Now that all the presents have been unwrapped and the holiday festivities are over, people's thoughts will soon turn to New Year's resolutions. Even those who don't make resolutions probably have some ideas about things they would like to do differently in the New Year.
We at the Tax Foundation have some thoughts about an area in which federal and state policymakers could use some improvement in 2008: tax policy. With this in mind, we have compiled a wish list for tax policy in the new year. This list can be viewed here and below.
Since 2008 is an election year in which a predicted economic slowdown could put pressure on some government budgets, reporters and politicians are likely to give the public a double dose of tax policy.
Special interests will, as always, push tax policies that favor themselves at the expense of other taxpayers. Social engineers will continue pushing tax policies that redistribute money based upon health, age, income, and other demographics. And finally, gimmicks like tax holidays and tiny, overhyped tax cuts will be featured in legislatures and political campaigns. Champions of sound tax policy like yours truly at the Tax Foundation will view all these policies with a skeptical eye.
Our Wish List for Tax Policy in 2008
1. Politicians will stop playing word games, and call taxes "taxes" and not "fees," "surcharges," or "profits." Any assessment that raises money in excess of what is needed to defray costs is a tax.
2. Politicians will stop using the tax code to give even more preferential treatment to sectors like housing and healthcare that are already tax-pampered. This includes using the tax code as a bailout for homeowners.
3. Elected officials in state governments seeking to give property tax relief to homeowners will not do so merely by shifting to some other source of tax revenue like sales or income (which usually ends up as a tax increase) or by shifting it all to commercial property owners.
4. Members of Congress will finally realize that two oceans can't protect us from the tax competition sweeping the rest of the world. China is now the latest country to cut its corporate tax rate.
5. Politicians will stop raising taxes on arbitrarily targeted items like cigarettes, alcohol, bottled water, soda, tasty food, adult entertainment, gambling, etc. just because they want to raise revenue for some government program that is supposed to provide broad public benefits.
6. State officials will stop obstructing our national market by attempting to export taxes to "out-of-staters." States should attract investment with pro-growth policies, not by protectionist penalties on the productive.
7. At least one of the states that have recently considered lottery privatization will go through with a sale (not a lease!). That will reverse the domino effect of state governments going into the business of promoting gambling.
8. States will eliminate gimmicks like sales tax holidays and instead lower sales tax rates for the entire year.
9. TaxReformPanel.gov and TaxFoundation.org will be the most visited web sites of 2008, and our ultimate wish...
10. Congress will avoid another AMT ping-pong match in late 2008, instead acting in the public interest by passing fundamental tax reform that merges the good features of the AMT (a broader tax base and lower tax rates) into the regular tax code.
Press release from the Internal Revenue Service today on the delay in refunds caused by Congress's procrastination on passing a patch for AMT:
The Internal Revenue Service announced today that the upcoming tax season is expected to start on time for everyone except certain taxpayers potentially affected by late enactment of the Alternative Minimum Tax "patch."
Following extensive work in recent weeks, the IRS expects to be able to begin processing returns for the vast majority of taxpayers in mid-January. However, as many as 13.5 million taxpayers using five forms related to the Alternative Minimum Tax (AMT) legislation will have to wait to file tax returns until the IRS completes the reprogramming of its systems for the new law.
The IRS has targeted Feb. 11, as the potential starting date for taxpayers to begin submitting the five AMT-related returns affected by the legislation. The February date allows the IRS enough time to update and test its systems to accommodate the AMT changes without major disruptions to other operations related to the tax season. As the IRS has said previously, it will take approximately seven weeks after the AMT patch was approved to update IRS processing systems completely.
Although as many as 13.5 million taxpayers will not be able to file their returns until Feb. 11, the effect of the delay may be lessened by the fact that under previous filing patterns only between 3 million to 4 million taxpayers file returns with the five affected forms during these early weeks in the filing season.
In an odd way, it will not affect all of those filing Form 6251, which is the AMT form. People filing other forms, however, will be affected. These changes, according to the IRS, take longer for the IRS to reprogram their computers compared to the mere change in exemption levels. Specifically, here are the forms that could cause delays:
Form 8863, Education Credits.
