Focused Searching Update, III

The following blogs have been added to the Tax and Business Law Commentary Google Co-Op search engine:

Professor Bainbridge's Business Association Blog

The Wilmington North Carolina Business Law
and Litigation Attorney Blog

Rubin on Tax

Texas State & Local Tax Law Blog

The Journal of the Business Law Society

Cases and Materials on Business Entities Update

The Tax Foundation's Tax Policy Blog

OMB Watch--Reg Watch

OMB Watch--Budget Blog

Gina's Tax Articles

Taxable Talk

I remain open to suggestions of weblogs and related sites to add to the search engine.

Comment on the 2006 Elections

There has been a lot of hoo-ha in the media about how the voter shift to the Democrats was not nearly as great as is typically the case in mid-term elections. Just to check, I compared the overall vote for the House of Representatives in 1994 with the vote this year.

In 1994, allegedly a banner year for the Republicans, the Republicans got 51.5% of the popular vote for members of the House compared to 44.7% for the Democrats, a little less than a 7 point spread. See here.

This time out, the percentages were 57.7% for the Democrats and 41.8% for the Republicans, a little less than a 16 point spread. That is, better than double the spread of the Republicans in 1994. See here.

However, the total seats won by each party in the two elections were virtually the same, with the Republicans getting 230 seats in 1994 (and with 1 independent) and the Democrats getting 232 (with no independents) this year. The reason that the heavily Democratic vote did not translate into more seats is, no doubt, a testament to the improvements over the last decade in the art and science of gerrymandering.

Limited Liability and Its Discontents (Gilbert and Sullivan Edition)

Apparently, critics of limited liability have been around for a long time. From Gilbert and Sullivan's Utopia, Limited, the song Limited Liability:

MR. GOLDBURY.
Some seven men form an Association,
(If possible, all Peers and Baronets)
They start off with a public declaration
To what extent they mean to pay their debts.
That's called their Capital: if they are wary
They will not quote it as a sum immense.
The figure's immaterial--it may vary
From eighteen million down to eighteen pence.
I should put it rather low;
The good sense of doing so
Will be evident at once to any debtor.
When it's left to you to say
What amount you mean to pay,
Why, the lower you can put it at, the better.

CHORUS.
When it's left to you to say,
What amount you mean to pay,
Why, the lower you can put it at, the better.

MR. GOLDBURY.
They then proceed to trade with all who'll trust 'em,
Quite irrespective of their capital
(It's shady, but it's sanctified by custom);
Bank, Railway, Loan, or Panama Canal.
You can't embark on trading too tremendous--
It's strictly fair, and based on common sense--
If you succeed, your profits are stupendous--
And if you fail, pop goes your eighteen pence.
Make the money-spinner spin!
For you only stand to win,
And you'll never with dishonesty be twitted.
For nobody can know,
To a million or so,
To what extent your capital's committed.

CHORUS.
No, nobody can know,
To a million or so,
To what extent your capital's committed.

MR. GOLDBURY.
If you come to grief, and creditors are craving,
(For nothing that is planned by mortal head
Is certain in the Vale of Sorrow-saving
That one's Liability is Limited),--
Do you suppose that signifies perdition?
If so you're but a monetary dunce--
You merely file a Winding-Up Petition,
And start another Company at once!
Though a Rothschild you may be
In your own capacity,
As a Company you've come to utter sorrow--
But the Liquidators say,
"Never mind--you needn't pay,"
So you start another company to-morrow!

CHORUS.
But the Liquidators say,
"Never mind--you needn't pay,"
So you start another company to-morrow!

Hat Tip: David Culpepper

Knaves--Airbrush Edition

"As a result of Stalin's purges, and later destalinization, many photographs of officials from the periods show extensive airbrushing, often entire people have been removed. The term 'airbrushed out' has come to mean rewriting history to pretend that something was never there."

Just in case you've forgotten what this election is about.

Hat tip: Brainshrub.com and Eric.

An Aside on Employment Numbers

In a recent post, I commented on two articles in the WSJ, one in the news section and one on the Op-Ed page. The employment numbers used in the Op-Ed piece seemed to me not to be credible. After some investigation, I discovered that the Op-Ed piece used the so-called "household survey" which reported significantly greater employment growth than the "payroll (or establishment) survey."

