Taxable Talk

Here’s an interesting idea. Why not put a special tax on illegal drugs? If a dealer gets arrested, and they don’t have a “crack stamp” on their cocaine, they’ll go to jail for tax evasion and drug possession/selling illegal drugs. Drug dealers are promised confidentiality.

Believe it or not, such a tax exists in Tennessee. And Tennessee raised $2 million in 2005 from the tax; all the money raised goes to fighting illegal drugs.

Of course, all drug dealers must declare their drug dealing income on their tax returns, or they risk following in Al Capone’s footsteps and landing in jail.

News Story: WBIR.com

Yesterday, the Tax Reform Panel issued its final report (available here). I have come to the conclusion that no matter the merits of the reforms mentioned (which I previously commented on), this plan (really, plans) are dead-on-arrival in Congress.

A quick search of Google news shows the following:
—Senior US Senator From Iowa Opposed to Panel’s Recommendations
—Realtors Upset With Tax Reform Panel
—LA Times: Popular Tax Breaks Put on Chopping Block
—New York Congresswoman: Unfair Tax Increase

You get the idea.

Now, the merits of the proposals are quite different than the rhetoric. But given that this proposal will be opposed by the delegations in New York, California, and other high-tax states, and is apparently opposed by Senator Grassley of Iowa, it has no chance of passage.

If you want to read more about the reaction to the panel’s report, the TaxProfBlog has a series of links to think tank reactions to the report.

While I was off this past week, the Tax Reform Panel came out with two proposals that are similar. The two proposals would:

1. Eliminate state and local tax deductions for individuals. Given that a large percentage of the US population lives in high-tax states (such as California), this isn’t going to pass.

2. Limitation on deducting health insurance. This is another non-starter given the high cost of health insurance. I do understand the panel’s reasoning (if taxpayers feel more pain, they will do more to lower health insurance costs) but I find a hard time seeing this passing.

3. Elimination of the Alternative Minimum Tax (AMT). This will be applauded by all.

4. Increasing charitable deductions; changing charitable deductions to excess of 1% of AGI. This makes both economic and political sense.

5. Changes to deductibility of mortgage interest; credit instead of deduction; limitation on amount. This is a political non-starter (see item #1 above). The proposed rules are complex, and will change the cap from $1 million of purchase-based interest (as a Schedule A deduction) to the maximum amount of FHA interest (will vary depending on location), to be taken as a credit. This will strike at higher-income taxpayers, and will, thus, be politically unpopular.

6. Change many deductions to credits. As best as I can tell, this will not change many taxpayers’ taxes, but could have a small positive impact to low-income taxpayers.

7. Lower the number of brackets from six to four; lowest individual bracket at 15%; highest at 32%. I believe that Democrats will not like the idea of lowering the top tax bracket. This proposal does not have a huge impact. Remember, the panel had to make these reforms “revenue neutral.” The big cut is the elimination of the AMT. This item is window dressing.

8. Changes to retirement plans, savings plans, etc. The changes, which will be difficult to pass, would change popular plans (such as IRAs) into refundable credits. This will aid low-impact taxpayers, but would disrupt an entire industry that has been built up around IRAs and similar programs. I doubt this will be implemented.

9. Two alternative individual plans: Either 8.25% on capital gains and interest taxed at regular tax rates or 15% on capital gains, interest, and divdends. The first plan exempts dividends (if I read it correctly) for individuals, ending double-taxation on dividends. The second plan continues the double-taxation on corporate investments but corporations can expense their investments. I need to read more about these plans to determine both their feasiblity and the chance of passage.

Overall, I think these plans will be buried in the political wastebasket. Perhaps the panel had good intent, but there’s too much in these plans that is political suicide for too many members of Congress.

There have been many comments about these plans. Roth Tax Updates posts about the first alternative individual plan here. Tax Professor Daniel Shivaro comments here. The New York Times comments here. Professor Maule has his comments, and they’re not positive.

With President Bush proposing (and Congress passing) extensive relief for Hurricane Katrina, and the possibility of perhaps another deadly strike by Hurricane Rita in Texas, one obvious question is how do we pay for this. I’ve seen estimates that the final bill for Katrina could be as high as $200 billion.

This morning, courtesy of the InstaPundit, are two new websites highlighting Pork spending by Congress: PorkBusters and PorkReports. Here are some sample pork projects that could (and should) be cut (all from the recently passed highway bill):

CA $100,000 Tiger Woods Foundation, Los Alamitos, to offer programs to at-risk youth (Fund for the Improvement of Education – Department of Education) I’m all for private foundations that do charitable work. But there’s no need for government funding here.

$2,320,000 for landscaping enhancements along the Ronald Reagan Freeway (Route 118), California. Unbelievably, the money is designated in the bill as “for aesthetic purpose.” This is particularly ironic considering that Reagan vetoed a highway bill containing “just” 152 earmarks. Need I say more?

This all harkens back to the days of Senator William Proxmire and his Golden Fleece Awards. A list of the “top ten” of the original Golden Fleece Awards can be found here.

