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Wednesday, September 30, 2015

Obamacare - can pieces be removed?

Presidential candidate Clinton has called for repeal one of the numerous parts of the Affordable Care Act (aka Obamacare).  Reuters reports that on September 29, 2015, she called for repeal of the "Cadillac tax" provision that goes into effect starting in 2018 ("Clinton calls for repeal of 'Cadillac tax' on healthcare plans," by John Whitesides, Reuters, 9/29/15).

A few observations on this:
  • What happens when one piece of the complete healthcare reform plan is removed? The Cadillac tax raises revenue by imposing an excise tax on certain expensive plans offered to employees (see IRC Section 4980I).  Likely it also is an incentive not to offer these generous plans that can result in increased health care costs (the insured in these plans might be getting services not needed when the cost to them looks free, but employers are paying a lot). Does repeal of one provision make the system not work?  Perhaps.
  • Politicians and many others keep skirting around the many inequities in the system.  One of the longstanding, costly inequities is that employees can exclude from income and payroll taxes, the value of the health insurance premiums paid for by their employer.  About 60% of  employees get this benefit.  It is worth more to individuals in higher tax brackets. That is part of the inequity (a credit would be more equitable). Another part is that it is so costly in terms of reduced revenue.  For example, if Jane's employer covers $10,000 of her annual health insurance costs, Jane excludes this from her income. If she is in a 30% tax bracket, she saves $3,000 of taxes compared to if her employer just increased her wages by 30%. And Jane and her employer don't have to pay Social Security and Medicare taxes on this health subsidy income (another savings of 15.3%). This exemption also makes it easy to increase the costs of health care because the insured don't necessarily see it.  Why not reform this costly provision (it is the most costly tax break in the system and isn't even available to everyone).
  • Why not address inequities such as the Premium Tax Credit ending once the insured's household income crosses 400% of the federal poverty line?  The employer-provided health subsidy exclusion (prior bullet) has not such end point? That means that someone with about $43,000 of income getting insurance in the Marketplace, won't get any government subsidy, where as someone making $200,000 with employer-provided health insurance gets to keep their tax break (the exclusion). Why isn't anyone talking about this
  • If the employer-provided health care exclusion were reduced, such as my having employees include 10% (or perhaps 15% or 20%) of the value of what the employer pays in their income, perhaps that would help pay for a better Premium Tax Credit and removal of the complicated Cadillac tax?  And the cost of this is minimal to the employee.  For example, Jane, in the earlier example would have to include $1,000 in her income (if 10% of the employer-provided insurance were taxable).  At her 30% bracket, her taxes go up $300.  That is a small price to pay for $10,000 of coverage!
A bigger discussion is needed.  Obamacare has too many complicated tax provisions in addition to many complicated non-tax provisions.  Has health care improved?  Is it all costing less?  What about removing health insurance from the employer-employee situation?  An many more questions that should be in this tax policy and social policy discussion.

What do you think?

Wednesday, September 23, 2015

Challenges of base broadening

The Senate Finance Committee's Working Group Tax Reform Report on Individuals, released in July, notes the largest tax expenditures in the individual tax system. It doesn't offer any suggestions for reducing them- something that would be needed to reduce tax rates.  It does discuss some inter proposals but overall they are ones that will lose revenues!

I've got more on this report and others in a 9/15 AICPA Tax Insider article, Tax Reform: Challenges of Broadening the tax base.

Wednesday, September 16, 2015

Odd tax holiday in Colorado today

Several states have "sales tax holidays" where for a day or a few days specified during the year, there is no sales tax on specified items.  For example, it might be on children's clothes or school supplies close to the time when school begins. Some states have them for guns and emergency preparedness items. The Federation of Tax Administrators maintains a list of these holidays in the states.

Today, September 16, 2015, Colorado has a holiday on marijuana - but just the special 10% and 15% taxes (there are a lot of taxes on marijuana in Colorado). The reason is complicated and ties to the fact that when recreational sales became legal in Colorado and new taxes added, they raised more than allowed. HB15-1367 explains some of this (in 33 pages!).

