough times. Additionally, during recessions the costs of social services tend to rise as people need more assistance, placing an extra burden on these already cash-strapped budgets.

If the economic slump in the early 2000's is any indication, the toughest time is still to come. The NGA reports that last time around, state's faced their largest shortfalls in the year or two after the economic downturn had ended. Considering we are still in the midst of a troubled economy with no end in site, it is likely that more and more states will be impacted.

For at least some states, there is still a little time left to tighten the belt for the rough road ahead. States seem to be doing that. According to the NGA report governors recommended only a one percent increase in discretionary spending in their 2009 budgets--the third lowest increase in the past 31 years. Hopefully, states are taking the time to carefully plan for the economic downturn and will make cuts to education only when they have to and in the places least likely to affect student learning.

We are just getting a first glimpse of what the economic downturn means for students, teachers and schools; the real fallout remains to be seen. Ed Money Watch will be closely following the economy and how it affects education funding around the country.

The California Budget Loot That Won't Stay Stolen

Mark Paul — Thu, 24 Jul 2008 21:52:00 -0400

One of the prime uses of the California initiative process is budget theft: a special interest, unhappy with its cut of state spending, passes a ballot measure to increase or fence off its budget. But sometimes the loot doesn’t stay stolen.

Just ask the road lobby. Alarmed by reports that Republican legislators want to grab dollars from transportation accounts to paper over the state’s budget deficit, it has launched a radio ad campaign to defend its booty.

The loot at issue is the portion of the state’s sales tax revenue derived from the sale of gasoline.
Until this decade, the state, for tax purposes, treated gasoline like any other purchased good. California levied the normal state sales tax on sales at the gas pump and put the money into the general fund, along with the revenue from sales of surfboards, Steely Dan records, and other goods. This money helped pay for schools, health care, and prisons. (The sales tax should not be confused with the separate 18-cents-a-gallon state excise tax on motor fuels, a levy on road users exclusively dedicated to fund road maintenance and improvement.)

But as the new century rolled around, the road lobby had a problem. The revenue from the gasoline excise tax, last increased in 1994, was being eaten away by inflation and more fuel-efficient cars. The inflation-adjusted gas tax revenue per mile driven fell by about 20 percent even as the number of cars and miles driven increased by about 20 percent. California no longer had enough gas tax money coming in to maintain and improve roads.

There was, of course, a tried-and-true solution available for this problem: raise the fuel excise tax on road users and index it to inflation. User-pay has been the central road financing mechanism for the better part of a century. But telling voters that they must pay for driving is against the California way –– remember, Californians drive on freeways, not highways. And with the Internet boom at its peak, California was rolling in revenue.

So the road lobby stole some of that money, fair and square. In March 2002 it convinced voters to pass Proposition 42, shifting the state sales tax on gasoline purchases out of the General Fund and earmarking it for transportation.

But like the tax cuts California enacted during the dot-com stock bubble, the road lobby’s raid was built on an illusion. Once the hot Internet money evaporated, the raid threatened to add another $1.4 billion to the state’s growing budget gap. To prevent that, the Legislature and Governor stole the money right back, suspending Proposition 42.

Not for long. In November 2006 the road lobby got voters to pass Proposition 1A, which limits how often the sales tax shift can be suspended and requires any suspension to be treated as a loan, to be paid back to transportation accounts, with interest, on an accelerated schedule.

Where’s the high moral ground in this budget border war of raid and counter-raid? Both sides have plausible claims. California is in no fiscal shape to shift general fund revenues away from schools, colleges, and health care. But it has also failed to adequately fund transportation. (For the moment, let’s give the road lobby a pass on the Loony Tunes nature of earmarking the sales tax, a general tax on consumption, according to the kind of goods being purchased. Other than to ask, What’s next? Dedicate the sales taxes collected on condoms and Victoria’s Secret lingerie to family planning services?)

What’s indefensible is having a two-track budgeting system: a main legislative track where budgeting is a matter of priorities and trade-offs; a second ballot-box budgeting track where voters decide every question in isolation, without the discipline of having to make the needed trade-offs for what they want. It is hard to see how California can ever escape budget hell unless it changes the initiative process to require every measure submitted to the voters to include its own funding source.

Trends as a Guide to Tax Reform

Annette Nellen — Mon, 16 Jun 2008 16:17:00 -0400

Last week, the Center for Disease Control and Prevention (CDC) reported that life expectancy has gone up, hitting a "record high in 2006 of 78.1 years."

