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tax policy

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Guest post by Laurence M. Vance

The congressional circus known as tax reform is getting ready to start again.

Republicans are eager to turn their attention to tax reform since they failed to repeal or repeal and replace Obamacare. Democrats are willing to play along as long as tax reform efforts don’t benefit “the rich.” Republicans are in favor of tax cuts, but are divided on how any tax cuts should be “paid for.” This is because Republicans (just like Democrats) are committed to the principle of revenue neutrality; that is, any revenue loss from tax cuts must be offset by revenue gains either from tax increases, broadening the tax base, closing loopholes, or eliminating deductions or from additional revenue that flows into the federal treasury from economic growth as a result of tax cuts.

Not in any particular order, here are some implications of revenue-neutral tax reform—none of them good.

Revenue-neutral tax reform implies that the problem with the tax code is its length or complexity. According to the Mercatus Center at George Mason University, 4,428 changes were made to the tax code from 2001 through 2010. But an income tax based on a shorter and simpler tax code is still an income tax. Tax reform should not simply result in making it easier for people to pay their taxes or feel better about paying their taxes.

Revenue-neutral tax reform implies that the government has a claim to a certain percentage of every American’s income. That is true even if tax reform actually includes the across-the-board lowering of tax rates. As Frank Chodorov explains in his book The Income Tax: Root of All Evil (1954), the income tax means that the state says to its citizens, “Your earnings are not exclusively your own; we have a claim on them, and our claim precedes yours; we will allow you to keep some of it, because we recognize your need, not your right; but whatever we grant you for yourself is for us to decide…. The amount of your earnings that you may retain for yourself is determined by the needs of government, and you have nothing to say about it.”

Revenue-neutral tax reform implies that the tax code contains too many exemptions, credits, loopholes, shelters, exclusions, and deductions. What tax reformers mean is that the tax code contains too many ways for Americans to keep their money out of the hands of the government. Tax deductions are not subsidies that have to be “paid for.” Lowering or eliminating tax deductions has the same effect as raising tax rates: higher taxes. They should be retained as long as the tax code is in existence.

Revenue-neutral tax reform implies that government revenue should not be decreased. Advocates of tax reform—including conservative Republicans—consider it unthinkable that the government should have less money to spend than it did last year.

Revenue-neutral tax reform implies that taxation is not government theft. Try as tax reformers might to make the tax code simpler, shorter, fairer, less intrusive, flatter, or less progressive, the income tax is still legalized government theft. As the late Austrian economist Murray Rothbard explained, “It would be an instructive exercise for the skeptical reader to try to frame a definition of taxation which does not also include theft. Like the robber, the State demands money at the equivalent of gunpoint; if the taxpayer refuses to pay his assets are seized by force, and if he should resist such depredation, he will be arrested or shot if he should continue to resist.”

Revenue-neutral tax reform implies that there is such a thing as a fair amount of taxation. But that is like saying that there is a fair amount of stealing, robbery, burglary, theft, mugging, expropriation, embezzlement, and larceny.

Revenue-neutral tax reform implies that increased government revenue resulting from lower tax rates is a good thing. We always hear this from conservatives when they trot out the Laffer Curve while they are arguing for lower tax rates. A letter from the House Ways and Means Committee to Paul Ryan mentions this: “More employment and higher wages would lead to higher tax revenues which would simultaneously address both the nation’s economic and fiscal problems. While the Committee is committed to tax reform that strengthens the economy, the Committee will continue to oppose any and all efforts to increase tax revenues by any means other than through economic growth.”

Revenue-neutral tax reform implies that congressional spending is not the fundamental problem. But as former congressman Ron Paul said regarding the mirage of tax reform, “The real issue is total spending by government, not tax reform.” The vast majority of things the government spends money on are either immoral wealth-redistribution schemes and income-transfer programs or unconstitutional foreign wars and government programs.

Revenue-neutral tax reform implies that the income tax is necessary. There was no regular, permanent income tax in American history until 1913. If government spending were strictly limited to just what is constitutionally authorized, there would be no “need” for an income tax in the first place.

Revenue-neutral tax reform implies that it entails no tax increases. But any revenue-neutral tax-reform scheme can, by definition, only shift taxes, not lower them. If someone’s taxes are lowered, someone else’s taxes must be increased.

Revenue-neutral tax reform implies that the income tax is the most burdensome tax. For many Americans, it isn’t. According to data from the IRS, the top 50 percent of taxpayers (in terms of adjusted gross income) paid 97.64 percent of all federal income taxes. It is the 6.2 percent Social Security tax and 1.45 percent Medicare tax that are deducted from Americans’ paychecks that is the most burdensome tax for the other 50 percent of taxpayers.

