Category Archives: Taxes

A Tale of Two States

The weekend edition of The Wall Street Journal had an article about the burgeoning film industry in Georgia that is likely to make the folks in the film industry here in North Carolina cringe:

ATLANTA—The film industry here has hit the big time, thanks to generous tax credits that have made Georgia one of the top states for movie and television production behind California and New York.

But the growth of what many call “Y’allywood” is being threatened by a shortage of makeup artists and costume and set designers—the rank and file of film and television crews…

In fiscal year 2013, film and television production budgets in Georgia totaled $933.9 million, according to the Georgia Department of Economic Development.

While some states have turned away from incentives, arguing that they hurt budgets, Georgia’s Republican-dominated legislature strongly supports them. Georgia offers film and TV projects transferable tax credits for 20% of production costs, plus an additional 10% if the project agrees to display the state’s promotional logo in its credits. The incentives apply for all workers on a set, whether they are Georgia residents or not.

North Carolina is one of the states that has turned away from incentives, with the state legislature failing to pass the legislation that would have renewed them in 2014. The Hollywood Reporter has a detailed story describing the issue and the probable effect:

One big reason the North Carolina incentive legislation failed is because the Koch Brothers-backed nonprofit Americans for Prosperity bought radio commercials as the debate that slammed film incentives was going on. The ads were part of a larger campaign to eliminate a range of state-funded development programs.

“The money coming in from the outside has hurt the North Carolina programs for business development,” said Rep. Susi Hamilton, a Democrat who fought to retain incentives. “The Americans for Prosperity spent a lot of money to try and end the program and unfortunately they have the ear or our leadership and appear to be successful.”

Hamilton, however, doesn’t believe this means other Southern states will follow suit. In fact, she sees the opposite happening as North Carolina stands to lose more than 4,000 good jobs.

“The implications for other states,” says Hamilton, “particularly in the Southeast, are that they are going to pick up the work that otherwise would have come to North Carolina. That’s good news for the other states.”

Griffin says the irony is that there has been an influx of work into North Carolina in the past three or four years, and 2014 could be a record year.

Hamilton estimates that, in 2013, $360 million was directly spent by productions, while the state paid out $62 million in incentives. And that doesn’t count millions more spent on services and by workers who have moved to the state for jobs that pay an average of more than $65,000 per year.

The article also points out that the legislature did pass a grant program for the film industry, but because of the way it was structured it is “nearly useless.”

As tempting as it is to see everything as black and white, to assume that all Republicans or all Democrats see things the same way, it’s situations like this that reveal how varied the views within a political party can be. Republicans are in charge in both Georgia and North Carolina, but they obviously take very different stances on economic incentives. The folks in the North Carolina film industry are likely to lose out because of it.

IRS Should Just Hire a Bunch of Direct Marketers and Listen to My Mom

During a show about how much tax revenue the IRS doesn't collect – 17% or $450 billion a year – the folks at Freakonomics talk about how a little-known unit of the British government called the Behavioral Insights Unit gooses the UK's tax collection efforts:

One of my favorite examples of this comes from a small unit in the British government called the Behavioral Insights Team.  What they do is experiment with all kinds of cheap and simple nudges.  For instance, sending out letters that appeal to the herd mentality in all of us. Here is the unit’s director, David Halpern:

David HALPERN: So what we do is we simply tell people something, which is true, which is 9 out of 10 people in Britain pay their tax on time. And by putting that single bit of information into the top of a letter, it makes people much more likely themselves to pay the tax on time.

GARDNER: So it’s peer pressure?

DUBNER: That’s exactly right — we like to run with the herd.  They also tried another super simple trick, which was just handwriting a message on the outside of the tax envelope.  This message would just say simply that the contents are important, but it’s written in hand.

HALPERN: Of course people are like ‘oh my God, but how can that possibly be practical?’ Well we’ve now just got the results in. It turns out that for every pound or every dollar that you spend on getting, you know, someone to write on the envelope, you get $2,000 return.  A one to 2,000 return. So it’s a nice simple illustration of these small things and how consequential they are.

