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Published: Wed, 18 Oct 2017 00:00:00 -0400

Last Build Date: Wed, 18 Oct 2017 11:01:39 -0400


Order Some More Avocado Toast: What Tax Reform Means for Millennials

Fri, 29 Sep 2017 13:25:00 -0400

Depending on which definition you're using, the generation of Americans known as "Millennials" started being born somewhere between 1977 and 1982. Suffice it to say that none of us were paying much attention to politics the last time Congress passed a comprehensive tax reform bill, in 1986. Though there's no way to know whether any tax bill will make it through Congress this year, Millennials have reason to be optimistic about reforms that lower rates and spur economic growth. But we should also be wary. America's fiscal policy could rob tax reform of its benefits if left unaddressed or made worse. First, the good. Probably the most obvious benefit of tax reform—for Millennials and for plenty of other Americans too—is the potential for simplifying the tax code. Republicans have promised that tax reform will make it possible to file your taxes on the back of a postcard, something they say can be done by ending special tax breaks and shortening the tax code. At present, the code is more than 4 million lines long and complying with it consumes more than 6 billion hours every year, according to the IRS' National Taxpayer Advocate. The economic and accounting burdens of complying with the tax code fall inequitably on smaller businesses and individual taxpayers, according to research by economists Jason J. Fichtner and Jacob M. Feldman of the Mercatus Center. "An overly complex and cumbersome tax code favors businesses and individuals who can afford well-paid accountants and lawyers," they wrote in a 2015 report. A simpler tax code is good for almost everyone, but it stands to help Millennials more than most. A 2016 survey commissioned by NerdWallet, a San Francisco–based personal finance website, found that 80 percent of taxpayers aged 18 to 34 say they're fearful about some aspect of preparing taxes, well above the 69 percent of people across all ages who said the same thing. Millennials might have an undeserved reputation for being easily frightened, but there's no doubt that the current tax code induces unnecessary stress. And Millennials are the group least likely, generationally speaking, to have access to tax help. "Millennials tend to have less experience with a deeply confusing tax code, less cash to seek professional help and less need for the more complicated returns that having children or a mortgage can bring," says Liz Weston, a personal finance columnist at NerdWallet. Tax reform carries other benefits for younger Americans. Done right, it means increased economic growth and more job opportunities. In the four different tax reform ideas floated last week by the Tax Foundation, projected GDP growth ranged from 2.2 percent to 7.1 percent. Wages are projected to grow too, by between 1.6 percent and 5.3 percent in the foundation's four scenarios. Lower corporate taxes—the GOP plan would cut the corporate tax rate from 35 percent to 20 percent—mean potentially lower costs for all consumer products, from avocados to iPhones. "Tax reform must be bold" for it to work, says David Barnes, policy director for the pro-market group Generation Opportunity. "It must make the tax code simpler, fairer, and more efficient by eliminating special interest tax credits and deductions." Still, tax reform carries plenty of risk. If Congress passes and Trump signs a tax reform bill that doesn't do anything to cut spending, it will only pile more debt onto younger generations. Already, each American owes about $62,000 as his or her share of the national debt—that's roughly 8,850 orders of avocado toast (average cost: $7)—and that amount will get larger if tax rates fall and spending doesn't. But does Congress even care about the deficit? The outline of a tax plan introduced by Republican leaders this week suggests not. The plan would cut $5.8 trillion in taxes, offset by only $3.6 trillion in base-broadening offsets. That leaves a $2.2 trillion deficit increase over the next decade, according to an estimate by the Committee for a Responsible Federal Budget. In the long term, the biggest drivers of the national debt are enti[...]

The GOP’s New Tax Plan Proves Republicans Never Cared About the Federal Deficit

Thu, 28 Sep 2017 11:39:00 -0400

You may remember a time when Republicans pretended to care about debt and deficits. As deficits skyrocketed during President Obama's initial years in office, Republicans harped on the burdens imposed by high debt levels at every possible occasion. Fiscal responsibility was a particular fixation for Rep. Paul Ryan, who in 2011 accused Obama of playing games with the budgeting process by "dodging tough choices," and offering "no real plan to avoid a spending-driven debt crisis." As recently as January of this year, Ryan, now Speaker of the House, was insisting that the GOP tax plan would be "revenue neutral"—balancing out any tax reductions by eliminating carve-outs in order to avoid increasing the nation's debt. He flatly dismissed the idea that Republicans would cut taxes without corresponding offsets. But perhaps it's a mistake to take Ryan strictly at his word. The Speaker also predicted at the same time that congressional Republicans would repeal Obamacare, rewrite the tax code, and fund a border wall by August. Those with a working sense of the passage of time will have noticed that it is now the end of September, and none of these things have happened. (On the wall, at least, that is good news.) Yesterday, however, a group of six top Republicans, including Ryan, did finally manage to release a tax plan. Or at least a partial plan. It's more of a sketch, really, a starting point, like a builder who begins work on a house design by saying that it should have some bedrooms, a bathroom, and a kitchen, probably. You have to start somewhere. In other words, there's a lot we don't know about the tax plan, which is to say that there's a lot Republicans don't know about their tax plan. The framework released yesterday calls for reducing the current seven tax brackets down to three—or possibly four. It specifies the new rates for the three brackets, but doesn't say where the income ranges for those brackets would begin or end, making it difficult to figure out who would be affected and how. It proposes increasing the child tax credit, but doesn't say by how much. There will be a kitchen and some bathrooms and some bedrooms, but we're still not sure how many. Among the details that Republicans have yet to work out is how, or even whether, to offset the tax cuts in order to avoid blowing up the deficit. The current plan proposes about $5.8 trillion in tax reduction offset by about $3.6 trillion in base-broadening offsets, meaning that it would result in a $2.2 trillion deficit increase over the next decade, according to an estimate by the Committee for a Responsible Federal Budget. These estimates are rough, and based on the incomplete information provided by the GOP plan. The exact number might be higher or lower, but what's more important is the scale. The deficit, and the debt, would rise by a lot. The Senate, meanwhile, has worked out an initial deal to allow for a tax cut that would increase the deficit by $1.5 trillion. These sorts of tax cuts are, in some sense, not really tax cuts, because they leave spending in place, and to spend is to tax. They are just delaying mechanisms, a way of postponing paying the tab for a decade or two. Now that Republicans are poised to overhaul the tax code, they tend to hand wave away concerns about deficit-increasing tax cuts by declaring that what they are really interested in is economic growth, enough of which will make the budget problem moot. In discussions about tax policy, Republicans often use "growth" as a sort of coded shorthand, a way to say, "I don't care about the deficit" without saying the precise words, "I don't care about the deficit." "The only way we're going to solve our long-term debt and deficit issue to allow the federal government to have the revenue it's going to need to fund all these promises made is with strong — and I mean strong — economic growth," said Senator Ron Johnson, told The New York Times. "If we do it right, then the economy will be stimulated appropriately and tax revenues will go up and the deficit won't increa[...]

