Tax Foundation - Tax Foundation's "Tax Policy Blog"

Will EPA "Pass" a Cow "Gas" Tax?

Thu, 04 Dec 2008 00:00:00 CST

A story from MSNBC about the EPA possibly implementing a per unit Pigouvian tax on cows to offset the greenhouse gas emissions that cows are responsible for. (Taco Bell customers, I hear you're next.)

On a serious note, in the story, the farmer featured complained about how such a tax would hurt him financially. While that may be true, it should be irrelevant. If there is truly an externality here and it can be effectively measured and properly implemented, then there should be a tax on cows in the amount that is equivalent to the negative harm done per cow. That's all that matters. It all hinges on the extent to which cows cause global warming and the extent to which global warming harms society. I'm not in a position to answer that question, but just because it may harm a farmer doesn't mean it's bad policy.

Side note: The video quoted how much in additional tax the farmer in the story, Charles Hanehan, would pay under this proposed tax. And he made a ridiculous comparison to the bailouts that certain companies are getting right now, which is irrelevant. But since he brought up handouts to certain companies, I did a little digging on EWG's Farm Subsidy Database and found that Hanehan Family Dairy received $561,695 in subsidies from 1996-2006. You can't make this stuff up.

Tax Foundation in Idaho and Arkansas, and the Best of the Blogosphere in the States

Thu, 04 Dec 2008 00:00:00 CST

Yesterday, Tax Foundation President Scott Hodge spoke to the Idaho Taxpayers Conference in Boise. The Idaho Statesman reports:

State and local taxes account for 10.1 percent of state income in Idaho, ranking 13th highest in the nation, Hodge said. Wyoming ranks 48th, Montana 40th, Washington 35th and Utah 22nd.
"You stand out in this high-tax state in the middle of a low-tax oasis," he said.
Hodge suggested eliminating the corporate income tax, which he said is the most anti-growth of all taxes.
"It's going to be really difficult for Idaho to gain a comparative advantage to any of your neighbors without eliminating one of your major taxes," he said. "Only permanent tax cuts will change people's behavior long term."

Staff Economist Josh Barro was in Little Rock, Arkansas to speak at a joint meeting of the legislature's Committee on Economic and Tax policy and the Committee on Revenue and Taxation. Both the Arkansas Democrat-Gazette and the Arkansas News Bureau featured Josh's testimony. Excerpts from the Bureau:

"Sales taxes have been falling off, especially in states with relatively narrow sales tax bases," Barro told lawmakers. "When a sales tax base includes groceries and other necessity items it's relatively stable, but a number of states, especially in the northeast, have continually narrowed their sales tax bases to a point where essentially they're depending on the sales of automobiles, electronics and furniture."
Rather than reducing the grocery tax, Barro suggested offering tax credits to low-income households.
"A credit provides more targeted relief to low-income taxpayers than a grocery tax cut," he said.
Barro also said studies have found that tax holidays for back-to-school shoppers do not promote economic activity.

As for the blogosphere, there's lots of Tax Foundation state data that's being used:

Heath Fahle, executive director of the Connecticut Republican Party, talks about bailouts for states in the CT GOP's official blog, The Everyday Republican, and cites Tax Foundation data on federal taxes paid vs. spending received by state.
WizardKitten of Blogging for Michigan uses the same data to also blog on bailouts for states.
Chris Campion of The Vermont Tiger cites the Green Mountain State's low ranking in the 2009 State Business Tax Climate Index while discussing a corporate tax holiday.

Indiana Court Considers Judicial Involvement in Education Spending

Thu, 04 Dec 2008 00:00:00 CST

This morning, the Indiana Supreme Court will hear oral arguments on whether Indiana's Constitution provides a right to a quality education, to be enforced by judicial orders to increase spending or raise taxes. I'm in Indianapolis for the hearing in the case, Bonner v. Daniels, and will report on the blog how it goes.

The Tax Foundation filed a friend-of-the-court brief in the case, arguing that such a ruling would violate the text and original meaning of the Indiana Constitution, and ignores the problems other states have had with judicial mandates for education spending.

"Nothing in the Education Clause establishes a specific, defined level of education that must be attained as long as the state maintains a generally supportive stance towards knowledge and learning," the brief states. "The Education Clause guarantees a free public education, not the right to a ‘quality' education."

The Tax Foundation brief also notes that Indiana's the lower court focused improperly on funding as the only way to improve state education:

It is problematic to say that more money necessarily means better performance in public schools. A focus on dollar amounts ignores potential efficiency increases, the diminishing returns of added spending, and alternative uses for each dollar. Courts are ill-prepared to weigh these competing policy concerns, and those that have tried have quickly found themselves mired in endless lawsuits to quantify unquantifiable standards. The Supreme Court should avoid micromanagement of education and finance policy.

The Tax Foundation has prepared a report, "Appropriate by Litigation: Estimating the Cost of Judicial Mandates," Tax Foundation Background Paper No. 55, July 2007, available at http://tinyurl.com/tfedfin, that outlines the serious problems encountered by courts as they embark on micromanaging education policy and mandating funding levels.

The Tax Foundation brief was filed on August 5, 2008, and can be found at http://www.taxfoundation.org/research/show/23497.html. The Education Law Center, a group supportive of judicial mandates for education spending, filed a brief in response to the Tax Foundation's brief, but the Indiana Supreme Court surprisingly declined to let it be filed.