Anyone who's spent even a week working as a direct marketer could have told you this would work. The IRS should just hire a bunch of laid off direct marketing folks and they'd pay for themselves in no time.

Later in the podcast they talk about an idea from a behavioral psychiatrist at Duke:

Dan Ariely, a behavioral psychologist at Duke, has a nice idea: to let taxpayers direct a small portion of their tax money to the parts of the government that they most care about:

Dan ARIELY: So I’m not sure what’s the right percent — five percent or ten percent.  But what if we got people to have a say about where some of the taxes go? All of a sudden you’re not looking at it as you against the government.  You’d have to look carefully at all that the government is doing for us — building libraries and roads, and education and military and so on and so forth and say, what do I care about?

My mother made this same argument when I was a kid. Her argument was that if she could earmark even one or two percent for any program/department of her choosing she'd feel better about paying her taxes in general. She also made another interesting point: taxpayers would be able to indicate with their dollars which programs they felt were most important. In essence we'd be able to tell which programs were truly valued by us, the taxpayers, and not have to trust politicians to divine what we wanted. That's why I figured it would never come to pass, and I haven't been wrong yet.

Starving the Beast

Those of us old enough to remember the Reagan years can probably remember hearing the phrase "Starving the Beast." What did it mean? From Wikipedia:

Starving the beast" is a political strategy employed by American conservatives in order to limit government spending[1][2][3] by cutting taxes in order to deprive the government of revenue in a deliberate effort to force the federal government to reduce spending. The short and medium term effect of the strategy has dramatically increased the United States public debt rather than reduce spending .

Those of us still around to see what happens when terms like "fiscal cliff" and "sequestration" enter the lexicon are able to see what will happen when the starvation takes hold:

Imagine that just before Thanksgiving a major retailer, say Nordstrom or Wal-Mart, announced it would furlough 10 percent of its sales, collections and accounts payable staffs.

The stock would tank. Indeed, it is hard to imagine the CEO or the board of directors keeping their jobs as customers switched to other retailers during the holiday buying season, costing the company revenues far in excess of the savings. Not only would the corporate overseers become everyday laughing stocks, they would surely be enshrined in a Harvard Business School case study as the worst of all corporate dunces.

Well, on March 1 — right in the middle of tax season — the IRS will be faced with cutting staff ten percent under the federal budget sequester…

Rational people would think that a law-enforcement agency which saved taxpayers more than 150% of its budget would get some support from Congress because its highly cost-effective. The operative word there is rational.

House Appropriations Committee Democrats on Feb. 13 offered these rational observations on what sequester would do to the IRS and to taxpayers: 

  • Sequestration will be particularly devastating to the IRS, since it will require furloughs to take effect during the 2012 filing season. Furloughs at IRS call centers equate to longer hold times on the phone for taxpayers, if the call is answered at all. Fewer enforcement agents will be available to investigate fraudulent claims, leading to an increase in the number of identity theft cases unresolved. Further, each dollar invested in enforcement actions returns $4 in additional revenue to the Treasury. Cutting investment in enforcement will lead directly to an increase in the deficit.

It's hard to generate any sympathy for the IRS, but if we must have an IRS (as we must) then we should make sure it has what it needs to complete its mission.

Taxing the Middle Class

It doesn't matter which party sponsors it or which party fights it tooth and nail – any tax package that causes taxes to rise significantly on the middle class should prompt a "throw the bums out" campaign that will jolt Congress indiscriminately. It should, but given America's private history it probably won't even if some of the numbers in this Washington Post story end up becoming reality.

So although households earning $100,000 to $200,000 a year would save about $7,000 from the lower tax rates in the GOP plan, those savings would be swamped by eliminating major deductions, according to the report by the Democratically controlled congressional Joint Economic Committee.

The net result: Married couples in that income range would pay an additional $2,700 annually to the Internal Revenue Service, on top of the tax increases that are scheduled to hit every American household when the George W. Bush-era cuts expire at the end of the year.

Households earning more than $1 million a year, meanwhile, could see a net tax cut of about $300,000 annually.

