tax news

We earlier described Virginia’s passage of new transportation taxes, which include higher sales taxes in the northern Virginia and Hampton Roads regions and higher hotel and real estate taxes in northern Virginia. Although not exactly the plan Governor Bob McDonnell (R) asked for, it looked close enough to most observers and he was expected to sign it into law.

Enter Virginia Attorney General Ken Cuccinelli, widely expected to the 2014 Republican gubernatorial nominee. He noted in an advisory opinion (PDF) last Friday that Virginia’s Constitution contains a uniformity clause, which requires that all taxes imposed by the Legislature be uniform across the entire state.

Because the law does not impose the new taxes equally across the state geographically, but only in certain areas, it violates the uniformity clause. (A similar law was struck down in 2008 for allowing regional authorities to impose new taxes without voter approval, to get around northern Virginia voters’ consistent habit of rejecting regional taxes.)

So, McDonnell exercised his power to amend the statute and expand the new taxes statewide. Sort of. The new taxes apply “statewide” to any region that meets the following carefully convoluted criteria: any planning district with at least 1.5 million people as of 2010, at least 1.2 million registered vehicles, and at least 15 million transit passengers. Not surprisingly, only the Hampton Roads region and northern Virginia fit this criteria. From the Stafford County Sun:

McDonnell's amendments to the bill, filed late Monday night, would: reduce a proposed annual fee on hybrid and alternative fuel vehicles from $100 to $64; trim a 1.3-percentage point increase in the sales tax on motor vehicles to 1.15 percentage points, phased in over three years; decrease new taxes on real estate transactions and overnight lodgings in Northern Virginia for regional initiatives there; and tie the new taxes for regional initiatives — including a higher retail sales tax than the rest of the state — to specific criteria such as population, vehicles, and transit use as proxies for highway congestion and pollution.

"So empirical criteria as opposed to naming regions," said McDonnell, who added that the criteria "theoretically could be met by any region of the state."

Currently, only the Northern Virginia and Hampton Roads planning districts meet the criteria — at least 1.5 million people in the 2010 census, at least 1.2 million registered motor vehicles, and at least 15 million transit passengers a year.

This dodge allows Virginia’s new taxes to get around the Constitution’s requirement that taxes be imposed uniformly across the state. Now they are uniform technically but not for practical purposes. Maybe it’s the right policy, given the greater transportation needs of the two regions in question, but it’s bad constitutional practice.

The Minneapolis Star Tribune has published a scathing denouncement of the proposal to raise taxes on high-income earners, part of the House of Representative’s DFL tax plan and similar to the Governor’s tax plan that we've critiqued here and here:

The House DFL proposal to double down on an upper-income tax increase — albeit temporarily — risks launching the state’s top tax rate into an anticompetitive stratosphere. It’s an idea that ought to disappear faster than March snow.

The paper-of-record's editorial goes on to warn that higher taxes on wealthier taxpayers is poor tax policy, bringing Minnesota into the same camp as high-tax California and Hawaii:

That’s not good company for a state that wants to continue to be home to more Fortune 500 companies per capita than any other. Those big businesses aim to attract top talent from around the country. A supersized state income tax for top earners would make their recruitment more difficult, and could cause some companies to ask whether they ought to do their hiring elsewhere.

States should think carefully about how they decide to collect revenue. The editorial board is right—revenue should be raised in a way that minimizes economic distortions and doesn’t put states at a competitive disadvantage. Governor Dayton and state legislators alike would do well to follow the Star Tribune’s advice.

More on Minnesota here.

Follow Liz on Twitter @elizabeth_malm.

This week's map shows the top corporate income tax rate in each state. Iowa has the highest rate at 12%; three states, (Nevada, South Dakota, and Wyoming) have no corporate income tax.

Click on the map to enlarge it.

View previous maps here.