Want to Do Tax Reform Right? Here Are Four Ideas.

Fri, 22 Sep 2017 08:30:00 -0400

Health care reform is front-and-center on Congress' agenda, but the clock is ticking. The Senate has until Sept. 30 to pass a bill with less than 60 votes. After that deadline—whether the Graham-Cassidy bill has passed or not—it's likely the discussion will shift toward the thing many GOP leaders (including President Donald Trump) have wanted to focus on all along. Tax reform. It's no secret Republicans are eager to reform our tax system and consider changes to corporate tax policy. Beyond that, though, details are still a little bit sketchy and plenty complicated. Earlier today, Veronique de Rugy, senior research fellow at the Mercatus Center, outlined three principles for tax reform. Lower the corporate tax rate (Trump favors a new rate of 15 percent, down from the current 35 percent). Pass an actual budget. And, if necessary, pay for the tax changes with spending cuts. The final leg is the key to the whole thing, because it reveals the truth about tax reform or any other complex policy issue. It's all about Congress making actual trade-offs, rather than simply cutting taxes and adding to the federal deficit. This is a practical rather than theoretical argument. For tax reform to pass in the Senate via the reconciliation process and without Democratic votes which it is unlikely to get, the majority must conform to the Boyd Rule, requiring that it does not add to the federal deficit. How, then, do you make all those pieces fit together? The Tax Foundation has a few ideas. The D.C.-based think tank, which favors lower rates and a broader base for taxes, today released four potential blueprints, each with benefits and trade-offs, for Congress. Three of the four are revenue neutral. The fourth requires an estimated $70 billion in spending cuts to balance. "The goal here to show is that there are a lot of ways to successfully achieve tax reform," said Scott Drenkard, an economist for the Tax Foundation. "This won't be easy, and everyone is going to have to give up some special provisions that currently benefit them, but the end game is lasting economic growth and higher wage." Option A: Replace the federal corporate income tax with a 22.5 percent cash flow tax, and allow companies to expense the investments in full (as de Rugy explains, "companies generally aren't allowed to immediately deduct (expense) their investment costs when calculating taxable income and that this creates a bias against business investment"). The current seven individual tax brackets would be consolidated into three at rates of 12, 20.5, and 37 percent. The standard deduction would nearly double, from $6,350 ($12,700 married filing jointly) to $12,000 ($24,000 married filing jointly). Projected GDP growth: 7.1 percent. Trade-offs: It would eliminate all itemized deductions, except the home mortgage interest and the charitable contribution deductions. The home mortgage interest deduction would be capped at $500,000 of acquisition debt. Family and child benefits would be consolidated. The personal exemption would be replaced with a $500 non-refundable credit for non-child dependents. Option B: Cut the corporate income tax rate from the current 35 percent to 15 percent. Make bonus depreciation permanent and broaden the corporate tax base by eliminating nonstructural business tax expenditures. The current seven individual tax brackets would be consolidated into three at rates of 10, 25, and 38 percent. The standard deduction would be greatly increased, from $6,350 to $50,000 for single filers (from $100,000 married filing jointly; $75,000 heads of household). Projected GDP growth: 3.2 percent. Trade-offs: The personal exemption and all personal credits would be eliminated, including the current Child Tax Credit and the Earned Income Tax Credit (they would be replaced by new consolidated credits: a new work credit, a new child tax credit, and a new additional child tax credit). The plan would tax all capital income (capital gains, dividends, and interest) as ordinary income. Most itemized deductio[...]

California Legislative Session Ends With Higher Taxes, Anti-Trump and Union Priorities