In the News: Tax Strategies, Tax Fraud, Tax Relief and Carbon Tax

Wed, 03 Dec 2008 00:00:00 CST

A lot of tax talk in today's news:

The Wall Street Journal's Tax Report goes through its "Year-End Strategies to Trim Your Taxes." Among the recommendations is "stayin' alive" ...

"Buried in the tax law is a powerful incentive for many wealthy people who care about their heirs to stay alive at least until the dawn of 2009. The basic federal estate-tax exclusion, now $2 million, is scheduled to soar to $3.5 million next year. Thus, if someone survives until Jan. 1, an additional $1.5 million of that person's estate will be sheltered from the federal estate tax, where the top rate is 45% both this year and next."

Yikes! Anyhow, the report also says that "tax planning will be trickier than usual because of factors such as the stock market's volatility and the possibility of significant tax changes next year when Barack Obama takes over as president." Just goes to show how out-of-line our tax code is when it comes to simplicity and stability, two principles of sound tax policy the Tax Foundation promotes.

In other news:

The WSJ's editorial staff cheered the Department of Justice's dropping of a tax fraud case against KPMG.
Richard Rahn of the Washington Times tries to define what an economic stimulus is. He proposes fixing monetary policy and financial regulation that have created the wrong incentives, cutting the payroll and corporate taxes, shifting land titles to the Social Security Trust Fund, and allowing for full write-offs of capital gains losses.
Finally, Ralph Nader and Toby Heaps propose a global carbon tax in today's WSJ.

A Government Charge of Five Cents per Plastic Bag: Tax or Fee?

Wed, 03 Dec 2008 00:00:00 CST

Toronto has enacted a citywide charge of 5 cents per plastic bag, calling it a fee, as reported in The Star. (hat tip: Jacob McCay)

A similar measure failed in New York City because it was deemed a tax, which the city's administration cannot enact without legislative approval. Here's how Tax Foundation economist Josh Barro described New York Mayor Bloomberg's proposal in a recent analysis:

A new five-cent-per-bag "fee" on disposable plastic shopping bags (expected to raise $16 million in FY'10). The Bloomberg administration maintains this proposal isn't a tax, despite the fact that the proceeds do not defray costs for the government to provide a specific service but rather provide general revenue. Most authorities would call it a tax, and the distinction matters, because the city council can approve a new fee, whereas a tax would require assent from the state legislature. Other cities that have considered such proposals (including Seattle) have properly labeled them as taxes.

The Star article doesn't explain where the revenue goes, but if it goes into general revenue, it's properly called a tax, not a fee.

Plastic bags aren't the only things that are being taxed with "fees." 911 calls in California, courts in Florida, lottery tickets in North Carolina, strip bars in Texas, driving on a bridge in Louisiana, etc.

Pittsburgh's Drink Tax Reduced

Wed, 03 Dec 2008 00:00:00 CST

Last night the Allegheny County council voted to reduce the county’s 10 percent tax on poured drinks. the Pittsburgh Business Times reports:

After substantial discussion over how much to reduce the tax, [the Allegheny] county council voted 13-0 with two abstentions to reduce the tax from 10 percent to seven percent. The measure was passed as part of council’s approval of the county’s $762.7 million budget for 2009. The budget did not include any proposed increase in real estate taxes, a fact which was heralded by a number of real estate professionals in attendance.

Since its passage in December 2007 the 10 percent drink tax has raised between $10 and $20 million more than is needed or expected, which has upset many residents and business owners. The revenue is dedicated to matching funds for the Port Authority, which owns and operates the county’s public transportation system. The matching funds have not yet been paid to the Port Authority because county executive Dan Onorato is waiting until the company and its union can come to an agreement on a new contract.

There is also still a possibility that the Pennsylvania Supreme Court will allow a referendum to be placed on May's ballot. The proposed referendum would let voters choose whether to further reduce the drink tax to 0.5 percent.

The county’s $2 rental car tax that was originally passed with the drink tax is unchanged for 2009. Read more about Pittsburgh’s drink tax here, here, here and here.

Twelve Days of Christmas More Expensive

Tue, 02 Dec 2008 00:00:00 CST

The cost of the twelve days of Christmas (that is, the price of a partridge in a pear tree, two turtle doves, three french hens, etc.) is $21,080, according to calculations by PNC Wealth Management. That's up 8.1 percent from 2007. Buying the goods online would cost $31,957, mainly due to shipping costs. (Buying everything in all the verses—12 partridges and pear trees, 22 turtle doves, 30 french hens, etc.—will run you over $86,000.)

The 78-item package of birds, rings, and people cost a mere $12,000 in 1995, and the big factor driving it up (besides general inflation) is increased wages for skilled laborers. The price of swans-a-swimming evidently fluctuates wildly by year.

Not sure whether this package includes luxury taxes, payroll taxes, and use taxes for goods purchased via the Internet.

Florida Rep. Trying to Call Cigarette Tax a "Fee"

Tue, 02 Dec 2008 00:00:00 CST

Florida Rep. Jim Waldman (D-Coconut Creek) is seeking to raise the state's cigarette tax by $1 per pack, to $1.339. Tax Foundation Chief Economist Patrick Fleenor explains why such a tax is probably far beyond any externality imposed by cigarette smokers, and is essentially a way to stick a disfavored group with punitive taxes.

