Blake Seitz

Foxes Guard Hen House With New W-2 Reporting Requirement


Posted by Blake Seitz on Friday, August 3rd, 2012, 5:04 PM PERMALINK

This content is provided by the Americans for Tax Reform Foundation.

Tax Provision

The 2010 health care bill includes a requirement that employers report on each of their employees’ Form W-2s the cost of health insurance they sponsor on behalf of that employee. This requirement was made optional for tax year 2011 (when it officially went into effect), and will be optional for small businesses (those with fewer than 250 W-2s) in tax year 2012.

ATRF Analysis

The IRS has waived the W-2 reporting requirement for tax years 2011 and 2012 because of confusion surrounding the provision.

This is understandable, because employers usually use Form W-2 to report salary and wage payments to the IRS so that they can be withheld and taxed appropriately. In a changeup from the form’s usual function, the new reporting requirement does not levy a tax on employees’ health benefits. Instead, its stated justification is to convey to employees the value of their health insurance, and to identify taxpayers who run afoul of the Individual Mandate tax and 40% “Cadillac” tax on “comprehensive” health plans.

Taxpayers should be uncomfortable with the implications of the W-2 reporting requirement, which portends higher taxes in the future. Reporting the value of employees’ health benefits opens the door to new taxes on these benefits in the future.

Rapacious lawmakers and bureaucrats are always eager for new streams of revenue (which explains such absurdities as the death tax and tax on Olympic medals due to the U.S.'s “worldwide” system of taxation), so the W-2 reporting requirement for health benefits may prove a stalking horse for higher taxes.

There is little reason to trust these same revenue-grabbers with personal information about what is, as of yet, an untouched sphere of our financial freedom.

10 Year Cost to Taxpayers

Joint Committee on Taxation: Negligible Revenue Effect

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"Medicine Cabinet" Tax a Bitter Pill for Ordinary Americans


Posted by Blake Seitz on Friday, August 3rd, 2012, 11:34 AM PERMALINK

This content is provided by the Americans for Tax Reform Foundation.

Tax Provision

Section 9003 of the Patient Protection and Affordable Care Act changed the definition of “medical expenses” for Health Savings Accounts (HSAs), Archer Medical Savings Accounts (MSAs), health flexible spending arrangements, and health reimbursement arrangements to match that of the medical expenses deduction. Under the new definition, holders of account-based health plans will not be able to use pre-tax dollars to purchase over the counter (OTC) medications, unless they bear a prescription from a doctor. They will pay out of pocket for these products, and will not be able to deduct them come tax time. This provision went into effect in 2011.

ATRF Analysis

Account-based health plans are increasingly popular among consumers looking for more control over their health dollars. Such plans have experienced substantial growth since their inception in 2003. The Employee Benefit Research Institute found that enrollment in consumer-driven (account-based) health plans stood at 21 million in December of 2011 — 12% of the health care market.

And available data show that these enrollees are overwhelmingly middle-class. A 2009 study by America’s Health Insurance Plans, a trade group, utilized geo-coding techniques to develop a proxy of enrollee income level. The study found that 95% of HSA enrollees live in neighborhoods with median incomes below $100,000. This suggests that adverse rules changes to account-based health plans will hurt the middle class.

And hurt them they will. Millions of middle class enrollees will face a higher tax liability resulting from deductions disallowed, and will also pay significantly more to purchase everyday OTC medicine like aspirin, cough medicine, and decongestants. Competitive Enterprise Institute economist John Berlau stated in a blog post that the tax increase on these medicines “is an effective 40%.”

Commentators have taken to referring to the rules change for account-based health plans as the “medicine cabinet tax.” Iain Murray put it more bluntly: the rules change is “a tax on your colds and flus.” Whatever it is, it will increase the tax bill and health bill of ordinary Americans, and should be opposed.

10 Year Cost to Taxpayers

Joint Committee on Taxation: $5 billion

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Obamacare Hits Businesses with Punitive, 10% Tanning Tax


Posted by Blake Seitz on Thursday, August 2nd, 2012, 1:32 PM PERMALINK

This content is provided by the Americans for Tax Reform Foundation.

