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Florida’s 19th Special House Election: A Budgetary Guide
Posted By: Dan Barrett - 06/20/14

In what some are calling a quiet election, there’s still a lot to be said. Though the challenges of taking drug tests have largely been replaced with who can help create the most jobs in the next five months, before the next election for the same office, Florida residents are asking the same questions of candidates as they did in Florida’s other recent special House election: What will you do in Washington, D.C.? Especially in the wake of their last Congressman, Trey Radel, who resigned after being arrested for possession of cocaine.

In just a couple of short months, three front runners have emerged to battle for the 19th District’s seat: businessman Curt Clawson (R), businesswoman and former political activist April Freeman (D), and former health worker Ray Netherwood (L). Each candidate offers different general solutions to America’s fiscal ills but details have yet to come out about how each would actually change the federal budget. However, by using a methodology similar to National Taxpayers Union Foundation’s (NTUF) BillTally project, taxpayers can see where the candidates stand on at least some of the spending issues. For this brief study, we took direct quotes and campaign materials of candidates and matched them with budget and legislative data to see exactly what the differences and similarities are.

Similar to the New Jersey Special Senate and Florida’s 13th Special House elections, details were few and far between. Even with the campaigns releasing economic plans and platform summaries, we’re still left asking what will they do if elected as the House of Representative’s newest member?

Check out the entire line-by-line analysis of all three candidates. As with NTUF’s other BillTally and campaign studies, only changes in current spending are recorded (similar to the Congressional Budget Office). The reports do not include changes in revenues or costs outside the federal government. Below are summaries of each candidates’ proposals.

Curt Clawson (R) has proposed two (out of 12) quantifiable policies that NTUF was able to score. Combined, they would decrease annual spending by $395.8 billion. The largest budget-influencing item that he supports would cap federal expenditures at 19 percent of GDP, which would be implemented using the “Penny Plan,” which would cut spending by one percent each year as long as the budget is not balanced.

  • Block Grant Education Funds to States: Unknown
  • Continue Federal Flood Insurance Rates: Unknown
  • Create a Budget Cutting Committee: Unknown
  • Freeze Federal Employment: Unknown
  • Limit Federal Spending: $331.9 billion (savings)
  • Require Congressional Approval for Major Regulations: Unknown
  • Block Grant Medicaid Funds to States: Unknown
  • Eliminate Government Health Care Bureaucrats: Unknown
  • Protect Health Insurance Access for those with Pre-Existing Conditions: Unknown
  • Provide for Health Care Plans and Accounts: Unknown
  • Repeal the Patient Protection and Affordable Care Act: $63.9 billion
  • Restore Medicaid Advantage Funding: Unknown

April Freeman (D) has two (out of 12) policy items that NTUF could fiscally score. Together, they would increase spending by $20.203 billion each year for the next five years. Her largest quantifiable proposal would overhaul the immigration system.

  • Ensure Wage Equality: $3 million
  • Support Domestic Industries: Unknown
  • Support Teachers: Unknown
  • Ban Hydraulic Fracturing: Unknown
  • Expand Alternative Energy Sources: Unknown
  • Fully Fund Water Infrastructure Improvements: Unknown
  • Fight Human Trafficking: Unknown
  • Pass Immigration Reform: $20.2 billion
  • Protect Citizens’ Privacy: Unknown
  • Secure the Border: Unknown
  • Normalize Relations with Cuba: Unknown
  • Ensure Veterans’ Benefits: Unknown

Ray Netherwood (L) had one proposal that NTUF could identify. It would be to replace the current income-based tax system with a national sales tax, known as the Fair Tax. The measure would cut an average $19 billion in federal outlays for each of the next five years.

Normally, there would be some overlap between the candidates’ platforms. In the other Florida Special Election, the front runners supported increasing current spending by $180 million per year to delay a scheduled rate increase for the National Flood Insurance Program. That was not the case in this House race, although the three candidates were not asked similar questions when interviewed by the same source.

What does this mean for taxpayers and residents of the 19th District? It’s time for the campaigns to give Americans more details. While candidates are asking Floridians for their vote, taxpayers are asking for the roadmap of each candidate’s path to reach a better and expanding economy. As highlighted above and in the full report, the absence of budgetary facts and figures opens the possibility that all of the candidates could have much larger or smaller spending aspirations in mind. Clawson, Freeman, or Netherwood need only clarify their intentions with dollar figures to help complete this report and help educate Americans on important and pressing issues that we’re all facing.

