Bob Goodlatte, (R-VA) is chair of the House Judiciary Committee. He has said that the House won't pass the measure already approved by the Senate that would require online businesses to collect state and local sales taxes like "brick and mortar" businesses do and he wants an "alternative" to be developed in the House.
Goodlatte says (from the Main Street Press Office, quoting the Washington Examiner) that he shouldn't have been taken as killing any legislation requiring online collection, but that he has "serious concerns" and thus wants the House to investigate "alternatives that could enable states to collect sales tax revenues without opening the door to aggressive state action against out-of-state companies. Furthermore, any alternative in the House would address fairness to all businesses and consumers.”
So he doesn't want "aggressive state action against out-of-state companies." When out-of-state companies sell items into the state, they should collect the taxes due to the state. Just what would Goodlatte consider "aggressive" actions in that context, I wonder.
But wait. Goodlatte also said that the Senate bill is "unfair" to consumers because "they'd have to pay more." Of course they'd have to pay more if they pay the taxes due on the purchase! But they should pay more! Consumers still owe those taxes that aren't now collected by online businesses--it is just really hard for a state or locality to collect them when they can't collected them through online businesses at the point of sale. There is no "fairness to consumers" issue in whether they pay the taxes due or not.
So just what does Bob Goodlatte want? Could it be protection of online business (excess) profits from the comparatively lower prices they can charge because of assisting consumers in evading state and local sales taxes?
Most are aware that online businesses have an unfair tax advantage. Under the 1992 Quill Supreme Court decision, states cannot currently require online retailers without physical presence in the state to collect applicable sales taxes. Although customers are supposed to save receipts and then pay over the appropriate amount of sales tax at the end of the year, nobody does. And they get away with not paying since it would be an onerous burden on states to assess those taxes without information from the onlines sellers. The result is that the tax-included price for merchandise purchased online is cheaper than for the same merchandise purchased in stores. So our tax system is essentially subsidizing the replacement of mom and pop small businesses with online giants. The mom and pop business often serves the online business in another way--for free: customers may go try on the merchandise at the local store, but then order online to get the cheaper (sales-tax-free) price.
Local businesses have lobbied for legislation that would permit states to require online retailers of reasonable size ($1 million in revenues annually) to collect sales taxes. Given the ability of today's software to handle these kinds of complex tasks, there is really no justification for subsidizing online businesses over local businesses by not requiring them to collect the taxes.
The Senate finally passed the legislation on Monday. The vote--69-27--demonstrates that when politicians understand that people want a fair tax bill, they can sometimes even in this stridently partisan age manage to get it passed.
The House, however, may be another matter. Tea Party extremists are more likely to rally to the Norquist anti-tax pledge even though this is quite clearly NOT a tax bill. The taxes have long been due. It is the mechanism of collecting the taxes that the bill would change, since collection by the seller works much better than self-reporting and payment by the customer. Right-wing groups oppose the legislation as a matter of "basic principle because they are not only ideologically opposed to ANY revenue going to governments but also don't like the idea of setting up reasonable measures to help government collect revenues actually due. Matt Kibbe of Freedom Works doesn't like "creating a new infrastructure to expand the general power of government."
Will the GOP leadership whip these guys into line. Probably not. Boehner has expressed his reluctance to support the legislation.
Funny, this is really a "state's rights" issue that the GOP would, in ordinary times, likely support. It just ensures that states can collect sales taxes already due. And the GOP has tried to use sales taxes as an argument for eliminating the income tax--remember that one of the purported "pros" of a national sales tax that is claimed is that it could "piggyback" off the state sales tax mechanism, letting the states collect the federal sales tax. So the truth is now revealed. The GOP would be quite happy if the states were incapacitated to collect their own sales tax and thus unable to collect the 'national' sales tax either. The idea of starving government programs lies very shallowly beneath the surface of the opposition to this legislation.
Robert Reich, former labor secretary, has some worthwhile advice for the President's State of the Union address: he notes that the focus should be the "central issue you want the nation to help you take action on". That's "not immigration, guns or the environment" (though "[a]ll are important") but rather "joblessness, falling real wages, economic insecurity, and widening inequality" . See Robert Reich, Memo to Obama: Focus on the inqueality gap, Salon.com (Feb. 11, 2013).
He's right.
"It's the economy, stupid", that old slogan from the Clinton campaign days, goes only so far. It doesn't tell us, for example, what parts of the economy are most important--is it the stock market's well-being, and indirectly the fortunes of the very few at the top of the income distribution who own significant amounts of those items being sold on the market? Or is it the unemployment data, with its distressing litany of continuing failure of our economy to provide decent jobs for ordinary people? Is it the way that corporate owners and managers can use the powers of government to make unionization difficult and thereby make it much easier for corporate management and shareholders to retain all the productivity gains while workers wages stagnate (everything from Wal-Mart's tendency to tear down union fliers in worker areas (based on my personal observation) to the CEO's determination to beat unions down any way possible (see the New York Times story in the 2/12 edition, At Cablevision, Norma Rae's Been Escorted Outside, New York Times (Feb. 12, 2013), at A23, regarding Cablevision's firing of two dozen employees for being off work, after claiming to have an "open" management that invited worker conversations yet allowing those same employees to cool their heels for 40 minutes waiting to talk to him and then walking out and firing them for not being on the job)? Or is it the general optimism of the upper class, who can pass on untaxed estates to heirs who will get those stocks at stepped up basis and renew the cycle of monetization without taxation for their own account?