Tomorrow, the Supreme Court will hear oral arguments in United States v. Windsor. While the overall issue at stake is the constitutionality of Section III of the Defense of Marriage Act (DOMA), which defines marriage as the union of a man and a woman for federal purposes, the heart of this particular case is the $363,053 federal estate tax bill from which the plaintiff, Edith Windsor, would have been exempt had her marriage to her same-sex partner, Thea Spyer, been recognized by federal law.

The overall effect of DOMA on federal estate tax revenue is hard to measure—estate tax revenues are likely higher than otherwise, because of gay couples in similar situations as Edith Windsor—and its effect on income tax revenue is also unclear. Marriage can cause income tax penalties as well as tax bonuses, and the exact effect depends on a number of factors. Couples with unequal incomes are more likely to receive a tax bonus by getting married, while couples with similar incomes are more likely to face a tax penalty, so DOMA’s effect on income tax revenues depends on the number of married gay couples that would face penalties and bonuses if required to file a joint federal return.

Viewed purely from a tax perspective, DOMA is bad policy. It violates two important principles of sound tax policy—simplicity and neutrality. The law fails from a tax neutrality perspective because of the arbitrariness of the way it imposes complexity on, and withholds possible tax benefits from, particular classes of married couples.

The principle of simplicity is violated because couples whose marriage is recognized at the state level but not at the federal level face an incredibly complex, burdensome filing process. Gay couples living in states that recognize gay marriage must complete four different tax returns every year: one federal tax return per person, one “dummy” joint federal tax return, and then one joint state return. The dummy federal return is necessary so that couples may file their joint state tax return, which requires a joint federal filing be completed first. The dummy return is then discarded (unfiled), constituting a waste of preparation time and costs.

The situation worsens when a same-sex couple jointly owns an asset like rental property, where federal law will permit only one spouse to claim the property for tax purposes because the couple is not recognized as married. In this case, six returns must be completed to determine which spouse should claim the property: the dummy joint federal return, an individual return with the rental property included (for each spouse), an individual federal return without the rental property included (for each spouse), and a joint state return. The spouses then decide who gets the best tax treatment by including the jointly-held asset and then proceed with the appropriate federal returns. Thus, three of the returns completed, the dummy return and at least one of the federal returns completed by each spouse, are discarded without filing. This is pure waste of time, effort, and money.

Gay couples are also placed in a position whereby they must effectively lie on their federal tax return. Marriages are regulated by the states and so couples must indicate whether or not they are married on their federal tax return based on what the law of their state of residence provides. However, for federal purposes, same-sex marriages do not exist. Thus, filers must check the “single” box, even though they are married under the law of the state in which they reside. The penalties for perjury on a tax form can be substantial, so many same-sex couples opt to include a disclaimer form or otherwise make a notation on their form that they are choosing “single” as required by federal law but are married under their state’s law.

Good news out of Vermont this week, as the House Ways and Means committee voted 6-5 to kill the proposed $1.28 per gallon sugar-sweetened beverage excise tax that was being considered in the state. Back in late February, I testified to the House Ways and Means and Health Care committees on the bill. While the Health Care committee sent the bill through (after a few shenanigans), the Ways and Means committee seems to have taken the arguments against using the tax code to change behavior to heart.

As I argued in my testimony:

[…] the influence of soda taxes on obesity outcomes is questionable. We know from the law of demand that raising the price of a product will make people consume less of that product, but people don’t behave in a vacuum. A 2010 study found that soda taxes do reduce soda consumption, but that children and adolescents tend to perfectly substitute in calories from other sources. This resulted in no net change in caloric consumption. A 2007 study found that an increase of 1 percentage point in the state soft drink tax rate would lead to a decrease in BMI of just 0.003 points. For perspective, the CDC defines a “healthy” BMI for a six foot tall adult male as between the large range of 18.5 and 24.9.

There is also evidence that taxes on soda lead people to drink more beer. A 2012 study by economists at Cornell University showed that for households prone to buying alcohol, there was a 172.4 ounce increase in beer consumption per month when a 10 percent tax was applied to soda. This equates to a heightened intake of 1,930 calories in the same time frame. This raises concerns about potentially switching one public health problem for another. As an interesting side note, Vermont currently taxes beer at a rate of 27 cents per gallon. The proposed rate on soda would be almost five times as high as the current tax on beer.