Revenue-neutral tax reform implies that there is a difference between Democrats and Republicans when it comes to taxation. Although they may differ on the number of tax brackets, the tax rates, and the amount of tax credits and deductions, neither group has any philosophical objection to the government’s taxing Americans’ incomes. Liberals simply prefer that more tax money be spent on the welfare state than the warfare state while conservatives simply prefer the reverse.

All revenue-neutral tax-reform proposals are nothing more than the proverbial rearranging of the deck chairs on the Titanic.

The tax burden doesn’t need to be shifted, the tax base doesn’t need to be broadened, tax loopholes don’t need to be closed, the “rich” or the “poor” don’t need to pay their “fair share,” and the tax code doesn’t need to be reformed, revised, or replaced—it needs to be repealed and government spending slashed to the bone.

Laurence M. Vance is a columnist and policy adviser for the Future of Freedom Foundation and writes at LewRockwell.com.

Guest post by Senate Finance Committee Chairman Orrin Hatch

For nearly a decade, middle-class American families and individuals have dealt with a stagnant economy, sluggish wage growth, decreased economic opportunity, and a growing detachment from labor markets. American workers and low-to-moderate income families are suffering under the status quo economy inherited from the previous administration.

Current efforts in Congress to overhaul the nation’s broken tax system would help.

Despite numerous claims to the contrary, Republicans’ main objective in tax reform is to provide relief and greater opportunities for hardworking, middle-class taxpayers. That goal is rooted in virtually all of our general ideas.

For example, expanding the standard deduction for individual and married taxpayers would lower taxes for tens of millions of middle-class families and eliminate federal income tax liability entirely for many Americans with low-to-moderate incomes. Most proposals to increase and enhance the child tax credit would benefit middle- and lower-income families almost exclusively. And, reducing our tax code’s existing disincentives for savings and investment would greatly expand the wealth and improve the average quality of life for those in the middle class.

Clearly, tax reform, if it is done right, will expand the pocketbooks and improve the day-to-day lives of middle-class Americans. And, for most Republicans I know, this is the primary goal.

However, that’s not all. The potential benefits for the middle class go well beyond direct tax and monetary relief.

American taxpayers – both individuals and businesses – spend about six billion hours a year complying with tax filing requirements. All of that comes at a cost of around $233 billion a year – more than the GDP of Ireland or Portugal.

While those numbers are obscene, they’re really not surprising given the complexity of our tax code, which has grown exponentially in size and confusion over recent decades. In fact, it is about four million words long, or seven times the length of the novel War and Peace.

A simplified tax code – one that reduces the number of credits, deductions, exclusions, and the like, and includes a more streamlined rate structure – will save taxpayers’ time and money and allow resources to be directed more efficiently elsewhere.

Reforms to the business tax system will also greatly benefit the middle class.

Millions of small businesses throughout the country, including partnerships, sole proprietorships, and S Corporations – the so-called “pass-through” businesses – are currently taxed at individual income rates. Reducing tax rates on pass-through business income with protections against gaming of the tax system will simplify the system and allow more businesses on Main Street to start up, expand, create more jobs, and grow our economy.

In addition, the United States has the highest corporate tax rate in the industrialized world, which stifles growth and encourages businesses to move and keep operations – as well jobs and investments – offshore. That punitively high and globally uncompetitive corporate rate translates into stagnant wage growth and limited opportunities for middle-class workers who, according to many economists, tend to bear much of the brunt of the corporate tax. In addition to growing the economy and creating more jobs, modernizing our corporate tax system will have a positive impact on individuals and families in the middle class by making America an inviting, rather than punitive, place to do business.

Long story short, anyone who says that the middle class does not have a stake in tax reform is probably more concerned with scoring political points and bloating the size of the government even further than they are with providing relief to struggling individuals and families. Everyone in our country has an interest in seeing our economy grow to create more jobs, expand opportunity, and improve the quality of life here in America. That’s what Republicans seek in tax reform.

One thing we know for certain is that, when it comes to our tax system, the status quo is unacceptable, particularly for middle-class taxpayers who continue to struggle in today’s overburdened economy. Therefore, every member of Congress – Republicans and Democrats alike – should be engaged in the effort to fix our broken tax code.

Sen. Orrin Hatch is chairman of the Senate Finance Committee and represents Utah in the United States Senate.

Guest post by Russell Fox

In Tom Clancy’s Executive Orders, there’s a scene where the Secretary of the Treasury designate puts the entire Tax Code on a desk, and the desk collapses. That’s an apocryphal image, but it does represent what’s happened with the United States’ tax system today. It’s far, far too complex for the average American to understand.