What is especially disturbing about Rep. Waldman's proposal is that he is calling it a "user fee." Government-imposed charges on cigarette purchases are taxes, not fees. ATR notes that Gov. Charlie Crist has played the same game. Waldman expresses ambivalence about the tax/fee distinction:

To me, it doesn't really matter. A tax is a tax, a user fee is a tax. It's the same thing. They like to hide behind the semantics. I choose not to. I'm calling it a user fee only because I have spoken to my Republican colleagues who said they would support it if it was called a user fee.

It does matter, in two respects. First, because the American antipathy to taxes is so deeply rooted in our nation's history, lawmakers often seek to raise revenue in ways to avoid the "tax hiker" label even it requires calling an obvious tax a "fee." That's what's happening here. These shell games undermine transparency by making it harder for citizens to understand the cost of government, and it can encourage them to demand more government services than they are actually willing to pay for. That, over time, can undermine fiscal stability and neutrality.

Second, Florida courts would reject out-of-hand Rep. Waldman's claim that it doesn't matter. Florida's Constitution allows local authorities to impose fees but not taxes, and a series of court decisions have drawn a careful line between the two in order to enforce this provision. See Fla. Const. art. 7, § 1(a) ("All other forms of taxation shall be preempted to the state except as provided by general law."); Alachua County v. State, 737 So.2d 1065, 1067 (Fla. 1999) ("The Florida Constitution preempts to the State all forms of taxation except ad valorem taxes and those authorized by general law."). Florida court rulings have looked at two factors:

First, one must ask whether the charge is "bargained for [or] unilaterally imposed." Florida Power Corp. v. City of Winter Park, 887 So.2d 1237, 1240 (Fla. 2004).
- See also Alachua County, 737 So.2d at 1068-69 ("Clearly, Alachua County conferred nothing to the utilities and there was no bargained-for exchange upon which a franchise could be found; rather, Alachua County has attempted to impose a forced charge on the utilities. Thus the trial court properly ruled that the Privilege Fee is not a franchise fee.");
- Town of Belleair v. Florida Power Corp., 897 So.2d 1261, 1261 (Fla. 2005) ("[C]ontinued imposition of the franchise fee without the support of the underlying agreement constituted an illegal tax....");
- State ex rel. Gulfstream Park Racing Ass'n v. Florida Racing Comm'n, 70 So.2d 375, 379 (Fla. 1953) ("In common parlance a tax is a forced charge or imposition, it operates whether we like it or not and in no sense depends on the will or contract of the one on whom it is imposed.").
Second, one must ask what the purpose of the charge is.
- If the charge is not "reasonably related to the government's cost of regulation or the rental value of the occupied land," Florida Power Corp., 887 So.2d at 1241, it cannot be considered a fee.
- See also Jacksonville Port Authority v. Alamo Rent-A-Car, Inc., 600 So.2d 1159, 1164 (Fla. App. 1992) (stating that a fee cannot be "a general revenue source for the support of a sovereign government").
The second point—whether the revenue is used for general spending instead of a narrow group of beneficiaries—is generally considered the essential inquiry by most courts in the United States. Here's a quick list of relevant cases:
- See, e.g., Safety Net for Abused Persons v. Segura, 692 So.2d 1038, 1041 (La. 1997) ("[A] tax is a charge that is unrelated to or materially exceeds the special benefits conferred upon those assessed.");
- Chicago and Nw. Transp. Co. v. Webster Co. Bd. of Supervisors, 71 F.3d 265, 267 (8th Cir. 1995) ("[A] government levy is a tax if it raises revenue to spend for the general public welfare.");
- San Juan Cellular Tel. Co. v. Pub. Serv. Comm'n of Puerto Rico, 967 F.2d 683, 685 (1st Cir. 1992) ("The classic ‘tax' is imposed by a legislature upon many, or all citizens. It raises money, contributed to the general fund, and spent for the benefit of the community.");
- Brock v. WMATA, 796 F.2d 481, 488 (D.C. Cir. 1986) ("A levy is properly defined as a ‘tax' . . . when its principal purpose is to raise revenues.");
- Roger D. Colton & Michael F. Sheehan, Raising Local Government Revenue Through Utility Franchise Charges: If the Fee Fits, Foot It, 21 Urb. Law. 55, 63 (1989) ("If the primary intent is to raise revenues, a measure is more likely to be considered a ‘tax.' If the level of the fee is totally divorced from any cost-basis, it is more likely to be deemed a ‘tax.'").

A $1 per pack government charge imposed on cigarette sales is both unilaterally imposed without bargaining and is used for the general fund not for regulatory purposes or to provide a service. Therefore, it's a tax. So, Rep. Waldman, it's more than just semantics. Referring to a government-imposed charge on cigarette sales as a "fee" instead of a "tax" undermines the transparency and long-term stability of Florida's tax system and comes into conflict with Florida case law.

"Tax Girl" Blog Launches Series on State Taxes

Tue, 02 Dec 2008 00:00:00 CST

Kelly Erb, a tax lawyer and editor of the "Tax Girl" blog, is launching a series of primers on taxes in all 50 states. As mentioned in my previous post, Kelly started off with Arizona and cites our State-Local Tax Burden Study.