Fri, 22 Sep 2017 00:31:00 -0400

California's legislative session, which completed its work in the wee hours Saturday morning, was one of the more controversial ones in years, given the degree to which the Democratic majority was able to secure various tax and fee increases. It was also one of the more divisive recent sessions from a partisan standpoint. The most significant measures passed long before the session's deadline. In April, lawmakers passed a controversial 12-cents-a-gallon gas-tax increase by a razor-thin margin. The law also increased vehicle-license fees. In July, they passed a 10-year extension of the state's cap-and-trade program, with the help of several Republican legislators. The Legislative Analyst's Office estimates the measure could increase gas prices as much as 63 cents a gallon by 2021. But the final hours of the session were still filled with tension. The housing package worked out between Gov. Jerry Brown (D) and legislative leaders had stalled in the final days, but snuck past the finish line. The package includes three bills. One (Senate Bill 35) would streamline the approval process for high-density affordable housing projects, but requires contractors to pay union-based prevailing wage rates on those subsidized projects in return. The other two parts of the deal have a bigger tax-and-spend element to them. SB2 imposes new fees of $75 to $225 on various real-estate transactions to help fund subsidized high-density housing projects. SB3 will place before voters on the November 2018 ballot a $3 billion state housing bond that likewise will fund the construction of low-income housing units. The gas tax increase has sparked a GOP-led recall effort of Fullerton-area Democrat Josh Newman, mainly because of his vote to support the increase—and because he represents a GOP-heavy district. Democrats passed two bills this session to change the recall rules to help the embattled senator, but that issue is working its way through the courts. If Newman loses, Democrats would lose their supermajority in the Senate. Anti-tax activists also are gathering signatures for an initiative that would repeal the new gas tax and license fees. Nevertheless, some commentators were relieved that the session wasn't worse, from a tax-hiking perspective. Joel Fox, editor of Fox and Hounds Daily, referred to this as a "tax-happy session," but noted the California Chamber of Commerce's success in defeating nine so-called "job killer" bills that proposed some form of tax increase. Some of these defeated tax proposals include: A tax on contractors who do business with the California Department of Corrections and Rehabilitation; excise taxes on manufacturers, distributors and wholesalers of distilled beverages; an excise tax on distributors of sweetened soft drinks to fund a new health program; an increase in the personal income tax of 14.3 percent; a tax on opioid distributors; a new retail tax to fund affordable housing; expansion of the capital gains tax; and a measure to lower the vote threshold for local property tax increases. California Democratic leaders spent a lot of time this session positioning themselves to resist the Donald Trump presidency. Many efforts involved little more than posturing and press conferences, but the Legislature passed three substantive bills that are designed to either affect the next presidential election or confront the Trump administration over its controversial immigration policies. For instance, the Legislature passed SB568, which moves up the state's presidential primary. It now occurs late in the primary process in June, but would move to March. That would make California the fifth state to vote for president in the 2020 election, provided other states don't play leapfrog with their dates. California's voters currently have little say in the presidential races because the nominees are fairly obvious by June. "Winning big in California could help a Democrat clinch the nomination in the spring instead of the summer," according to the Was[...]

New England's Illinois: Connecticut's Budget Mess Shows That States Can't Tax Themselves to Prosperity

Mon, 18 Sep 2017 12:15:00 -0400

Even in deep blue Connecticut—one of just six states in the country where Democrats control both halves of the state legislature and the governor's mansion right now—the suggestion of a $1.8 billion tax increase has incited a political revolution. Three Senate Democrats and five Democrats in the state House bailed on a plan to impose an array of new taxes, including a 75 percent wholesale tax on electronic cigarettes and other vaping products that likely would have killed dozens of small businesses in the state. The budget plan proposed by Gov. Dannel Malloy also would have hiked taxes on cellphone bills, vacation homes, hospitals, cigarettes, hotel rooms, ride-sharing services, nonprescription drugs, and fantasy sports gaming, the Hartford Courant reported. Coming on the heels of two of the largest tax increases in state history—lawmakers raised taxes by $1.5 billion in 2011 and then hiked them by another $1.2 billion in 2015—seems to have been too much to ask. "How do you come out with a multi-page budget with all these tax increases and keep it secret from your membership and expect you're going to get everybody in line in a couple of hours? It's a ludicrous thought," Senate Republican leader Len Fasano, R-New Haven, told the Courant. "People are tired of taxing." He seems to be right. Republicans, long in the minority in the Connecticut legislature, have made big gains in recent years by opposing tax increases in Hartford. Last week's drama seems to suggest that state lawmakers, too, are getting tired of taxing, or at least are getting tired of the political consequences of it. "Yes, I may be risking my political career," said state Sen. Paul Doyle, D-Wethersfield, on Friday, announcing his intention to vote against the Democratic budget plan. "My party may not be happy with me. But to be honest, I don't care." If it were true that a state could tax its way to prosperity, Connecticut should be on a non-stop winning streak. Instead, state lawmakers are battling a $3.5 billion deficit. Companies including General Electric, Aetna, and Alexion, a major pharmaceutical firm, have left the state in search of a lower tax burden. Connecticut is looking increasingly like the Illinois of New England: A place where tax increases are no longer fiscally or politically realistic, even though budgetary obligations continue to grow and spending is completely out of control. In fact, on a per capita level, Connecticut extracts more—about a thousand dollars more—from its residents than Illinois does, according to the U.S. Census Bureau's data on state taxes. The Republican budget plan, which passed the state Senate Friday with those three Democratic defections, relies on a mix of common sense changes and some wishful thinking. It would impose a 10 percent cut on some state government budgets, would impose a hiring freeze for many state government positions, and would cut funding for higher education. Much of the savings would be bankrolled by future changes to public sector workers' pension benefits, hardly a political certainty. [Update: The budget bill cleared the lower chamber with a 77-73 vote Saturday.] The GOP plan makes "makes important structural changes," said Carol Platt Liebau, president of the Yankee Institute, a free market think tank based in the state, who applauded the three Democrats who broke ranks to support the Republican budget. "We echo their sentiments that Connecticut deserves a budget that makes the changes necessary to put Connecticut on a better path." Malloy says he will veto the budget if it reaches his desk, according to the Associated Press.[...]

Did Arizona Fund Medicaid Expansion With an Unconstitutional Tax? Supreme Court Will Decide.

