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“The Revolution is Just a Tax Change Away”

Thomson Reuters David Brunori

David Brunori is a regular contributor to Checkpoint State & Local Tax news. David is a partner at Quarles & Brady and a professor at The George Washington University. The views expressed in his articles are his own and should not be construed otherwise or as legal advice. He can be reached at david.brunori@quarles.com.

I read on the always true Internet that there is a dramatic rise in the number of communist clubs in American high schools. Some of these clubs are on the Upper East Side where students measure poverty by the number of ski vacations in Switzerland one takes. In rich Northern Virginia where I live, there has been a noticeable uptick in the number of young people sporting Che Guevara t-shirts. Nothing says I love the poor like wearing the face of a murderous thug.

But it's not only the youth of America that is waiting for the great leap forward. Many politicians are trying to even things up between the rich and the poor through the tax laws. In the past couple of weeks I have been asked by legislators and staffers in four states about the pros and cons of tying corporate tax rates to CEO pay. There are no pros. I have written about this before in the context of Portland, Oregon. Portland imposes an income excise tax of 10% on publicly traded companies if the CEO–average worker pay ratio is 100-1. But that tax increases to 25%, if the ratio is 250-1. To a friend I jokingly called the city, the “Peoples Republic of Portland.” She said many in the city wear that moniker proudly.

The goal, of course, is to level the playing field. They want to use the tax code to have corporate America pay its executives less and the workers more. Legislators in Minnesota, Massachusetts, Rhode Island, Connecticut, and Illinois have proposed laws that will tax corporations who pay their CEOs and other executives too much. Legislators in Maine, Pennsylvania, Oregon, New Jersey, Maryland, and New York have been thinking about it.

From a sound tax policy perspective, such laws are terrible. Ideally, the tax laws should minimize economic distortions. All taxes affect markets of course. But the goal should be to minimize those effects. The CEO pay laws are designed to directly change economic decisions. The pay of a CEO should be up to the owners (shareholders) of the company. Despite the “shock” to learn that some CEOs make a lot of money, the market works. Who decides how much pay is too much pay? Proponents of such taxes believe that politicians can actually efficiently set the price of a CEO. They can't.

I know that where the politics of envy rule, rich CEOs who run successful companies are targets. But think slippery slope. Many folks think professional athletes make too much. The highest paid NBA players earn $25 million a year. We could place an excise tax on the teams to lower the salaries. Of course, then the owners will make more. Actually, I think we should put an excise tax on baseball teams who charge too much for tickets. Some think doctors make too much. Others think lawyers make too much (they don't by the way). But you see the problem.

Zapping the Zappers

I have long been intrigued by the zappers. Zappers, of course, are software designed to create false sales records. Usually, they create the impression that you collected far less tax than you actually did. Vendors use those records to remit less tax to the state. So the buyer pays the vendor $10 in sales tax. The vendor uses the zapper to show it only received $5. The vendor uses the zapper to steal $5 from the state.

Let's be clear. There is no reason for zapper software other than to cheat and steal. We should collectively be cheering on the departments of revenue and attorneys general that are going after vendors using the software. Connecticut recently charged a restaurant owner for using the zapper to avoid remitting $80,000 in sales taxes. We should say bravo to the Department of Revenue Services.

Nothing should drive honest taxpayers crazy like cheaters. Liberals should hate them because they take money away from government services. Conservatives should hate them because they make burdens go up for everyone.

Worth Reading

My friends at the Tax Foundation have issued another report on sales tax holidays. This year 16 states will have them (down from a high of 19 in 2010). The Foundation gets this issue right as they do most tax policy issues. But maybe I am biased because the Foundation has been citing an article I wrote back in 2001 where I called sales tax holidays dumber than a bag of hammers. Sales tax holidays don't really help anyone other than those who lobby for sales tax holidays. They hurt the states, don't save consumers money, and honestly don't even help most retailers. You can find the report at taxfoundation.org. Well worth the read.

Foxconn is Going to Wisconsin

A lot of folks seemed to be sitting on the edge of their seats waiting to see where Foxconn was going to open its new plant in the United States. I must admit after 25 years I am way bored writing about tax incentives. Honestly, it would be better if the system was such that states did not need to offer incentives and companies did not need to ask. But as I have said a thousand times, if a state is offering incentives, a rational company has to take them. It would be dumb not to. Foxconn will receive $3 billion in tax breaks for investing in badger land. The 3,000 new jobs (and maybe as many as 13,000) will benefit Wisconsin. The $30 billion investment will benefit Wisconsin. If it goes as planned, Wisconsin will be better off. Most of the incentives are for corporate taxes–which I think should be repealed anyway. If incentives are inevitable, perhaps the right policy outcome should be to make sure they are fair and administrable. I would love to hear from readers on this issue.

Bad Idea of the Week (or Maybe the Year)

Everybody Loves Raymond but hates the property tax. Politicians are always trying to provide property tax relief even when it makes no sense from a policy perspective. I admit that I am a pro-property tax guy. I think the tax is ideal for paying for local government services. Unfortunately not everyone agrees with me (or most public finance experts).

In Texas, there is a bill (H285) that would repeal the property tax that is used to finance public schools. To pay for the repeal, the proposed law would increase the state sales tax rate from 6.25% to a whopping 12%.

This tax swap is a bad idea for Texas. Despite the public's historic dislike of the property tax, it remains a good way to pay for schools. Doubling the sales tax however will be bad for consumers–particularly the poor. I am not sure if the sponsors know that the sales tax is regressive. Doubling the burden will make it more so. But the swap is bad for business. When you tax something you get less of it. Doubling the sales tax will crush retail sales. It is a terrible idea.

Okay, This Idea is Worse

I must have received 20 emails about this. One asked me if the legislators were drunk. I would like to blame the bourbon. Eventually you sober up. A group of Kentucky legislators introduced a spate of tax ideas for next session. Almost all of them are bad.

Basically, they would like to adopt a throwback rule, combined reporting, tax haven legislation, higher taxes on limited liability companies (LLCs), a reinstated estate tax, higher cigarette taxes, and, higher taxes on wealthy taxpayers. Why not just put a big sign up that says: “if you have money or would like to start a business consider Tennessee.” All of these ideas are plainly wrong from a policy perspective. From an economic development perspective, Kentucky should consider being more like Tennessee.

Trivia

A reader sent me a note saying he loved the trivia—and that he guessed it was the most read part of my column. Thanks. I think. I was going to ask you to name the only two Major League Baseball (MLB) players to have 100 hits from both sides of the plate in one season. Then I remembered this is a tax publication. So back to sales tax holidays. Which state first enacted a sales tax holiday? First person to write me with the answer will receive a limited edition Sales Tax Policy book. All the cool kids are reading it.


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Originally published in Thomson Reuters and is reproduced here with permission, August 7, 2017