Stock market statistics mostly tell us about the upper class, along with the upper part of the middle class that has some share of that bounty: they don't tell us about how well the economy is serving others, unless the general well-being of corporate America spills over to the general well-being of average Americans. It doesn't do that in an era of push-down on unions to ensure that workers have no voice, push-back on taxes to ensure that the wealthy managers and owners not only get all the productivity gains but have to pay too little in taxes to support the system that made those gains possible. Mostly, stock market statistics tell us about how the privileged are maintaining their privilege, as their ownership of most of the financial assets continues to mean their heightened influence over most laws and their garnering of most of the gains that do take place.
This is well noted in a post on Economist's View (Mark Thoma), embedding a post by Miles Corak on Free Exchange about research on inter-generational social mobility.
The real lesson from the historical research is not that there is anything inevitable about a low degree of inter-generational mobility, or that it signals more persistence than other research. The most privileged will do everything they can to perpetrate their status across generations, and in past eras the structure of labor markets and public policies permitted, and in some measure continue to permit, a non-level playing field.
I've long argued that the way to evaluate the economy is in terms of how well it is serving ordinary people who make up the middle class (roughly defined as the middle three quitiles of the income and wealth distribution) and how adequate is the safety net it provides for those who make up the lower class (the bottom quintile of income and wealth). What matters is economic sustainability, in terms of adequacy of those many intangibles by which we measure quality of life--like accessible quality health care, accessible quality education, accessible quality jobs, decent wages for decent work. That means that government's intervention in the economy will need to be on the side of the little guy, ensuring that resource allocation isn't so skewed to the already rich that we become an oligarchy where most of us live off crumbs and a few of us live like kings. If we want a sustainable economy and sustainable democracy, democratic eqalitarianism demands that governments temper market forces with protections for underdogs, providing counterforces to the redistribution upwards tendency of brute force capitalism.
Today, the rise of the US oligarchy and the frightening power of wealth in determining how laws work have put us in a terrible situation: "debtor prisons, once a relic of the 18th century, are making a frightening comeback in the U.S. justice system." Alex Kane, Miss a traffic ticket, go to jail?, Salon.com (Feb. 11, 2013).
So an appropriate slogan for progressives today should be something along the lines of "It's the inequality, stupid." And that certainly doesn't mean more of the same old failed GOP policies that favor the wealthy, mistakenly labeled "job creators" by the GOP in its constant effort to undo unions (witness Michigan's disastrous anti-union legislation or Cablevision's determination to aid anti-union forces and squelch union activists), favor capital over labor (from the problematic preferential rate for capital gains to the ridiculous "carried interest" taxation of the compensation payments to so-called profits partners (a category of "partner" for tax purposes not provided for in the tax code but essentially an invention of Wall Street) to the squandering waste of an estate tax and charitable contribution deduction that favor meritless accession to and use of untaxed wealth and pushes the burden for government revenues to laborers instead). And it certainly doesn't mean more of the same "deficit hawks, austerity mavens, trickle-down charlatans, and government haters who have commanded center stage for too long." Memo to Obama: Focus on the inqueality gap, As Reich says:
The President should make it clear that any Republican effort to hold the nation hostage to the GOP's ideological fixation on the budget deficit and a smaller government will slow the economy, likely pushing us into another recession. And that those most imperiled are the middle class and the poor.
He should emphasize that the real job creators are not the rich but the vast majority of ordinary Americans whose purchases give businesses reason to add jobs. And that if most Americans still cannot afford to buy, the government must be the spender of last resort. Id.
Reich goes on to make some specific policy suggestions for acting to reduce inequality. These include
reversing the impact of the reinstatement of the higher Social Security tax rate by exempting the first $20,000 of income from the tax and lifing the ceiling on income subject to it;
reviving government-run work corps, like the WPA and CCC, "to put the long-term unemployed directly to work"
raising the minimum wage
imposing a 2% tax surcharge on wealth in excess of $7 billion to be dedicated to education
Cutting corporate and military welfare
not cutting public investments or safety nets
giving tax credits for actual job creation
supporting states that rehire teachers, firefighters police and social workers. Id. (quoting and paraphrasing).
Sounds like a pretty good plan. As Corak noted (in the Economist's View post cited above):
[D]ynamic labor markets offering new opportunities to the population as a whole, progressive public policies of relatively more benefit to the relatively disadvantaged, and strong families with growing incomes and human capital will lead to much more mobility than aristocrats of a pervious era could ever have imagined.
And the Reich plan is certainly better than what most of the GOP-led state experiments like Michigan are coming up with, which read like a plan for even more redistributing upwards to the top few, including:
eliminating income taxes in favor of regressive sales taxes,
eliminating business taxes in favor of regressive user fees (a GOP-led Michigan "upward" redistribution "innovation"),
pushing hard against unions (a GOP-led Michigan "innovation"),
reducing safety net support like Medicaid (being considered in Michigan),
taxing vulnerable seniors on pension income (another of Michigan's recent "innovations"),
cutting support for state universities while reallocating the support that remains to those that serve the upper class rather than underprivileged who will generally need to borrow more and take longer to succeed (another of Michigan's redistributionist efforts).
As most tax practitioners and academics know, Professor Paul Caron maintains a "tax prof blog" that provides timely links to most things tax in major papers, blogs, journals, conferences and the like, as well as announcements and releases from the IRS, Treasury and Congress related to tax. Paul does not usually provide much analysis or opinion, but rather an excerpt or two and a title.
