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Archive for the ‘Tax Legislation’ Category

There is no such thing as tax reform, at least when it is framed within the same Byzantine template that has bedeviled taxpayers for generations.

The primary objectives of any tax system should be to raise revenue, allow for efficient enforcement and encourage public compliance through simplicity. These goals have alluded the government at least since the passage of the Internal Revenue Code of 1954 and its 24 brackets.

If you are counting on Congress to get it right this time around, start recounting.

In my view, the only true reform would be something resembling a flat tax system.  See this earlier article of mine on the subject.

However, there are two chances of a flat tax system becoming law:  slim and none; I won’t waste time, then, on discussing it again.

As one would expect, the current package under consideration has become a partisan battle, with both sides playing to their loyal bases…. and too little weight given to economic and practical considerations.

There are many moving parts in play, but I will focus on just one – the mortgage interest deduction since it is the most complex of any.  It is as American as apple pie, but some developed countries have dropped it, including Canada, UK and France. There are limitations in others.  There has been no sustained impact on the real estate prices where it is not allowed.  Hey, just watch HGTV’s Househunters International for anecdotal evidence, assuming you can overlook the naivety of the buyers featured on the program!

We already have a limitation (also a topic I’ve covered in the past). It allows for the deduction of interest on $1M in mortgage debt used to construct, purchase or improve your home, and $100K for general purposes – basically cash draws to cover vacations, cars, boats or just plain, everyday self-indulgences.

The new proposal cuts the $1M in half to $500K and does not allow any interest deduction on second homes.  All existing mortgages would be grandfathered in at the $1.1M cap.

Presently, there are many people who are probably unaware of the current limitation, and many of them are equally unaware they are over the limit because they have not kept track of what their cash-out refinances or HELOC advances were for.

Don’t lose any sleep, unless your overall mortgage debt is high enough to appear on the IRS’s radar screen. It is at least as difficult to audit as it is for taxpayers to keep records and make the necessary adjustments.  The calculations are not a fun exercise, especially if there have been multiple borrowings.

One thing is for certain, by halving the cap more new borrowers, along with those who subsequently refinance, will fall under the new limitation. The IRS will be challenged to adequately deal with the increased load.  Taxpayer compliance will likely fall short of targets; accordingly, the projected deficit will be higher than expected, all other things being equal.

I would gladly trade all the deductions in the world for a much lower tax rate and an uncomplicated tax return. But the rate cuts for this package are no where near an incentive enough for me to get on board, especially if the loss of the state income tax deduction is also part of the deal.

Until there is real tax reform, America will continue to spend 6 billion hours per year on preparing their tax returns. I believe our personal time is worth more than a few dollars per hour, not to mention $2 billion we pay for individual tax software.

I think we have better things to do.

 

 

 

 

 

 

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Illegal sources of income are subject to federal and state income tax; so, why would I object to the City of Los Angeles collecting Transitory Occupancy Tax (TOT) revenue from illegal short-term rentals, such as Air BnB?

In the former case, taxation does not exempt scofflaws from prosecution.  If anything, tax compliance requirements are useful tools to bring criminals to justice or enhance their sentences . If Al Capone were alive, he would agree.

The latter is different – it creates an impediment to enforcing zoning laws.  A cash-strapped city like Los Angeles will not want to bite the hands that feed it.  It is the equivalent of bribery.  Pay to play, and the city will not pursue enforcement of residential zoning codes. The City Council and mayor will drag their feet, if not completely overlook, the protection of honest residents’ right to enjoy their neighborhoods without the adverse effects associated  with revolving door occupancy.

In his annual budget letter to the mayor and City Council, City Controller Ron Galperin weighed in.  He said the city must be “vigilant to consider the potential TOT revenue impacts to the general fund.”

As I read between the lines of his statement, that’s not really an endorsement of the policy. If anything, it is a carefully nuanced assessment.  Ron is the controller and he is required to advise the city on any financial matter – good or bad.

But zoning violations should not be ignored just because the cash generated by the TOT partially mitigates the effects of the city’s reckless approach in managing its budget. Please note that Galperin also emphasized the importance of a prudent and well-balanced budget. Ignoring laws does not meet the definition of prudent.