Note: National Taxpayers Union Foundation is a 501(c)3 nonprofit organization. Our research efforts are intended only to educate Americans on how their tax dollars are being or will be spent by those in office, seeking office, or in appointed positions. For more information on NTUF go here.

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Permanent Internet Tax Freedom Act Moves Ahead
Posted By: Michael Liguori - 06/20/14

Wednesday, the House Judiciary Committee passed the Permanent Internet Tax Freedom Act (PITFA), and there is plenty of reason for the American taxpayer to get excited. Congress has previously held a temporary moratorium on Internet access taxes. This bill sets that moratorium in stone, ensuring that burdensome state and local taxes don’t create a fiscal hurdle for engaging in the one of the fastest-growing, most productive parts of our economy and culture. Taxes on a resource like the Internet are not only a tax on free speech and communication, but a tax on an educational and economic resource that all Americans can access.

NTU Vice President of Government Affairs, Brandon Arnold recently wrote a letter to Congress in support of this admirable piece of legislation:

Any nation seeking to remain technologically and economically competitive should not punish the very citizens who are reaching out into the digital realm, especially by levying charges that are unlikely to have anything to do with bettering Internet service. Taxpayers need long-term protection from state and local authorities seeking to add taxes to the various routes consumers use to access the Internet, and this bill would provide such safeguards.

NTU urges lawmakers to bring PITFA to the House floor for a full vote immediately, as removing the uncertainty of Internet taxation would create a boon for both consumers and investors. However, it is important that other unrelated tax bills aren’t tacked on. One particularly concerning piece of legislation that has been lurking in the shadows is the Marketplace Fairness Act. This bill  would allow states governments to collect sales taxes from out-of-state businesses. This would increase costs for businesses, prices for consumers, and allow states to discriminate between one online business and another. In a commentary piece, NTU’s Nan Swift debunks some of the worst myths about this harmful piece of legislation.

National Taxpayers Union supports laws that encourage free enterprise and minimize unnecessary government burdens. PITFA is an excellent step toward this ideal, and we hope that legislators vote “yes” and a clean bill and avoid potential pitfalls, like the disastrous Marketplace Fairness Act.

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In New Jersey, 76ers Come First, Taxpayers Second
Posted By: Melodie Bowler - 06/18/14

Various ideas are cropping up in the New Jersey legislature to close the looming $2.7 billion budget gap for fiscal year 2015, and Governor Christie has had to cut pension payments to pay for this year’s $800 million shortfall. Despite these fiscal woes, the state has approved an $82 million gift (paid in yearly $8.2 million installments) for the Philadelphia 76ers basketball team to build a training facility in Camden. While legislators debate raising income taxes on millionaires and an e-cigarette tax, Governor Chris Christie lauded the 76ers decision, which he believes will bring “additional revenue and other things and business for the city of Camden.” The New Jersey Economic Development Authority voted unanimously in favor of the grant, given their authority by the Economic Opportunity Act of 2013.

Local politicians believe the construction of the training facility will boost the economy in Camden, where unemployment continues to soar above national rates at 16 percent. For $82 million, the 76ers facility will bring only about 250 jobs to Camden, 200 of which are already filled by players and current members of their staff, according to reports. Still, Governor Christie and Camden’s own representatives believe that the facility will revitalize the area, bringing in new businesses to meet the demands of people visiting and working in the facility. Camden Mayor Dana L. Redd asserts, “The ancillary services that are going to be needed provide a great opportunity for small businesses, to reap rewards. There's going to be a spill-over effect."

Based on the area’s current attractions, however, a spill-over effect seems unlikely. The 76ers’ training facility will be built at the Camden waterfront, a long-time local attraction. At the waterfront currently sits the Adventure Aquarium and Susquehanna Bank Center, along with the Battleship New Jersey and the Camden Children’s Garden. Despite the jobs these brought to Camden when they were first built, the existing attractions have done little to improve economic growth in the area. The state currently predicts the deal will bring in $76.6 million in benefits over 35 years. In the end, New Jersey will give the Sixers an $8.2 million per year tax cut, only to see approximately $2.19 million per year in net benefits. Next time, before catering to a multi-million dollar franchise, perhaps Governor Christie should give his own heavily-taxed constituents a break.