This is not an atypical way of titling items on tax prof blog. The observant reader will notice a slight bias in the title. The Wall Street Journal article is actually titled "The State Tax Reformers: more governors look to repeal their income taxes" (Jan 29 2013 updated). The article summarizes states that are lowering or eliminating their income tax (sometimes including their corporate income taxes) and sometimes replacing it with a broad sales tax--for example, in the Republican strongholds of Nebraska and Louisiana. The Journal article then goes on to opine (and it is indeed opinion) that "this swap makes sense" because "income taxes generally do more economic harm because they are a direct penalty on saving, investment and labor that create new wealth" whereas "sales taxes ... hit consumption, which is the result of that wealth creation." This is the typical "free market" pitch favoring capital income (and the rich) over labor income (and everybody else).
Of course, the Journal then proceeds to quote Art Laffer for the right-wing corporatist ALEC in an article claiming that a majority of new jobs are created in states without an income tax because of their lack of an income tax.
[Aside: Laffer is (in)famous as the 'free market' economist who described his view of the maximum tax rate by drawing a bell curve on a napkin. The Laffer Curve is more ideology than theory, as I explain in an earlier post: CFP's Laffer Curve Video, ataxingmatter (Feb. 2008). ]
Not surprisingly, Caron's title suggests that the "real" policy reason for the shift is a "real" desire to create jobs.
I have significant doubts. Most of the anti-income tax proponents are pro-Big Business and pro-wealth. A shift from an income tax to a consumption/sales tax is a move from a somewhat (often minimally) progressive tax system to an explicitly regressive tax system. Such a move favors those with capital assets and mainly capital income. Claims (like that made by the Civitas INstitute cited in the Journal article) that shifting from income tax to sales tax will result in "average annual personal income growth" mean almost nothing since averaging income growth across a population doesn't really tell you whether almost all of it goes to the wealthy or not--if that growth goes to those already in the wealthy distribution, then inequality increases and in fact most everybody else is worse off, in spite of the "average" growth.
The Journal acknowledges the regressive nature of a sales tax swap, but suggests that exemptions of necessities (e.g., food, medicine, utilities) and rebates for low-income families will suffice. I also find that doubtful--the very low absolute benefit to the poor of the exemptions and/or rebates, while important, is substantially less than the very real high absolute benefit to the wealthy of the switch to a consumption rather than income tax. Accordingly, the so-called "reform" will inevitably increase an already devastingly problematic inequality that has resulted in lower quality of life for most Americans on many different areas from literacy to access to health care to teenage pregnancy to death rates and all the many other factors in which Americans enjoy a lower level of quality of life than most other OECD nations.
Not, in other words, a good idea. As noted in Nick Carnes (who teaches at Duke University), A Tax-Reform Plan that Rewards the Wealthy and Stalls the State, NewsObserver.com (Jan 24, 2013, modified Jan. 25, 2013), these proposals are being pushed by right-wing propaganda tanks, including a "wealthy conservative foundation [that] has paid [Arthur] Laffer to write another report and to fly to our state to promote it." Id.
The goups behind these proposals have their one-size-fits-all state-level strategy down to a science, but they don’t have a handle on the actual science of state tax reform. It’s easy to see why their ideas are appealing. Who wouldn’t like to grow our economy and lower taxes without cutting vital services like schools and public safety?
However, independent economists in every state where the Laffer plan has been introduced – including North Carolina – have found serious problems with the evidence its proponents have used to back it up. No matter how low the tax rate is, businesses and wealthy people won’t relocate to a state where the schools are bad, the streets are unsafe and the infrastructure is crumbling – things that all tend to happen when taxes are cut to the levels that the Laffer plan outlines. Id.
The Carnes article goes on to note that "Kansas, which earlier passed the Laffer bill, is now projecting $800 million annual budget deficits and has extended an emergency sales tax that should have expired years ago" while state agencies are facing a 10% across the board cut, with education expected to lose a billion dollars in state funding over the next five years. Yet no businesses have flocked to Kansas because of the legislation. Id.
And guess what. It is the wealthy who would benefit if North Carolina were to carry through with enacting its own form of the "Laffer bill". Carnes notes that families earning $24,000 a year would pay $500 MORE in taxes under the Laffer plan, whereas wealthy families with incomes of more than $900,000 a year would pay $42,000 LESS in taxes. Id. Shifting the tax burden from the wealthy who can easily bear it to the low-income who cannot, while at the same time cutting government support for essential public services that build a shared community is a disaster in the making.
The Wall Street Journal isn't flummoxed by such facts (which it doesn't even acknowledge). The Journal article suggests that the idea (set forth in some Big Oil/Fracking states) of replacing income taxes with revenues from oil and gas extraction would be good (and maybe better than regressive sales taxes) because "it would make everyone a stakeholder" in increased drilling and fracking, thus "help[ing] to build a politicial constituency for more mining and drilling." Note the presupposition that supporting "more mining and more drilling" is inherently a public good! (One assumes that the Journal staff think this because Big Oil/Big Gas is Big Business, and the Journal is ALWAYS in favor of whatever Big Business wants.)