“According to this report, while millionaires will receive a huge tax break, earners making under $200,000 will see their taxes rise significantly,” said Sen. Robert P. Casey Jr. (D-Pa.), who chairs the Joint Economic Committee.

If you read the whole article you'll see that the analysis is based on some assumptions about likely tax breaks for the wealthy and the elimination, or reduction, of certain tax breaks for the middle class. That's why there's a healthy dose of the unknown tied to the story, but given the past history of the parties involved some of those assumptions are likely accurate, and given the proclivity of the powers-that-be to rob from the middle to pay the very-rich it's a safe bet that those making less than $200k a year are looking down the barrel at a healthy screwing.

Here's a nice table to drive that point home:


Tax Expenditures – A Celebratory Post for CPA Liberation Day

In celebration of CPA Liberation Day I bring you a link to a column by two professors at the University of Pennsylvania's Wharton School about how we might think differently about tax deductions if we (properly) identified them as government spending:

Here’s a way to see through the fog. Instead of looking at all the breaks for mortgage interest, health care, retirement savings and so on as deductions, picture the government writing you a check for each item. This equivalence between tax deductions and government spending leads economists to call them “tax expenditures.” Reformers have hit on an even more pointed description: spending through the tax code.

The tax system is also equivalent to a collection of individual mandates, like the one in the Obama health-care law, with penalties for Americans who fail to buy insurance. For many people, that’s how our system works. You and your neighbor might have the same income, but if, unlike your neighbor, you fail to have a mortgage or buy as much health insurance, then you have to pay higher taxes…

Here’s our proposal: Let’s replace all tax expenditures with explicit subsidies — that is, with actual federal payments — so we can really see the costs and debate all spending programs on an equal footing. Doing so would help us answer crucial questions, such as whether we get more bang for our buck by subsidizing homeownership or by spending more on schools.

There’s one more payoff to getting rid of the myriad breaks hidden in our byzantine tax code: It will be a lot easier to get your taxes done before midnight.

Next Year’s Property Revaluation in Forsyth is Going to Be a Doozy

From Yes!Weekly's blog post on the proposed bond referendum that would pay for streetcars in Winston-Salem among other things:

Budget challenges faced by the city include an anticipated 11-percent decrease to the property tax base with revaluation next year, the loss of federal stimulus dollars for police salaries, increased fuel costs, and plans for the city to kick in more for employee salaries and healthcare benefits.

For all of these reasons, City Manager Lee Garrity told the city council’s finance committee this evening that he is recommending that there be no bond referendum this year.

“The latest numbers for the first quarter of this calendar year are very concerning,” he said. “Sales of houses are up, as you may have read, but the price versus assessed value is down. A house in Forsyth County right now on average is selling for 11 percent below tax value. What that means for us going into the year after next with the budget is pretty significant.” (Emphasis mine).

The last time we went through a revaluation in Forsyth we were in the midst of the financial meltdown and at the time I though revaluations would not accurately reflect the true value of a property because there hadn't been time for the sales comps to have an impact on the system. Literally nothing was selling at the time so the comps were all pre-meltdown, and thus I felt they were artificially inflated. Those comps are now in the system and as the city manager pointed out this revaluation is going to show a significant drop in values, which means that tax rates will be raised significantly.

Here's the funny thing – the size of the check each property owner will be sending is likely to be close to the same amount they sent this year. That's because from the city/county's perspective they need a certain amount of revenue to make their budget (note I'm not saying whether or not the budget itself is a good thing), so when property values go up the city council or county commission will leave the rate flat or even reduce it so they can say they reduced taxes. Obviously they didn't really reduce the dollars, just the tax rate. Nice, huh? When property values go down they have to raise the tax rate, but in reality the actual tax dollars isn't much at all compared to the previous budget year. That's when you'll hear the council members and commissioners talking about how they were able to minimize the tax dollars each property owner had to send them, not the increase in the tax rate. Actually, if you read the Yes! Weekly post you'll see that they're already doing this and who can blame them?