In yesterday's WSJ, Greg Ip focused on the two surveys and their divergent numbers (Divergent Data Raise Questions About Labor Market's Health). In reviewing the article, Dean Baker comments:

I looked at the data more closely and must come down on the side of the establishment survey. The simple arithmetic looks like this. Social Security tax collections were up 5.35 percent in fiscal year 06 compared to fiscal year 05. The average weekly wage rose by 3.9 percent, which implies job growth of 1.4 percent. Reported job growth in the establishment survey matches this closely, at 1.44 percent. However, we know that the Labor Department will add in 810,000 jobs to its March 2006 number in its benchmarked revision (these additional jobs are wedged in over the prior 12 months). When the data is adjusted for these additional jobs, the establishment survey shows job growth of 1.9 percent for the fiscal year, substantially more rapid growth than is implied by the growth in Social Security tax receipts.

There are complicating factors here -- self-employed workers pay SS taxes, but are not counted in the establishment data, many government workers don't pay into SS -- but these are not likely to change the basic story. It is implausible that the establishment survey is understating job growth, and it may well be overstating it.

Smoke! Smoke! Smoke! (That Cigarette)

At least as long ago as 1947, it was widely known that cigarette smoking was unhealthy, hence the caption on this post from the title of a famous popular song of that year. Apparently, the people at the Tax Foundation haven't figured out that this represents a public health issue. They oppose an increase in cigarette excise taxes because of a perceived spur to the criminal enterprise of cigarette bootlegging. (And see here.)

As long ago as 1981, the cigarette industry realized that:

Given a prince elasticity of -0.4 for total cigarette sales and -1.2 for teenage smoking participation, a 25 percent increase in the excise tax could be expected to reduce industry sales to about 1.2 percent below what would be expected in the absence of such an increase, and to reduce the number of teenage smokers to 3.5 to. 4.0 percent.

As even the Tax Foundation admits, cigarettes are highly addictive. The ability to quit is related to the age at which one begins smoking--it's easier to quit the later you begin. Although I've seen no specific studies on this, one must assume that price elasticity is even more pronounced among younger teens. Thus, it makes good public health policy to increase the cost of cigarette consumption by increasing excise taxes. Thus, increasing excise taxes will have its greatest impact on those physically most at risk and will have positive effects for years going forward.

The Cato study cited by TF is fairly irrelevant. It deals with cigarette smuggling into New York state and New York City which had high excise taxes relative to the rest of the country. The conclusion, that excise taxes always increase bootlegging, is simply not supportable. The correct conclusion is that excise taxes that are higher than those in jurisdictions that smugglers can easily travel to and from (e.g., North Carolina) can trigger an increase in criminal activity. However, that is not likely to be the case if, for instance, taxes are increased by a majority of all taxing jurisdictions. Moreover, to the extent that high excise taxes, coupled with a variety of other anti-smoking programs, reduce teen smoking, over time the demand (and the profit in smuggling) will decline. In fact, that's exactly what's been happening for a number of years.

Just because a tax (or, for that matter, any enactment) has negative effects is not, in and of itself, a basis for opposing the tax. One has to weigh the negative impact (e.g., smuggling) against the positive effects (e.g., reduction in teen smoking, leading to a long-term, overall reduction, leading to a reduction in cigarette smuggling). TF offers only a one-eye view of cigarette excise taxes.

Finally, in 2003, a California study concluded that "[p]reviously published studies that analyzed data from various time periods between 1950 and 2000 have estimated that 2% to 6% of cigarettes are smuggled within the United States" and that "the tobacco industry exaggerates smuggling claims." Thus, it's not at all clear that any increase in cigarette bootlegging is a major criminal problem.

Focused Searching Update II

Today, I added four sites to the Google Co-Op search engine.

Two are tax specific, Tax Playa and Andrew Mitchell International Tax Services. (The Andrew Mitchell site has the incredible collection of tax flow charts that Jim Maule, justifiably, raves about.)

The other two, Docuticker and Open CRS Network, have a large amount of research material. While the majority of the material on those sites is not tax or business related, the quality of what can be found there makes it almost imperative that these sites be included in the search engine.

Focused Searching Update

I've added several more blogs to the Co-Op Search:

California Estate and Business Law Blog
Business Law Prof
Delaware Corporate and Commercial Litigation Blog
Florida Asset Protection Blog
and
Ideoblog (Larry Ribstein)

Again, any suggestions as to additional blogs or websites is welcome.