That idea strikes me as truly worrisome--we have a climate-change problem, and trying to "buy" votes to support environmental degradation at whatever cost through the swap of income taxes for some (probably minimal) increased royalties (probably also accompanied by less in the way of services, especially for the poor or for public goods like public education) is not a good idea. Yes, probably those very people who are the poorest and most harmed by environmental degradation would tend to be able to be bought off by that swap--they would not realize that the wealthy are again getting the mountain of the share of the benefit, and they are bearing most of the burden in terms of the long-term costs of the environmental degradation as well as the long-term costs of lower public revenues spent on programs especially important to them because of their lack of a cushion of wealth (schools, public parks, fire/police, health care, etc.).
Interestingly, the Journal article notes that Alaska got rid of its income tax in the 1980s and suggests that's been a good deal. Of course, Alaska also gets more back from the Federal government than it gives in Federal taxes--ie, Alaskans have replaced their income tax revenues with federal handouts.
The Journal calls these plans for revamping state laws to provide substantial benefits to wealthy individuals and corporations a "rare bright spot in the current high-tax era." That is garbage from both sides. We do not live in a "high-tax era." IN fact, we live in a low-tax era and we are already paying for that with the significant drop in state support for higher education, state support for parks and other public amenities (police and fire protection, protections for workers, fair and easy access to voting, etc.), and state support for K-12 education as well as the failure of the federal government to fund the kinds of infrastructure and education and basic research projects that could make the difference between a continuing great economy and the continuing muddle we are in after the Bush recession. All of those costs are borne more substantially by those in the lower-income brackets. With the proposed "reforms", the wealthy will be sailing through with even more wealth, able to shut out even more effectively any association with the "lower class" elements and giving even less to support schools, colleges, unemployment benefits, etc. Meanwhile, the poor and near-poor will get much, much less (when they didn't owe much in taxes anyway). Not a bright spot at all. More like class warfare.
The real reason behind these shifts is to benefit the major members of the Republican base--i.e., Big Business and the wealthy. It has little to do with jobs... That's just a handy obfuscating claim to make about policy moves that substantially shift the benefits of the economic system to the rich and the burdens of the economic system to everyone else. This is just another element of the class warfare that has been waged for the last few decades to allocate gains to the wealthy.
The Tax Foundation claims to be a nonpartisan institute interested merely in researching and informing people about taxes. That's far from the truth, however. Its work is aimed at one purpose--convincing Americans that they pay too much in taxes and that government is too big.
One of its most useful distortions is its self-proclaimed "tax freedom day." It adds up all the state and local and federal income, excise, social security, property, and other taxes on individuals and businesses,including corporations, and then considers how many days of work, at a consistent amount per day, are required to raise that amount of taxes. See Tax Freedom Day 2012, Tax Foundation.
But of course the entire enterprise of tax freedom day is baloney. Nothing in that formula actually relates to what an individual earns or what an individual pays in taxes. But because the date is announced as the day that Americans quit working to pay government and start working for themselves, many media outlets and readers interpret the "tax freedom day" as meaning that they themselves must work that long to pay off their share of taxes. There is no such thing as an average American, and it isn't clear at all that many of the excise, corporate and other businesses taxes are borne by ordinary Americans. Moreover, thinking about this on an individual level means averaging in the super-rich like Warren Buffet with ordinary Joes like "Joe the Plumber" and poor folk like those barely scraping by on teacher or janitor salaires results in sheer nonsense. There is no such thing as an "average" amount of taxes paid or a day in the year when each and every American can say--this is the last day I have to work to pay taxes.
The Tax Foundation often goes through some rigamarole to insist that it doesn't ever imply that the "tax freedom day" is anything other than a cute figure of speech that captures a meaningless statistic. But look at what it says in its announcement of the 2012 date:
Tax Freedom Day® 2012 arrives on April 17 this year, four days later than last year, due to higher federal income and corporate tax collections. That means Americans will work 107 days into the year, from January 1 to April 17, to earn enough money to pay this year’s combined 29.2% federal, state, and local tax bill.
Now, a typical person reading those two sentences would conclude that this is a straightforward statement that that particular American will work 107 days to pay off his own personal taxes. Nothing could be further from the truth. Some would have to work only a few days to pay off their share of taxes, while others don't work at all--those living on capital gains from inherited wealth--and still others may work considerably longer. The statistic is meaningless and by confusing ordinary Americans into thinking that it can be applied to their own particular situation it becomes detrimental to understanding of the US tax system or government costs.
Further down, the Tax Foundation makes this statement.
Tax Freedom Day is a vivid, calendar-based illustration of the cost of government, giving Americans an easy way to gauge the overall tax take.
And there one sees the anti-government bias of the Tax Foundation. By using a formula that pretends to show Americans how hard they must each work to fund government, and providing no counterbalance (such as showing how many people are benefitted by various government programs, or how much harder each American would have to work without the various subsidies for home ownership, financial institution soundness, health research, and old age health care and retirement benefits), the Tax Foundation succeeds in convincing many Americans that government is indeed a wasteful exercise that demands too much of their own sweat.
Just about as bad is the more recent Fiscal Fact: Americans paying more in taxes than for food, clothing and shelter, Tax Foundation (May 3, 2012). This look at government tax collections (using the same data used for the tax freedom day calculation, so including all taxes paid by individuals or businesses, whether income, property, excise or other and whether paid to local, state or federal government) and compares that to government figures for expenditures on essentials.