Tax Provision

The Excise Tax on Indoor Tanning Services, colloquially known as the “tanning tax,” imposes a 10% excise tax on ultraviolet tanning bed services. Tanning bed services included as part of a gym membership, and the sale of phototherapy treatments, spray tans and tanning lotions are exempt from the tax, which became effective on July 1, 2010.

ATRF Analysis

Few industries can absorb a 10 percent tax hit, which inevitably leads to higher prices and fewer customers. The indoor tanning industry is no exception.

A Northwestern University study found that, among Illinois tanning salons, 80 percent pass the full costs of the tax to their customers.

An estimated 19,000 tanning businesses (which employ 160,000 Americans) are subject to the tax. Besides the pages of jargon-filled, confounding regulations and quarterly reporting requirements businesses must wade through to comply with the tax, they are also being aggressively targeted by the IRS, which hired 81 agents to enforce the tax (cost to taxpayers: $11.5 million).

According to industry estimates, the majority of tanning facilities are owned by women.

The tanning tax is an example of a sumptuary, or “sin,” tax, designed to punish those who engage in activities the government deems “bad.” It is also a “luxury” tax, designed to soak a small, politically-vulnerable group of taxpayers for more government revenue.

Both of these policy rationales are contrary to a neutral (and just) tax system, which does not attempt to impose its concept of right or wrong through the tax code and which treats all taxpayers equally.

The tanning tax is a harmful ploy to fund the government’s new, $1.76 trillion health care leviathan. It negatively impacts small businesses, their many employees, and middle-income Americans.

10 Year Cost to Taxpayers

Joint Committee on Taxation: $2.7 billion

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$4 Billion Tax Hike Set to Shake Down States with No Income Tax


Posted by Blake Seitz on Wednesday, August 1st, 2012, 5:29 PM PERMALINK

This content is provided by the Americans for Tax Reform Foundation.

Current Law

Taxpayers who itemize their federal income tax returns have the choice to deduct either state and local income tax or state and local sales tax from their gross income. The amount of the sales tax deduction is determined by a taxpayer’s receipts from that taxable year, or else by an IRS table that dictates “standard” sales tax deductions.

Scheduled Changes

The deduction for state and local sales tax is set to expire at the end of calendar year 2012. The deduction for state and local income tax will remain in place.

ATRF Analysis

The state and local sales tax deduction is particularly valuable to residents of the seven states which do not levy an income tax (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming), for residents of the two states which levy a limited income tax (Tennessee and New Hampshire), and for taxpayers who make large purchases in a given taxable year.

Twenty-seven percent of Washington returns, for example, deduct sales tax from their federal income tax, a move that saved Washingtonians $1.8 million in 2009, for an average deduction of $2,100. Overall, 7% of all federal income tax returns claimed the sales tax deduction, for over $15 billion in tax relief — an average deduction of $1,500.

This is substantial tax relief, and its elimination would result in a massive tax hike on the shoulders of a relatively small number of taxpayers. It would disproportionately punish taxpayers who dwell in states with no income tax and who also itemize their deductions.

Although itemization is used most frequently by higher-income households, 67.3% of middle-income taxpayers (those with AGI between $50,000 and $100,000) itemize their deductions. The tax hike resulting from elimination of the sales tax deduction, then, will cut across all income levels to hit the middle class.

If Congress allows the sales tax deduction to expire, it will allow a geographically arbitrary, $4 billion tax hike on its constituents.

10 Year Cost to Taxpayers

Department of the Treasury: $4.1 billion

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Adopting Families to See Higher Tax Bill in 2013


Posted by Blake Seitz on Tuesday, July 31st, 2012, 3:23 PM PERMALINK

This content is provided by the Americans for Tax Reform Foundation.