The complexity in the Tax Code leads to lesser compliance with the law. For example, take gambling. Amateur gamblers are supposed to separate out their winning sessions from their losing sessions; winning sessions are noted as part of “Other Income” while losing sessions (up to the amount of your gambling winning sessions) are included as an Itemized Deduction.

Most gamblers simply ignore this on their taxes (unless they receive a W-2G). If gamblers could simply note their net win on their tax return, they’d be far more likely to include their gambling winnings on their returns.

A simpler Tax Code would also lower compliance costs for Americans. Today, many of my clients are people who shouldn’t need a tax professional—people who we think of as average Americans with typical lives. These clients tell me that the complexity has driven them to a professional. As I tell my friends, I have lifetime employment.

Additionally, there’s no reason for favoritism in the Tax Code. Thanks to lobbyists, the Tax Code is littered with examples such as real estate. Mortgage interest and property tax are tax deductible (itemized deductions) for homeowners; rent is not. The same favoritism is present in business taxes, too. The Domestic Production Activities Deduction is for manufacturers of tangible products. Thanks to lobbyists, software, an intangible good, is eligible for this tax break. The real estate and software industries have excellent lobbyists.

A simpler Tax Code would be easier for the IRS to administer, lessen compliance costs for both individuals and businesses, and would almost certainly lead to increased tax collections at the same tax rate. Unfortunately, what I’ve seen in the initial proposal from President Trump is a lowering of rates without changing the Tax Code.

There is no doubt that if tax rates decrease, taxpayers will pay less. In that sense, President Trump’s plan is a win for the average American. But why not aim higher? Why not put the current Tax Code in the shredder and make something that’s simple and straightforward? We could both lower tax rates and keep it revenue neutral.

The reality is that Congress benefits from the complexity. Lobbyists spend their largesse on Congress, and our Congressional representatives are the beneficiaries. Maybe Congress will surprise me. Being cynical, I doubt this will change.

I’d love to be surprised out of what emerges from Congress (if anything). I suspect, however, that my cynicism is well placed.

Russell Fox, E.A. is the founder of Clayton Financial and Tax of Las Vegas, Nevada. His tax blog is taxabletalk.com

Guest post by U.S. Congressman Kevin Brady

Tax reform is the legislative challenge of a generation for America. It hasn’t been accomplished since 1986, when President Reagan and Congress delivered the most sweeping overhaul of our nation’s tax code in American history. 2017 is the year to change that and make history of our own.

Working with President Trump, the House and Senate are moving forward now in crafting bold legislation that will reduce taxes for all Americans and grow jobs and paychecks nationwide. The week of September 25th, we will release a consensus document laying out a clear framework for bold, pro-growth tax reform that helps Americans of all walks of life. From there, Congress will move forward aggressively to get tax reform legislation to the President’s desk this year.

As chairman of the House Ways and Means Committee – the chief tax-writing body in Congress – I understand that true comprehensive tax reform is tremendously difficult. I’m confident that, with the help of the American people, we can and will make permanent, pro-growth tax reform a reality in 2017 – especially if we build upon the successful principles of the 1986 overhaul.

The Reagan tax reform delivered real fairness, closing loopholes for Washington special interests so that all Americans could keep more of their hard-earned paychecks. It focused on simplicity and certainty, streamlining the code so it was easier to file your taxes. Most of all, it focused on American competitiveness and economic growth. It delivered one of the most modern and pro-growth tax systems the world had ever seen so our businesses and workers could have the greatest possible opportunity to compete and win.

President Reagan put it best on the day he signed tax reform into law. “Fair and simpler for most Americans,” he said, “this is a tax code designed to take us into a future of technological invention and economic achievement, one that will keep America competitive and growing into the 21st century.”

Flash forward 31 years and you can’t even recognize the fundamental tenets that made the 1986 tax reform such a triumph for the American people.

Fairness has been replaced by favoritism for Washington special interests. Simplicity and certainty have been supplanted by complexity and incredible frustrations for the American people. American competitiveness has become a casualty of Washington’s inaction – and now the American people are watching good-paying jobs and U.S. manufacturing plants move overseas to countries with more competitive tax systems.

I don’t accept where our tax code stands today. American families and Main Street businesses don’t accept it either. And it’s time for us to come together as Americans and show the world that this nation will not accept it any longer.

For the first time in over three decades we have a President, a House, and a Senate who are all committed to overhauling this broken tax code and unleashing the growth of jobs and paychecks across the country. We are dedicated to delivering bold solutions for the American people, who President Reagan called “the only special interest that counts.”

