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Saturday, October 18, 2014

Premium Tax Credit Problems

Two of three recent federal court rulings held that the premium tax credit (PTC) is only available to individuals obtaining coverage through their state exchange, not the federal exchange. This is a big deal because the PTC serves to help make health insurance affordable to individuals with income between 100% and 400% of the federal poverty line. Also, the majority of states did not create their own exchange, forcing individuals in need of insurance to go to the federal exchange (if they are eligible for a PTC).

Resolution of this big issue likely won't happen until next year. Meanwhile, the upcoming filing season will involve millions of individuals having to reconcile the PTC they may have received in advance, with their true amount. There is also a lot of complexity for practitioners too. Another key piece of the Affordable Care Act that comes into play in 2014 is the individual mandate. How many people are subject to it will also depend on the outcome of the PTC litigation.

I've got a short article in this week's AICPA Tax Insider on the three cases and the relevance to individuals and employers.  I hope you'll take a look.

What do you think?

Thursday, October 16, 2014

Guest Post - Death and Taxes

Robin Hyde-Chambers in the UK presents an interesting guest post on "death and taxes." I expect the US data is similar to the UK data he presents. I think that people who have made wills, living trusts and similar documents, will want to review them with their advisers to see if anything should be done to cover all of the digital assets we have today (such as your photos on Shutterfly or Instagram, your blog, your LinkedIn page, your bitcoin, etc.). And of course, there are taxes that can come into play in many ways, beyond estate taxes that do not apply to many in the U.S.  For example, property taxes on revalued property that has been transferred.

Thanks to Robin for the nice infographic and information. ‘Death & Taxes – Are you Financially Ready to die?’- Infographic
What do you think?

Monday, October 13, 2014

States without an income tax - good idea?

California's largest tax revenue source by far is its personal income tax. This tax generated 67% of total tax revenues for FY 2012-2013's General Fund. As shown in the pie chart from the California State Controller's Office, the corporate income tax only provided 8% of state tax revenues.

Source: California State Controller
Seven states do not impose an income tax and two states impose it on only a portion of one's income. How can they do that? A recent article in answers that question. See "No-income-tax states use other taxes to pay the bills: Axing Ohio's Income Tax," by Robert Higgs, 10/2/14.

The seven states without an income tax are:
  • Alaska (relies on significant oil taxes)
  • Florida
  • Nevada
  • South Dakota
  • Texas
  • Washington
  • Wyoming (also relies on significant oil severance tax)
See the article for details on how the other states manage.

Is it good to not have a state income tax? I say no regarding the personal income tax and maybe regarding the corporate income tax. For states that don't have few people and lots of oil, lack of a personal income tax means greater reliance on the state sales tax, which is a regressive tax. While Nevada and Florida are able to get tourists to pay a good amount of the sales tax, that is not true in all states and Florida have a greater population than Nevada (for 2013, 19.5 million for Florida and 2.78 million for Nevada, per US Census Bureau).

The problem with the sales tax is that it results in lower income individuals using a larger portion of their income to pay it relative to higher income individual (making it regressive). In contrast, the income tax is progressive and even more progressive if tax rates increase with income. High income individuals get a significant tax break if their income is all earned in a state without an income tax. They likely only spend a small portion of their income, so do not pay much in sales tax (again, relative to their income).

Another benefit of having an income tax is that a balance of taxes can help improve revenue stability. For example, an economic downturn might hurt income tax revenues quickly, but not so quickly with respect to sales and property taxes.

So far as the corporate income tax, I think states should consider eliminating it. Already, most states have significant tax benefits to lower corporate taxes and entice corporations to do business in their state. The state will still make revenues from the spending and the wages paid to employees. The tax incentives include single sales factor apportionment (so state income taxes don't go up when you put more property and employees in the state), film credits, R&D credits and various energy and equipment purchase credits. These special rules also add more complexity to the law.