Focused Searching

You can now find on the right side of the page a search box below the title "Search Tax & Business Law Commentary Google Co-op Search Engine." This will allow readers to conduct Google searches that are limited to various tax and business blogs and other related sites. Thus far, the search engine is limited to searching the following sites:

TaxProf
ataxingmatter
Death and Taxes
Mauled Again
Roth & Company, P.C.
Center for Tax Studies
Taxalicious
The Tax Foundation
Citizens for Tax Justice
Start Making Sense
Unincorporated Business Law Prof
and of course
Tax and Business Law Commentary

The purpose of the co-op search engine is to allow searches on tax and business law topics where the sites that will be searched are narrowed even before the search is initiated. I will be adding additional sites as time goes on and suggestions are appreciated.

Taking Credit Where No Credit's Due

On Monday, Maryland Governor Bob Ehrlich's office issued a press release trumpeting "Governor Ehrlich Cuts Unemployment Insurance Taxes by $95 Million--Millions in Reduced Taxes Go to Maryland Employers." In other words, the Governor implied that he engineered a tax decrease.

He didn't.

To understand what actually occured, one has to know a little bit about unemployment insurance and the Maryland Unemployment Insurance Trust ("UIT").

Unemployment insurance is funded by a payroll tax. The tax is earmarked for a fund, the UIT. Financial demands on the UIT increase when unemployment rises and decrease when it falls. During recessionary periods, when unemployment is high, these demands threaten the solvency of the UIT.

In order to avoid a situation where the UIT became exhausted and could not pay unemployment insurance benefits, the General Assembly enacted a supplementary surtax that kicked in whenever the reserves in the UIT fell below a designated level. This determination was made every September 30. If on that date the reserves had fallen below 4.7 percent of the previous year's state-wide taxable wages, the surtax was triggered. The surtax applied to wages paid beginning in January of the following year. Due to sluggish labor market growth, the surtax was in effect for 2004 and 2005.

Maryland's method of funding the UIT had been criticized for a number of years. Among the criticisms was the fact that the surtax was triggered during times when the labor markets were under the greatest pressure. Because the surtax raised the cost of labor, it created a disincentive to hiring and wages at a time when tax incentives should have been pulling in the opposite direction. See here.

In 2003, a special task force was created to revise the way the UIT was funded. As a consequence of that task force's efforts, a comprehensive change in the funding mechanism was enacted by the General Assembly, Ch. 169 Laws of Maryland, 2005. That statute established a single experienced tax rate system to replace the previous experienced rates and flat-rate surcharge system. Six tax rate tables were established. The table used for a particular year now depends on the UIT balance from the preceding September 30 as a percentage of total taxable wages. The rate tables can be found here.

Gov. Ehrlich did not cut taxes on September 30. What actually took place was that the Division of Unemployment Insurance followed the mechanical procedure that had been mandated by Ch. 169 as enacted by the General Assembly in 2005. When it utilized this mandated formula, employers' were required to make unemployment insurance contributions based upon a lower rate table. The change in the formula used was due to the improvement in the labor market as the country came out of the recession: more money flowed into the UIT because of the increase in employment due to the (shallow) recovery and unemployment rates fell slightly, reducing demands on the fund.

Front Page News

TaxProf takes note of two pieces in today's WSJ. One was an interview, on page 1 (i.e., a news page), of this year's winner of the Nobel Memorial Prize in economics, Columbia University professor Edmund Phelps. The other was an op-ed piece by Brian S. Wesbury, the chief economist at First Trust Advisors L.P. The two pieces clashed, with Prof. Phelps suggesting higher taxes ("[I]t would be a good thing for the federal government to raise taxes and run big surpluses until we have retired the public debt. In the short run the higher tax rates might be unpleasant. But in the long run, with the debt reduced or eliminated, incentives to work or to advance in the world would be enhanced, because after-tax pay rates as a proportion of wealth would be higher.") and Wesbury recommending that we stay the Bush tax cut course.

Presented in this way, it would appear that there are merely two economists who simply reach different conclusions after reviewing the same data. However, further investigation of one portion of the Wesbury piece exposes his essential intellectual dishonesty. Specifically, he states that:

During the 12 months ending in September 2006, the [Bureau of Labor Statistics] household survey reported 2.54 million new jobs. Going back 24 months shows 5.5 million new jobs, an annual average of 2.75 million. This exceeds the booming 1995-2000 average of 2.34 million new jobs per year. The household survey, in contrast with the establishment survey, has consistently signaled a resilient economy. And it continues. In the past two months, the household survey has expanded by 261,000 per month, while the establishment survey rose by an average of just 120,000.