This kind of trend data is relevant to tax reform discussions, but not often highlighted. Tax reform discussions could be better focused if we spent more time looking at how the world has changed since most of our current rules were enacted and how it will likely continue to change.

Several years ago I started gathering data on trends and using it to show where our tax law was outdated or working contrary to a trend, that is - contrary to reality. A few simple examples:

1. Longevity - this is clearly relevant in considering our Social Security system. When Social Security was created in the 1930s, life expectancy was lower than retirement age. That is clearly not the case today.

2. Who lives in poverty - In 1959, 35.2% of people age 65 and older were in poverty. In 1996, that percentage had dropped to 10.8%. (Leatha Lamison-White, Poverty in the United States: 1996, U.S. Department of Commerce, Bureau of the Census, Table C-2, page C-5). The federal tax law (as well as some state income tax laws) include exemptions and credits for being old. Years ago it may have been appropriate to assume that most elderly needed a tax break, but that is not true today.

3. The US share of world GDP continues to drop. Our foreign tax rules were written decades ago when US companies had a dominant role in the world markets. Today, US companies face a far more competitive environment in a global economy and our tax rules may be hindering their ability to compete.

4. Intangible assets are more varied and important today than a few decades ago. Many tax rules, even ones written in the past 20 years may not make sense in our information age. For example, PL 86-272 enacted in 1959 to provide guidance on when a multistate business could be subject to income tax within a state, only applies to sales of tangible personal property. Also, Internal Revenue Code Section 197 written in 1993 provides a 15-year amortizable life for most acquired intangibles. That life is likely too long today due to rapid changes in technology.

Here is an example of the type of trends analysis that could help guide tax reform discussions. This is just a draft - there are many more examples of trends and of current tax system flaws they help point out. (Click here for a pdf of the following chart - it's easier to read.)

Trend and Examples

Relevance to Tax Law Design

U.S. businesses face an increasingly greater competitive environment

§ Technology and tax or financial incentives have lowered the barriers to entry into many markets § Economic growth is projected in non-OECD countries post-2000§ Reduction in trade barriers (NAFTA for example)§ Growth in E-commerce

§ Double taxation of corporation income increases the cost of capital in the U.S. Many other countries have an integrated corporate/individual tax system.

§ Many countries offer research incentives. U.S. research tax credit is a temporary measure. § U.S. tax treaty network is not complete. § Withholding rates may not align with free trade policies.

§ Some tax rules don’t work well with e-commerce, such as sales tax collection and sourcing of transactions

§ Corporate tax brackets are not adjusted for inflation.

Shift from industrial age to information age

· Decrease in tangible goods as percentage of GNP, and growth in services · Changes in consumption patterns (such as consuming more services and intangibles and less tangible goods)

§ For many intangibles, 15-year life under IRC Section 197 is often too long.

§ Eroding tax bases for state and local governments - typically, property and sales tax bases do not include intangibles and services. § P.L. 86-272 - the protections and clarifications of this law only apply to income taxes and tangible personal property.§ Consumer Price Index (CPI) has reportedly not kept up with product and consumer changes. The CPI has tax implications: annual inflation adjustments to personal exemptions, standard deduction and non-corporate tax brackets. A 1997 estimate noted that failure to correct the CPI (downward) reduced federal revenues.," March 1997; http://www.house.gov/jec/fed/inflat/cpi-tax/cpi-tax.htm.

Taxation shifts to payroll and personal income taxes, base broadening, and environmental tax considerations

· Decline in marginal tax rates and broadening of tax base · Expanding view of tax as an incentive tool · Shift from corporate income and property taxes to individual income and payroll taxes · Growth in use of consumption taxes and environmental taxes (worldwide)

§ Increased cost of non-taxable fringe benefits, including employer-provided health insurance, erodes payroll and personal income tax bases.

§ Increase in deductions, exclusions and credits makes the law less neutral and creates inefficiencies. Such provisions also make the law more complicated.§ P.L. 86-272 - The protections and clarifications of this law only apply to income taxes. § The U.S. is the only OECD country that does not have a VAT. § Opportunity to address environmental concerns with polluter pays taxes and have a tax shift that may improve efficiencies in other taxes.

Changes in business operations

· Growth of virtual workplaces and markets · Telecommuting and distant workers, global work teams · Increasing need for special expertise on an as-needed basis · Shorter product life cycles due to global competition · Changed production techniques: JIT, outsourcing, ability to address specialized customer needs

§ Some depreciation (MACRS) lives may be too long.