Tax reform for the 21st century means rewarding hardworking families by closing unfair loopholes, lowering tax rates across the board, and simplifying the tax code dramatically. It demands reducing the tax burden on American businesses of all sizes so they can keep more of their income to invest in our communities. And, to unshackle productivity and wage growth in our nation, tax reform has to make America a magnet for innovation, entrepreneurship, and economic growth.

Lower rates alone will not be enough for tax reform that is truly transformational. We should also offer unprecedented capital expensing to all American job creators – allowing businesses to write off more of the cost of new equipment, machinery, software, and buildings needed to compete at a higher level. Additionally, it’s past time that America move to a modern, “territorial” tax system that allows our businesses to excel worldwide and invest their foreign profits in growing jobs and paychecks here at home.

As President Trump said during his recent tax reform address in North Dakota:
“We want our companies to hire and grow in America, to raise wages for American workers, and to help rebuild our American cities and towns. That is how we will all succeed and grow together – as one team, one people, and one American family.”

This is our challenge. Together – with President Trump, with leaders in the House and Senate, and with the American people – I’m confident we will rise to this challenge just as our nation has risen to and prevailed over so many great challenges.
2017 is our year to make history on tax reform. Working together, we will.

U.S. Congressman Kevin Brady represents the 8th District of Texas and serves as chairman of the House Ways and Means Committee.

Guest post by Bob Meyers, CPA

Is the tax code too complicated? Maybe, but I don’t think that should be the main focus of tax reform. No doubt the tax code under the Revenue Act of 1913 was less complex, but so was the straight-6 flathead engine in grandpa’s Ford pickup. When it wasn’t running right, he could remove, clean, adjust, and reinstall a half dozen parts and be back on the road in an hour. The more complex, computerized engine/electric motor combination in your new Camry provides a higher power to weight ratio, more torque, less pollution; you get the point; I’m a closet gear head. No, that’s not it, I mean complexity is good. No, that’s not the point either. The point is, simplicity is good, but complexity is sometimes necessary to get the results we desire.

We ask the U.S. income tax code to do a lot of heavy lifting. We want it to raise revenue, control the economy, create jobs, encourage and discourage certain activities, redistribute wealth, even participate in the country’s health care system. And, according to the 18th-century economist, Adam Smith, in his famous book “The Wealth of Nations,” we should make the code Equitable, Certain, Convenient, and Efficient. I’m sure we all lack the wisdom to do that in 66 words.

Consider just a few of the many things we ask our income tax code to help with:

  • We want to encourage energy efficiency, so we have residential energy tax credits for installation of energy saving appliances and materials.
  • We want to promote higher education, so we offer education credits and deductions.
  • We want people to have health insurance so we fine those who don’t buy it.
  • We want to help lower income workers, so we offer them Earned Income Credit.
  • We want businesses to follow the law, so we disallow business deductions for fines paid.
  • We want to promote charitable giving, so we offer a tax deduction for charitable contributions.

Maybe we could live with a tax code that does not do so much controlling of the economy, changing social behavior, or encouraging certain activities. This would allow us to get rid of many of those confusing tax code provisions. I could get behind that proposal.

Except we should keep the one that allows me to deduct mortgage interest payments on my house, and my sister still has kids in college, so the education credits need to stay.

And, I have a buddy with four young children who doesn’t make so much money; he really depends on the Earned Income Tax Credit (EITC).

Probably we can get rid of the energy credits. That would fix the code, and I replaced all my appliances a while back anyway.

Politicians are gearing up to take a run at the tax code. Of course, they want to do more than simplify the code. They want to make it better at doing all those other things we have come to depend on the Internal Revenue Code to do. President Trump said he wants a tax code that is “simple, fair, and easy to understand.” He said this means “getting rid of the loopholes and complexity that primarily benefit the wealthiest Americans and special interests.” I’ll go along with provisions that make wealthy Americans pay more since I’ll never travel in that crowd, but we have to keep the loophole that allows me to deduct my home office expense and the one that allows my friend to allocate some of his son’s college scholarship to taxable scholarship income so as to increase his American Opportunity Credit (wow, there’s an obscure little maneuver).

Speaker Ryan says “our tax system should be simple, fair, and promote economic growth.” He goes on to say it is currently “notoriously complex, patently unfair, highly inefficient, and is littered with special interest loopholes.” I applaud their efforts; I would not want that assignment. I have more faith than most that Congress and the President will come up with some reasonably good tax reform.

Both the President and Speaker Ryan have also indicated they want to reduce the number of tax brackets from the current seven (down to five or even two). I know this is not their main focus, and I know it makes a good tax reform mantra that we can all get behind but it makes me think of my buddy who mentioned that his new (used but new to him) Mercedes GLA has seven speeds. Maybe I should inform him of how much simpler and better his life would be if he could find a decent 62 Impala with a two speed Powerglide transmission.