While it is a little wonkish, there are good reasons why economists typically do not use the household survey, but instead rely upon the indice known as the "Employment, Hours, and Earnings from the Current Employment Statistics survey (National)." Barry Ritholtz explains the reason that the household survey, unadjusted, was misleading. His conclusion:

Let's see who has the intellectually honesty to step up to the plate with a big mea culpa. You may assume any of the original advocates of this now totally untenable position [that the unadjusted household survey is more accurate] who adhere to it are little more than partisan hacks, and disregard them as appropriate.

Just so the record is clear, here's the Employment, Hours, and Earnings from the Current Employment Statistics survey (National) on a monthly basis from January, 1992, through September, 2006:

(Click to enlarge.)

Do the math: During the 96 months of the Clinton Administration, the country added 22,635,000 jobs or almost 236,000 jobs a month. By contrast, during the 79 months of the Bush Administration, the country, on a net basis, has added only 3,109,000 jobs, or just a shade under 40,000 jobs a month. Even isolating the most recent 24 months, as Wesbury does, we find that only 4,026,000 jobs have been added or an average of just 167,750 per month. In other words, even when rebounding from a recession, job growth during this Administration is just over 70% of what it was during the Clinton Administration.

(Wesbury also wrongly states that the "the booming 1995-2000 average [was] 2.34 million new jobs per year." In fact during the 60 months from January, 1995 through December 2000, a total of 16,428,000 jobs were created, an average of 273,800 jobs per month or 3,285,600 jobs per year.)

In the end, the Nobel guys tend to shoot straight. They get on the first page of the WSJ. On the other hand, "partisan hacks" are relegated to the knave opinion page.

The Sweet Science?

The Journal of Law and Policy at Brooklyn Law School has an interesting student note by Joshua A. Stein, Hitting Below the Belt: Florida's Taxation of Pay-Per-Pay Boxing Programming is a Content-Based Violation of the First Amendment. Stein concludes that:

Florida is one of numerous states to authorize a tax specific to telecasts of boxing. As these taxes are specific to a type of television programming, they should be held by courts to be content-based restrictions on speech. However, boxing and other sports have been denied the protections of the First Amendment because they are deemed to be non-expressive. An historical and literary analysis of boxing demonstrates that the sport satisfies the Spence test because boxers intend to express particularized messages which are understood by their audiences. When strict scrutiny is applied to taxes on boxing telecasts, the state's interest in raising revenue is outweighed by boxers'—and their promoters'—freedom of expression.

Stein quotes Norman Mailer at length in an attempt to show that "[a]lthough the expression inherent in boxing cannot be neatly categorized, it is expressive conduct that conveys a specific message that has a substantial likelihood of being understood nonetheless."

Somehow, I can't buy the argument the two guys beating their brains out is an exemplar of "expressive conduct." However, I am sensitive to the argument that (i) there's a potential slipperly slope here and (ii) the power to tax is the power to destroy. For instance, if the state can tax boxing while exempting other sorts of content, what's to stop it from imposing a tax that is so high that it would, in effect, ban any show with any erotic material (however loosely defined) from the cable-ways.

Ultimately, of course, the state's efforts in this regard will fail. As I noted earlier, once the internet pipes get big enough, the broadcasters of internet content will be beyond the reach of state sales tax assessors. Anyone who doesn't think that boxing matches can't be moved offshore simply does not remember "The Thriller In Manilla"


or the "The Rumble in the Jungle."


Hat Tip: DocuTicker

Rollin' (Part II)

In August, I commented on the creative tax planning efforts of Congressman Gary Miller (R. CA). Representative Miller rolled over the profits from real estate sales not once, but twice, pursuant to the provisions of IRC §1033. He claimed that the properties were sold under threat of condemnation, even though he faced no actual threat of condemnation. To bolster his reporting position, he asked Monrovia, California to provide him with "a letter that talked about eminent domain."

Last week, on similar facts, the Sixth Circuit, in U.S. v. Harris, affirmed a conviction for tax evasion. The pertinent portions of the opinion (which begin on page 77 of the slip opinion) should make for chilling reading by Rep. Miller:

The evidence against Kotula [one of the defendants] on the tax-evasion count is not overwhelming, either in absolute terms or compared to the conspiracy evidence against him. But it is sufficient to support his tax evasion conviction under the very deferential standard for reviewing jury verdicts.