Wed, 13 Sep 2017 17:50:00 -0400

When Arizona accepted the Medicaid expansion portion of the Affordable Care Act in 2013, state lawmakers enacted a new levy on hospitals to pay for the state's share of new spending. They did so, however, without a two-thirds majority in the state House and state Senate—something the state constitution requires for tax increases. There is, however, an exception for "fees." Is the hospital levy a tax or a fee? Four years after it became law, the state Supreme Court will have the final say. It's a decision that could mean the state's Medicaid provider can no longer collect approximately $285 million from hospitals, potentially jeopardizing health coverage for about 400,000 state residents. Arizona's high court Tuesday accepted an appeal from legal activists at the Goldwater Institute, a free market think tank, challenging the law. The Goldwater Institute lawsuit contends the 2013 Medicaid expansion violates Proposition 108, a 1992 voter-approved state constitutional amendment. The amendment requires a two-thirds vote of the legislature to approve a measure increasing taxes. The law included an exception for "fees and assessments that are authorized by statute, but are not prescribed by formula, amount, or limit, and are set by a state officer or agency." This has prevented the bill from being declared unconstitutional in previous cases. Under the Affordable Care Act, states were authorized to expand Medicaid eligibility to able-bodied adults at up to 138 percent of the poverty level. The federal government promised to pick up 100 percent of the tab for new enrollees over the first three years, and then 90 percent in perpetuity for participating states. Arizona moved to expand eligibility for the joint federal-state health insurance program in 2012, shortly after the U.S. Supreme Court ruled that states had to opt-in to Obamacare's Medicaid expansion. The hospital levy passed in 2013 as a way to restore coverage to childless adults—something required before Arizona could accept Obamacare Medicaid expansion funding—who had been dropped from the state's Medicaid rolls during a budget crunch years earlier. Lower courts have said the "fee" is constitutional. A decision by the Appeals Court rejected the Goldwater Institute's argument that the assessment on hospitals is a tax because, as Judge Paul McMurdie, wrote for the majority, it "narrowly applied only to hospitals" not a "broad class of citizens subject to a tax." If that's the case, the Goldwater Institute argues, the constitutional amendment is rendered useless. The lower court's decision "has disastrous consequences for future revenue-raising measures," warns Christina Sandefur, the Goldwater Institute's executive vice president. Arizona has been central to the ongoing fight over Medicaid expansion and the legacy of the Affordable Care Act. Brewer was one of several governors who signed onto the lawsuit challenging the Affordable Care Act after the law passed. It eventually went to the Supreme Court, which ruled in 2012 that states could opt out of Obamacare's Medicaid expansion. After the ruling, though, Brewer agreed to accept Medicaid expansion and the federal dollars that came with it. Current Arizona Republican Governor Doug Ducey criticized congressional attempts by members of the GOP this past summer to repeal Obamacare, concerned by the treatment of states that expanded Medicaid. The Medicaid expansion played a role in Arizona Senator John McCain voting against the Obamacare repeal this past July.[...]

How Should Bitcoin and Cryptocurrencies Be Taxed?

Tue, 12 Sep 2017 08:30:00 -0400

The tax treatment of cryptocurrencies has been a persnickety affair. Long gone are the days when bitcoin users mistakenly believed that their experiment in monetary innovation would be free from the grabbing hands of the state. But cryptocurrencies' unique properties and uses posed a dilemma for tax authorities seeking to outline a reasonable path for taxation of technologies like bitcoin. Thankfully, a new bill could rectify many of the early mistakes made with the tax treatment of cryptocurrencies. The tax problem was not an immediately straightforward one to the policymakers looking to address it in the post-2013 bubble haze. Underscoring just how novel bitcoin was to the federal government, a 2013 Government Accountability Office report recommending that the IRS take action on cryptocurrencies was mostly informed by the tax agency's previous stance on virtual and game world currencies like those in World of Warcraft and Second Life. The concept of a totally distributed, censorship-resistant virtual currency understandably exceeded the boundaries of what policymakers had considered thus far. Adding to the mystification were the myriad applications of blockchain technology. Cryptocurrencies were simultaneously used by different people as a kind of transaction platform, standard currency, investment vehicle, or even a complex financial instrument. It was difficult for policymakers to review this developing landscape and determine which of the many alternative tax options would be most appropriate for the new technology. There were two likely candidates for the IRS to pursue. It could have either treated bitcoin as a kind of currency, which means that cryptocurrency users would be taxed just as if they were transacting with a foreign currency like euros or pounds, or it could have treated bitcoin as a kind of property, which means that cryptocurrency users would be taxed as if they were earning capital gains. There were pros and cons to each possibility. Taxation as a currency would entail an overall higher tax rate for cryptocurrency users, which would be a bummer. On the other hand, cryptocurrency users would enjoy what's called a de minimus exemption for transactions under $1,000. This means that users who transacted in bitcoin to purchase everyday items ranging from coffee to furniture would not be liable for any tax. Transaction as a property would have the desirable benefit of a lower tax rate. However, it would create a huge headache for large swathes of cryptocurrency users that make many regular small transactions. Capital gains taxes work by calculating the difference in price between the time of purchase and time of sale, and taxing that amount. People who primarily use cryptocurrency as a medium of exchange don't necessarily watch the daily price fluctuations in between the time that they bought bitcoin and exchange it for their daily cup of coffee. They just translate the value in dollars in their minds and go about their day. Yet if bitcoins were taxed as a property, these casual users would be placed in the same tax category as serious monetary speculators, complete with the burden of tracking and calculating substantial price fluctuations between their transactions. Users would then need to adequately document these price changes, prove they had been purchased and sold for the equivalent value in U.S. dollars on the dates claimed, and pay the subsequent tax on the capital gain for each transaction. (Although, there would be somewhat of a silver lining in event of a huge price decrease in that capital losses could at least be deducted from income come tax season.) Talk about red tape! Unfortunately, the IRS indeed announced that they would treat cryptocurrencies as a property for tax purposes in 2014. While this verdict was met with a good amount of grumbling from the cryptocurrency community, the decision was largely out of the IRS's hands: By [...]