I hope Congress and the President can improve the tax code and maybe in the process even simplify it but don’t expect a panacea. After all, we still have to raise revenue, control the economy, create jobs, encourage and discourage certain activities, and redistribute wealth even if the IRS will no longer participate in the country’s health care system. And remember, the Tax Code should be Equitable, Certain, Convenient, and Efficient.

Bob Meyers, CPA, is an Accounting Department lecturer and runs the UWisconsin – Whitewater Volunteer Income Tax Assistance (VITA) clinic.

Guest post by Edward Mendlowitz

Massive tax cuts are being suggested in the name of “reform” with claims the cuts will spur economic growth. In my opinion, nothing that is presently being suggested can work. The proposals can pass, but they will not work only causing future problems to fix what they put into motion today. Following is the way I see it.

Myth 1: “Tax cuts will fuel economic growth because they provide incentives for business spending.” At present and for the past eight or nine years interest rates and fuel costs have been at traditionally low amounts, and wages have remained at almost stagnant levels and that hasn’t been able to spur business spending. Reduced taxes won’t provide a magic bullet that will cause businesses to suddenly increase spending in new plants and equipment.

Myth 2: “Tax cuts will fuel economic growth because they have in the past.” Occasionally this was so, not always! However, the economy has changed. We are no longer living in yesterday’s world. Wealth is now not being created by massive physical structures but by new and clever uses of the Cloud, artificial intelligence, robotics, digitization and virtualization of transactions using a global marketplace and labor pool, none of which require enormous capital spending.

Myth 3: “Tax cuts will fuel economic growth because they are the direct reason for the spending.” Possibly, but in recent years many of the tax cuts were made retroactive. How can a tax benefit for something that was already done provide an incentive for doing it? It can’t and doesn’t; it is impossible, but our politicians continue to tell us tax cuts do that.

Reality 1: Tax reform means to me that the tax code will change in a way that doesn’t increase or decrease aggregate tax revenues, i.e., it would be revenue neutral. If the “reforms” result in overall reduced taxes, it Is not reform but rather a tax cut. If the reforms result in greater tax revenues, it is not reform but a tax increase.

Reality 2: Taxes are necessary to maintain our government, our national security, our way of life and so many other necessary things. We know that, and we pay our taxes voluntarily. Evenhandedness, fairness, and consistency are cornerstones for voluntary compliance. Continued politicization of the tax system will draw people away from voluntary compliance, divide constituencies, cause divisiveness, confusion, and even more dissatisfaction, disillusionment, lack of faith and distrust with our legislators than exists today which seems to be at the nadir in our nation’s history.

Reality 3: The more complicated the laws get, the more difficult voluntary participation will be. The present system stinks, but it is what we have, and it seems to be working. Changes cannot be made in a vacuum. Adding a benefit to one group would require taking away a benefit from another group. The result of taking away a benefit will be dissatisfaction by those that lost the benefit; however, without the lost benefits, we will have reduced government revenues giving us a tax cut rather than a reform. BTW, I am not suggesting tax cuts are bad; I am suggesting that cuts in the cloak of reform or by using invalid assumptions are not truthful.

Reality 4: The major tax issues that are being bandied about are one-sided reductions. If our legislators want to cut taxes let them say so and call it a tax cut, but what they are doing is not reform. Some “reforms” are reduced corporate tax rates, elimination of the net investment income tax, raising the exemptions to reduce coverage for those eligible for the alternative minimum tax, and increased depreciation deductions allowing a shorter cost recovery period for fixed asset acquisitions.

Each of these, in and of themselves are desirable. However, I haven’t heard too many revenue enhancing changes, i.e., tax increases, except for the “windfall” that say that would result from large corporations repatriating foreign cash, which I contend will not occur. I am all for tax cuts, but they need to be responsible and consider the overall picture and not be done in a way that will cause insurmountable problems someday in the future…it will be kicking the can forward to be confronted at a later time by equally predisposed politicians inclined to avoid a confrontation with the overall issue.

Edward Mendlowitz testified twice before the House Ways and Means Committee – in 1980 and 1985. His 1980 proposals were adopted by then candidate Ronald Reagan and again when he became president as one of his arguments for the massive 1981 tax cuts that were enacted. Alas, none of his 1985 proposals were adopted, but his predictions of greater tax law obfuscation became reality after the 1986 tax law was enacted.