Form 5695, Residential Energy Credits.
Form 1040A’s Schedule 2, Child and Dependent Care Expenses for Form 1040A Filers.
Form 8396, Mortgage Interest Credit.
Form 8859, District of Columbia First-Time Homebuyer Credit.
Every time you turn around, some ridiculous tax policy is being proposed in Wisconsin. Whether it's Governor Doyle's proposed tax on oil companies, Governor Doyle's proposed tax on hospitals, a proposal to tax soft drinks put forth by some legislators, a gigantic payroll tax hike to pay for universal healthcare within the state that would basically double the state's tax burden, or the state's continuous support of tax credits for specific industries and companies, the state is a bastion of bad tax policy. (It actually makes you appreciate the federal tax system.)
Now one state senator is proposing a special tax on video games to fund the juvenile detention system in the state. Here's the story from DailyTech:
This week, Wisconsin state Senator Jon Erpenbach proposed a bill that would add an additional tax on video games and gaming equipment, like consoles and accessories.
The new tax would levy a 1% surcharge on the sale of video games and related equipment, with funds applied towards the cost of moving non-violent, delinquent 17-year-olds into the juvenile detention system, as they are currently treated, prosecuted, and incarcerated as adults.
According to Erpenbach, the tax has nothing to do with dissuading gamers or casting videogames in an undesirable light; rather the idea is that the tax is "a kind of kids-kids thing," with gamers helping out fellow youth stuck behind bars in an adult prison system.
Despite the fact that the bill's emphasis is on moving non-violent youth offenders into the juvenile court system, gamers have latched onto the tax as an unfair attack on their hobby. Justin Sallows, an adult Wisconsin gamer speaking to WISC-TV, thinks that the tax is "a real problem ... even if that's not what the intention is, it creates the impression that there's something wrong with the video games because we need to put some extra tax on there to try to dissuade people from playing them."
Erpenbach's logic is this: kids should have to pay a tax on video games to help out other kids their age that engage in bad behavior. There are many problems with this logic. First, the move that Erpenbach is suggesting within the juvenile detention system would benefit everyone in the state, not just children who play video games. His ridiculous "kids-kids logic" could be extended to every program that sends government funds to children. Maybe a video game tax and a tax on other products that children disproportionately buy should pay for public schools too.
But even if one buys the "kid-kids" argument, there are many more industries where young people buy products at a disproportionately higher rate than others. Why not put taxes on certain types of music, clothes, or entertainment? Or why not go directly at the source and put a special tax within the income tax system on people who work at ages 16 or 17, or raise the drivers license fees on people those ages? This may sound stupid and discriminatory, but that's exactly what this proposal is.
Today's Wall Street Journal has an editorial piece discussing the Quill physical presence rule. That's the constitutional bar which prevents states from forcing out-of-state businesses to collect each state's sales tax on purchases. Overturning Quill would mean that retailers would have to collect taxes based on where the seller lives (not where the business is), an obligation that would next extend to brick-and-mortar businesses. The editorial recognizes this:
[S]mall merchants could potentially have to keep track of 86,000 different tax rates, depending on what they sell and to whom. But what about nine-digit zip codes? Could governments create different rates within each one? Yes indeed.
Believe it or not, it gets worse. The board of state and local tax collectors that administers the "streamlined" plan recently amended the agreement. Now the plan would allow some states to choose whether to tax online purchases at the seller's address or the buyer's, depending on whether they're in the same state. The end result will be different tax rates for in-state and out-of-state vendors—a clear Constitutional violation.
As I explained in Why the Quill Physical Presence Rule Shouldn't Go The Way of Personal Jurisdiction and in a recent commentary, overturning Quill will create uncertainty and discrimination:
While some constitutional principles surely must be revisited to apply them to new circumstances, the idea that parochial state interests cannot burden interstate commerce remains a timeless principle regardless how sophisticated technology may be.
The effort to kill Quill is nothing more than states attempting to boost their tax revenues at the expense of the national economy.
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