"It’s worth noting that the series is meant to be a primer, not an exhaustive list of all taxes and rates applicable to any given states. I practice in New Jersey and Pennsylvania, so I am not familiar with the nuances in other states. So, while I’m making every effort to do my homework, I’m relying on resources from those individual states and of course, my fellow tax professionals."

You can follow Kelly on Twitter at http://twitter.com/taxgirl.

[Hat tip: Club for Growth]

Federal and State Tax Policy in the Best of the Blogosphere

Tue, 02 Dec 2008 00:00:00 CST

The Tax Foundation's mission is to educate taxpayers about sound tax policy and the size of the tax burden borne by Americans at all levels of government. And it's nice to see that bloggers are paying attention to the Tax Foundation's work at all levels of government.

On federal tax issues ...

The Urbanophile, a blog about urban affairs in Midwestern cities, uses Tax Foundation studies on "nonpayers" into the federal income tax system to make the point that "the burdens of society must broadly be shared" and that folks should be concerned "about the class warfare rhetoric being used to demonize the 'top 2%' or whomever, as well as tax policies that are again separating America into a two-tier society: those who pay taxes and those who collect benefits."
FisCons.com cites a recent blog post from Staff Economist Josh Barro on Congressman Louie Gohmert's (R-TX 1) proposal for a two-month temporary tax holiday, saying that "Gohmert’s plan may be well-intentioned, but bad policy" and "will do little to stimulate the economy."

On state tax issues ...

Justin Katz of the Anchor Rising blog in Rhode Island features and analyzes the Ocean State's rankings our State-Local Tax Burden Study.
Kelly Erb, the editor of the Taxgirl blog, uses the State-Local Tax Burden Study to create a primer on Arizona's taxes.
Adam Pagnucco of Maryland Politics Watch gives mention to the State Business Tax Climate Index and the state's slide from 24th in 2008 to 45th in 2009, bemoaning that "if in addition the state is perceived as unable to finance its transportation infrastructure, it will risk being perceived as a radioactive place for locating jobs."

TARP and a Tax Holiday Are Apples and Oranges

Mon, 01 Dec 2008 00:00:00 CST

My colleague Joe notes below a proposal by Texas Rep. Louie Gohmert to suspend personal income and payroll tax collections for two months in 2009, as an alternative "use" for approximately $350 billion in bailout funds that are as yet unallocated. Let's set aside the merits of temporary tax suspensions in general. I'll note that they violate one of the Tax Foundation's five principles of sound tax policy—stability—and leave it at that.

A key problem with this proposal and its counterparts on the left (see, for example, The Progressive's $700 billion wish list for new government spending) is that they conflate buying $x worth of assets with spending $x on programs, or foregoing $x in tax revenues. Because TARP (the bailout program) is not really $700 billion of spending, an alternative plan of the same size that funds more government programs or gives new tax cuts would blow a much bigger hole in the federal budget than TARP does.

So far, the Treasury has used about $350 billion of the $700 billion in funds available through TARP, principally to purchase preferred stock in large banks. The preferred stock is an asset with real value—the banks pay an annual rate of interest to the government, and the government can sell the preferred stock to other investors. So, when the government buys $350 billion worth of preferred stock in banks, it's not spending the money; it's investing it.

Of course, these might be bad investments. The preferred stock may be worth less than the government is paying for it, if the dividend is below market. And if one of the banks the government invested in fails, it would likely lose part of all of its investment in that bank. However, the cost to taxpayers here is the difference between what the government pays for its investments and what they're worth—a fraction of the total bailout amount, except in the unlikely event that all the investments are worth $0 (i.e., all banks fail).

On the other hand, new tax cuts or new spending programs represent an actual current cost to the federal treasury in their full amounts. If the government spends $350 billion more on health care programs, or gives $350 billion in new tax cuts, it must either cut spending elsewhere or raise that money from taxpayers today (with current tax increases) or tomorrow (with debt issuance followed by higher taxes in future years). Suspending personal income and payroll taxes for two months would cost the federal government about $330 billion, in Gohmert's estimation; using that money to buy more preferred stock would cost only the amount by which the government overpays, almost surely much less than $330 billion.

A Federal Tax Holiday?

Mon, 01 Dec 2008 00:00:00 CST

RedState has the scoop about the proposal:

Gohmert’s tax holiday plan is elegant in its simplicity: every American taxpayer would pay no federal income or FICA taxes for the first two months of 2009. For the typical American family -- earning about $50,000 a year -- that would mean they would keep about $2000 that would otherwise be paid to the government.
Gohmert would like to hold the holiday in January or February of next year. It would cost approximately $332 billion, still cheaper than using the rest of the bailout money for a bailout.

Even in the World of Tax Policy, ThereÂs Something to Be Thankful For

Wed, 26 Nov 2008 00:00:00 CST

All year long we complain about taxes, and there's no shortage of tax-related issues to complain about. In light of Thanksgiving, however, we decided to list some tax-related things we're grateful for.