§ Inventory valuation rules (Sec. 263A) are fairly complex and require more costs to be treated as inventoriable than is required for financial reporting purposes (GAAP). Rapid turnover and quick obsolescence of goods may not have been considered in 1986 when these rules were adopted. § Property tax valuation/obsolescence schedules may be too conservative. § For many intangibles, 15-year life under IRC Section 197 is often too long. § Temporary nature of research tax credit limits the benefits of this credit to the U.S. economy. § Nexus standards need to be reviewed and standardized among states. For example, should location of telecommuting employee in a state cause employer to have nexus in that state?§ The tax law should not hinder alternative compensation techniques, including equity compensation. § Outdated and complex worker classification rules play too great a role in hiring practices which adversely affects both employers and workers.

Increasing gaps

· Increasing gap between high-income and low-income individuals (such as in California – see CBPP report)· Education opportunities · Access to technology (such as broadband, opportunities for skill development/enhancement)

§ Some low-income individuals may face high marginal tax rates due to phase-outs of earned income tax credit (EITC), child-care credit, education credits, etc.

§ States as a whole rely on the regressive sales tax and excise taxes for about 50% of their revenues. See Census information at www.census.gov/ftp/pub/govs/www/statetax.html.§ Tax breaks for higher education are not refundable and therefore are not helping those most in need.§ Some state income tax systems are not as progressive as the federal income tax system. In states with incomes tax, the number of tax rate brackets ranges from one to ten, some states, such as Colorado and Michigan have a single flat tax rate. See FTA at http://www.taxadmin.org/fta/rate/ind_inc.html. § Many states do not have the equivalent of the federal EITC (see 2008 report of the Center for Budget and Policy Priorities). § Tax compliance costs tend to be high due to complications of the filing system in general and calculating the EITC in particular. Over 70% of individuals claiming the EITC used a preparer (AICPA, Understanding Tax Reform, 2005, p 3).

What trends and tax system flaws would you add to this starting list?

Guest Post: Six Principles for Financial Aid Reform

Ed Policy — Tue, 13 May 2008 14:00:00 -0400

By Art Hauptman

There is widespread agreement among financial aid analysts and practitioners that our country's student aid system is not working as effectively as it could be. Many believe that the solution to this problem is to have the federal government substantially increase the amount of money it spends on the existing student aid programs.

I disagree. The federal government currently spends roughly $40 billion for grants, college work study, loan subsidies, and tax breaks for college -- more than enough to achieve the programs' goals if they were operating effectively and efficiently. As I argued last week, the current structure of student financial support in this country needs to be changed in fundamental ways.

Federal aid programs and tax benefits should be molded into a more comprehensive and comprehensible whole. This would entail some program consolidation and a much better coordination of federal programs and policies with each other. The federal government should also strengthen the incentives it provides states, colleges, and the private sector so that these entities complement, rather than complicate, its public policy goals. Such a system should adhere to the following six principles:

It should be much simpler for students and their families to apply for aid and for college officials to administer it. The current application process serves as a huge barrier to access for many students and families, especially those most at-risk.

A modest amount of self help in the form of loans or work should be required of all students, although institutions should be encouraged to cover some or all of this self-help component for students from the most impoverished circumstances.

The largest proportion of assistance should be targeted on the most at-risk students. This greater commitment to targeting of benefits should include federal and state policies, institutional practices, and private sector initiatives.

Tuition tax breaks should be the primary form of non-repayable aid for middle class students and lifelong learners who are already in the work force. Tax benefits are much better suited for these two groups of students than cramming them into the already strained traditional student aid programs.

The federal student loan programs should be restructured to reduce the adverse effects of growing debt burdens and to stem instances of program abuse. The policy focus should shift from the traditional emphasis on when the loan is made to more attention being placed on helping borrowers when they enter repayment.

Greater reliance should be placed on non-financial aid activities to improve the preparation and increase the aspirations of students most at-risk. Student aid is clearly not enough when it comes to the riskiest students; reaching them in various ways while they are in grade school or middle school is clearly key to greater success.

By taking the following three steps, policymakers can accomplish the kind of reform that is needed without spending any additional money:

Federal student aid programs and tuition tax benefits should be integrated in a systematic way. Many student aid advocates have suggested doing away with the current range of tuition tax benefits and using the savings to increase spending on need-based financial aid. Others have suggested making the tax credits refundable. A better approach is to recognize the need for tax benefits -- both to offset current tuition expenses and stimulate more college savings -- and integrate the tax system with federal student aid programs: before, during, and after college.