Guest post by Shaun Hunley

Many would agree that less is more. But does that ring true for tax reform? The GOP seems to think so. In their 2016 tax blueprint, House Republicans traced the 30-year growth of Federal tax law from 26,000 pages to approximately 70,000 pages. This added complexity has resulted in time-consuming tax forms, increased compliance costs, and incentives for businesses to move overseas. The remedy? A dramatic simplification of the tax code.

But what does simplification look like? According to Republicans, the tax returns of most Americans will fit on a postcard. This means that most of the itemized deductions will be axed in favor of a larger standard deduction. Rumor has it that the deductions for charitable contributions and mortgage interest are safe, but details are fuzzy at this point. The GOP would also reduce the number of tax brackets from seven to three, with a top rate of 33%. Republicans are hopeful that such changes will promote economic growth and global competitiveness.

At first glance, simplification is appealing, but is it realistic? A tax code that is too simple is susceptible to loopholes. Over the past 30 years, the tax code has been stuck in a loophole cycle. The steps are quite straightforward: (1) Congress passes a law; (2) taxpayers and practitioners invent schemes to avoid tax while still technically complying with the law; (3) Congress passes another law to close the loophole; and (4) the process is repeated. It’s no wonder that Federal tax law nearly tripled in length! No matter how clear and concise the tax code is, taxpayers and practitioners will always find varying interpretations of the law. Without additional legislation, the government’s interests may go unprotected.

Take, for instance, President Trump’s proposed special tax rate for flow-through entities (such as partnerships and S corporations). The intent behind this idea is quite noble—let’s put small businesses and family-run companies on a level playing field. However, this gives employees an incentive to pursue tax avoidance schemes whereby wages are recharacterized as flow-through income. Once this practice becomes abusive, additional legislation will be needed to preserve the original intent behind the law.

The quest for a simple tax code is also stalled by special interest groups. And I’m not just referring to the oil and gas industry. After President Trump and House Republicans announced their plan to eliminate the state and local tax deduction, special interest groups from high-tax states (think New York and California) began lobbying to keep the deduction. Lobbyists for nonprofit groups and the real estate industry are also on the move, campaigning against a higher standard deduction. They claim that charitable giving and home-buying could decrease if fewer people are able to claim those deductions.

The bottom line is that tax reform is a complicated jigsaw puzzle where various groups are competing to be heard. As these voices cross paths, simplicity becomes less likely. The key to reform is finding a balance between simplicity, protecting the government’s revenue stream, and appeasing special interest groups. Congress will soon find out how difficult a task this will be.

Shaun Hunley is a sketch comedy performer turned tax attorney, blogger, amateur genealogist, and Thomson Reuters editor.

Sin taxes are good for society, we’re told, for two reasons:

  1. They decrease dependence on “bad” things (feel free to fill in the blank with the “bad thing” of the moment); and
  2. They raise money for targeted causes.

While data is mixed on the first, news out of Massachusetts is proving that the latter isn’t always true.
According to a Boston news report, the state’s cigarette smokers have paid an extra $285 million from the $1 per pack hike tax approved in 2013. With that increase, Massachusetts’ cigarette tax soared from $2.51 per pack to $3.51 per pack, making the tax, at the time, the second-highest rate in the country after New York. That has since changed: it’s now fourth behind New York ($4.35), Rhode Island ($3.75) and Connecticut ($3.65).
The problem? None of that extra cigarette tax revenue was used to stop smoking. Not surprisingly, most of the cigarette revenue ($222 million) went to the state’s general fund. The remaining $63 million went to the Commonwealth Care Trust Fund. The Commonwealth Care Trust Fund is used to pay for subsidized health insurance and Medicaid rate increases for those in the state.
It’s not a new trend. Overall, Massachusetts collected more than $882 million in tobacco taxes for the fiscal year 2015 alone. That total includes payments related to a massive settlement with tobacco companies from 1998. That settlement helped boost Massachusetts’ spending on smoking cessation programs. Again, back in 1998. By 2000, the state was spending a whopping $55 million per year on anti-smoking programs.
A few years later, things looked much different. By 2003, not so coincidentally around the same time the national economy was trying to recover from a steep downturn, the state’s spending on anti-smoking programs had dropped to less than $6 million. That trend isn’t likely to change any time soon: the current fiscal year budget has $3,866,096 earmarked for Smoking Prevention and Cessation Programs. The majority of that money is designated for the Safety Net, a program which reimburses hospitals and community health centers for the care of low-income patients that are uninsured or underinsured.
But wait… There’s more money coming in, right? There have been two increases in the Massachusetts cigarette tax in the past decade: a $1 per pack increase in 2008 and the more recent $1 per pack increase in 2013. Funds are pouring in. They’re just not going towards anti-smoking programs. They’re being used for other purposes, such as filling holes in the budget.
You might assume that Massachusetts has scaled back its efforts because the increase in cigarette taxes, bringing the average retail cost of a pack of cigarettes to $9.08, including taxes, has already solved the state’s smoking woes. It’s true that the number of smokers has decreased in the state in recent years, from about 28% of adults 30 years ago to about 20% today. But many people feel like the numbers aren’t dropping quickly enough. The American Lung Association gave the state an “F” in its most recent report card on tobacco, saying that Massachusetts should “[i]ncrease funding for the state’s tobacco control program to $9 million per year.” That’s more than twice the amount currently budgeted.
So what’s next? A bill that raises the legal age to buy tobacco. The current age is 18, and there are efforts in the legislature to boost that number to 21.
If those efforts turn out to be the magic bullet – the cure for smoking – that should mean that the sin taxes should disappear, right? And herein is the problem: it’s too easy to become dependent on the revenues from sin taxes. It’s easy money. And it’s easy money that states and localities become dependent on – so these “sin” taxes really becomes revenue raisers. If you can paint the right picture, it’s easy money that you don’t even have to spend for the reasons you claim you want to in the first place (just look at Philadelphia and its soda tax): who is going to say no to health care for low income patients so long as it’s paid for on the backs of smokers?
I’m not a smoker. And I don’t live in Massachusetts. But I have long been opposed to sin taxes. I don’t think it’s appropriate to raise revenue – especially when you bait and switch the targets – disguised as social engineering. It’s not good tax policy.
Consider for a moment what would happen if Massachusetts – and states like it – was actually successful in significantly reducing or eliminating the number of smokers? Great, right? Only not so much. Since Massachusetts has been busily redirecting millions of dollars in cigarette tax revenue to other programs, if that revenue source dries up – because it’s a success – the budget doesn’t improve or break even. Instead, it creates a bigger hole causing legislators to ponder: what do we tax next?