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IRS Targets the Long Departed for Peanuts, Ignores the Living for Billions
Posted By: Dan Barrett - 06/03/14

If you didn’t like the 2008 Farm Bill before, get ready for an IRS-sized dose of malarkey. The massive bill, officially enacted to support farmers but in reality does more to benefit the billion-dollar agribusiness industry, has paved the way for the IRS to come after your tax refund, even if you have good standing with Uncle Sam. According to the Washington Post, Congress’ enacted Farm Bill repealed a statute of limitations on old debts owed to the feds. Historically, this statute prevented the Treasury Department from coming after debtors after ten years.  Now, taxpayers across the country are seeing the effects and the government aims to get $1.1 billion.

The article mentions one woman who suddenly had no tax return because the IRS determined that her family was overpaid for her father’s death benefits, which had been paid out since 1960. IRS officials are not sure specifically who was overpaid so they chose her to make up the difference. In all, the IRS has collected $424 million in “new” debt, i.e. debt that has only recently been available to collect in the wake of the statute’s repeal. Yet, this new tactic is not limited to the IRS. The Social Security Administration is now working to get benefits from nearly 400,000 taxpayers, totaling some $714 million.

What does the IRS have to say? “... [W]e understand the importance of ensuring that debtors are treated fairly.” Perhaps the agency should clarify what it means by “fairly” when many taxpayers have received no notice of the actions taken against them. The same woman mentioned above was apparently sent a notice from Social Security but to an address she had in the late 1970s. Generally, the IRS suggests that you keep tax documents for three years, so the accused are depending on the government to produce evidence from their records. It seems that Social Security’s records are often incomplete, making it difficult to contest officials’ claims.

So, to reiterate: a bill presumably designed to protect the agriculture industry included a new power enabling federal officials to take money from Americans who may have indirectly benefited from a payout beyond ten years ago; BUT, those officials don’t really have the records to back up their claims.

There are a few takeaways from this:

  • Taxpayers are paying for massive benefits programs that can’t accurately keep track of payouts (the initial problem).
  • Congress passed a law that included a provision that now permits agencies to take Americans’ money seemingly at will, and with little proof.
  • The IRS and Social Security are expending new efforts (with added administrative costs) to recover about $1.1 billion.
  • Tax collectors have decided that this method is better than the alternatives.

What are the alternatives? Quite a few, but let’s look at two. One would address the core problem and one would be a more fair way to get outstanding debt.

If Americans had a simpler tax system, one which didn’t take 6.4 billion hours and $192.6 billion to comply with, some of these errors and inefficiencies would go away. Some proposals would try to cut down on the number of exemptions and deductions one can take, resulting in a more streamlined and less error-prone tax bill. Others take further steps to reform the entire system in the hopes of making tax preparations a mere inconvenience, instead of a heavy burden. NTU Foundation has examined some of these proposals, including the flat tax and the Fair Tax, many of which would reduce federal spending in addition to less time and money spent by taxpayers.

Another option is to change who the government goes after for outstanding debt. Instead of targeting debt that is decades old, IRS and Social Security investigators could shift their focus to those who are alive and kicking. One easy place to start is inside the government itself. According to a handy chart on Don’t Mess With Taxes, the government could recover $3.3 billion in back taxes (that’s 65 percent more than what is being collected in old debt AND it would be from the debtors themselves, not relatives who had no say in the matter).

If legislators should take just one lesson from all of this (and I know that’s asking a lot), it is to write bills that are simple, succinct, and single-issue focused. Taxpayers are on the receiving end of these bloated Acts that put more complexity in the Tax Code. This is also not a wholly partisan issue. As Republicans rally against the Affordable Care Act and the Dodd-Frank Wall Street reforms, Democrats are pitching fits over the Farm Bill and Defense Authorization, all of which are putting taxpayers on the hook for more when they are in need of less.

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When It Comes to Foreign Investment, Sales Pitch Should be to Congress
Posted By: Nan Swift - 05/20/14

Marketplace reports that President Obama is meeting with business executives today to pitch investment in the U.S.:

Last year, foreign investment in the U.S. was roughly $193 billion -- down from its peak of $310 billion in 2008.

Dartmouth’s Matthew Slaughter says the U.S. attracts investments from foreign companies by telling executives that the U.S. is "the most innovative, open, largest economy on the planet.”