Current Law

The adoption tax credit is designed to offset out-of-pocket expenses incurred during the adoption process. It is meant to make adoption an option for families whose finances may not otherwise permit it. The credit’s amount is a direct function of how much is paid in “reasonable and necessary” adoption expenses, up to the credit maximum. For 2011, the credit is worth up to $13,360, and is refundable (which means that filers with zero or negative tax liabilities can receive money from the credit). Families that adopt special-needs children are eligible for a “flat” credit, meaning they can receive the maximum credit even if they spend little on adoption. For 2011, the credit begins to phase out after $185,210 AGI, and is phased out completely after $225,210 AGI.

Scheduled Changes

In 2013, only families who adopt special-needs children will be eligible for the credit, which will be worth up to $6,000 (it will no longer be “flat). The credit will no longer be refundable, and its income phaseout range will be significantly reduced.

ATRF Analysis

The adoption tax credit is a large credit (the largest available to individual taxpayers) that fills a small niche in the tax code. It is claimed by relatively few filers: the IRS reports that in 2009 80,676 returns claimed the credit. Scheduled changes will shrink this constituency dramatically by excluding non-special needs adoptions (that is to say, most adoptions).

For families that adopt non-special needs children in 2013, this means upwards of $13,000 in disallowed deductions — a dollar-for-dollar increase in tax liability for the amount they lose in the credit. Families that adopt special needs children are not off the hook, either, as the lower credit amount ($6,000) will increase their tax burden by over $7,000.

One of the changes to the adoption tax credit is beneficial: the elimination of the credit’s refund mechanism (which, as the Child Tax Credit demonstrates, is a euphemism for spending through the tax code). The advantages of this change, however, are swamped by the overwhelming negative aspects of other changes — chiefly, the $5.5 billion tax hike that will fall on adopting families. And in any case, the refundable portion of the tax credit is not often invoked, for the simple reason that adoption is most common among families with means. Voice for Adoption, an advocacy group, reports on IRS data that show “two-thirds of the dollars that go to the credit” go to families that make over $75,000 per year.

There is considerable doubt about the effectiveness of the adoption tax credit in promoting domestic foster care adoptions. There should be little doubt, however, that allowing the current iteration of the credit to expire will constitute a sizable tax increase on those who make the bold decision to adopt a child.

10 Year Cost to Taxpayers

Department of the Treasury: $5.5 billion

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The Problem with PEP and Pease


Posted by Blake Seitz on Monday, July 30th, 2012, 9:07 AM PERMALINK

This content is provided by the Americans for Tax Reform Foundation.

Current Law

The Personal Exemption Phaseout (PEP) is a tax provision that cuts the value of a filer’s personal exemption by 2% for every $2,500 that the filer’s AGI exceeds a certain high-income threshold.

The Pease limitation is a provision that slashes a filer’s itemized deduction by 3% of the amount that the filer’s AGI exceeds a certain threshold. The limitation can strip away up to 80% of the value of a taxpayer’s itemized deductions.

The 2001 tax act disposed of the Personal Exemption Phaseout and Pease limitation gradually over half a decade beginning in 2006, so that both were eliminated by 2010.

Expiration

Both PEP and Pease will be reinstated when EGTRRA sunsets on January 1. For an unmarried filer, both provisions will kick in once AGI exceeds $174,450. That taxpayer’s personal exemption will be completely phased out after $296,950 of AGI.

ATRF Analysis

The PEP and Pease provisions are stealth tax increases on high-income earners, most of whom are net job creators.

As if the expiration of the 2001/2003 tax relief wasn’t bad enough, Pease will ratchet up the effective tax rates on ordinary income, capital gains, and dividends by an additional 1.2% if allowed back from the grave; the top effective rates for these taxes will become 40.8%, 25.0%, and 44.6%, respectively. To make matters worse, the Pease limitation will apply to the 95% of small businesses that file through their owners, constituting a 1.2% tax hike on small employers.

The Personal Exemption Phaseout serves to penalize success. The Pease limitation, for its part, penalizes individuals who qualify for deductions, such as those who contribute large sums of money to charity.

Indeed, the Pease limitation is considered a key provision by those who want to put a cap on certain deductions, especially the charitable deduction. Its reinstatement will discourage individuals with means from contributing to charity.