But, elimination of the corporate income tax is not as easy as it might sound. Many businesses operate as LLCs, partnerships or S corporations. The taxes paid by these entities mostly shows up in the personal income tax piece of the revenue pie. It doesn't seem fair to continue to tax these businesses, but not ones that operate in the corporate form. What happens if these businesses convert to the corporate form?  They still have federal income taxes. It could turn into a tax shelter as well if people place investment assets in corporations. Then you need rules to prevent that. So, we end up with a complex corporate income tax that produces a small amount of revenues. Oh well.

What do you think? (about a state having no income tax and elimination of the corporate income tax)

Monday, October 6, 2014

DC Broadens Sales Tax Base for Good Tax Policy

In May, DC's Tax Revision Commission released its final report after hearing from experts and studying DC's tax issues. In July, changes from the report were enacted! That is amazing. Typically, reports of tax commissions sit on shelves.

Included in sales tax reform was base broadening to include some services mostly used by consumers and ones people won't obtain via e-commerce or by traveling out of state (although hair salons were not included in the final legislation, but in the commission recommendations). Instead of lowering the sales tax rate, they kept it where it is (1/4 point lower than Virginia and Maryland) and lowered individual income taxes.

For the details, please see my post at

What do you think?

Saturday, October 4, 2014

California to study alternative to current gas tax

California SB 1077 (Chapter 835, 9/29/14) calls for creation of a Road Usage Charge (RUC) Technical Advisory Committee by the Chair of the CA Transportation Commission. This 15-member committee is to study alternatives to the gas tax and make recommendations to the Transportation Agency for a pilot program to begin by the start of 2017. The preamble to the legislation notes that existing revenues “for highways and local roads are inadequate to preserve and maintain existing infrastructure and to provide funds for improvements that would reduce congestion and improve service.” It also describes the gas tax as “an effective mechanism” for long-term infrastructure needs due to a few factors including use of more fuel efficient cars. It is estimated that by 2030, fuel efficiency will decrease otherwise available gas tax revenues by half. The bill also notes that Oregon has already studied this issue. Any proposal is to consider privacy implications. The work of the committee and items it must consider are detailed in the legislation.

The Senate Floor Analysis (8/26/14) of SB 1077 describes a “trifecta of circumstances” warranting this study:

(1)  The current fuel excise tax is not indexed for inflation.
(2)  Federal and California policies have required greater fuel efficiency for cars, thereby leading to a drop in collections of a tax based on gallons purchased.
(3)  “Demographic trends and state policies are encouraging Californians to drive fewer miles per capital.”
For more about Oregon’s work on an alternative to the gas tax based on gallons purchased (which dates back to 2001) and other information on a vehicle miles traveled (VMT) approach, see:

·         Nellen blog post of 3/16/13 (with links to federal and Oregon activities)
·         Oregon’s Road Usage Charge Program – to test a mileage collection system for 5,000 volunteers starting 7/1/15. Per the website, “may assess a charge of 1.5 cents per mile for up to 5,000 volunteer cars and light commercial vehicles and issue a gas tax refund to those participants. This will not be another pilot program but rather the start of an alternate method of generating fuel tax from specific vehicles to pay for Oregon highways.”
·         Background on Oregon’s Road User Fee Task Force (created by 2001 legislation)
·         Information from the US Federal Highway Administration on Vehicle-miles Traveled (VMT) Fees.
·         CBO, Alternative Approaches to Funding Highways, March 2011
If you want to know more about the gas tax in your state or others - when added, rate, whether adjusted for inflation, etc., the Tax Foundation has a helpful website.

I think it makes sense to change the gasoline excise tax to tie to miles driven rather than gallons purchased. For example, why should someone with a hybrid or electric car, not have to pay for road maintenance and expansion? Technology should enable the necessary data to be collected while still protecting privacy. Also, when Oregon started its study back in 2001, I think there was a greater interest in privacy than exists today. For example, many people already have readers in their cars for toll booths. Also, lots of people post all kinds of private photos and information (including their location) on the web.

The California study sounds like it will explore more than a VMT.

What do you think?