In 1998, Kotula sold his own land to Ashtabula County, Ohio for $425,000. The sale contract recited that Kotula was selling the land to avoid eminent domain. Kotula made a $382,000 profit on the sale, on which he owed federal income tax of $82,000. The parties agree that Kotula did not list the profit on his 1998 federal income tax return.

The government charged that Kotula's failure to report the land-sale gain in that year constituted willful attempted evasion. Kotula's defense is that 26 U.S.C. § 1033 allows a taxpayer to defer gain from a sale made under threat of eminent domain if they use the proceeds to buy replacement property within a certain period of time. As Agent Fisher testified, if the taxpayer meets the requirements, he is not required to report the gain in the first year following the sale.

The government alleges that "several Ashtabula County officials" testified that the land-sale agreement's references to eminent domain were a "sham," but the government fails to point to particular testimony using that word. The government relies on the testimony of current and former county commissioners that the county never suggested that it was considering using eminent domain to take Kotula's land, that it was Kotula alone who insisted on inserting the eminent-domain language, that the commissioners knew eminent domain was unpopular and so would not use it lightly, and that the county had probably not used eminent domain in the twenty years prior to the county's purchase of Kotula's land.

* * * * *

On this record, a reasonable factfinder could find that it was not reasonable to fear eminent domain under the circumstances. With or without such a finding, the factfinder could conclude that Kotula did not actually have a good-faith belief (reasonable or otherwise) that his property was threatened by eminent domain so as to trigger the deferred-reporting provision of IRC §1033.

Incredibly, as near as I can determine, Miller is running unopposed.

Importance of Immigration to Population Growth

A report by the Pew Hispanic Center, From 200 Million to 300 Million: The Numbers Behind Population Growth, underscores the point that underlay my comment on Thursday. Specifically, the report finds that:

Immigrants and their U.S.-born offspring accounted for 55% of the increase in [U.S.] population [from 200 million to 300 million] since 1966-67. 3 Within this group of 55 million, Latino immigrants and their offspring were by far the largest, representing about 29 million persons, or 53% of the addition due to immigration . . . .

Strikingly, Hispanics constituted only 4.25% of the U.S. population in 1966. In the last 40 years, that figure has grown to 14.9%. The percentage of Americans classified as "White" has fallen from 83.6% to 67% over the same period.

How Many Times Have I Heard That Before?

From a report, Investigation of Jack Abramoff's Use of Tax-Exempt Organizations, by the Minority Staff of the Senate Finance Committee:

The documents reviewed by the Minority staff raise several issues with respect to [Americans for Tax Reform]’s compliance with current tax laws. As a threshold issue, many of the activities alleged in the e-mails reviewed by the Minority staff indicate that ATR may not be primarily operating to further social welfare purposes, which is a necessary condition of tax-exempt status as a section 501(c)(4) organization. In addition, the documents raise questions whether ATR should have reported income from some of its activities as taxable income. Finally, the e-mails raise questions as to whether insiders at ATR, including [Grover] Norquist, used ATR primarily for their own or Mr. Abramoff’s private benefit. Violations such as these could, under certain circumstances, result in penalties under current law, including excise taxes on officers of ATR, revocation of ATR’s exempt status, and even criminal tax fraud penalties.

Where have we heard this before? Well, here, here, here, and here.

Equal Protection Under State Law: Very Big Deal in America!

Today, the Maryland Court of Appeals issued an opinion in the case of Ehrlich v. Perez that illustrates that (i) in some cases, rights that we tend to think of as being rooted solely in the U.S. Constitution (in this case, the right to equal protection under law), can also find alternative bases for support in state constitutions and (ii) the Republican Party is doing its best to run headlong off of a demographic cliff.

At issue in the case was a preliminary injunction forcing the state of Maryland to provide medical assistance benefits to resident alien children and pregnant women who immigrated to the United States on or after August 22, 1996. A federal law, The Personal Responsibility and Work Opportunity Reconciliation Act of 1996, generally know as the "Welfare Reform Act," was enacted in 1996. As described by the Court of Appeals:

The [Act] states: "An alien who is a qualified alien (as defined in section 1641 of this title) and who enters the United States on or after August 22, 1996, is not eligible for any Federal means-tested public benefit for a period of 5 years beginning on the date of the alien's entry into the United States with a status within the meaning of the term 'qualified alien.'" 8 U.S.C. §1613(a). Among the provisions of the W elfare Reform Act was the elimination of all benefits for illegal immigrants and other "non-qualified aliens," with a few limited exceptions such as emergency medical care. 8 U.S.C. § 1613. In doing so, Congress divided the two qualified alien categories into two subcategories: (1) qualified aliens who have resided in the U.S. since a time prior to August 22, 1996. . . .Some states were required to provide funding to the first subcategory of qualified aliens. . . . However, a period of five years residency in the U.S. was required for the second subcategory. . . . Congress then authorized the States to enact any law after August 22, 1996, should they choose to compensate this newly designated class of ineligible aliens, provided they use only State funds.