Updating America's Tax Code Can Help Gig Economy Workers: New at Reason

Wed, 06 Sep 2017 10:35:00 -0400

When Congress last passed broad tax reform legislation, in 1986, no one had ever heard of the "sharing economy." There were no Uber drivers, nobody was renting bedrooms via Airbnb, and no one was selling kitchy art on Etsy.

The American economy looks very different in the year 2017, as Congress (maybe) embarks on the first major tax reform effort in more than 30 years.

The rise of the so-called "gig economy" over the past decade has caused a shift in how many Americans work and earn income. While most workers are still paid hourly or on a salary, there are more than 2.5 million Americans earning income each month by renting rooms, giving rides, running errands, and selling goods via online, on-demand platforms, according to data collected by JPMorgan Chase. Harvard University researchers found a 66 percent increase in on-call workers, independent contractors, and freelancers—from 14.2 million in 2005 to 23.6 million in 2015.

But the federal tax code remains hopelessly outdated—1986 was closer to the the Eisenhower administration, the first one, than to today.

If Congress pursues tax reform this year, writes Eric Boehm, it will have to consider the implications for workers in the gig economy:

The current federal tax code puts those workers at a disadvantage in several ways. Ambiguity in the tax code has led to different interpretations about IRS reporting standards for workers earning money through gig economy platforms. Even though the current tax code contains loopholes that exempt potentially tens of thousands of dollars of income from some part-time independent contractors, navigating it can be complicated and costly for workers who use Uber or Etsy to earn a relatively small amount of extra income. Taken together, these problems can leave sharing economy workers with huge tax bills, potentially forcing them to seek expensive professional tax help, while simultaneously hampering the federal government's ability to collect tax revenue.

As talk of tax reform heats up in Congress, lawmakers have an opportunity to update the tax code to account for the growth of independent contractors and peer-to-peer employment, a trend that is unlikely to reverse in the coming decades. If lawmakers make small expansions to existing protections for low-dollar work of this type, it could save the majority of gig economy workers from costly tax issues, while making the tax code fairer and likely increasing revenue collections.

"Everyone is losing under the current rules," says Caroline Bruckner, managing director of the Kogod Tax Policy Center at American University.. "Both on-demand economy players and the IRS deserve greater efficiency and less hassle. We can do better."

Read the whole thing here.

How America's Outdated Tax Code Fails Gig Economy Workers

Wed, 06 Sep 2017 10:30:00 -0400

When Congress last passed broad tax reform legislation, in 1986, no one had ever heard of the "sharing economy." It would be more than a decade before eBay and Amazon, the first major precursors of the idea that you could run a business with nothing more than something to sell and an internet connection, would appear on the scene. Companies that would later become synonymous with the sharing economy (or the "gig economy," as it's also known), such as Airbnb and Uber, were more than two decades away. But in 2017, as Congress mulls a rewrite of the federal tax code for the first time in more than 30 years, people earning money from gig jobs tied to smartphone apps are a large, and growing, part of America's workforce. "The current tax administration system isn't working for a significant percentage of on-demand platform small business operators," says Caroline Bruckner, managing director of the Kogod Tax Policy Center at American University. "These tax compliance challenges are only going to continue to grow and impact more and more self-employed small business owners." Tax reform could be the centerpiece of Congress' fall agenda. While most of the discussion will focus on top marginal rates and the promises of faster economic growth or reduced inequality, a less-noticed but crucial part of the discussion will involve changing the tax code to match the needs of an economy that includes more independent contractors and freelancers, thanks to the rapid growth of gig economy platforms in recent years. The current federal tax code puts those workers at a disadvantage in several ways. Ambiguity in the tax code has led to different interpretations about IRS reporting standards for workers earning money through gig economy platforms. Even though the current tax code contains loopholes that exempt potentially tens of thousands of dollars of income from some part-time independent contractors, navigating it can be complicated and costly for workers who use Uber or Etsy to earn a relatively small amount of extra income. Taken together, these problems can leave sharing economy workers with huge tax bills, potentially forcing them to seek expensive professional tax help, while simultaneously hampering the federal government's ability to collect tax revenue. As talk of tax reform heats up in Congress, lawmakers have an opportunity to update the tax code to account for the growth of independent contractors and peer-to-peer employment, a trend that is unlikely to reverse in the coming decades. If lawmakers make small expansions to existing protections for low-dollar work of this type, it could save the majority of gig economy workers from costly tax issues, while making the tax code fairer and likely increasing revenue collections. "Everyone is losing under the current rules," says Bruckner. "Both on-demand economy players and the IRS deserve greater efficiency and less hassle. We can do better." II. For new Uber and Lyft drivers trying to figure out the complexities of the federal tax code, ride-sharing can quickly turn to cloud sourcing. Websites like and subsections of Reddit and other online message boards are used to swap stories, give advice, and, yes, complain about taxes. "Why must the tax code be so stupidly complicated?" wrote user "New-Ber X" in one rather typical post on's "Taxes" section. It was December 2014 and the 33-year-old woman from Chicago had only been driving for Uber for a few weeks, but she was already looking ahead to the following year's tax season. "I know that full-time Uber Drivers are typically classified as independent contractors and are required to pay quarterly estimated taxes once they pass a certain profit threshold," she wondered. "However, is that still the case for someone who has a full-time, 40+ hour job and is just doing Uber on the side for extra cash[...]