The federal government should be more aggressive in seeking to increase the access and success of the students from the lowest income families. Federal policy makers have tended to rely on expanding Pell Grants as the means for helping low-income students. But it is increasingly obvious that other policies are needed to achieve this goal, including more early intervention through GEAR UP and related efforts, and providing incentives for institutions to require less borrowing from these students. It would also be worthwhile to consider establishing college savings accounts for poor but promising students to raise their aspirations.

A student-centered seamless federal student loan structure should be created. Federal student loan policies and practices have been central to postsecondary policy debates for the past several decades, with the primary focus over the past 15 years on whether loans should be financed directly by the federal government or privately financed. But the ‘direct loan' debate has obscured a number of other critical issues related to the provision of student loans, including the complexity of the system and whether federal policies contribute to rapidly mounting student debt burdens. We should consider how the federal student loan structure can be streamlined so that all loans have the same terms and conditions and real relief is provided to borrowers in trouble when they reach repayment.

These three sets of reforms could be paid for largely through changes in the student loan programs that would: restrict the in-school interest payments that the government makes on behalf of students in the subsidized Stafford Loan program to Pell Grant recipients; increase the share of federal student loans provided through the Direct Loan Program; and use auction mechanisms to determine a market rate of return on federally guaranteed loans and thereby drive down federal payments to lenders. In addition, improving coordination between the Pell Grant and tax credit programs would create some savings by making students from middle-income families ineligible for Pell Grants. This change would justify increasing tuition tax benefits for middle-class students and their families through the consolidation of existing tuition tax breaks into a new single expanded tuition tax credit.

Future posts will consider how adopting these reforms could lead to a reinvigorated system of student financial support in this country.

Art Hauptman is an independent consultant on higher education finance issues. His guest blog column will continue to appear each Tuesday in the month of May. The views expressed herein are his own and do not necessarily reflect the positions of the New America Foundation.

The Rich Will Always Be with Us

Mark Paul — Mon, 12 May 2008 22:26:00 -0400

Like generals who are always fighting the last war, California's pundits are still fighting their way out of the last budget crisis. Latest case in point: George Skelton of the Los Angeles Times, who recently complained again that California's income tax "depends too heavily on the wealthy." In Skelton's world, the wealthy are just like those men mothers always warn their daughters about: they'll show you a good time, and then disappear, leaving you heartbroken. "Their incomes rise and fall steeply with the economy," he writes, "and therefore so do state budget deficits."

Except that's not why California has a budget crisis. As the state controller reported on May 9, personal income tax collections for the first nine months of the current budget year are $1.4 billion over the estimate in Gov. Schwarzenegger's January budget and within a whisker of the amount budgeted last summer. Through the first nine months California revenues are up 1.2 percent over a year ago, thanks entirely to the income tax, which has more than made up for the decline in sales tax revenues caused by the housing crash.

The pundits' obsession with the volatility of income tax revenues is a holdover from the past. In 1999 and 2000 the incomes--and income tax payments--of the wealthy, powered by huge capital gains and stock option grants during the Internet stock market bubble, soared. Then they fell back to earth in 2001 and 2002, dragging California into a budget crisis. But as I've explained in more detail elsewhere, the bubble and its subsequent popping were an unprecedented event. Just look at the chart below, showing California's four largest sources of general fund tax revenue over the last three decades.

Uploaded with plasq's Skitch!

Take out the bubble years, and revenues don't resemble a "roller coaster," as Skelton puts it. They rise when the economy grows and flatten out when it shrinks, as it did in the sharp recession and restructuring that hit California in the early 1990s. Charts of federal revenue, also dependent on income taxes, show the same pattern. The Internet boom was an anomaly.

But let's suppose for a moment that it wasn't. What would the pundits do so that California no longer "depends too heavily on the wealthy"?

Raise taxes on the poor and middle class? According to an analysis done for the California Budget Project by the Institute on Taxation and Economic Policy, low- and middle-income households already pay a higher percentage of their incomes in state and local taxes than do those in the top 1 percent.

Cut income tax rates on the wealthy? California has already done that. The state had top marginal rates of 10 percent and 11 percent on the wealthy through the 1970s, most of the 1980s, and some of the 1990s, but lowered them to 9.3 percent (in 2004 voters added, by initiative, an extra 0.7 percentage points on incomes over $1 million, with the funds earmarked for expanded mental health care.) Yet the amounts collected by the income tax continue to grow.