It’s a good thing that a city-sanctioned, short-term rental scheme did not exist when Scarface Al was around. No telling how much more power he would have wielded in Chicago.

We now face an army of non violent mini-Als, no baseball bats or Chicago pianos, but armed with industry lawyers and plenty of money.

 

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State Senator Bob Hertzberg is a smart man; smart enough to know the power of language. According to his bio, as an undergraduate English major, he wrote a 400-page handbook titled A Commonsense Approach to English.

To paraphrase a quote attributed to the late US Senator Everett Dirksen: A deft turn of a definition here, and a subtle re-characterization there, the next thing you know, we are dealing with some serious money!

And that has been Hertzberg’s game plan since he returned to the legislature in December 2014.

He introduced SB 8, a bill cloaked by a seemingly harmless name – the Upward Mobility Act. The senator described it as a tool to “modernize” the state’s tax structure. He admitted it would be designed to yield another $10B in tax revenue.

The bill died, but that did not stop Bob from reintroducing a replacement: SB 1445.

As SB 8 proposed, this new bill would extend the application of sales tax to services, a direct hit to all segments of society – the middle class, most notably. As he did with SB 8, he is characterizing it as “modernization.”

The only thing being modernized is the state’s access to our wallets.

But the “serial hugger” is not stopping there.  He again whipped out his English to Taxation dictionary to conjure up SB 1298.

His objective is to do an end run around Prop 218’s requirement for voter approval of tax increases by redefining “sewer service” to include stormwater projects. Perhaps “serial wordsmith” would serve as a better moniker for him. Please read the excellent editorial concerning 1298 in the Daily News. 

The bill has a worthwhile objective.  It is designed to encourage recovery of stormwater. No one is arguing with the benefits it offers to our drought-stricken state.

But it is dangerous to override the benefits of government transparency and the legislative process.

Californians are being asked to pony up more cash to fund a growing list of expensive projects.  In Los Angeles alone, we are being asked to pass a permanent increase in the sales tax for the MTA.  The city and county are considering spending over a billion dollars to provide housing to the homeless.  There is also the trainwreck of HSR absorbing funds that could be used to enhance the state’s water capacity.

Our state and local governments have no grasp of prioritization.  Capital budgeting is completely absent in the minds of Hertzberg, his colleagues in Sacramento and counterparts at the local level.

Taxpayers have a right to weigh in on what needs attention and the means of paying.  To do so requires presenting the big picture of competing needs. Let the people decide what is most important and authorize appropriate funding levels.

We do not have unlimited funds; we can only afford what can be sustained without breaking the bank.

Sneaking around the voters and playing word games, as Hertzberg has been doing, is disrespectful to all of us.

 

 

 

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When State Senator Bob Hertzberg announced his tax proposal, SB8, in late 2014, he made no secret of using it as a tool to raise taxes by a net $10 billion – that is, per year.

The senator tried to pass it off as “tax modernization.”

He even gave the bill a deceivingly benign name: the Upward Mobility Act. Loosely translated, that means the Up Your Wallet Robbery initiative. I would have been at least conciliatory towards it had he been straightforward and called it a tax increase, rather than obfuscating its purpose. Hertzberg has generally been a straight-shooter in his career, so this slight of hand attempt was out of character, making it all the more disappointing.

A year later, it effectively died. It received no traction in Sacramento. Governor Brown shrugged it off; the Senate Governance and Finance Committee, which Hertzberg chairs, did not deem it worthy to progress. It officially died January of this year.

He said he would reintroduce it.

He did in February – SB1445.

This time, Hertzberg made no fanfare, perhaps learning a lesson from the bad publicity he created with SB8. For that matter, the bill contains only intent language at this time. It appears he is playing it close to his chest.

Does he still want to raise $10B?

As I stated in an earlier article on the subject, Hertzberg needs to share how the bill would impact each segment of the state’s taxpayers.

He did not in 2015, although he must have had an idea. One does not arrive at a figure as large as $10B without having at least penciled it out in some detail.

Let’s see what he does this year.

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