This is again misleading, as the Tax Foundation itself acknowledges, since it counts taxes that are used for social programs that pay for those same essentials. Redistribution programs that use the collective wealth to support those who cannot support themselves (vulnerable elderly and children, unemployed, mentally incapacitated, prisoners) serve a vital government function. Similarly, it again deals with national statistics that ordinary people are likely to interpret as applying to their own situations, even though the statistics cannot be applied in that way. Consider the wealthy billionaire with a private island and seven multimillion dollar homes in the US--taxes collected on those properties will be much more than what ordinary folk pay on their single residence. Likewise, taxes collected from billionaire CEOs will be much more than those collected from ordinary workers, even though the CEOs may also have considerable investment income that is taxed at ridiculously low preferential rates. So no conclusions can be drawn from aggregate numbers of housing, food and clothing expenditures to individual taxpayers, just as no meaningful analysis can be drawn from aggregate federal, state, and local expenditures to benefits received (or costs borne) by individual taxpayers.
So why does the Tax Foundation produce such deceptively simple statistical studies that are cast in terms that are bound to mislead ordinary Americans about the role of taxes and government and even the amount of taxes they pay? It seems likely that the primary purpose is to mislead ordinary Americans about the role of taxes and the amount of taxes they pay. The Tax Foundation gets my maximum "boo" for its shameless exploitation of statitstics to mislead Americans about both their own tax burdens and the role of government in our lives.
Gov. Rick Snyder (GOP) and the GOP dominated houses of the Michigan legislature have applied the Chicago School "shock doctrine" to the state's economy. The Chicago School theory isn't worth much, in my view. In most of the South American states where it was applied, it pushed ordinary people deeper into peonage and put down a red carpet for the already propertied, for whose benefit the IMF and World Bank and, often, the US government seem to think an economy exists. Brutal capitalism is the result of the corporatist agenda that claims "free markets" are working for everyone, while the state actually paves the way for multinational corporations to damage ordinary lives (all treated as externalities, oh so sorry) while reaping "rent" profits for managers and shareholders.
But somehow the people of Michigan were bamboozled enough by misuse of the word liberty to think that allowing most businesses to pay no or very little tax, while burdening ordinary people with more taxes, was a fair thing to do.
So on May 25, Snyder signed eight tax bills. The bills treated big business as king--deleting the Michigan business tax even though businesses benefit enormously from highly favorable laws. Now only big corporate businesses will pay any tax and that only at a 6% statutory rate (which amounts to a much lower effective tax rate--practically nothing). At the same time, Michigan made public pensions completely subject to tax--an immediate cut in income for every single retired public employee (who probably gave up singificant wage increases for the promise of retirement benefits), and created a three-tier system whereby retirement income will be subject to a significant tax for baby boomers and later generations (the generation of WWII vets will still enjoy tax free retirement income). It eliminated Michigan's child credit and kept part of the earned income tax credit that the GOP had wanted to eliminate entirely only because of deal-making to get a vote. So the billion-dollar giveaway for big business will be paid for out of the hides of the working poor, public workers and retirees, among others.
Snyder and the GOP-dominated legislature are whistling the same old reaganomics tune that has been proven wrong over and over again--the idea that lowering taxes to businesses will create jobs; that lowering taxes to businesses will spur economic growth; that lowering taxes to businesses will make businesses more "competitive" and therefore provide better pricing structures. Lowering taxes to businesses achieves none of those things. The only thing it does for sure is provide a windfall to business managers (who can pay themselves even higher salaries and bonuses) and shareholders (who can extract even more wealth from productivity gains off the hides of workers). Jobs get created when ordinary people can afford to buy necessities and extras. Jobs don't get created when wealthy people have more wealth that they can't manage to spend.
Of course, the Governor and legislators will have congratulated themselves mightily this week, as they cavorted at the Mackinac Center with big business and many right-wing thinkers. The Mackinac Center is a "free market" pusher--"free" in this case many markets that work for big business, free from the worry of needing to provide adequate compensation to workers, free from the worry of needing to clean up pollution caused by the business, free from the worry of caring about the community in which it is located. "Free" before "market" has nothing to do with individual freedom--workers are told to like it or lump it, to make do on inadequate wages, to pay more of their health costs (while their bosses still get cadillac care), etc. And in many states these days public workers are being told that they cannot join together with their friends and co-workers to form a union, going against the fundamental notion of freedom as a right to associate with whomever one wishes without the state stepping in to interfere.
You can tell that a bill is not good for ordinary people when the Chamber of Commerce likes it. Not surprisingly, Michigan's Chamber of Commerce thinks these bills are humdingers. The president claimed that the "vote moves us one step closer to a simpler and fairer tax code that will improve Michigan's competitive edge in retaining and attracting jobs." See Legislature shows bold leadership in repealing job-killing Michigan business tax, Chamber of Commerce press release. Naturally the Chamber of Commerce claims that the business tax cost thousands of jobs. But in fact taxes don't cost jobs--they create jobs. Because the government spends money, generally in the state, on things that provide jobs in the state--food, transportation, equipment, labor. Whereas wealthy business managers and owners who will benefit from Snyder's giveaway package have no incentive to put their money to work in the state--their investments are fungible and located wherever.
There has been considerable concern about the role of contingency fees as an incentive to tax attorneys to provide advice in support of aggressive or even risky positions on tax returns. The Treasury has looked at that in the context of the regulations governing practice before the Internal Revenue Service, commonly called "Circular 230" and has restricted the setting in which contingency fees are permissible in tax practice. Not surprisingly, tax practitioners have argued for loosening of those restrictions, claiming that contingency fees are not problematic in many situations.