My 4th grader has been singing selections from “Hamilton” all day. I’m no theater critic, but it has to be a good sign for the musical – with a record-breaking 16 nominations – in the run-up to the 70th annual Tony Awards when you’re so popular that even elementary school children can’t stop singing your songs.
But “Hamilton” doesn’t get all the breaks: producers all along Broadway are pretty thrilled, too. And not just with our Founding Fathers but with our current Congress. In December, our current Congress voted in a tax break for The Great White Way. As part of the Protecting Americans from Tax Hikes (PATH) Act 2015, also known as the Extenders Bill, Congress not only extended the expensing provision for qualified film and television through 2016 but added live theater productions to the mix.
The bill modified the provision found at section 181 of the Tax Code which formerly allowed:

A taxpayer may elect to treat the cost of any qualified film or television production as an expense which is not chargeable to capital account. Any cost so treated shall be allowed as a deduction.

With expensing, business owners can claim deductions for expenses paid in the year paid rather than the deferring the deduction over a period of years. That’s important to theater investors since – despite the popularity of shows like “Hamilton” and “Wicked” – most live theater productions don’t immediately recover all of their costs. It can take years for some shows to turn a profit and by then, many shows will have closed.
Previously, producers were asked to guess how long it might take for a show to recover the initial capitalization. They then paid taxes on the show’s anticipated first-year profit. Refunds were available if the money didn’t shake out but that was after the fact. Producers argued that, in reality, that required them to pay tax on profit that might not exist. Now, producers say, the system is more fair, putting them on par with motion picture and TV investors.
For purposes of the bill, expensing is capped at $15 million.
(You can read more about the extenders bill here.)
Those in favor of the extension included Bryan Cranston, Harvey Weinstein, and Neil Patrick Harris, all of whom lobbied for the provision on behalf of the theater industry. Supporters argued that the proposal would not benefit only Broadway but also cities and states around the country where plays are performed live. How much? The Broadway League reported in 2014 that Broadway contributes nearly $12 billion to the New York City economy on top of ticket sales; touring Broadway productions contribute an additional $3.2 billion to the U.S. economy.
But not everyone is on board.
Congressman Tom Marino (R-PA) who voted in favor of the PATH Act last year now opposes an extension, calling it “crazy.” Rep. Marino said, about the extension, “With that kind of thinking, no matter what the circumstances, if you lose money, you can write that off. And who pays for it? Middle-class taxpayers.”
The provision is up for renewal this year: expect a vote after the November elections.
As for Marino, he already knows how he’ll vote: “If these guys aren’t bright enough to put anything together that makes money, tell them to get out of the business.”