As a member of the National Association of Enrolled Agents, every Friday I get an email with a summary of tax news. Today, I received the Ways & Means Committee’s Version of the new Highway Bill. You can find this document here. On the good news front, the requirement of prepaying offers-in-compromise has been eliminated.

Did you know that there’s up to a $10 excise tax on fishing rods? Yep, and it’s mentioned in the summary. I have no idea what the funds are used for.

On the other hand, the energy bill is also about to pass Congress. As Roth Tax Updates notes, “Pork is Good.” I know there are ethanol provisions in the legislation (ethanol mandates for gasoline), and who knows what other provisions are included in this mammoth, $14.5 billion legislation.

Hat tip: Roth Tax Updates

According to a wire service story, Senator Blanche Lincoln (D-AR) plans on introducing legislation this week that would add a 25% federal excise tax on pornography and additional requirements on adult websites. Lincoln’s spokesman wouldn’t comment on the bill’s provisions, stating, “We prefer to wait until the bill is introduced to discuss it.” As of this morning, the legislation has not been introduced.

I’m naturally skeptical about efforts to regulate sin. Sure, child pornography is bad, children viewing pornography is bad, etc.; however, if this legislation were to pass and it was effective, wouldn’t pornographic websites just move across the borders away from the US?

Today’s Wall Street Journal also reports that Senators Grassley (R-IA) and Baucus (D-MT) have introduced a “technical corrections act” to fix errors in last year’s tax law and other recent legislation. The Tax Technical Corrections Act of 2005 was also introduced in the House.

While this act, if passed, may fix problems, unfortunately these acts have, in the past, been used to add pork and other problems to the Tax Code. Time will tell.

Hat Tips: The TaxProf Blog

According to published reports, several Senators plan on introducing legislation to repeal the AMT (Alternative Minimum Tax). While every tax preparer I know would jump for joy if this happens, the chances are about the same as it snowing tomorrow here in Irvine. The problem: Eliminating the AMT would cost the US Treasury about $600 Billion.

Oh, it could be made revenue neutral—just increase some other taxes. Oh yeah, that’s really going to happen.

Before I say that it won’t happen, I should point out that the bill does have bi-partisan support. Still, I think the snowballs win here.

On the Federal level, the Democrats in the Senate want to filibuster President Bush’s judicial nominees. Whether the Democrats in the Senate like it (or not), there’s nothing in the Constitution saying that you can filibuster appointments. The Democrats are trying to change the rules.

Here in California, after property taxes went crazy in the 1970s, Proposition 13 was passed. That limited property tax increases and mandated a 2/3 vote for new taxes.

The education establishment, unhappy that many of their tax increases aren’t being approved by the voters, now wants to change the rule so that it takes a 55% vote for passage. The next time you’re approached by anyone from the education establishment, ask them:

– Does money spent correlate with improved learning for our children? [No, according to numerous studies.]
– Why do the school districts that spend the most money have some of the worst results?
– Why are you against standardized tests that mandate our children meet basic education levels before being advanced to the next grade?

Remember, it’s our money being spent–that’s what tax dollars are.

Hugh Hewitt asks, “Does the Senate GOP go McClellan or Grant if Harry Reid goes “Gingrich?” This is a lot more important than just pure politics, which is why I’m responding in a tax blog.

First, for the non-Civil War buffs, General McClellan was the first Union Commander of the Army of the Potomac, and was (at best) wishy-washy. General Grant, on the other hand, successfully led the Union and defeated the Confederacy. He might have been an alcoholic, and had other personal problems, but he knew how to lead.

Now, why is this important for tax policy? Let’s assume that the judicial nominees make it out of the Judiciary Committee (a safe assumption), and come to a vote on the Senate Floor and the Democrats filibuster (another safe assumption). Now, Senate Majority Leader Bill Frist has said he will go nuclear: interpret the Senate rules so that judiciary votes cannot be filibustered. Senate Minority Leader Harry Reid has promised, if this occurs, to shut down the Senate. This, if it were to occur, would cause budgeting and tax issues to grind to a halt (which is why I’m interested).

I’m all for the nuclear option, if the Senate Democrats filibuster. In the long-term, this will work for the GOP. The Democrats will be seen (by most of the public) as the party that shut down government, caused benefits to vanish, etc. This will lead to the Democrats getting further marginalized. (Remember what happened when Newt Gingrich shut down the government back in the Clinton years?)

Unfortunately, that’s not what I think will happen. No, I don’t think the GOP will go McClellan; rather, I expect a compromise. The Democrats don’t want the long-term damage. So the Democrats will say to the GOP, “We’ll allow votes on half the nominees.” And the Republicans will acquiesce. There are enough GOP Senators who don’t want to disturb the “Gentleman’s Club” of the Senate.

I don’t think that’s like General McClellan (although it’s much more like McClellan than Grant). Unfortunately, I don’t know any Generals best known for compromising. Probably a French general….