(Some internal citations omitted.)

In 1997, the Maryland General Assembly enacted Md. Ann. Code, Health-General Article §15-103(a)(2)(viii), which provided "comprehensive medical care and other health care services for all legal immigrant children under the age of 18 years and pregnant women who meet [Medicaid] eligibility standards and who arrived in the U.S. on or after August 22, 1996." In 2006, however, Governor Ehrlich cut funding coverage for this part of Medicaid in the budget that he submitted to the General Assembly. (In Maryland, the General Assembly cannot add or increase funding beyond what the Governor has proposed.)

The Circuit Court for Montgomery County issued a preliminary injunction ordering that the state (i) provide Medicaid coverage for all those within the ambit of §15-103(a)(2)(viii) and (ii) reimburse recipients for the benefits that had been denied to them before the date of the order. The injunction was based on the equal protection provisions of Maryland's constitution set forth in Article 24 of Maryland's Declaration of Rights.

On procedural grounds, the Court of Appeals rejected that part of the Circuit Court's order requiring reimbursement of past benefits. The vacation of that part of the order was based solely on the fact that the preliminary injunction remedy is designed to maintain the status quo. An an order that requires payment for benefits provided before the dispute came before the court is equivalent to a judgment in favor of the plaintiffs prior to a complete adjudication of the dispute. However, the Court upheld the injunction insofar as it requires that, while the litigation process is ongoing, the state must continue to provide benefits.

The holding of the case is narrow. If the federal statute had explicitly required that the states deny non-qualified aliens Medicaid benefits, the exclusion would likely have been upheld under the Supremacy Clause. Under those circumstances, the question would have become whether there was a rational basis to conclude that statute furthered the exercise of a particular federal power, namely the power to control immigration. However, because there was no federal mandate prohibiting the states from providing benefits, the more stringent "strict scrutiny" test was applied to determine whether the budgetary exclusion denied the plaintiffs their Equal Protection rights. And, by bottoming its opinion on a provision of the state constitution, the Court of Appeals precluded any Supreme Court review of the Equal Protection question. (Although, various other questions, e.g., a somewhat different "Supremacy Clause" issue raised by the state, could theoretically be appealed to the Supreme Court.)

The opinion comes a day after a story in the Baltimore Sun, Latinos' power in numbers-Naturalized citizens are becoming a political factor in Maryland that demands to be recognized, highlighting the growing political importance of Hispanic voters in Maryland. Those voters will presumably remember that Ehrlich's attempt to cut benefits to pregnant women and children was nothing more than a gratuitous slap at immigrants. As the opinion notes, this budget cut would only achieve "a cost savings of seven million dollars . . . of the four billion dollar budget appropriated for medical assistance health care costs generally."

I suspect that, in the short term, Republicans can mine anti-immigration sentiment to their electoral benefit. In the long run, however, the children and grandchildren of immigrants will remember the nativist enmity stirred up by Republican politicians. That will ultimately crush the party.

Movin' On Up?

There's been a debate, of sorts, between Grover Norquist's Americans for Tax Reform and the folks over at Citizens for Tax Justice over the question of whether state tax rates cause individuals to migrate from higher tax states. The ATR paper is here and the CTJ argument, linked to three studies of specific states, is on its weblog here.

The ATR analysis is singularly unconvincing. It includes a nifty chart sourced to "Vedder" with no additional information that would allow one to verify the chart's accuracy or to make a separate analysis to determine whether other factors were at work. (Presumably, "Vedder" is Richard Vedder of Ohio University and the Heartland Institute.)

The CTJ web posting cites three studies, from the Iowa Policy Project, New Jersey Policy Perspective, and Policy Matters Ohio, respectively.

The Iowa study was rather narrow in scope. It was designed to address an argument made in support of a particular piece of legislation before the Iowa legislature that would have provided various income tax exemptions to the elderly. The study showed, convincingly I think, that Iowan income tax rates did not cause significant out migration of the elderly from the state. However, the paper did not fully address the more basic question: Do taxes, in general, cause emigration from high to low tax states?