But first, some tax-related items that we think others may be grateful for this Thanksgiving (these do not all represent sound tax policy, but we suspect that each one has made some individuals or industries thankful anyway):

Iowans who include pumpkins in their Thanksgiving decorations should be grateful that the state did away with its bizarre pumpkin tax, which was levied on pumpkins that were intended for display, but not on pumpkins that were intended for cooking. (How often have you been asked by a store cashier what you intend to do with the pumpkin in your shopping cart when you get it home?) Retailers who sell pumpkins for decoration and/or pumpkin-pie making should also be glad that they don't have to deal with this tax-induced complexity anymore. (Just when we felt safe telling Iowans they should be thankful for this improvement in their tax system, we remembered Iowa's Turkey Marketing Council, which is authorized to levy an excise tax at the processor level of up to 3 cents per turkey.)
Minnesotans who buy their Thanksgiving turkey pre-cooked have something to be thankful for. In 1980, the Supreme Court of Minnesota ruled that sales of hot turkey and hot turkey parts in grocery stores are exempt from the sales tax. (Comm'r of Revenue v. Applebaums' Food Markets, Inc., 297 N.W.2d 141 (Minn. 1980)).
Mississippi residents who enjoy hunting for their own turkeys, or want to ensure that others are able to do so, will be thankful to learn that for an extra $30, Mississippi will issue a motorist a special license plate identifying the driver as a supporter of the National Wild Turkey Federation.
Here's something that preparers of Thanksgiving dinners across the country will not be thankful to read: A court in Pennsylvania does not appreciate all those cooks' hard work and culinary skill. In 1985, a Pennsylvania appeals court ruled that the "[p]reparation of potato salad, macaroni salad, cole slaw, pepper cabbage, baked lima beans, rice pudding, tapioca pudding, health salad, egg salad, tuna salad, cranberry relish, potato filling, bread filling, clam chowder, macaroni and cheese, and red beet eggs did not require the high degree of skill, science, or labor" to be considered manufactured goods exempt from the city of Reading's business privilege tax. (Van Bennett Food Co. v. City of Reading, 486 A.2d 1025 (Pa. Cmwlth. 1985)).
Some industries that sell foods traditionally used in Thanksgiving dinners may be feeling grateful this Thanksgiving for the subsidies they receive. According to the Farm Subsidy Database, from 1995 to 2006, the following subsidies were bestowed: $56.2 billion for corn, $22.1 billion for wheat (used in stuffing), $84.9 million for lamb, and $16.5 million for potatoes.
Everyone who pays income taxes (or cares about the effects of extremely high marginal income tax rates) should be thankful that our current rates are lower than the rates the country has faced in some years past: a top rate of 94% in1944, for example, and a top rate of 77% in 1964. (Click here for a chart of federal individual income tax rates and brackets from 1913 to the present.)

We at the Tax Foundation are thankful, of course, for all the people who support our efforts, whether through generous donations or by reading and disseminating our research. We're thankful for everyone who visits our website, reads our blog, listens to our podcasts, and makes an effort to educate themselves and others about sound tax policy.

Happy Thanksgiving.

Tax Foundation Files Brief Supporting Class Tax Refunds

Wed, 26 Nov 2008 00:00:00 CST

In a friend-of-the-court brief filed last week with the California Court of Appeal, the Tax Foundation argues that class actions for tax refunds should be allowed.

Estuardo Ardon, who argues that the Telephone User's Tax (TUT) imposed by the City of Los Angeles is unconstitutional for failing to be approved by two-thirds of voters as required by California's Proposition 218, paid the tax, demanded a refund, exhausted administrative appeals, and filed a lawsuit "on behalf of himself and all others similarly situated." Los Angeles argues that such a class claim is not permitted, citing a municipal ordinance.

In the brief, the Tax Foundation argues that state law supersedes the municipal ordinance and therefore class actions are permitted. The brief adds that unless such class claims are allowed, the hurdles of legal process may deter taxpayers from pursuing refund claims, permitting governments to keep the proceeds of illegally collected taxes and providing an incentive to levy them. A class action also combines all who paid this tax into one comprehensive legal case, and if Ardon prevails, it ensures that the city must refund illegally collected taxes to all who paid them.

Tax Foundation Fiscal Fact No. 156, "Permitting Class Refund Actions Is Key to Effective Challenges of Illegal Taxes," examines the legal issues in the case. Read it here.

Read the full brief here.

South Carolina Prepares for Gun Sales Tax Holiday

Wed, 26 Nov 2008 00:00:00 CST

Sales tax holidays are a way for politicians to look like they are cutting taxes without really cutting them. In addition, if only certain items are exempt, it can confuse consumers while giving politicians the power to pick winners and losers (e.g., what products "deserve" favorable tax treatment). From the Augusta Chronicle:

For two days after Thanksgiving, shoppers in South Carolina will be able to buy guns tax-free, but some say it's a political gimmick that only complicates the tax code.
The bill that created this sales-tax holiday, which was vetoed by the governor but overridden by lawmakers, also created a month-long exemption for next October for energy-efficient dishwashers, ceiling fans and other home products.[...]
Bryan Cox, a spokesman for the South Carolina Policy Council, said the holidays distract from meaningful tax reform.
Besides, "If we all agree lower taxes promote economic growth, let's support lower taxes all year round," he said.

The South Carolina government estimates that the Nov. 28-29 tax holiday will save taxpayers a measly $15,000. In a state where the average 6.84% sales tax raises over $2.6 billion, and where citizens purchase something like 1,000 guns a week, $15,000 is a rounding error.

Check out the full article for more quotations from me about sales tax holidays. Surprisingly, the sponsor admits the holiday is basically a political gimmick and he'd rather see broad-based tax reform. We'll be waiting!