But Slaughter says many foreign company leaders respond by saying growth in the U.S. has slowed compared to developing countries like China, not to mention an aging infrastructure, complicated immigration system and high corporate taxes.

Slaughter does a good job summing up the problem, however, in the past six years our infrastructure hasn’t aged a great deal and the immigration system hasn’t grown significantly more complicated.  While those things don’t help, what is hurting the most is our high corporate tax rate. For the past two years running, the U.S. has had the highest corporate tax rate among industrialized economies and the effects are clearly taking a toll. This problem continues to worsen as more and more countries cut their rate each year.

As NTU has noted again, and again, and again, the best way to declare the U.S. open for business is to lower the corporate tax rate and pursue other reforms, such as rolling back burdensome regulations, making our business climate competitive once again.  Before President Obama sits down with global investors, he should first sit down with the legislators on Capitol Hill who need to act before the U.S. falls further behind.

 

 

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In the Battle for Tax Extenders, "It's Complicated"
Posted By: Nan Swift - 05/19/14

Just a few days ago, GOP Members of the Senate voted to block the EXPIRE Act, offered as a substitute amendment to  H.R. 3474, over Senate Majority Leader Harry Reid’s (D-NV) repeated refusal to consider amendments to the legislation. The same problem shut down debate of the Portman-Shaheen energy efficiency legislation last week. 

Even before Reid once again hijacked the Senate’s normal order, the EXPIRE Act’s future was anything but certain. The bill comprised a two-year extension of 55 tax credits, deductions, and other tax policies, most of which recently expired at the end of 2013. These tax provisions, often referred to as “extenders,” are a complex issue to discuss. Not surprisingly, those within the conservative movement have a variety of perspectives on this matter, centering on the true nature of a tax credit, what constitutes a “good” or “bad” tax extender, and whether or not the bill’s broad-based, pro-growth provisions outweigh its less beneficial elements .

These differences of opinion were evident earlier last week with Club for Growth and Heritage Action holding one view and Americans for Tax Reform (ATR) another.  That these venerable free-market institutions – who agree on many other issues – should come to such different conclusions is a good illustration of just how much remains to be sorted out among people of good will.

The Club for Growth and Heritage Action’s vote alerts focused on the fact that the EXPIRE Act is packed with tax provisions that benefit only a narrow part of the economy, distort markets, and prop up otherwise unprofitable industries, such as the notorious Wind Production Tax credit. Heritage explained:

The Senate’s tax extenders — and indeed the entire process surrounding the extension of expiring tax provisions — is one of the most egregious examples of Washington using its powers to prop up well connected interests.

For example, the Senate package includes over a dozen targeted tax provisions aimed at energy production, most of which are geared toward so-called green energy.  According to the Heritage Foundation, Congress designed many of the provisions to “artificially tilt the energy market in    the direction of certain renewable sources or reward certain taxpayers for behaving how the government would like them to.”  Others are “narrowly tailored so only certain industries can    benefit, which is unfair.”

In light of preferential tax policies directed toward likes of NASCAR and horse racing, it’s easy to see why taxpayers should be outraged at such an obvious manipulation of the tax code on behalf of favored industries. At the same time, as ATR’s supportive vote alert  argued:

Some tax provisions should not return – the wind production tax credit springs to mind, but there are a number of others. However, these are more than balanced out by extremely important tax relief provisions which must not be lost from the code.

The vote alert went to great lengths to differentiate between good and bad provisions, highlighting the fact that “many conservatives have been deeply confused on this distinction,” before finally warning that “the mandate for the Senate is clear: do no harm.”

The Tax Foundation  did not take a position on the EXPIRE Act, but it added further nuances to the debate as it carefully laid out the case for good and bad tax extenders in this article:

Often, Congress keeps all of the extenders – which includes a whole slew of tax breaks for individuals and businesses – but they shouldn’t. Many of the 55 expired provisions are economically distortive, encouraging some economic activities over others. In fact, there are only a small few that should be kept in order to make the tax code more neutral by mitigating the tax code’s biases against savings and investment.