The Minimum Wage Cut in St. Louis is Bad Politics, Good Policy

Tue, 29 Aug 2017 17:00:00 -0400

Missouri's state minimum wage preemption law—which Reason covered when the state legislature passed it back in May—went into effect yesterday. Plenty of states have these wage preemption laws. What makes Missouri's law different is that it actually reduces the wage rate in St. Louis from $10, which had been in effect for the past three months, to the state's current $7.70. Local politicos and media voices have been quick to play up this "theft" by the legislature. "St. Louis gave minimum-wage workers a raise. On Monday, it was taken away," the Los Angeles Times headline read. "Thousands in St. Louis likely to see wage drop with new law," wrote the Washington Post. "They literally took money out of the pockets of individuals," State Senator Jamilah Nasheed‏ (D – St. Louis) told ThinkProgress back in May. The bill became law without the signature of Republican Gov. Eric Greitens, normally a critic of minimum wage increases, because he objected to its politically awkward timing. "I disapprove of the way politicians handled this. That's why I won't be signing my name to their bill," he said in a July statement. It's hard to disagree with Greitens. The quick back and forth on the minimum wage left businesses in an awkward position, while providing labor unions and their political allies the opportunity of pushing a statewide increase. A bit more puzzling is why politicians and the media are lavishing special attention on a bill that offers only the potential for worker wage reductions, when laws that certainly reduce their wages escape mention. These laws are called taxes, and most pass without nearly the kind of scrutiny from politicians or national media. Neither the Washington Post nor the L.A. Times were so concerned about the paychecks of St. Louis workers when St. Louis County voters approved an April sales tax hike. And while Nasheed has fretted about families "smaller paychecks" on Twitter, she has consistently voted for increased taxes on everything from zoos to cigarettes. The good senator even voted against a 2014 tax bill that increased the personal deduction for low income earners by $500, a tax cut the mainstream media, as far as I can tell, ignored. Tax cuts actually help workers and the economy by putting more money in their pockets. Minimum wage increases meanwhile harm workers by encouraging employers to cut back on hours and job offerings. Seattle's $15 minimum wage is costing workers $125 a month in lost hours, and killing low wage job growth according to a University of Washington study. After Washington D.C. shed some 1,400 restaurant jobs during the first six months of 2016 after raising its minimum wage to $10.50. Surrounding counties in Maryland and Virginia added 2,900 in the same period. Similar examples abound across the country. So, while Missouri's minimum wage law is bad politics, it is good policy. Government-mandated wage hikes harm the very workers they are designed to help. Some St. Louis workers may see their wages go down. Others however will escape the joblessness and hours cuts that have plagued the other cities that have raised their minimum wage.[...]

California May Have Just Made It Easier for Cities to Hike Taxes

Tue, 29 Aug 2017 12:30:00 -0400

A decision this week by California's Supreme Court might make it easier for local governments to levy taxes. Note the use of the word "might." A 5-2 opinion by the state's Supreme Court yesterday throws the rules for ballot initiatives into confusion, suggesting initiatives put forth by private parties may require only a majority vote to pass, rather than the two-thirds California law required for decades for both private and city-led proposals. It's not entirely clear how far-reaching the court's ruling is. But if the broadest interpretation is applied, the potential impacts are obvious and huge: Suddenly it's a whole lot easier for private interests to get tax increases and new fees passed to take money from others for their own pet interests. Jon Coupal, president of the Howard Jarvis Taxpayers Association, is already preparing for the worst, telling the San Diego Union-Tribune, "This is a significant decision that will lead to unbridled collusion between local governments and special interest groups." The state Supreme Court case involves a ballot initiative introduced by California Cannabis Coalition, a medical marijuana group, in Upland. The group asked that the city's ban on dispensaries be repealed. That sounds good, right? But it also introduced a permitting process and significant license and inspection fees. Protectionism via fees—that's bad! Upland determined those fees triggered the two-thirds requirement. The marijuana group challenged that requirement in court. It's worth noting the ballot initiative failed to get even majority support, but the court decided to consider the underlying claim that these types of ballot initiatives should not be held to the two-thirds requirement. There is a sense in the majority decision that because these ballot initiatives originate from "the people" rather than city governments, they should not be subject to the tougher threshold. But, of course, "the people" do not regularly embark on massive quests to raise their neighbors' taxes. "Citizen" initiatives that increase taxes or introduce fees are frequently introduced and pushed by those who would stand to benefit from the revenue that's brought in. They're no more neutral or "democratic" than those proposed by city leaders. The most glaring example is that of publicly financed professional sports stadiums, the example news outlets point out when considering the possible consequences of this ruling. San Diego citizens were asked to vote to raise taxes just last fall to build a new stadium for the Chargers. They said no. Often, city leaders and the private interests are on the same side in these kinds of cases. City leaders try to sell stadiums to citizens as economic development while sports team owners pocket the subsidies. These tax initiatives are not the result of some group of football fans organizing at tailgate parties. It's cronyism. With the right marketing, this court ruling actually makes local corruption easier. It's also very easy to imagine public employee union groups using this mechanism to try to raise taxes and fees to fund their growing pension debt. Democratic State Sen. Scott Wiener says the change will make it easier for cities to more easily fund local schools and transportation needs. What we really see is that tax increases go right into the pension money pit and don't actually fund improvements at all. Judge Leondra R. Kruger noted in her dissent essentially that a tax doesn't become more pure or democratic simply because it was levied via a voter initiative. It's still taking money from citizens and giving it to the city: "A tax passed by voter initiative, no less than a tax passed by vote of the city council, is a tax of the local government, to be collected by the local government, to raise revenue for the local government.[...]