UPDATE: BNA reports more criticism of this politically-motivated tax policy change:

Like most sales-tax-holiday advocates, backers say the sales tax break will give a boost for consumers and help stimulate the economy a bit. But opponents -- some of whom are against all sales tax holidays, regardless of purpose -- call this tax break an even bigger gimmick that complicates the tax system and won't save shoppers much cash in the long run.
"If the sales tax is too high, they should lower the tax rate year round, not just on holidays," said Joseph Henchman, tax counsel for the Tax Foundation. "If they think there's a shortage of guns in South Carolina, they should set up government programs and let them compete for funds."
Henchman said he is opposed to any sales tax holiday because it puts government in the position of picking winners and losers. For example, a sales tax holiday on clothes benefits retailers, but not necessarily any other businesses.[...]
The South Carolina Policy Council, a fiscally conservative think tank, opposed the gun sales tax holiday for this reason, said spokesman Bryan Cox.
"This is a symptom of a problem we have; there will always be pet projects that individuals support," Cox said. "If we allow lawmakers to tinker with the tax code for everything they support at the expense of those they do not, we'll end up with what we have now, which is an absurdly complicated tax code."

New Jersey Takes One Step to Improve Its Business Tax Climate

Tue, 25 Nov 2008 00:00:00 CST

Kudos to New Jersey Governor Jon Corzine and state legislators from both parties. Yesterday, Gov. Corzine signed into law a bill that will make a positive change to the state's corporate income tax, by extending the period for which a corporation may carry forward a net operating loss from 7 years to 20. This move brings New Jersey into line with the federal corporate income tax on loss carry-forwards.

Last month, some of my colleagues and I traveled to New Jersey to announce that the state had placed last on our annual State Business Tax Climate Index, which ranks the 50 states on the business-friendliness of their tax codes. We highlighted this reform (then pending before the state legislature) as one of several avenues for improving New Jersey's business tax climate.

The Bloomberg News report on the new law cites our Index ranking, and also quotes Gov. Corzine underscoring the importance of improving business' perceptions of New Jersey's tax climate:

Last month, the nonpartisan Washington-based Tax Foundation ranked New Jersey the worst in the nation for a second year in a row in terms of whether its tax system encourages investment. The state has the third-worst individual income tax, the 10th-worst sales tax and the worst property tax, and its tax code reads like a What Not to Do for legislators, the group said in a report.
"This measure is important for building a change in psychology with regards to New Jersey's business environment," Corzine said of the bill he signed today.

Of course, improving New Jersey's tax climate involves substantive as well as psychological changes. The source of negative perceptions of the Garden State tax climate is a set of real problems, including the highest per-capita property taxes in the country. Fortunately, this new law is a substantive improvement to the state's tax code. Extending the net operating loss carry-forward improves the tax code's simplicity and its neutrality between sectors, for reasons I discussed here.

The Bloomberg report also notes that other positive tax reforms supported by Gov. Corzine remain before the legislature. These would repeal two rules ("throwout" and the "Regular Place of Business" rule) that allow New Jersey to tax income of multistate corporations that is not earned in New Jersey. Plus, the state's corporate income tax rate is already set to fall from 9.36% to 9% on July 1, 2009. Put together, these changes would mark a significant improvement in the state's tax climate for 2010.

That said, New Jersey can do more to improve its business tax climate. One key opportunity is on the sales tax. At 7%, New Jersey ties for the second-highest sales tax rate in the northeast, and has one of the highest rates nationally among states that do not have local sales taxes. Meanwhile, it also has the third-narrowest sales tax base in the country. Expanding the sales tax to more consumer goods and services while reducing the tax rate is a revenue-neutral reform that legislators could pursue now, even while state coffers are not flush.

Listen to our recent podcast on New Jersey taxes here. Read recent posts on New Jersey tax issues here, here and here.

Giving Thanks: Best of the Blogosphere from the Garden State, the Sunshine State and the Keystone State

Tue, 25 Nov 2008 00:00:00 CST

Happy Thanksgiving! We're out of town for the rest of the week, so it's time to give thanks to a few of our friends in the blogosphere as they have been friendly to our state tax policy work.

NJ Business Matters, the blog of the Commerce and Industry Association of New Jersey, mentions the Garden State's bottom ranking in the 2009 State Business Tax Climate Index while lauding Gov. Corzine for signing the net operating loss carry-forward extension bill. They say that "despite the poo pooing of this report by our progressive friends, a tax climate actually does impact business decisions."
Rattler Nation, a blog on Florida A&M University, writes about a "differential tuition plan" being considered and cites Florida's 47th place ranking in our State-Local Tax Burden study.
Nathan Benefield of PennRepublican.com posts a piece on Pennsylvania's budget crisis and their 11th place ranking in our State-Local Tax Burden study. Benefield says that "an analysis of the 50 states shows that those with the lowest tax burdens and those that cut taxes the most had much faster economic growth than those on the opposite end of the spectrum."

Beer Tax Map

Tue, 25 Nov 2008 00:00:00 CST

Click on image for larger size version of "State Excise Tax Rates on Beer"

Alaska has the highest tax rate, where residents (Sarah Palin, for instance) would pay $16.58 in beer taxes on a keg of beer. Wyoming has the lowest rate, and residents (Dick Cheney, for instance) would pay only 31 cents in beer taxes on a keg.

Maine residents recently repealed a briefly enacted beverage tax which raised their beer tax rate to 54 cents.