Why? Because of an underlying economic shift the pundits rarely mention: California gets an increasing share of its budget from income taxes on the wealthy because that's where all the money is. According to California Franchise Tax Board data, in 1979 the top 10 percent of taxpayers had about one-third of the state's total adjusted gross income. In 2005, their share had grown to roughly half.

If the pundits know a way to balance the budget, reduce the share of taxes paid by the wealthy, and not widen this growing income gap between the wealthy and everybody else, they should let us in on the secret.

A Dollars and Sense Rationale to Deliver Accounts at Tax Time

Melissa Koide — Mon, 28 Apr 2008 13:34:00 -0400

Each year the U.S. Treasury Department issues over one-hundred million refunds worth billions of dollars to individual tax filers.

Almost half of all refunds are issued via a paper check, with the majority of those checks being mailed to lower-income households. This presents a scaleable opportunity to provide these households with a low-cost transaction and savings account on the tax form.

IRS data show that of the 60 million federal tax refunds that were issued via a paper check in 2005, almost half were mailed to households earning $30,000 or less. These are the very households who typically lack access to reasonably-priced financial services and who are most likely to pay a disproportionate amount of their income to conduct routine financial transactions. They are also less likely to have adequate savings to cover emergency expenses like car repairs or unexpected medical bills, which often leads to payday lenders and other expensive sources of credit.

These households do, however, receive on average about $1,700 in federal tax refunds. And when examined in the aggregate, almost $50 billion is annually refunded to households with AGIs of $30,000 or less, via paper check.

The potential of those refunds as deposits creates a powerful case for financial institutions to make a low-cost transaction and savings product available to lower-income consumers.

And the millions of dollars in cost savings to the federal government in delivering these refunds electronically, combined with the policy objective of helping to "bank the underbanked," present a strong case for the federal government to provide tax filers with an option for such an account on the tax form.

Envisioned as a large-scale federal policy, the Assets and Transaction Account, or ATA, would be a prepaid account that would be delivered to tax filers who didn't direct deposit their refund into an existing account or elect to receive a paper check.

Financial institutions would issue the ATAs, which would be initially funded with tax refunds. Other deposits, including wages and salary and federal benefits, such as social security payments, could also be made into the accounts throughout the year. To facilitate savings, five percent of the tax filer's refund would be automatically deposited into a savings purse of the account. At a minimum, the ATA would be FDIC-insured, network-branded, and provide ATM access, POS capabilities, and web- and phone-based bill payment options, thus allowing the ATA-holder to use their account to conduct routine financial transactions and build some savings at a reasonable price.

By leveraging billions of dollars in annual tax refunds, there is enormous potential to deliver a financial product that benefits consumers, industry, and the government alike.

Thursday Round Up: A Look at a Petition Firm

Joe Mathews — Thu, 17 Apr 2008 18:59:00 -0400

DEPARTMENT OF MOON HOWLING: The Las Vegas Review & Journal takes a long look at one of the country's more important signature firms, National Voter Outreach and its CEO Rick Arnold. I've interviewed Arnold in his Carson City home, and found him to be one of the more thoughtful people in the petition trade, critical of its problems and clear-eyed about its limitations. This story is built heavily around criticism from the liberal/progressive Ballot Initiative Strategy Center, which is quick to lable signature gathering as corrupt (at least in cases where it opposes the cause in question). There is a "shocked, shocked" quality to this criticism. The signature gathering business has plenty of problem workers, many of them poorly trained folks who, for lifestyle reasons, have taken a job that usually pays them in cash. But BISC and other critics invariably propopse to criminalize the process of gathering signatures, as in Oklahoma. In supporting these restrictions, liberals are hurting themselves, by establishing precedents restricting political speech that can be used by their political opponents. And such restrictions don't stop direct democracy. They merely slow it down, adding to the costs (and thus the influence of interest groups) that progressives love to denounce. The more you regulate, the more firms like National Voter Outreach will benefit.

BLOOMIE AND ARNOLD: Mike Bloomberg, deepening his involvement in California initiative politics, hosts a fundraiser tonight on behalf of Gov. Schwarzenegger's redistricting ballot initiative. It's still gathering signatures on the street.

MICHIGAN POT: Medical marijuana initiative makes the ballot in Michigan after legislature declines to adopt the measure itself. (hat tip to Ballotpedia).

INDIVIDUAL MANDATE: A ballot initiative to establish an individual mandate for health care in Michigan is now circulating on the street.

NO ANIMAL CONFINEMENT MEASURE IN COLORADO: Colorado's ballot will be a little less crowded, as animal rights advocates drop their farm animal confinement measure. The state legislature passed legislation similar enough to satisfy the initiative's backers.