California is apparently moving towards a position that is even stronger than the one currently followed in Circular 230. The California Senate Governance and Finance Committee approved S.B. 342 today on a 5-2 vote and the bill now goes to the Judiciary Committee. The bill would "ban contingency fees for anyone representing taxpayers in matters involving the Revenue and Taxation Code". It would also place a cap on attorneys' fees for lawyers in tax litigation and make clear that the provision in the Revenue and Taxation Code is the only remedy for fees in tax litigation, because of a recent attempt by attorneys to claim higher fees under the private attorney general doctrine.
The drafter of the legislation, Sen. Lois Wolk, stated that the ban would address the problem of tax advisers who file "highly aggressive tax refund claims hoping not to get caught in the audit lottery." BNA Daily Tax RealTime, Apr. 27, 2011 (7:54 pm). The statement in the bill's text worries in particular about "unregulated tax consultants" , as noted below.
However, sophisticated cottage industries of non-accountant tax consultants have grown considerably in recent years, offering to amend a taxpayer's previous state income tax returns seeking refunds of previous taxes paid by claiming tax credits not included on the taxpayer's original return. Additionally, consultants assist taxpayers protesting an assessor's valuation of his or her property by pursuing appeals seeking to reduce the value with county assessment appeals boards. In both cases, the taxpayer compensates the consultant as a percentage of the refund, providing a significant incentive to file aggressive claims with questionable justification. As many of these consultants are neither accountants subject to state law or codes of ethics, nor practitioners covered by Circular 230, they may charge taxpayers contingency fees without any limitation. Id. at 1-2.
Michigan fared like much of the rest of the country in the 2010 elections--moving to a GOP-controlled state house and legsilature. It lost a Democratic governor and put in a pro-business GOPer, Rick Snyder (former CEO of the Gateway computer company), with majority votes in almost every county except Detroit's Wayne County. Similar lopsided votes put the GOP in many of the Michigan seats in the House of Representatives, including re-election of rightwinger and pro-business conservative Dave Camp, who now holds an influential tax writing chairmanship, and new Tea Party favorite Dan Benichek in the Upper Peninsula, who took the seat held by Democratic representative Bart Stupack for 18 years. Returning Democrats in the House included veteran reps like Sander Levin, John Conyers, and John Dingell, along with freshman rep. Hansen Clarke and returning freshman Gary Peters. For 2011-12, the GOP has a firm grip on the Michigan legislature, with 26 of the 38 State Senate seats and a clear majority (61 out of 110) of the State House seats.
What can we expect on taxes from this GOP-dominated state? Bad news, I fear. Gov. Snyder has already shown his support for expanding the GOP control of governmental functions through support of the recently passed financial manager legislation, allowing him to replace elected local officials with his appointees who will have enormous power, including the ability to break union contracts. This legislation is of a piece with the union-busting, anti-public employee movements in Wisconsin, Florida and Ohio,and augers ill for sustainable democracy. As already noted in the context of the Wisconsin debacle, the aim here is to weaken state government by targeting public employees to create divisive jealousies from workers who haven't fared well under the anti-union sentiment now dominanting the private marketplace. Instead, we should be celebrating the willingness of public servants to accept do sometimes thankless government work, often for less than they could make in the private sector. One likely result, as public employees lose job security and the benefits that partly compensated for the higher workloads and graver responsibilities of their jobs, is that state governments will suffer and state agencies will be "captured" by the businesses they regulate. That will be detrimental to the economies and political communities of the states.
Snyder's tax proposals--set forth in the Feb. 17, 2011 document Reforming Michigan's Tax Structure--are in line with the general trend in the GOP to reduce the tax burden on businesses and allocate it towards individuals, especially vulnerable groups such as seniors and retirees, with the (unsupported) claim that business tax "simplification" and cuts will lead to economic growth and job creation.
Snyder proposes significant tax cuts for businesses through the elimination of the Michigan Single Business Tax and replacement with a flat 6% tax that would only be paid by businesses that operate in corporate form. Partnerships and other types of business would be exempt, with the only Michigan tax collected that which is paid by the individuals who own the business equity. The net cost is expected to be about $1.8 billion. This is huge in a state that already plans drastic cuts to higher education based on revenue shortfalls, another case where self-created deficits are being used to lay a foundation rationale for ideological spending reductions that devalue public institutions and overvalue so-called "free market" alternatives.
Snyder would also ultimately eliminate the film incentives that have helped develop a burgeoning southeastern Michigan film industry: critics charge that this is foolhardy, since independent studies demonstrate the effectiveness of the film incentives in bringing new industry and jobs into the state, resulting in six dollars of new expenditures in the state for every one dollar of tax incentives. See, e.g., Dave Krieger, How we all benefit from film incentives: an industry insider weighs in, Model D Media, Mar. 1, 2011. Krieger notes that the expanding film industry in Michigan has been particularly successful because of the generosity of the credit and the variety of locales that Michigan offers for the film industry, from gritty city to idyllic countryside. The new business brought in by the credit has had an impact, he claims, in many ancillary areas. Drivers, electricians, caterers, hotels, sign companies, antique stores, and many other industries and professions benefit, and much of the hiring has provided new jobs for laid off auto workers and others hit hard by the recession. Community colleges even developed training programs for movie production and opened new opportunities for unemployed workers to retrain in a new industry.