The Personal Exemption Phaseout and Pease limitation are nothing more than class warfare tax hikes that will soak $165 billion out of the private economy in ten years. They should be put to rest for good.

10-Year Cost to Taxpayers

U.S. Department of the Treasury (Pease): $123 billion
U.S. Department of the Treasury (PEP): $41.9 billion

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Changes to Child Tax Credit will Reduce Tax Relief, Gov't Spending


Posted by Blake Seitz on Friday, July 27th, 2012, 1:29 PM PERMALINK

This content is provided by the Americans for Tax Reform Foundation.

Current Law

The child tax credit was enacted in 1997 to reduce the tax burden of filers with children. It was expanded in the 2001 tax relief (EGTRRA) for ten years, and extended for an additional two years by the 2010 tax act (TRUIRJCA). The credit is currently worth $1,000 per child under the age of 17, subject to limits. The credit is reduced by $50 for every $1,000 that the filer’s AGI exceeds a certain threshold ($75,000 for heads of household and $110,000 for joint filers).

The credit has a “refundable” aspect as well, known as the additional child tax credit. The additional credit pays filers beyond their tax liabilities for the greater of 1) 15% of earned income over $3,000, or 2) the amount of payroll taxes not offset by the Earned Income Tax Credit (EITC) for households with three or more children.

Scheduled Changes

In 2013, the per-child value of the child tax credit will fall by half, to $500. The “additional,” refundable portion of the credit will be limited to strike the 15% provision stated above. Additionally, the child tax credit will only be available for Schedule I filers — AMT filers will not be able to claim the credit.

ATRF Analysis

There is an important distinction to be made between the child tax credit and its refundable provision, the additional child tax credit. The child tax credit is genuine tax relief — in 2009, it was claimed by 23.6 million filers to offset $28.4 billion in income taxes, for an average credit value of roughly $1,200. The expiration of this relief, most of which is claimed by lower- and middle-income taxpayers, should be fought.

The additional child tax credit, in most cases, cuts a check to its recipients, and can rightly be viewed as a spending program. The IRS dubs payments made through the additional credit “refunds,” but that is an abuse of the word’s ordinary usage, because the payments it refers to are made to filers with negative tax liabilities — they have paid nothing into the system which can be refunded. The additional child tax credit rivals its tax-relieving counterpart in scale: in 2009, it awarded 21.3 million recipients an average handout of roughly $1,270, for a total program cost of $27.2 billion. The additional credit is a spending program (indeed, the Treasury Department and other budget authorities score it for its outlay effects), and cannot be viewed as tax relief. Its broad 15% provision should be allowed to expire, to reduce spending.

One final note must be made concerning AMT filers, who will not be able to claim the child tax credit against their AMT liability. This seemingly minor change will affect countless taxpayers (most of them middle-income), and, because of the AMT’s perverse eligibility rules, will affect more taxpayers each year. It will potentially raise each AMT filer’s tax bill by thousands of dollars.

10 Year Revenue Effect

Department of the Treasury: $409.7 billion (of that amount, $213.3 billion are outlays, or “refunds”)

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EITC Changes a Bad Deal for Low-Income Taxpayers


Posted by Blake Seitz on Thursday, July 26th, 2012, 2:33 PM PERMALINK

This content is provided by the Americans for Tax Reform Foundation.

Current Law

The Earned Income Tax Credit is a refundable tax credit for low- and middle-income individuals and households. It was enacted as an assistance program that “rewarded work” by increasing in value as earned income increased. The credit begins to phase in with the first dollar of earned income, plateaus at the maximum credit value at a certain income level (depending on the filer’s number of dependents), and phases out slowly as more income is earned.

The current iteration of the EITC features a top rate of 45% of earned income (for couples with three or more dependents), for a maximum credit value of $5,891; for this group, the credit begins phase-out at $22,300 of earned income, and is completely phased out after $45,060 of earned income.