Donald Trump Unambiguously Condemns...Amazon

Wed, 16 Aug 2017 10:45:00 -0400

President Donald Trump woke up this morning and decided to tweet about how much he dislikes a major American corporation. Amazon is doing great damage to tax paying retailers. Towns, cities and states throughout the U.S. are being hurt - many jobs being lost! — Donald J. Trump (@realDonaldTrump) August 16, 2017 This is pretty normal for the president, who has been singling out companies for praise and blame since the earliest days of his presidential campaign. Trump's unique spin on cronyism typically involves more public bullying than his predecessors, but he's hardly the first to use the power of the presidency to try to dictate firms' internal decisions about where to locate factories, whom to hire and fire, how to file tax returns, or what to produce. Sometimes his signature variant of corporate authoritarianism rises to the level of state action, in the form of subsidies, threatened investigations, or withdrawal of government contracts. Sometimes it sticks to the rhetorical realm. Amazon shareholders seemed worried about the former this morning, though I suspect the stock price will bounce back. (I'm not the first person to only semi-jokingly suggest an investment strategy based around buying the reflexively tanking stocks of the companies bashed by Trump on Twitter and then selling when they recover.) Today's entry into the genre of bullying tweets seems to be based on a misunderstanding, however: Amazon hasn't always broadly collected sales tax, since the law and mechanism for tax collection on internet purchases is still evolving. But since April, the retailer collects taxes in every state where it has a physical presence. A 1992 Supreme Court ruling, Quill Corporation vs. North Dakota, prohibits states from extracting taxes from companies that don't have a physical location within their borders. It seems likely that Trump is confused about the facts here, but if he's not, then perhaps he's making the same argument that Republicans love to mock when the Democratic counterparts make it: That businesses should pay more tax than they are legally required to by ignoring loopholes or other technicalities, because there's something shady or un-American about minimizing tax burden. Trump should be wary of making such arguments, since his as-yet-unreleased tax returns almost certainly reveal similar techniques. He also shouldn't make such arguments because they are simple wrong—paying the amount of tax the law requires and not a penny more is not only legal but morally commendable, especially if you believe your tax money is going to waste or to fund activities that are harmful. Amazon is just the latest scapegoat in a long line of large successful firms that have shifted the way the retail sector functions, including Walmart, Borders Books, and more. Trump's tweet is nicely calibrated to play on existing confusion between the economic health of a municipality and the level of tax collection, as well as the relationship between state and local income taxes and job creation. It true: More efficient means of warehousing and distributing goods will mean fewer jobs in the sub-set of the retail sector previously dedicated to warehousing and distributing goods. But that tells us nothing about tax revenues, and even less about the broader economic health of the nation. Politicians of both parties love to traffic in static thinking about the tax base. Some of those politicians actually believe their own story that if the small businessman on Main Street stops paying sales tax on the stuff he sells to his neighbors in meatspace, the state's tax base will collapse and no one will have jobs anymore. Others know that the labor market and the sources of tax revenue are more complex and dynamic than that, but play on the public's igno[...]

Can't Afford a Vacation? Blame the State!

Mon, 24 Jul 2017 07:33:00 -0400

Your sweet summer getaway is just around the corner—if you can afford one. But however you get to and from your favorite vacation spot, the government is there to take a cut. If you're a road tripper, you'll pay a tax on gasoline that accounts for almost 19 percent of the price of refilling your tank. Even more annoyingly, a quarter of that money is diverted from relevant tasks like highway maintenance to other projects, including turtle bridges and bike lanes. Repaving the roads is low on the priority list, but at least you can experience first-hand what driving in the Soviet Union must have been like. If you fly, Washington will get you too. A ticket from New York to Paris in September on the French airline XL costs a total of $541. Some $401, or 74 percent, goes to taxes and fees. These can include a passenger facility charge (up to $18 per passage), a federal excise tax (7.5 percent of your airfare), $5.60 per one-way trip for the "September 11 security fee," up to $200 in U.S. and international departure and arrival fees, and more. If you're flying domestically you'll pay fewer fees (yay), but your ticket will be more expensive than it could be (boo) because of protectionist laws banning foreign airlines from accommodating travel within the United States. According to the Mercatus Center's travel guru, Gary Leff, "The largest domestic airlines are lobbying aggressively to stop foreign airlines like Emirates, Etihad, and Qatar from expanding their U.S. flights, and from being allowed to charge low prices." The rationale for government intervention here is that it "protects American jobs." Of course, that ignores the new jobs that could be created if these foreign companies were allowed to set up shop in the United States—not to mention the benefits that flow to American consumers when they get to choose from more carriers and price points. Getting where you're going can take longer than it should, thanks to long security lines and an antiquated government-managed air traffic control system that stacks delays on top of delays. Other countries have privatized their systems and seen spectacular results, but not us. The Federal Aviation Administration (FAA) has also made it harder for most of us to adjust our plans in the face of such delays. For decades, the only way to catch a lift on a private jet with open seats was to check for postings to a physical billboard. Not surprisingly, this limited the number of people with access to that option considerably. But when the company Flytenow put this data on an online platform, the FAA showed its gratitude for the money it could save passengers and pilots alike by shutting Flytenow down. The fun continues even after you've arrived, since many state and local governments are also running interference. Don't expect to be able to grab an Uber or a Lyft in places such as Atlanta and Boston, which ban ride-sharing companies from picking up passengers. While some of these laws are only loosely enforced, many airports now spend a great deal of effort punishing rogue ride givers. According to The Wall Street Journal, "Miami airport police issued 4,000 citations to ride-sharing drivers over the past several years, each with a $1,010 fine." Home-sharing services, too, are being targeted. Last year, Democratic New York Gov. Andrew Cuomo signed a law to impose fines in the state of up to $7,500 "per advertisement of an 'illegal unit' on home sharing sites like Airbnb, which is likely to mean a fine for anyone who advertises short-term accommodations," Leff wrote at View from the Wing. The result, of course, is higher costs for visitors. Unfortunately, cities such as San Diego and San Francisco are considering doing the same. The governmental meddling doesn't end[...]