I've said it before and I'll say it again, I think the best way to do this is having an annual revaluation. It's the fairest system because it more accurately reflects property values at any given time, prevents property owners from seeing 10-20% changes in their property values all at once, and makes budgeting for the city and county a little steadier. 

Unintended Consequences

Most of us are familiar with the law of unintended consequences (for those of you who aren't, prohibition would be a good place to start your research) and this post at has me wondering if all those folks fighting Obamacare in the courts might have considered the unintended consequences if they win:

The only difference between the mandate and your common tax incentive is that Congress framed the incentive as a tax penalty instead of a tax break. I recognize there might be a legal difference between the two approaches that is beyond my comprehension. But the Court, Congress, and the public should understand that economically the two approaches are exactly the same…

A tax penalty and a tax incentive have the same economic impact on affected and unaffected individuals. They have the same effect on the goals the government is trying to achieve. They have the same effect on government revenues. It is possible, then, that they have the same effect on freedom and constitutional principles.

So armchair constitutional scholars should enjoy the show. But please excuse us economists if we tune out. Perhaps too blithely, we assume the mandate will be affirmed because the nation's leading legal gurus won't want to open up a can of worms that makes all tax incentives subject to constitutional challenge. If by chance the court does strike down the mandate, by all means give us a call. It could be the beginning of the end for all those complex and inefficient tax incentives we have been complaining about all these years.

So a question for you legal scholars out there: if the Supreme Court strikes down Obamacare is my wonderful deduction for mortgage interest soon to follow?

Not Exactly the 1099EZ

According to the this if you printed out GE's tax return it would be 57,000 pages:

In a November 28 letter to IRS Commissioner Douglas Shulman, Congressman Frank Wolf, a Republican from Virginia, wants to know how many hours IRS employees spent reviewing General Electric’s massive 2010 tax return and what it cost the taxpayers.

Wolf says that, according to an article on the Weekly Standard’s website, if printed out, GE’s 2010 electronic tax filing “would be the equivalent to 57,000 printed pages.” If those pages were stacked, they would stand more than 19 feet tall – 19 feet! (Now that’s a monster if ever I’ve heard of one.)

According to Wolf, “A return of this magnitude was clearly necessary to take advantage of every loophole and earmark in the tax code to avoid paying federal taxes.” (May I note that “every loophole and earmark” in the tax code was put there by the United States Congress.)

BTW, Rep. Wolf has one of the all time great lazy-man signatures. See it here.  Basically it looks like a hastily written "8".  I'm thinking of making mine "9" which should save me many hours over my remaining years…oh wait, I rarely sign anything.  Never mind.

NC Senator Co-Sponsoring “Repatriation Holiday” Bill

If you had to guess which North Carolina Senator, Republican Richard Burr or Democrat Kay Hagan, was co-sponsoring a bill with former Republican Presidential candidate John McCain that would provide a "tax holiday" for multinational firms which would you guess?  Of course it wouldn't be blog-worthy if it was Sen. Burr, so you'd be right if you guessed Sen. Hagan.  Over at Christopher Bergin isn't too happy about it:

Why am I worked up? Because tomorrow two Senators, Democrat Kay Hagan and Republican John McCain plan to introduce a bill they will call the Foreign Earnings Reinvestment Act to provide a repatriation holiday. They should really call it the Outrageous Grab Under False Pretenses Act…

Why? In part because the U.S. economy stinks and they see an opening, neatly laid out in WIN America's mission statement: "We have an opportunity right now to make a significant investment in our struggling economy, boost U.S. businesses, and help put people back to work." They urge that "Congress should pass legislation to offer an immediate reduction of taxation on income earned overseas by innovative American businesses to allow that money to be brought home and invested in the United States." 

Trust me, there's nothing innovative or new here. The Heritage report correctly points out that this proposed “sequel to a similar 2004 holiday would, like its predecessor, have a minuscule effect on domestic investment and thus have a minuscule effect on the U.S. economy and job creation." So, the idea is that you line the pockets of large corporations at a time when regular taxpayers are struggling to hold onto their jobs, their houses and their way of life.