Snyder's proposal makes up for the $1.8 billion annual loss in income from lower business taxation by increasing the tax burden on individuals--especially the middle and lower income classes because of pension taation and elimination of the Michigan earned income tax credit. The proposal moves towards the ideologically motivated flat tax being pushed by ultra-right wing groups that want to eliminate progressive taxation. Snyder would lower the rate to a flat 4.25% and "broaden the base"--eliminating most of the credits and deductions that currently apply. Public and private pensions would become taxable, reducing the income of vulnerable retirees who live on fixed incomes and cannot easily bear the increased tax burden, while simultaneously reducing the value of the benefits that have been bargained for as a substitute, in many cases, for the higher wages that would be merited for public employees. Snyder also proposes eliminating the Michigan earned income tax credit, ostensibly saving the state about $331 million, but ultimately costing it more in services and assistance needed for the vulnerable working families that currently receive the credit. Changes listed in the proposal include the following:
Earned income tax credit
Energy efficient home improvement credit
Historic preservation credit
Film production wage withholding credit
City income tax[] credit
Gifts: public art, radio, colleges, universities, archives, museums, libraries credit
Community foundations, food banks and homeless shelters credit
College tuition and fees credit
Automobile donation credit
Family/Individual development accounts credit R
enewable energy surcharge credit
Medical care savings accounts credit
While elimination of some of the credits may make sense, many of these are of substantial importance to middle class Michiganers--especially the credit for college tuition and fees in an era when state support for public universities is trending ever downward, or the credit for city income taxes in places like Detroit with a substantial city tax burden. Overall, the substitution of individual taxes for the $1.8 billion in business taxes lost in the pro-business tax proposals will shift the tax burden to people much less able to bear it compared to the elite who tend to own business equity. These changes can be expected to have a deleterious effect on Michigan's economy.
What should be done instead? Michigan should retain a substantial tax on businesses operating in Michigan, so that profitable businesses (including sole proprietorships and partnerships) pay their fair share to support the state benefits that they receive (roads, court systems, communications and other utilities, police and fire protection, etc.). Instead of a reduced-rate flat income tax without reasonable deductions and credits for the kinds of major expenses that can break a family, Michiganders should push for a constitutional amendment permitting a progressive income tax and should then enact such a tax with a maximum rate around 7 or 8% applicable to those with $1 million or more of annual income. Although eliminating some of the incentive credits for businesses and individuals may make sense, the decisions should be made after independent study of the success or failure of the incentives in achieving their objectives. It appears that the film incentives, for example, have been extraordinarily efficient in bringing a new industry into the state to take advantage of particular assets that Michigan offers. While retaining those incentives long-term is likely not a wise approach, it may well be reasonable to retain the credit system for a sufficient start-up period for the industry, perhaps 10 or 15 years to ensure that workers, facilities and procedures can be established strongly in the state. Credits like the earned income tax credit are vitally important to lower-income Michigan workers: a still recessionary economy is not the time to remove this lifeline for them. Removing it will just cost the state more in the long run, as health care and other services must be provided to these vulnerable groups even when they cannot afford to pay. Michigan should use the resources from the reinvigorated business tax and progressive income tax to substantially increase its funding for higher education and for special programs for disadvantaged schools, such as the schools in Detroit's inner city neighborhoods, and to continue building ways for vulnerable Michiganders to retrain for new employment opportunities.
Snyder and the Michigan GOP are proposing short-sighted tax policies that will do actual harm to Michigan. They are relying on the same old ideologies of the GOP that protect business owners and the wealthy while pushing the tax burden (and the absence of needed services because of insufficient funding) onto the middle class and poor. This classical "free market" ideology has a record of consistent failures. Broad based economic growth that builds a strong middle class is best supported by progressive tax policies that provide sufficient funding for physical infrastructure and human capital development. It looks like Michigan is going to be yet another testing ground for these failed Chicago School "free marketarian" policies. So perhaps the best news is that the people of the state may be waking up. See Andrew Leonard, Red vs. Blue: The Great Midwestern Backlash, Salon.com, Mar. 18, 2011 (noting that support for the newly elected GOP governors in Wisconsin, Michigan and Ohio appears to be plummeting, in part because of their harsh budget cut policies coupled with corporate-friendly tax policies).
[edited 3/16 to add link to website "stand with main street"]
Most people will likely have read that Amazon.com is a fierce fighter of any obligation to collect state sales taxes on its retail sales. There's a website now devoted to debunking the various reasons Amazon.com provides for not collecting sales taxes. See standwithmainstreet.com (offering a bundle of reasons for why Amazon's refusal to collect sales taxes don't make sense).
In Texas, where Amazon has one of its huge warehouses, it is at battle with the state, which claims that the warehouse is sufficient nexus to require the company to collect state sales tax on its sales. Amazon's response? It plans to dump the warehouse and dump plans for building another one. In other states, like Illinois, legislatures are considering legislation that will require the company to collect sales tax whenever it has affiliates that run its advertising and create access points for it in the state. Amazon says it will just dump the affiliates, and run its online sales solely through its own website. See Kopytoff, Amazon Pressured on Sales Tax, New York Times, Mar. 13, 2011.