Scheduled Changes

In 2013, a number of provisions enacted in 2009 to change the EITC will expire. Most significantly,  families with three or more dependents will see the top rate for their credit decline from 45% to 40% of earned income. Additionally, the beginning point of the phase-out range for joint filers will be reduced by $3,000 (to $19,300), a “marriage penalty” will reemerge in the phase-out range, and filers with liability from the Alternative Minimum Tax (AMT) will be limited in their ability to claim EITC benefits.

ATRF Analysis

The EITC was designed in 1975 to cover the FICA taxes of lower-income people. It was created as an alternative to Milton Friedman’s Negative Income Tax, a proposal to replace the welfare state with a simple system of cash assistance for the poor (Friedman, for his part, opposed the EITC, because it supplemented the existing welfare bureaucracy instead of replacing it). Within ten years of the credit’s creation, its tax-relieving intent was swamped by a new purpose: to provide welfare through the tax code by empowering the IRS to cut checks to workers with negative tax liabilities.

That said, much of the EITC’s benefits cannot be accurately characterized as tax relief — rather, it is social spending. According to 2009 data from the IRS, $54 billion of EITC benefits were cash supplements (“refunds,” according to the IRS, although it’s unclear what is being refunded), while only $5.3 billion served as tax relief, or an offset to existing tax liability.

The changes set to occur in 2013 will reduce tax relief in the EITC substantially — by $26.5 billion over ten years. This amounts to an effective tax increase of $2.65 billion per year, whittling away the EITC’s actual tax relief by roughly half. A special burden will be placed on AMT filers (many of them middle-income, due to bracket creep), who will no longer be able to claim the EITC against their AMT liability.

To contrast, the 2013 changes will only reduce EITC social spending (outlays) by $14.0 billion in ten years — a positive step towards lower government spending, but a drop in the bucket compared to the EITC’s outlays over that same period.

Scheduled changes to the EITC will reduce legitimate tax relief, while making only a small dent in government spending through the tax code. On net, this is a major loss for taxpayers.

10 Year Cost to Taxpayers

Department of the Treasury: $40.5 billion (of that amount, $14.0 billion are outlays, or “refunds”)

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The American Opportunity Credit: Relief for the Many, Handouts for the Few


Posted by Blake Seitz on Tuesday, July 24th, 2012, 10:52 AM PERMALINK

This content is provided by the Americans for Tax Reform Foundation.

Current Law

A number of tax credits on the books today are deemed “refundable,” because they can reduce filers’ tax liabilities below zero (when this occurs, the IRS sends the filer a check, rather than the other way around).

One such refundable provision is the American Opportunity tax credit (AOTC), enacted as a temporary measure under the 2009 stimulus. The AOTC, modeled after the earlier Hope Scholarship and Lifetime Learning credits, is a four year, dollar-for-dollar tax reduction of up to $2,500 for the first $4,000 in eligible educational expenses (tuition, fees, course-related supplies, etc.). Up to 40% of the credit ($1,000) is refundable. The credit is reduced for taxpayers with AGI in excess of $80,000 ($160,000 for joint filers), so that it is fully phased out for filers with AGI $90,000 or above ($180,000, jointly).

Scheduled Change

The American Opportunity tax credit will expire on January 1, 2013 — Taxmageddon. Many of its recipients will receive in its place the Hope Scholarship credit, a nonrefundable credit with stricter income requirements that is worth up to $1,800 for two years of qualified educational expenses.

ATRF Analysis

The American Opportunity tax credit is a tricky subject, due mostly to its status as a refundable tax credit. Refundable credits, when they result in negative tax liabilities, can rightly be viewed as increasing government spending — “spending in the tax code,” as it were.

According to reports by the Congressional Research Service (CRS) and Treasury Department, the AOTC doled out just shy of $4 billion in “refunds” (read, handouts) in 2009, for an average refund of $800. Of that amount, CRS found, an estimated 11.5% went to recipients with AGI over $50,000; $100 million went to recipients with incomes greater than $75,000.