The New Jersey study dealt with the broad question of whether income tax caused net emigration from that state. It concluded:

It is impossible to tell from the IRS data the reasons why people leave or come to a state. However, the numbers for New Jersey would seem to suggest that the regional and national economic situation is an important force, especially in view of the fact that in most years outflow and inflow either rise together or fall together.

But it is equally impossible to interpret the data as in any way showing that changes in New Jersey's income tax rate-up or down-have an impact on whether high income families-or any families-choose to come to the state or to leave it.

One could just as easily, and perhaps more plausibly, conclude that the tax driving people out of New Jersey is the local property tax, since this tax takes a higher percentage of the yearly income of low- and middle-income families than it takes from the wealthiest-so that an increase of even a few hundred dollars is more noticeable to those families than an income tax increase that amounts to a relatively smaller percentage of a wealthy family’s income.

Finally, the Ohio study also limited itself to the affect of income tax on migration and concluded that "migration does not appear to be linked to income tax policy. Policymakers seeking to prevent outward migration should look to policy other than income-tax policy to alter the trend."

Clearly, taxes do have some effect on interstate migration. For instance, I know from my practice that state estate and inheritance taxes will cause some high wealth individuals to relocate. However, it would be virtually impossible to design a study that could isolate and measure the effect that these taxes have on migration. There are likely to be a large number of other factors at work and, more importantly, the number of people affected by these taxes is statistically small.

One of the problems with all of the studies is that there are generally so many factors that bear on an individual's decision to relocate it is virtually impossible to isolate the affect attributable to taxes. For instance, do people move to low tax states to avoid taxes in their state of origin, to enjoy a warmer climate, or to take a job at a non-union factory because work at older, union manufacturers has dried up? And, to the extent that the move is motivated by tax considerations, to what extend are the emigrants fleeing property tax assessments that fund primary and secondary education? If this last factor proves decisive, to what extent are the emigrants really defaulting on their responsibilities (i.e., "The state already paid for my kids' education. The hell with the next generation.")

It is anticipated that Maryland will have a huge increase in population over the next 10 to 15 years caused by the expansion of Aberdeen Proving Grounds, the NSA facility at Fort Meade, and the military's biological research facilities at Fort Detrick. Under these circumstances, unless Maryland's tax system becomes outright confiscatory, there will be little, if any, affect on immigration to the state. The population will increase because there are good, well-paying jobs available.

I think that, in general, similar, non-tax forces are at work causing either immigration to or emigration from various states. With some isolated exceptions (Nevada comes to mind), I think that the amount of taxes imposed on individuals is of little moment in determining emigration or immigration. But, as yet, I have little to go on in reaching that conclusion other than my own intuition.

Taking a Bite at the Apple

Russ Fox of Taxable Talk reports that New Jersey has extended its sales tax to cover music downloads. Following the links back, you get to this April 13, 2006, story in CNET, The Tax Man Cometh After iTunes. According to CNET, at the time of publication, 14 states and the District of Columbia imposed sales tax on music (and, presumably, software) downloads. New Jersey would be the 16th jurisdiction to do so.

The Supreme Court's holding in Quill v. North Dakota poses a significant hurdle to the states' efforts to impose sales tax on electronic media of any sort. In essence, that opinion requires that there be some significant physical contact with a state before the state can establish sufficient nexus to impose a sales tax. With respect to iTunes, the states probably can effectively impose a sales tax because Apple has sufficent contacts with almost every state to meet the nexus requirements of Quill. However, that is principally because Apple sells and services its computers and MP3 players throughout the country. If Apple were merely in the business of selling the music, it would likely not have a physical presence in any state that imposed sales tax on electronic media. Effectively, the states could not tax these sales.

However, as Apple's relative market share declines (it now controls about two-thirds of the market), the ability of the states to collect tax on the sale of electronic music will also decline since market share will inevitably be gained by companies whose only business is the sale of electronic media over the internet. (Note: Theoretically, the states would lose nothing since consumers who fail to pay sales tax are required to pay use tax. Consumer self-reporting and payment of use tax is, for all intents and purposes, however, non-existent.)

There have been bills introduced in Congress that would overide Quill and allow states to impose sales taxes on internet sales. While such legislation might work with respect to internet sales of tangible property, intangibles, such as software and electronic music downloads, would still be problematical. After all, so long as the servers that provide the downloads are located outside of the U.S., the purchase of downloads would still be sales tax free.