Michigan Gets Money to Help Homeowners, Uses it to Demolish Homes Instead

Fri, 21 Jul 2017 10:10:00 -0400

Detroit has foreclosed on a remarkably large number of private homes for failure to pay property taxes. The tax bills in question may have been unconstitutionally high, and federal funds intended to prevent the foreclosures have been spent demolishing the houses instead. Since 2002, 143,958 properties in Detroit—more than 37 percent of the properties in the city—have gone through tax foreclosure auctions, according to data compiled by Detroit-based mapping and data company Loveland Technologies. More than 100,000 of those auctions have taken place since the Great Recession hit in 2008. "Something that has really followed on the mortgage foreclosure crisis is the tax foreclosure crisis," says Loveland CEO Jerry Paffendorf. Many of those foreclosures may have been illegal. "People are losing their home for inability to pay taxes that they never should have had to pay in the first place," says Michael Steinberg of the American Civil Liberties Union (ACLU). Under the Michigan Constitution, Steinberg points out, property taxes must be assessed on the actual cash value of a property. The recession caused housing prices to plummet in Detroit, but there was no corresponding reassessment of property taxes. "Homes are sold in the tax foreclosure auction for $500 or $1,000 when at least a few years ago it was being taxed as if it were worth $50,000 or $60,000," he says. As part of the Troubled Asset Relief Program (TARP), the federal government provided the State of Michigan with $761 million to prevent these foreclosures. But less than half of that money ever got into the hands of financially distressed homeowners. A TARP report released earlier this year notes that Michigan is "among the states that have the most TARP dollars set aside," but it also has one "of the highest percentage of people turned down for the Hardest Hit Fund" (HHF). The state rejected 52 percent of those who applied for mortgage assistance through the HHF. A majority of the rejected applicants—71 percent across the state, more than 80 percent in Detroit—earned less than $30,000 a year. Where did the money go instead? Since 2013, Michigan officials have spent $381 million out of that $761 million demolishing vacant buildings. Some 11,249 homes have been destroyed with HHF funds, 7,119 of them in Detroit. "The properties that need to be demolished, 95 percent of them, have gone through tax foreclosure in the past," notes Paffendorf. "It doesn't seem like as an effective use of those funds to spend $13,000 or $15,000 on a demolition later on when someone might have been $2,000 or $3,000 behind on their taxes and the funds were there to work on that." Meanwhile, another TARP report faults the Michigan authorities for insufficient safeguards on how the HHF money was spent, leaving them "vulnerable to the risk of unfair competitive practices such as bid rigging, contract steering, and other closed door contracting processes." Indeed, contractor costs for demolitions rose 90 percent in Michigan after HHF funds were made available, from $9,266 per building in January 2014 to $17,643 per building in June 2016. The City of Detroit is now the subject of a federal grand jury investigation over its use of the HHF funds. And the Michigan ACLU and the NAACP Legal Defense Fund are suing Wayne County and the City of Detroit over illegally collected taxes and illegally seized houses. But in the meantime, the seizures and demolitions will continue. Roughly 8,000 homes are going to property tax auction in September, according to Paffendorf. "This is still something that is happening this year," he says. "It's going to happen again next year until something changes."[...]

The Price of Press Bias

Tue, 18 Jul 2017 15:00:00 -0400

How seriously should one take President Trump's complaints about the press? About $37.06 a year seriously, to be precise. Trump tweeted earlier this week: "With all of its phony unnamed sources & highly slanted & even fraudulent reporting, #Fake News is DISTORTING DEMOCRACY in our country!" The most sinister interpretation of Trump's attacks on the press is that they are an effort to undermine public confidence in one of the few independent institutions that could challenge his grip on power. Trump's Republican Party controls Congress. Conservative-leaning justices hold four of nine Supreme Court seats. The Democratic Party is in disarray. That leaves the press—with the possible exception of the quasi-permanent federal bureaucracy—as the most formidable obstacle to whatever Trump wants to get done. The most charitable interpretation of Trump's complaint is that, even if he may be exaggerating or painting with an excessively broad brush, he's nonetheless performing a valuable service by highlighting a genuine problem. The truth, as usual, is somewhere in between. But Trump is right about the "highly slanted" part. I can say that as someone who has been documenting bias at The New York Times in items for my website now for 17 years. How can I quantify the cost of press bias so precisely—$37.06 a year? That's the amount my property taxes increased after the City of Boston voted to approve a tax surcharge. The slanted coverage came from the local National Public Radio affiliate, WGBH, which aired an indefensible piece that quoted two people in favor of the tax increase but not a single person who opposed it. Now, one might argue that the press is just serving its audience of left-leaning Boston-area voters. The voters approved the tax increase in 2016 with about 74 percent in favor. But it's a bit of a "which came first, the chicken or the egg" type of question. Are WGBH and the Boston Globe liberal because the citizens of Boston are? Or do the people of Boston lean left because the press is feeding them a diet of slanted information on which to make their judgments? The truth, as usual, is somewhere in between. The new property tax bill from the city, admirable in its transparency, has a line that itemizes the amount of the "community preservation act" surcharge. It's a line that didn't exist on last year's tax bill. The line is labeled "community preservation act," but I prefer to think of it as a "media bias" tax. For $37.06, I could buy a pair of shoes for one of my children, make a donation to WGBH, or hire a local teenager to mow the lawn or shovel snow off my driveway. Instead, the money will go to local politicians for spending on their pet projects. It's rare that the cost of press bias is as clear, and the consequence of it as direct, as with this property tax increase. But the price we pay is there, in every doctor's bill and every health insurance bill, every electric bill, every estimated tax payment, every payroll tax deduction, every sales tax imposed on every purchase at every store or restaurant. When the press tilts in favor of higher taxes and more regulation, against energy exploration, and for more government spending, democracy is indeed, as Trump accurately observes, distorted. The true cost, on annual basis, is probably well more than my $37.06 tax increase. The First Amendment wisely prevents Congress from making any laws to address this problem. But President Trump is free to complain. And the rest of us are free to read, watch, and listen with skeptical eyes, ears, and minds, and to call out egregious cases of slant when we see them. If we don't, we'll all be stuck with the bill.[...]