It's hard to say why beer taxes are highest where they are and lowest where they are. Anyone have some good ideas?

UPDATE: We fixed an error in Idaho's rate calculation. They tax 5% ABV beer at 15 cents, and higher-point beer at a higher rate.

Previous map: State/Local Sales Taxes

IRS Announces 2009 Mileage Reimbursement Rates

Tue, 25 Nov 2008 00:00:00 CST

In mid-2008, the IRS hiked the automobile mileage reimbursement rates used to calculate deductible expenses, from 50.5 cents to 58.5 cents. This week the IRS has announced new mileage rates for 2009, and they are a bit less:

Beginning on Jan. 1, 2009, the standard mileage rates for the use of a car (also vans, pickups, or panel trucks) will be:
55 cents per mile for business miles driven
24 cents per mile driven for medical or moving purposes
14 cents per mile driven in service of charitable organizations
The new rates for business, medical and moving purposes are slightly lower than rates for the second half of 2008 that were raised by a special adjustment mid-year in response to a spike in gasoline prices. The rate for charitable purposes is set by law and is unchanged from 2008.
The business mileage rate was 50.5 cents in the first half of 2008 and 58.5 cents in the second half. The medical and moving rate was 19 cents in the first half and 27 cents in the second half.

Obama's Economic Team Is Solid Thus Far

Mon, 24 Nov 2008 00:00:00 CST

What we know thus far:

Treasury - Timothy Geithner
NEC - Larry Summers
CEA - Christina Romer
Adviser to Pres. - Austan Goolsbee
OMB - Peter Orszag, moving from CBO

This is a solid lineup to say the least.

Click here for a Minneapolis Fed interview done with the economics profession's second most famous couple (after Milton & Rose), David and Christina Romer.

So You've Decided to Spend Money for Fiscal Stimulus...How It Should Be Done

Mon, 24 Nov 2008 00:00:00 CST

So it appears as if Pres.-Elect Obama and Democrats in Congress have decided that a huge spending spree by government is necessary to help the short-run macroeconomy. It's classic Keynesian economics, which says that in the short-run, government should deficit-spend in order to spur aggregate demand and to therefore get the macroeconomy out of the current downturn.

But there is no free lunch. All of this spending must be paid for down the road. Now Keynesian models would argue that some of the spending is offset by the fact that revenue will increase in the short-run above what it otherwise would have been due to the fact that the short-run downturn "market failure" is corrected.

But what is the best way for government to boost aggregate demand if we are going to do it? I mean we could pay people to dig ditches and then pay others to fill them up, but that doesn't do much in terms of creating long-term wealth (besides the possible public good of "getting the economy moving" that some would argue). A benevolent government that is truly looking out for the interest of its citizens should increase short-run spending on projects that are already slated to happen in the medium-term. In other words, when possible, governments should push forward projects that are slated to occur a few years down the road anyway. In this way, a significant financing mechanism is already built-in for the short-run stimulus: it is financed by future decreases in government spending. (Similar to accelerating depreciation, the net cost to government is only the difference in the time value of money for a few years.)

Some Democrats in Congress may not like this suggestion because it would involve spending actually falling at some point. One of the scary possibilities that comes out of Keynesian policies (despite the question of their effectiveness which has been debated in the economic literature for decades) is a possible endowment effect (also status quo bias) whereby once government spends money on X, it can be difficult to lower it even if you only meant initially to have the increase be temporary. (The same is true for many special tax provisions.)

Homebuilders Seek More Tax Subsidies and Credits

Mon, 24 Nov 2008 00:00:00 CST

The Congressional Budget Office has estimated that the effective tax rate on owner-occupied housing is -5.1% (yes, negative), while other investments have an effective tax rate of 13.8%. This tax-induced incentive to invest in owner-occupied housing is probably a big reason why so much capital went into that sector and sparked the housing boom.

Now that these tax policies have failed and the boom has busted, the homebuilders are asking for us to double down:

The builders' lobby is ramping up its sales pitch for a $250 billion stimulus package called "Fix Housing First," arguing that financial markets won't recover until home prices stop falling. They are calling for a generous tax credit for home purchases and a federal subsidy that would lower a homeowner's mortgage rate.
Congress resisted a similar effort to pass a larger tax credit earlier this year, instead creating a $7,500 credit for new-home purchases that had to be paid back over 15 years, effectively extending an interest-free loan.
Builders are promoting the campaign with full-page newspaper advertisements, but face an uphill battle, with critics suggesting the proposal is too expensive and that it too heavily promotes home purchases rather than addressing loan modifications for delinquent homeowners.

In 2009, the U.S. government will forego collecting some $100 billion in tax revenue due to the mortgage interest deduction alone. If this generous and expensive deduction were treated like the expenditure it really is, and forced to compete against other federal spending priorities, we might have a more sensible economic picture.

Tax Foundation Among 20 Organizations to Follow on Twitter, and the Best of the Blogosphere

Mon, 24 Nov 2008 00:00:00 CST

Duane Lester, lead writer for All American Blogger, gives readers a primer on Twitter and lists 200 "people" to follow. Among the 20 organizations in his recommendations is the Tax Foundation. Lester explains that Twitter is a great way to build online communities, to get breaking news and to receive posts that you would otherwise miss.

You can follow the Tax Foundation at http://twitter.com/taxfoundation.