Of course, I once again have a good excuse to post a link to my favorite tax song, "Sales Tax," performed by the Mississippi Sheiks. Since the download is free, it is not subject to sales tax in any state.

Deja Vu All Over Again--WSJ Edition

Today's WJS editorial page touts the decline in the size of the budget deficit from the amount previously projected. Iit, correctly, attributes the decline of the deficit to increases in tax revenue. (The CBO press release on the deficit number is here.) However, it incorrectly finds that the Bush tax cuts are the underlying cause of the increase in tax revenue.

Jim Maule figured out that the WSJ editorial was baloney three months ago, before it was even published. He said then:

Members of the Administration are touting the revised deficit estimate, and its cause, as a sign that tax cuts are working as intended. Excuse me, but that makes no sense. Without the tax cuts there would be little or no budget deficit. So we're supposed to cheer because the mess isn't quite as bad as it appeared to be? I'd be impressed if the revision showed a budget surplus, because THAT would demonstrate the validity of the "cut taxes, double revenue" nonsense spouted by the "I refuse to pay taxes because I'm special" crowd and the "I cannot pay taxes because I'm selfish" group.

A closer look at the source of the increased tax revenue is most revealing. A significant chunk of it reflects increased corporate taxes, a natural consequence of the huge increase in corporate profits during the past half-year. Most of the rest reflects taxes on high-income taxpayers who have received bonuses. The Washington Post article goes into greater detail on these points. It also explains that taxes on wages are barely increasing, because wages are increasing only slightly. In other words, the tax revenue increases are consistent with the shift of income gains away from the middle class and toward the very top of the income and economic ladders. The rich get richer ....

Making the situation worse are the allegations that the Administration initially overestimated the deficit so that it could return and claim that it deserved kudos for reducing it. That's a ploy not unlike the child who says to a parent, "Would you be upset if I told you I broke the heirloom vase?" only to follow-up with the following comment to the rattled parent, "Well, I didn't. It's just that the picture window is broken." There's one word to describe this approach: manipulative.

The CBO report explicitly notes that:

Steady growth in corporate profits probably explains most of [the increase in tax revenues in September, 2006 from those in September, 2005], although some of it likely stems from settlements of past years’ taxes and a recent change in tax law that required large firms to accelerate some payments from 2007 into 2006.

Paul Krugman also pinpoints a different cause for the growth in corporate profits (behind Times Select Paywall), than that offered by the WSJ:

[A]fter-tax corporate profits have more than doubled, because workers' productivity is up, but their wages aren’t — and because companies have dealt with rising health insurance premiums by denying insurance to ever more workers.

This, of course, would also explain another "surprise" the WSJ editorial focuses on--the fact that the top 1% of all income earners account for 37% of revenue receipts from the individual income tax.

Angry Bear also anticipated the WSJ editorial when he published this chart from the CBO's August, 2006, estimates and made the following comments:

(Click to enlarge.)

But look at the on-budget deficit for 2006. It shows a small improvement over 2005, and then the CBO projects the on-budget deficit to worsen in fiscal 2007.

But compare 2006 to the earlier CBO estimates - 2006 is a complete disaster. And the bad news is another bubble is bursting right now (the housing bubble), and IMO the CBO estimates are once again ignoring the budget implications of that bursting bubble.

So when the Bush Administration touts their budget progress in the coming weeks, remember where we were just a few years ago. And remember where the budget deficit is likely to go. They call that progress?

Well, the WSJ editorial board certainly does.

Hat Tip: TaxProf

Premier Kissov

The BBC is reporting that CBS's Sixty Minutes will report this weekend that a "US no-fly list used to try to prevent terror attacks [created after 9-11] includes the names of 14 of the long-dead 11 September hijackers." However:

[T]he names of the 11 British suspects recently accused of a plot to blow up airliners flying to the US were not included on the list.

Cathy Berrick, director of Homeland Security investigations for the General Accounting Office told CBS that this was due to concerns that the list could end up in the wrong hands.

"The government doesn't want that information outside the government," she said.

As Dr. Strangelove once pointed out, some things have to be made public in order to work:

Yes, but the... whole point of the doomsday machine... is lost... if you keep it a secret! Why didn't you tell the world, eh?

Thing are not nearly as bleak as they may first seem, however. I have obtained a photograph of one of the people on the list, Robert Johnson:

Be on the lookout!

Hat Tip: beSpacific

Ok. Now back to work.