21st Century Taxation

Congressman Dingell (D-Mich) has released more of the details of his proposed carbon tax (see earlier entry). The package includes:

• $50/ton of carbon from coal, oil and natural gas. The tax would be transitioned in over a 5 year period and the tax would be adjusted for inflation
• 50 cent/gallon increase in the gasoline excise tax, also phased in over 5 years and adjusted for inflation
• Reduced mortgage interest deduction for home over 3,000 square feet, with some exceptions, such as for LEED certified homes or for owners who purchase carbon offsets

Dingell would use the new revenue for:

• Increasing the earned income tax credit
• Highway trust fund
• Social Security and Medicare
• Children's health coverage
• Conservation
• R&D on renewable energy
• Energy assistance for low-income households

Dingell is soliciting comments on the proposal at his website.

What do you think?

This post was originally published at http://21stcenturytaxation.blogspot.com.

On 9/6/07, the House Ways & Means Committee held a hearing on Fair and Equitable Tax Policy for America's Working Families. The emphasis was on the AMT, the future of the 2001 tax cuts, and carried interests.

What about these inequities?

1. Allowance of a mortgage interest deduction on up to two homes and on mortagages totaling up to $1.1 million. There is no reason to allow a mortgage interest deduction on a home other than one's principal residence and the debt amount is too high. Even in Silicon Valley, the median home price is not $1.1 million.
2. Fantastic benefits for employees who have employer-provided health insurance and health care. The benefit generally is not taxable to the employer and the employer gets to deduct the cost.

These are two examples of "tax expenditures." They cost the government in terms of lower tax collections. However, they are not direct spending so they do not show up on the budget expenditures. But, they are the equivalent of spending. Example: The government could give write a check to homeowners to help subsidize the debt on their home or they could give them a tax deduction of that would result in the equivalent amount.

These tax benefits are worth more to individuals in higher tax brackets - those with higher incomes.

Congressman Dingell has certainly caught attention with his call for addressing global warming by increasing the gas tax and denying a home mortgage deduction for homes larger than 3000 square feet (referred to by some in the press as "McMansions"). There are articles in the LA Times (8-30-07) and Washington Post.

Are these crazy ideas?

Not really, although it sounds like some refinement is needed. And Dingell's bill has not yet been introduced so details are still to come. A few observations:

1. Polluter pay approaches to taxes or fees make economic sense. If you cause pollution and don't have to pay for it, the costs of it and its eventual cleanup are borne by everyone. The challenge is in designing the tax or fee to address the polluting behavior. Denying a mortgage interest deduction for a home greater than 3000 square feet isn't targeted and so is problematic:

a. the home may be completely powered with renewable energy that doesn't emit greenhouse gases
b. it may be built tall rather than all on ground level so isn't taking 3000+ square feet of land that could be used for something else, like planting trees
c. the number of occupants of any size house may be another measure of energy use

H.R. 2776 passed by the House on 8/4/07 would provide a variety of incentives for alternative energy, paid for with reduced tax breaks for the oil industry. It also calls for a "carbon audit of the tax code."

Treasury would work with the National Academy of Sciences to conduct a "comprehensive" review of the tax law to "identify the types of and specific tax provisions that have the largest effects on carbon and other greenhouse gas emissions and to estimate the magnitude of those effects." They would have 2 years to complete the report.

Should this provision become law or someone decides to do such a report anyway, what might they find? Here are some possibilities:

1. Allowance of mileage for business travel. Almost all of this is likely done in vehicles that produce carbon emissions. Perhaps deductions should only be allowed for travel in vehicles that use alternative energy sources that produce little or no carbon emissions. Or perhaps travel deductions should be reduced by a specified percentage if done in vehicles that emit CO2.

2. Expenses of air travel. This produces lots of CO2 and nitrous oxide. These expenses could be disallowed or only partially allowed so the tax law doesn't encourage air travel.

3. Favorable provisions for the oil industry such as percentage depletion. These could be eliminated to reduce GHG emissions.

And there are certainly many more.

What do you think?

On August 9, 2007, President Bush noted that he'd be ok with reducing corporate income taxes and simplifying the tax law. On that same day, he signed H.R. 2272 - America COMPETES Act and called for Congress to finish the work and make the R&D tax credit permanent.

He is not alone in this tendency to call for simplification and lower rates, while also calling for new tax breaks. In his remarks about corporate tax rates he observed that "it's much easier to get something in the code than get it out of the code." A very true statement!

http://www.whitehouse.gov/news/releases/2007/08/20070809-1.html

http://www.whitehouse.gov/news/releases/2007/08/20070809-6.html

So, how do we simplify when we also want to use the tax law to solve all kinds of problems from health insurance to encouraging innovation?