Eligibility and reporting requirements for the AOTC are notoriously convoluted as well, which has shut out deserving applicants while providing benefits to ineligible filers. In 2011, the Treasury Inspector General of Tax Administration (TIGTA) found that 2.1 million AOTC recipients may have received $3.2 billion in “erroneous education credits.” Of those claimed, 84,754 students did not have a valid Social Security number, and 250 “students” were incarcerated.

These statistics illustrate just a few of the problems with “Santa Claus” provisions like the AOTC. Too often, refundable credits turn into welfare programs for the well-off. And because these programs do not technically count as spending, they often metastasize without the knowledge of those who foot the bill — real taxpayers.

Expiration of the AOTC will eliminate a fair bit of spending in the tax code, but it will also deny up to $5,000 in actual tax relief to many filers. “Refund” recipients make up just over a third of those who receive the AOTC, which means the other two thirds (eight million students and their families) may see higher tax burdens because of the credit’s expiration.

The AOTC, then, is a mixed bag, and its expiration will produce mixed results. The correct response to its expiration is to salvage its tax relieving components, while scrapping its spending components.

10 Year Revenue Effect

Department of the Treasury: $137.4 billion (of that amount, $62.3 billion are outlays, or “refunds”)

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Bye Bye, Bonus Depreciation


Posted by Blake Seitz on Monday, July 23rd, 2012, 11:38 AM PERMALINK

This content is provided by the Americans for Tax Reform Foundation.

Current Law

Over the past decade, Congress has enacted a number of provisions that allow businesses to subtract a portion of the costs of their capital purchases from taxable income.

One important provision, first introduced in 2002, is first-year “bonus” depreciation, which allows businesses to write off a certain percentage of the cost of “qualifying property” (assets like vehicles and specialty manufacturing equipment which have a depreciable life-span of less than twenty years) from their taxable income.

Businesses have enjoyed a bonus depreciation rate of 100% since 2010, the highest rate since its enactment (in 2002, the rate was 30%).

Another provision is the Section 179 deduction, which was enacted in the 2003 tax relief. Section 179 is similar to bonus depreciation, but is tailored specifically to give small businesses a boost. For the latest applicable tax year, small and medium sized businesses which purchased less than $2,000,000 in new or used equipment could write off up to $500,000 from their taxable income through Section 179.

Scheduled Changes

On Taxmageddon, 50% bonus depreciation will vanish, and Section 179 will be drastically diminished in value (the phaseout threshold will plummet by $1,800,000 to $200,000; the maximum deduction will nosedive $475,000, to a paltry $25,000). The bonus depreciation and the deductions disallowed by the Section 179 change will be replaced by the Modified Accelerated Cost Recovery System (MACRS), a depreciation schedule that forces businesses to write off the cost of capital purchases over the course of many years (up to 39, in the case of non-residential, “real” property). MACRS is currently used to depreciate assets not covered under the favorable bonus depreciation and Section 179 provisions.
  
ATRF Analysis

The Congressional Budget Office projects that corporate tax receipts will double relative to GDP in the near future, with some of the blame falling on the scheduled expiration of favorable depreciation rules — a roundabout tax hike resulting from deductions disallowed to business.

This tax hike will cost expanding small businesses tens of thousands of dollars every year; it will cost capital-intensive corporations hundreds of millions: when bonus depreciation reached a golden 100% in 2010, the Union Pacific Railroad Co. was able to save $450 million in taxes in a single year.

That same year, it was reported that the effective corporate federal tax rate had fallen to 12.1% of domestic profits, well below the twenty year average of 25.6%. A small percentage of this development (0.4%) was attributed to bonus depreciation, which has time and again proven a minor buffer against America’s growth-hostile corporate income tax, which is the highest in the developed world.

Bonus depreciation and Section 179 are valuable because they reduce the tax hurdle businesses face when considering new investments. The provisions incentivize consumption, which both stimulates the economy and modernizes the private sector’s capital stock. Allowing this stealth tax hike to take effect will hamstring U.S. businesses at a time when the economy cannot afford it.

10 Year Cost to Taxpayers

Department of the Treasury: $87.8 billion

This content is provided by the Americans for Tax Reform Foundation. To donate to ATRF, click here.

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