And here the Tax Foundation delineated the “cost” of each provision, bringing to light to another major complicating factor in the tax extenders fight.  While some repeatedly reference the “cost” of a particular tax credit, others argued that these provisions are effectively already on the books and thus, did not reduce anticipated tax revenue. Due to the perceived “cost” of the tax credits, the EXPIRE Act also contained other revenue raisers to “offset” the extenders. The Heritage Foundation did a good job of explaining the problem:

… the Congressional Budget Office incorrectly scores an extension of previously-enacted tax cuts as if they were wholly new tax cuts. Under budgeting rules it follows, this means Congress must cut spending or raise other taxes to avoid “adding” to the deficit.

But reviving once again a repeatedly-extended tax policy is not a tax cut. These policies have been in place for years, some — such as the Research and Experimentation (R&E) Credit — for three decades. If they expire, taxes will rise on those taxpayers who use them. Extending them merely prevents a tax increase, so there is no need to offset their “cost.”

While it will be hard to ever completely reconcile these very thoughtful perspectives, what all free market advocates can agree on is the need for fundamental, comprehensive tax reform, in particular a lower corporate tax rate.

Despite earnest attempts to jump-start such a discussion, that day is still a long way off. However, in the meantime, the House has taken a good approach toward the extenders problem by bringing the provisions up in a piecemeal fashion that will allow them to pass or fail based on their specific merits. Such was the case earlier this month with a bill to make permanent the research and development tax credit that NTU supported here. This also avoids the log-rolling of the Senate’s EXPIRE Act package while keeping some of the more voracious special interests at bay.

The best prospect for taxpayers to emerge from this extenders fight with a win is to urge the House to stay the course and when it comes up again, encourage your Senators to insist on good amendments to the EXPIRE Act that would remove some of its narrowly tailored and economically dubious tax provisions with an eye toward across-the-board rate reductions. Still, one thing is for certain: without real reforms to make good policies permanent, we’ll be haggling over the minutiae of tax extenders again soon.

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The First Missouri Income Tax Cut in Nearly 100 Years
Posted By: Lee Schalk - 05/07/14

For the first time in almost a century, Missourians will see their income tax reduced.

It’s not every day that a state legislature defies its governor in the name of pro-growth income tax reductions. But that’s exactly what happened in the Show Me State this week thanks to votes of 109-46 in the House and 23-8 in the Senate to override a veto by Governor Jay Nixon.

Last year, in a similar scenario, lawmakers were unable to buck Nixon’s rejection of income tax cuts. This time around, Republican lawmakers and a single Democrat stuck together to make income tax relief a reality.

With SB 509 in place, income taxes for hardworking Missourians will be lowered by $620 million annually, starting in 2017, and small business owners will benefit from a 25 percent tax cut. Additionally, taxpayers making less than $20,000 annually will receive an extra $500 personal exemption.

By gradually lowering the top income tax rate to 5.5 percent, lawmakers have created a more competitive tax climate amongst neighboring states such as Kansas and Oklahoma, where top marginal rates are 4.9 and 5.25 percent, respectively.

SB 509 is not on par with North Carolina’s tax reform; however, the bill represents a step in the right direction that will allow taxpayers to keep more of their hard-earned money to spend, save, or invest. And by lightening the tax load on small businesses, entrepreneurs will have additional resources to create jobs and expand operations. This historic tax cut package is truly a victory for the people of Missouri.

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"A Taxing Trend", & Tax Day Aftermath - Speaking of Taxpayers, April 18
Posted By: Douglas Kellogg - 04/22/14

Subscribe to NTU's podcast "Speaking of Taxpayers" via iTunes!

Pete & Doug examine NTU's study of tax complexity, "A Taxing Trend", which found a $224 billion cost due to 6.1 billion hours lost in complying with the tax code; as well as IRS online monitoring, and what to look for next year. Plus, the Outrage of the Week!

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Another Tax Day Gone...
Posted By: Douglas Kellogg - 04/17/14

“Man is a creature that can get used to anything.”

That’s Dostoyevsky, though he’s not the only person to express that sentiment.

After another tax season, as the federal government vacuums up record revenues while the economy sputters, that seems to be the appropriate theme. Though one might add, “especially if he cannot see or understand it.”

Last year I wrote on a few topics related to Tax Day and NTU’s study of tax complexity: A Taxing Trend. Unfortunately, from the challenges faced by overseas taxpayers, and the spike in the cost of tax complexity in the ‘10s, to the IRS tracking of your digital footprint, nothing has really changed.

There are more stories about the IRS’ monitoring of social media presences, overseas taxpayers still have to deal with FATCA, and we still lost north of $200 billion to tax complexity.