Comments?

This post was originally published at http://21stcenturytaxation.blogspot.com.

While global warming has been a problem for quite some time, it is getting heightened attention today, particularly in California which now has a goal to reduce greenhouse gas (GHG) emissions by 25% by 2020. That's ambitious. How can that goal be acheived?

There are a few different techniques for resolving environmental problems.

The Treasury Dept released a report on 7/23/07 on Business Taxation and Global Competitiveness. It precedes a conference they are hosting on 7/26. The report notes several areas in our current income tax that distorts business behavior, increases costs to comply with the system and inefficiently allocates capital.A few interesting points:

• Removal of special provisions would allow the top corporate rate of 35% to be lowered to 27% and still raise the same amount of revenue.
• Businesses spent about $40 billion in 2004 to comply with the federal tax laws.
• Analysis of business tax rules cannot just look at corporate provisions because in the past 30 years, the number of sole proprietorships, partnerships and S corporations has grown.

I think it is great that Treasury is raising these issues. There are many ways to improve the federal income tax system (as well as the California one) to remove complexity, make taxes less important in business decisions, increase equity, and reduce administrative and compliance costs.For example, many, if not all preferences, such as the manufacturing deduction (Section 199), should be removed and replaced with a lower tax rate.For more information on the Treasury report and conference:http://www.treasury.gov/news/index1.html This post was originally published at http://21stcenturytaxation.blogspot.com.

In my July 9 post about the California use tax, I noted that $1 billion goes uncollected every year and in 3 years of giving consumers the easy option of reporting their use tax on their income tax form, only $13 million was collected.

I think it is realistic to collect much more through simpler ways to compute yearly use tax and a public awareness campaign (see 7/9 post).

I think many people might say we should just get rid of the tax. Or some may say we should exempt a certain amount of annual purchases. But these are not the solutions to uncollected use tax.

First - exempting a certain amount of purchases each year still requires taxpayers to keep records to see if they are above or below the exemption amount.

Second - if we eliminate the use tax and keep the sales tax, it will be even more enticing for Internet businesses NOT to set up operations in California. With no operations in the state (offices, warehouses, employees), they will have no physical presence and not have to collect sales/use tax. Their goods will look like good deals compared to the prices at your local store. And who wants to pay more taxes than they need to? Buyers would take the extra effort to find a seller who doesn't have to collect sales tax and buy from them. Sales tax collections would drop.

Third - many businesses and individuals pay their use tax so if we eliminated the use tax, the state would lose more than $1 billion per year.

In my July 9 post about the California use tax, I noted that $1 billion goes uncollected every year and in 3 years of giving consumers the easy option of reporting their use tax on their income tax form, only $13 million was collected.

I think it is realistic to collect much more through simpler ways to compute yearly use tax and a public awareness campaign (see 7/9 post).

I think many people might say we should just get rid of the tax. Or some may say we should exempt a certain amount of annual purchases. But these are not the solutions to uncollected use tax.

First - exempting a certain amount of purchases each year still requires taxpayers to keep records to see if they are above or below the exemption amount.

Second - if we eliminate the use tax and keep the sales tax, it will be even more enticing for Internet businesses NOT to set up operations in California. With no operations in the state (offices, warehouses, employees), they will have no physical presence and not have to collect sales/use tax. Their goods will look like good deals compared to the prices at your local store. And who wants to pay more taxes than they need to? Buyers would take the extra effort to find a seller who doesn't have to collect sales tax and buy from them. Sales tax collections would drop.

Third - many businesses and individuals pay their use tax so if we eliminated the use tax, the state would lose more than $1 billion per year.

Many California residents and companies have not paid their use tax. Over $1 billion of this tax, that has been around since 1935, goes uncollected each year! That money could really help the state improve health care coverage and education.

So, what's a use tax? It's a complement to the sales tax and imposed at the same rate. If a seller is not required to collect sales tax, such as because it has no physical presence (offices or employees) in the state, then the buyer owes use tax. The buyer must self-report and pay the use tax. For example, when you buy books from Amazon.com, no sales tax is charged because Amazon has no physical presence in California. So, you must keep track of these types of purchases. At year end, you add up all your purchases of taxable goods for which you were not charged sales tax and multiply that amount by the sales tax rate for your county.

For the past few years, California has done what many states have done for years - it added a "use tax" line to individual and corporate state income tax forms. This is a generous approach to collecting the tax because it allows taxpayers to avoid sales tax forms and let's you pay the tax late with no penalty (for example, you pay your 2006 use tax on your 2006 Form 540 which you file in 2007). However, the "use tax" line on Form 540 is elective because you could instead pay your use tax in the year it is owed using sales/use tax forms.