All of this is odd and bad tax policy. For Colorado, too bad no one thought of a law modification earlier that if too much marijuana taxes were raised, it would be used to reduce other taxes or for backlog infrastructure projects, or something other than a one-day tax holiday. I'll get back to the tax issues next, but also want to note that this is also odd - isn't the state now encouraging more people to buy marijuana today due to the greatly reduced cost?  What is the purpose of that?

Tax problems include the inequity of making somethings tax exempt, but not other things. Also, everyone, regardless of need gets the tax break. For example, someone making $200,000 per year who buys school supplies for their child during a state sales tax holiday period for these items saves a few dollars of tax. Why?  If the holidays are to help low income individuals, it would be better for the state to give them gift cards for stores that sell these items (or some other way to give money for them). 

Some might be too broad. For example, what all falls under school supplies or emergency preparedness?  Time is needed by the tax agency to define the terms, if possible.  And how, for example, does the store know if someone buying paper during the holiday is doing so for school?

The compliance and administrative burdens are also high. A vendor needs to be sure it handles the holiday correctly and the state needs some way to verify that it did. 

And the effect to vendors is odd.  The holidays will cause many people to wait to buy items then causing operational challenges for stores and theirs suppliers.

What do you think?

Monday, September 14, 2015

Personal property tax issues

There is an interesting article in the San Jose Mercury News - "Silicon Valley's stealthy, selfish war on taxes," by Michelle Quinn (9/11/15).  She looks at some of the assessed values high tech firms have noted for their equipment, including $1.  She reports that some companies argue that the machine has no value to anyone else.  That seems odd.  But, it is a problem with a valuation tax, such as the property tax.

What is business personal property, such as equipment, worth each year?  Arguably, when purchased, it is worth what you paid for it, but it isn't worth that much after that.  The valuation approach used does allow for adjustments down for subsequent years. The system also allows for lower values and appeals when necessary.

The article notes that the Santa Clara Valley Assessor are successful 96% of the time in their appeals efforts.

The public face of all of this, as noted in the article, is that it looks like these companies are taking money from public schools when they argue that their personal property is worth less than what the Assessor believes.  This is unfortunate I think.  I'm quoted in the article regarding this issue.  I noted that a company is not obligated to pay more tax than it owes. This ties to the famous quote from Judge Learned Hand - "Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes."

That quote might work better for income taxes.  Unfortunately, there is less exactitude in valuation taxes, such as the property tax. But, a company is wrong to purposefully overstate the value of an asset. The goal of tax compliance is to determine the proper amount of tax (not to overstate it or understate it). If a company wants to give more money to the government, it should donate it.

Personal property taxes have inherent weaknesses, including:
  • Subjectiveness of valuations leading to additional compliance and administration time and costs.
  • Disincentive to expand in the jurisdiction (unless the tax is lower than in all other jurisdictions).
A 2012 article from the Tax Foundation notes that some jurisdictions are moving away from the personal property tax.  Of course, a challenge in doing that is how should the lost revenue be made up? California has some obvious answers to that question because our sales tax base is so narrow (it only taxes tangible personal property despite the fact that today, a good portion of personal consumption is of services and digital goods).

What do you think?

Tuesday, September 8, 2015

Tell me - hot state tax issue of 2015?

In preparation for a State Tax Notes article I'm working on for publication later this year, I'd appreciate your input on what you think are one or two of the most meaningful state tax issues for 2015?  For example, perhaps it is the Wynne decision, Justice Kennedy's comment about Quill in the DMA case, the revised Marketplace Fairness legislation (H.R. 2775), accountability measures, some states trying to reduce income tax and increase sales tax, expiration of the Internet Tax Freedom Act, taxes on short-term rentals, worker classification, marijuana taxes, something else?

Please post a comment here or if you don't want to do that, you can email me at

Thank you!