Though for the cost of tax complexity, that is quite noteworthy… This year the hour cost of tax complexity seems to have come down a bit, and, while that has brought the dollar cost down ever so slightly, that second figure has not come down much.

In fact, it is still in the stratosphere at $224 billion this past year. The charts illustrate how the dollar cost of tax complexity is, at best, very slow to react to the hour burden - and with more Obamacare measures still being implemented the dip may be short-lived.

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The story is a familiar one as our tax code remains a huge burden, and the agency enforcing it looks for more ways to track your every move, but perhaps it’s not that much of a problem?

It might seem anathema to consider such a question, yet, the Associated Press asked whether filing taxes was truly difficult in a recent poll, headline: “Most Americans Say Filing Taxes Easy.”

How could something that is costing the economy 6.1 billion hours be “easy”? How could it take the average taxpayer 15 hours and $280 out of pocket to get it done? Maybe we just aren’t that bright.

Well the AP found that 58 percent of respondents thought filing a tax return was easy. Sad to say, that relief you’re feeling will be short lived.

The poll’s other findings undermine their own lead finding. First of all, they peg the number of taxpayers using assistance of some type (from Turbo Tax to an accountant) at 91 percent!

That’s right, practically everyone gets help with their taxes, and then claims filing them is “easy.” Something is amiss…

This is like saying changing your oil is easy because you take your car to Jiffy Lube. By this logic I have no problem flying a plane, just look how many times I’ve flown on airplanes! One could go on and on.

AP also needles simplicity by asking: “Would you be willing to pay more in federal taxes if the process of filling out a tax return were easier, or not?”

Of course only 7 percent of respondents said yes. It is very disappointing this loaded question was asked, as if paying more is somehow a feature of simplifying the tax code.

Maybe if they had told them how much they are losing just due to tax complexity those polled would have had some math to do.

This poll does show that the convenience tax filing products have brought to the table is now obscuring the true pain of complying with the tax code for almost everyone. We are all glad to have this arduous process made easier on us, but when you combine this situation with the real cost of tax complexity as shown by A Taxing Trend, you have the worst possible situation: A complex tax code that costs our economy billions, and remains hidden from view.

Similar to how automatic withholding and deficit spending can obfuscate what you pay in taxes, when everyone has help filing their taxes, the inefficiencies and burdens of the system are not clear to individuals.

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A State-Based Federal Tax System?
Posted By: Dan Barrett - 04/14/14

If you’re following HBO’s Game of Thrones, winter’s always coming. The problem for taxpayers is that our winter comes every year in mid-April and it’s increasingly becoming a game with only losers. Around this time of year, I hear from citizens and even policy experts not only complaining about their tax burden but wondering why the system itself is in such dire straits. There are many reasons (NTUF recently laid out some of the problems and solutions in The Taxpayer’s Tab -- seriously, if you’re not subscribed to the Tab, you’re missing out) but some Americans see no hope for our graduated progressive-income tax system and are looking to completely replace it.

One such reform was pointed out to me by Tom, whom I met at NTU and Foundation’s CPAC 2014 booth. His idea is to streamline America’s tax system in a way similar to what the Founding Fathers originally created. I later found a short description of what Tom calls the Neutral Tax on his website:

[The Neutral Tax] eliminates all federal taxes on citizens and businesses (including federal income, payroll, personal income, unemployment, corporate, gift, estate, capital gains, alternative minimum, self-employment, gasoline, etc.) and replaces them with a singular flat tax on the gross revenue of each state government (including all local taxes & fees.)

In short, the new system would transfer the requirement of collecting federal revenues from individuals, households, businesses, and corporations to state governments. State governments tend to be more efficient in costs and accountability when collecting taxes because they are made up of much smaller jurisdictions than the entire country. Dealing with a smaller pool of people means lower operating and enforcement costs. Though there are still horror stories coming out of state Departments of Revenue, taxpayers are better able to walk down the street or travel to their state capitol to dispute their tax burden compared to traveling all the way to Washington, D.C. and/or dealing with examiners of a large and oftentimes cumbersome agency, such as the Internal Revenue Service (IRS).