As for the rest of the blogosphere ...

Tina Hemond, author of the Massachusetts Conservative Feminist blog, gives mention to a March 2008 report comparing combined federal-state corporate tax rates of all 50 states to the rest of the world in a post on flim tax credits.
DontReadOnMe of RedState features Tax Freedom Day on his post, describing it as "the best way to view taxes and their effect on the taxpayer."
H. Bruce Miller posts about Oregon's looming budget crisis in "The Wandering Eye" blog of The Source Weekly (Bend, Oregon) and mentions previous coverage of the state's 9th place position in the 2009 State Business Tax Climate Index.
Jason Springer of Blue Jersey writes about NJ Transit's troubles since AIG's collapse and refers to Tax Foundation Tax Counsel Joseph Henchman's work on the SILO issue.

Congress Considers Bailout for Detroit Lions (Satire)

Sun, 23 Nov 2008 00:00:00 CST

The article is funny because the logic is in many ways similar to the actual auto bailout given that there is no such thing as a free lunch. (Somebody must pay for it.)

From CarbolicSmokeBall (fake news site):

WASHINGTON, DC - Congressional leaders of both parties huddled behind closed doors on Capitol Hill today in an attempt to work out a bailout package for the Detroit Lions. Items being discussed include giving the Lions a four touchdown lead prior to kickoff in all remaining games, forcing Lions' opponents to play at least one half of each game wearing blindfolds, and taking the best players from teams enjoying a bye week and adding them to the Lions' roster.
Detroit owner William Clay Ford, who was observed leaving the Senate office building with Democratic Majority leader Harry Reid (D-Nevada), told reporters that any one of those options would be helpful. "Not a cure-all, for sure, but a good start."
By late yesterday, a deal appeared imminent. "We're hopeful we'll be able to reach an agreement soon," said Speaker Nancy Pelosi (D-California). "But it is doubtful we'll be able to have anything in place before Thanksgiving Day."
Speaker Pelosi's remarks sent the nation's football fans into a panic, as the prospect of another Detroit collapse on national television appeared certain. The Lions, who have not won a game all year, are scheduled to play the Tennessee Titans, who have not lost a game this year.
White House spokesman Dana Perino said the President would sign any legislation that would keep Detroit afloat, at least for the remainder of the season.
"The failure of Detroit to remain competitive is a failure the American people cannot abide. We've got to give them the tools to succeed."

Maybe a more valid comparison could be to the University of Michigan football program this year given its subpar performance. Wolverine fans have always had a sense of entitlement to be a winner, in a way that is similar to the entitlement that many auto workers in the state have felt for decades.

Russia to Cut Corporate Taxes, Washington Dithers

Thu, 20 Nov 2008 00:00:00 CST

File this under "What's wrong with this picture?" Bloomberg is reporting that Russian Prime Minister Vladimir Putin has announced a sweeping economic package to "prevent the kind of financial crises that shook the country after the collapse of the Soviet Union."

The tax changes in Putin's plan would cut the Russian corporate tax to 20 percent from 24 percent on January 1st and "reduce taxes for small businesses and speed refunds of value-added tax."

Meanwhile, China—which cut its corporate tax rate to 25 percent this year from 33 percent—recently announced reforms to their VAT in order to reduce the cost of the tax on businesses.

By contrast, there has been little or no discussion in the U.S. about cutting business taxes as a means of boosting the economy in the short term even though America has the highest federal level corporate tax among industrialized countries, at 35 percent.

These trends are further proof that the U.S. is moving in the wrong direction on tax policy while the rest of the world—including ostensibly Communist countries—are moving in the right direction by cutting business taxes.

Tax Foundation - Tax Foundation's "Tax Policy Blog"

Will EPA "Pass" a Cow "Gas" Tax?

Tax Foundation in Idaho and Arkansas, and the Best of the Blogosphere in the States

Indiana Court Considers Judicial Involvement in Education Spending

In the News: Tax Strategies, Tax Fraud, Tax Relief and Carbon Tax

A Government Charge of Five Cents per Plastic Bag: Tax or Fee?

Pittsburgh's Drink Tax Reduced

Twelve Days of Christmas More Expensive

Florida Rep. Trying to Call Cigarette Tax a "Fee"

"Tax Girl" Blog Launches Series on State Taxes

Federal and State Tax Policy in the Best of the Blogosphere

TARP and a Tax Holiday Are Apples and Oranges

A Federal Tax Holiday?

Even in the World of Tax Policy, ThereÂs Something to Be Thankful For

Tax Foundation Files Brief Supporting Class Tax Refunds

South Carolina Prepares for Gun Sales Tax Holiday

New Jersey Takes One Step to Improve Its Business Tax Climate

Giving Thanks: Best of the Blogosphere from the Garden State, the Sunshine State and the Keystone State

Beer Tax Map

IRS Announces 2009 Mileage Reimbursement Rates

Obama's Economic Team Is Solid Thus Far

So You've Decided to Spend Money for Fiscal Stimulus...How It Should Be Done

Homebuilders Seek More Tax Subsidies and Credits

Tax Foundation Among 20 Organizations to Follow on Twitter, and the Best of the Blogosphere

Congress Considers Bailout for Detroit Lions (Satire)

Russia to Cut Corporate Taxes, Washington Dithers

Even in the World of Tax Policy, ThereÂs Something to Be Thankful For