OAKLAND YOUTH: Here's an interesting report on a city of Oakland (Calif.) ballot initiative to double funding for a youth services program.

NEVADA NEUTRALITY: School superintendents, never fan of teachers' union, are staying out of a coming mega-ballot war in Nevada over the union's effort to raise taxes on gaming to generate more funds for education.

MAINE DEBATE: A referendum question has been submitted in Maine that would remove "sexual orientation" from human rights and discrimination law, and bar same-sex marriage and adoption by gay couples.

PARENTAL NOTIFICATION: Here's a description of another attempt, via California blalot initiative, to require parental notification for minors seeking abortions. A similar initiative went down in the 2005 special election. Over the past week, I found this initiative was a low priority for the state's signature gatherers. It's pay $1 or less a signature, half the price being paid by sponsors of redistricting, crime victims' rights, and alternative fuel measures.

FROM OVERSEAS: Croatians won't get to vote on their country's decision to join NATO.

Spend Your Money on Something REALLY Stimulating, America!

Sonia Hamel — Tue, 15 Apr 2008 16:23:00 -0400

April 15, 2008 - US NewsWire Service - A spokesman for the Internal Revenue Service today apologized for the inadvertent release of an unauthorized letter* written to accompany the economic stimulus payments to households across America. The IRS spokesman said that taxpayers should ignore the letter, originally written for review and consideration by the White House. Congressional leaders asked for an investigation into how the letter was released. The document is reproduced below:

Dear U.S. Citizen,

Enclosed is your economic stimulus payment for 2008. The check amount is as follows: $600 for a single person, $1,200 for a married couple, and $300 per child, for families making less than $75,000 ($150,000 for a couple).

Speaking of children, if you have any, you should thank them for loaning you this money. After all, they are the ones who will have to pay it back. If you are blessed with grandchildren, don't forget to thank them too. They'll be paying off the interest.

Internally at the IRS, we had suggested that the President and Congress could have saved us a lot of work if they had just sent the money directly to China. After all, they are hoping for a boost in consumer spending, another Christmas in May. But, purchases of Gameboys and Xboxes, iPods and big screen televisions, won't really help the U.S. economy or the global environment. They will send jobs abroad and increase energy use in the US. But since the President wants you to have the money, we here at the IRS are frankly worried that this rebate will make both the economy and global warming worse for our children and grandchildren - a double whammy.

So, if you actually want to help build a better future, then the IRS wants you to consider the following ways to strengthen the economy and rescue the planet:

1) Invest in a "green" mutual fund that invests in environmentally friendly companies, or in those backing alternative energy. Investments in U.S. clean-tech companies will pay you back as they begin the shift to a lower carbon economy for the U.S. (By the way, did you really think a President from Texas was going to invest your tax dollars in alternative energy sources?)

2) Reduce your energy costs by investing your rebate. Replace an energy inefficient refrigerator. Insulate your house. Replace drafty windows. Get your car tuned and replace that tire with the slow leak. Save it up for a hybrid to replace your current car when it fails. These changes will allow you to see an economic return from your rebate and boost American jobs. It will also reduce greenhouse gases and help reduce the price of energy for everyone. Reducing our use of energy is ultimately patriotic and good sense for your family.

3) Buy organic food this year. Although it is more expensive, it will help domestic (mostly small) farmers. And, if you want to be really energy efficient, buy a share in a local farm. Community-supported farmers plant a variety of crops, selling shares (generally costing about $500) in advance. During the growing season, farmers deliver boxes of assorted fresh organic produce; you get fresh healthy food and the farmer gets help in keeping local land in farm use. Can't get more wholesome than that.

4) Repair your house. Using local skilled labor will boost our economy and, after all with the current real estate market, you're going to be living there for a while.

5) Donate the money to a U.S. oriented charity. Any local charity will spend your money, and stimulate the economy almost as quickly as if you had. This will also give you a tax deduction next year and a warm fuzzy feeling this year.

6) Donate the money to a political campaign of a candidate who supports action on the environment and climate change, in particular.

The media is going to be paying a lot of attention to how you spend this money. One of the arguments for tax cuts is always that people can do a better job of deciding how to spend their money than politicians can. This time, America, let's prove them right.

There's no such letter, obviously -- or at least it hasn't surfaced yet! But the point is very much a real one: Short-term thinking is what's gotten us into these messes, both economic and environmentmental. Taking the long view for a change might actually make a difference!