Colorado may make headlines when it comes to revenues from the sale of marijuana, but California is making the news when it comes to marijuana-related taxes. A test case challenging the Internal Revenue Service (IRS) interpretation of expenses related to the sale of medical marijuana is headed to court: on Monday, June 6, Harborside Health Center, the country’s largest medical marijuana dispensary, will be in Tax Court to argue the application of section 280E of the Internal Revenue Code.
Under current federal law, marijuana is classified as a Schedule I drug, putting it in the same category as heroin, lysergic acid diethylamide (LSD), and ecstasy, among others. According to the Drug Enforcement Agency (DEA), “Schedule I drugs are considered the most dangerous class of drugs with a high potential for abuse and potentially severe psychological and/or physical dependence.” They are defined as “drugs with no currently accepted medical use.”
Despite federal law, twenty-five states and the District of Columbia currently have laws legalizing marijuana for either medical or recreational use. States which allow marijuana for medical use include Alaska, Arizona, California, Colorado, Connecticut, Delaware, Hawaii, Illinois, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, Vermont and Washington – as well as the District of Columbia. In those states, doctors may recommend medical marijuana for patients but may not officially prescribe medical marijuana: that would be a violation of federal law.
For the most part, the feds have been mostly silent about the apparent contradiction between federal law and those state laws. That has been helped along by some court cases, including a ruling involving another California dispensary, the Marin Alliance for Medical Marijuana. In that case, the court agreed that Section 538 of the Consolidated and Further Continuing Appropriations Act of 2015 (yes, it was a budgetary decision) prohibited the Department of Justice from spending money granted by the appropriations bill to prosecute organizations or otherwise prevent certain states “from implementing their own State laws that authorize the use, distribution, possession, or cultivation of medical marijuana.” States listed in the Act include Alabama, Alaska, Arizona, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Illinois, Iowa, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, Oregon, Rhode Island, South Carolina, Tennessee, Utah, Vermont, Washington, and Wisconsin, as well as the District of Columbia.
You’ll note I said mostly silent. There’s one huge exception: taxes. Under federal tax law, taxpayers must report “all income from whatever source derived” unless specifically excepted (you’ll find that rule at 26 U.S. Code §61). That includes all illegal activities: from illegal gambling to prostitution to kickbacks. In fact, the IRS has a program, the Illegal Source Financial Crimes Program, as part of its Criminal Investigations department, which enforces tax rules on income obtained through illegal operations which would otherwise be part of the “untaxed underground economy.”
Clearly, then, to stay legal – for tax purposes – you need to report all of your income subject to tax. That’s what Harborside says it did. The IRS does not disagree. Nonetheless, in 2010, after an audit, the IRS sent Harborside a bill for $2.4 million. The reason for the tax bill? The IRS declared Harborside (and thus all medical marijuana dispensaries) to be drug trafficking organizations (DTOs) and therefore subject to a special tax rule found at Section 280E of the tax code. That rule says that expenses connected with the sale of certain illegal drugs – including Schedule I drugs, like marijuana – are disallowed:

No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.

As you probably figured, section 280E was intended to target illegal drug traffickers, giving the feds more ammo to fight the war on drugs. It wasn’t contemplated that it might affect medical marijuana dispensaries made legal under state law. So you’d think that when the question came up, the IRS would back down. It did not. In addition to slapping Harborside with a $2.4 million tax bill for the two years under audit, the IRS demanded access to financial records for every subsequent year of Harborside’s existence and doubled down on similar dispensaries across the country. Harborside decided to fight back.
You can read more about Harborside’s tax battle here.
“We’re not asking for special treatment — we just want the same rules applied to us that are applied to any other legal, tax paying business,” said Steve DeAngelo, executive director of Harborside.
That means allowing Harborside – and other medical marijuana dispensaries – to deduct from income those same “ordinary and necessary” expenses that other businesses can claim under existing tax laws. Those expenses include the costs of labor, rent, utilities, insurance, professional fees and the like. Without the benefit of those deductions, Harborside claims that the federal tax rate can hit as high as 60%-90%, essentially putting legal medical marijuana dispensaries out of business.
Henry Wykowski, lead attorney for Harborside Health Center, explained it this way:

Section 280E was passed during the height on the War on Drugs, many years before California and 24 other states legalized the use of medical cannabis. It was meant to apply to drug dealers, not state-sanctioned cannabis dispensaries. Ignoring the intent of Congress, the IRS has chosen to apply 280E to legitimate cannabis businesses.

The matter has been winding its way through the court system for years. The case, which was originally scheduled for trial last October, will be heard beginning on June 6, 2016, in San Francisco. The ruling could likely have a significant impact on medical – and possibly, recreational – marijuana dispensaries across the country in establishing whether they are to be treated as bona fide businesses or illegal drug traffickers.