So what's the right answer here? It seems to me that the Supreme Court needs to update its understanding of nexus for constitutional purposes to take into account the significant changes in the way we interact based on the new context created by a wireless world. Physical presence once readily defined the reach of a commercial entity--if it had a store or warehouse distribution point or other physical presence in the state, it had a presence in the state; if it did not have such a site in the state, it did not have a presence in the state. But surely that notion of physical presence should no longer underlie the constitutional reach of a state's ability to require companies to collect the state's sales tax on the companies' sales within the state. If it does so limit enforcement, it creates a wholly artificial differentiation between companies that run actual physical stores in the state (often with online counterparts) and companies that interact with residents of the states through their online sites. And that differentiation is problematic, because it gives those companies that operate solely online an unfair advantage, in that they do not have to carry out the administrative task of collecting tax and turning it over to the state. And since many residents in the state will not self-report the tax owed on items that they purchase online (and without the company's report the state itself would have tremendous difficulty attempting to enforce collection), residents will consider the online purchase less costly--treating the inappropriate tax savings achieved by failure to report as required (and failure of the internet company to collect the tax) as a price advantage for the online merchant and causing the in-state company to suffer a comparative loss of sales. That results in unfair discrimination in favor of out of state companies--something that runs counter to the spirit of the commerce clause, if not actually a violation of it.
The best answer, then, would be for the Supreme Court to revisit its conclusion in the 1992 case Quill Corporation v North Dakota, which required a physical presence in order for states to mandate collection of their sales taxes by companies that make sales to their residents. The Supreme Court should overturn that precedent and conclude that online access to a state and more than a de minimis number of internet sales to a state's residents constitute sufficient nexus to permit a state to require a commercial entity to collect sales tax at the point of sale on behalf of the state.
It is not as if that is such a complex requirement that it would be too difficult to ask companies to do. Companies that sell over the internet have already got various kinds of procedures in place that take account of where the purchaser is located compared to where the product is stored--they charge for shipping and handling and they compute the charges for sales tax in those cases where the purchasers are residents of states in which they have a nexus. It would be relatively simple for them to extend such calculations to include appropriate sales tax in each state.
But will this Supreme Court recognize the error of its ways? It's doubtful. The majority of the court is made up of rightwingers who are exceedingly friendly to big business. Much of the "originalism" and "traditionalism" used in that majority's interpretation of cases is relied on because it is super-friendly to big business--that is, a traditionalist approach as employed by Scalia and Thomas may tend to result in decisions that are super protective of property rights and business interests at the cost of the "little guy" who does not have large property interests at stake. Combine that with the right's tendency to disdain the interests of government and one suspects that it will be decades before a new Supreme Court reconsiders the Quill decision and comes to the correct conclusion that physical presence is an archaic test in an age of globalization and the world-wide web.
Wisconsin Gov. Walker is still playing his "I won't budge" game of chicken with the lives and well-being of thousands of Wisconsin employees and all the others that depend on them, from family to local businesses, not to mention schools and other public services. In the phone call a few days ago, he noted that they planned to lay off 5-6000 employees but might "ratchet that up" to blackmail Democratic senators into making the union-busting vote possible. Today he is threatening to fire 12,000 state workers. See Wisconsin Governor Threatens to Trigger Layoffs for Thousands of Public Workers, Washington Post, Feb. 26, 2011.
The argument is that unions get too sweet a deal, but that argument doesn't hold water, since it compares apples to oranges and disregards the fact that the state made a contract with the worker on pension and health care, through which workers gave up higher wages. The GOP that proclaims its belief in personal responsibility, the importance of property and contract rights shows that it really means that it values those only for the wealthy when it intentionally tries to break contracts for public employees.
Besides, the unions have already conceded that in tough financial times they should be willing to give up some of the benefits they have won in bargaining in the past. Walker doesn't really want that--he wants to break the unions and be a national hero to the Ayn-Rand/John Birch Society branch of the Republican party (which seems to be most of it these days).
This is not "equal sacrifice." Walker has pushed through and signed a series of tax cuts for business. That's robbing Peter --the ordinary wageearners who happen to work for the state as janitors and teachers and carpenters-- to pay Paul --mostly the big businesses that elects GOP politicians. The Democratic Senators should stay away rather than assist Walker in his union-busting economic crisis-causing legislative gambit.
In Michigan, the GOP-led legislature passed an "emergency financial manager" bill that lets the GOP politicians in office appoint their cronies who weren't able to get elected and take over the jobs of elected officials. It is privatization run amok, as schools are being closed and then leased (cheaply) to private for-profit schools. Services for janitors and maintenance are being contracted out and those persons with 18 or 20 years of service are being fired and told that they cannot work for the new, privatized services else they will forfeit any pension rights that they have. The claim is that this is for security reasons.
Don't these GOP politicians realize or care that they are creating a new class of poverty-striken people who were in the middle class just a few decades ago?
I know a family of five who are living on the (about to end) unemployment compensation of the wife, the odd jobs that the carpentar husband can get (about $500 a month at most), and the meager wages that the son gets working as the cook at a pizza bar, and some income from a daughter that is a part-time dental assistant with a young child. The family gets just enough income that they've been turned down for money to assist with buying food. They are afraid they will lose their home, on which they have a $102,000 mortgage. What then? What prospects for that young child? For the father being able to work if he loses his garage workshop and his tools? For the mother to find a new job if she is struggling to eat or buy a warm jacket?
This is what the GOP mentality is doing to this country. Throwing decent people out of jobs, because they won't raise taxes on the wealthy and big businesses. This has got to change.
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