The new system would take the responsibility of collecting taxes away from the federal government, leaving the states to decide the methods and parameters to tax citizens. Bringing the notion that states are laboratories for democracy into play, governments could choose to merely expand existing systems or choose to reform to collect the necessary funds. The goal is to allow states to have the freedom to reform their systems without having to also conform to the federal income tax-based framework. For example, today, taxpayers in Florida (and six other states) don’t pay state income taxes (and generally pay higher sales or use taxes) but still must pay federal income taxes. This system makes having a comparatively more efficient sales tax system less advantageous because people are a part of two systems. Having a Neutral Tax system might increase efficiencies by decreasing compliance costs for households and businesses. Of course, the tax system that states would adopt is all dependent on the Governor and state legislators.

With the basic concept out of the way, let’s delve down into what a Neutral Tax system might look like, how it would affect taxpayers, and how it might change the federal budget.

Calculating the Neutral Tax: As it appears in Tom’s document, the Neutral Tax would be revenue-neutral, meaning that the system would collect the same amount of revenue as before the fundamental reform. At the federal level, tax rates would be set at zero. Each state would calculate the state, local, and federal tax makeup of its citizens to determine how much it would need to increase its own collections to offset the federal income tax repeal.

For 2014, total projected federal revenue ($3.0 trillion) is divided by total tax revenue ($5.7 trillion – federal, state, and local total) to reveal that 52.6 percent of taxes paid go to the federal government. To be compliant in the new system, state revenue departments would need to increase average collections by 52.6 percent, which would not change the taxpayer’s tax burden (just the method of collection). It would be up to the Department of the Treasury and Congress to determine what percentage of the tax mix would go to federal accounts.

The Neutral Tax & Taxpayers: At least initially, taxpayers would likely not see a change in their tax burden. States would have the freedom to decide how to collect revenues and how much to collect, which would also leave it to state officials to decide who collects taxes. For example, it’s possible that one state could adopt a more progressive income tax while its neighbor could have a Fair Tax system.

The policy document also notes that “it cannot be argued The Neutral Tax inherently falls more heavily on one group or another. It will be up the states to determine how they modify their existing tax/fee structures to collect the additional federal tax… .”

A Different Federal Budget: Even with the same amount of revenue coming in, the Neutral Tax would not necessarily lead to similar spending levels. Enacting the new system would mean refundable tax credits would no longer be in effect. These credits are payments given to households in excess of their tax liability and are counted by both the Congressional Budget Office and NTUF’s BillTally project as spending, not revenues. Without these credits, federal spending would be reduced by $86.4 billion if the Neutral Tax was enacted this year. This line of reasoning is also found in our scores of the flat tax and Fair Tax proposals.

I took a similar view of the Neutral Tax as with the Fair Tax with respect to the IRS. With the elimination of most of the Tax Code, the IRS would be significantly downsized. The agency is approved to spend $12.1 billion this year, which would be counted as savings if the Neutral Tax is passed and the IRS is eliminated. BUT, a couple of further details: The IRS would need a multi-year wind-down to finalize remaining tax cases and to transfer data and authority to a smaller entity, comparable to the Treasury’s Alcohol and Tobacco Tax and Trade Bureau. They spend $96 million last year (page 1070 of the Budget Appendix) on operations and so I would credit that figure against the total IRS deauthorization.

Changes to FY 2014-2018 Federal Spending Under a Neutral Tax System
(in millions of dollars)

 
FY 2014
FY 2015
FY 2016
FY 2017
FY 2018
Total
Repeal Refundable Tax Credits
-$86,743
 
 
 
 
-$86,743
IRS Wind-Down
 
 
 
 
-$12,106
-$12,106
Tax and Trade Bureau
$96
$96
$96
$96
$96
$480
Total
-$86,647
$96
$96
$96
-$12,010
-$98,369

Note: NTUF's BillTally system only tracks changes in budget outlays.

Much like other fundamental tax reform measures, this proposal also has a slim chance of passing a divided and pro-establishment Congress. In this proposed system, as with other reforms, the decision making power of how much to tax Americans rests with Congress and the Treasury Department. This then relies on individuals, local taxpayer associations, and national organizations to push for changes in the overall rate. It is difficult to tell if taxpayers would organize to keep rates low or if we could face a situation similar to today where rates are often times arbitrarily increased. However, it is good to keep the ideas coming for taxpayers to consider how best to fund the government in challenging economic times. Thanks to Tom for stopping by our CPAC booth and helping me add another alternative to the growing list of reforms!

Have an opinion of the Neutral Tax or another tax reform? Let us know in the comments.

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