I think the overarching lesson to learn from this is that people respond to tax changes, but not necessarily in the way policymakers would want them to.

[…] this debate centers around moral questions. Reducing obesity is an important goal, but policy actions have costs. My largest concern is that placing a tax on soda is a blanket policy that would affect all Vermonters. There are many people that enjoy sodas regularly and make adjustments in their diet elsewhere to maintain a healthy lifestyle. These people will be affected by an excise tax as well, and I think that is why the tax code is far too blunt an instrument to address something as comprehensive and subtle as nutrition choices.

UPDATE: The final tax package that the House will vote on may expand the sales tax base to include candy and sugar-sweetened beverages (my arguments here), and also includes a 50 cent per pack hike on cigarettes (comprehensively addressed here). The budget will ultimately have to be signed by Governor Shumlin, who has expressed his opposition to tax hikes.

More on soda taxes here.

Follow Scott Drenkard on Twitter @ScottDrenkard.

(Reuters) - Grammy Award-winning singer Dionne Warwick has filed for bankruptcy in New Jersey, citing tax liabilities she has attributed to financial mismanagement, her publicist said on Monday. Warwick, 72, known for "Do You Know the Way to San Jose?" and other popular songs, filed the petition on March 21 in the U.S. Bankruptcy Court in New Jersey, the state where she was born and currently lives. She listed total assets of $25,500 and total liabilities of more than $10.7 million, nearly all tax claims by the Internal Revenue Service and the state of California, according to the filing. ...

As part of “Vote-o-rama” this past Saturday, the U.S. Senate voted 51-48 to “require the Congressional Budget Office to include macroeconomic feedback scoring of tax legislation.”  Even though this is likely non-binding, it shows the majority of the Senate recognizes that CBO revenue estimates are unrealistic in that they do not account for any effects on the larger, “macro”, economy.  That is, when income taxes go up, for example, the CBO ignores for purposes of revenue estimation how this might change incentives to work, save, or invest.  This is clearly wrong by any school of economics, yet this “static” analysis is what determines the official revenue estimates for every tax bill passed by Congress.  It is a shame that 48 Democrats, including chief Senate tax writer Max Baucus, voted to continue ignoring how taxes actually affect the economy and how that in turn feeds back into tax revenue. 

It is not as if the CBO is unprepared to do a more realistic analysis, which is sometimes called “dynamic” or “macroeconomic” analysis.  The CBO relies on the Joint Committee on Taxation (JCT) to estimate revenue changes from legislation, which has at its disposal three macroeconomic models that all take into account to some degree how taxes affect the labor supply, savings and investment, and GDP.  These macroeconomic models could be used to provide more realistic estimates of revenues, as a supplement to JCT’s standard analysis.  However, it appears the last time JCT used these macroeconomic models at all was in 2009 to estimate the effects of the Affordable Care Act. 

To be clear, JCT in their standard analysis does account for certain behavioral effects which they describe as “dynamic”, namely:

However, JCT’s standard analysis explicitly ignores any of the big effects of tax changes that affect the overall size of the economy, such as higher income taxes causing less work and investment overall:

“A conventional JCT estimate incorporates behavioral responses in projecting tax revenues, but assumes that these tax and behavioral changes do not change the size of the U.S. economy, as measured by the Gross National Product (“GNP”).”

Failing to account for these big effects biases tax policy against economic growth, as it pretends that higher income taxes in particular won’t hurt the economy.  JCT’s macroeconomic models hold the potential to do a much better job, and Congressional tax writers should at least demand they be used and the results published.  Additionally, Congress should look to outside groups such as ours to independently estimate the effects of tax changes.  An open discussion of the various models, and their underlying assumptions, would greatly improve the tax writing process.  

Follow William McBride on Twitter @EconoWill