Category Archives: Taxation

Corporate Income Tax Expenditures: The State’s Regular Evaluation of Corporate Income Tax Expenditures Would Improve Their Efficiency and Effectiveness

Source: California State Auditor, Report 2015-127, April 2016

From the summary:
Our audit concerning the benefits and cost-effectiveness of state corporate income tax expenditures (tax expenditures) highlighted the following:
– Corporate taxes contributed $7.3 billion to the State’s General Fund in fiscal year 2012-13; however, forgone revenue from tax expenditures totaled more than $5 billion.
– Implementing oversight methods from other states could improve the effectiveness of the State’s current and future tax expenditures.
– Tax expenditure legislation does not consistently include policy goals, performance measures, and sunset provisions.
– The State does not conduct regular, comprehensive reviews of tax expenditures.
Our review of six of the largest tax expenditures revealed the following:
– Insufficient evidence and oversight of the research and development credit and the minimum franchise tax exemption make it unclear if they are fulfilling their purposes.
– The water’s edge election, the low-income housing credit, and the film and television credit appear to be achieving their respective purposes, but improvements would make them more effective.
– The Subchapter S corporation election appears to be achieving its purpose.
Related:
Fact Sheet
Recommendations

Hospital Community Benefit Spending: Leaning In on the Social Determinants of Health

Source: Sara Rosenbaum, Milbank Quarterly, Volume 94 Issue 2, June 2016

For as long as the Internal Revenue Code has existed, federal tax policy has exempted corporate entities organized and operated for charitable purposes, as long as they meet applicable federal requirements. The Code does not identify the promotion of health as an explicit charitable purpose, but since 1956 the IRS has recognized that hospitals can qualify as tax-exempt charities. The 1956 standards identified the provision of charity care as the sine qua non of tax-exempt status. But in 1969 the Nixon administration revised the standard, eliminating charity care as a basic requirement and substituting in its place a nebulous “community benefit” standard that gave hospitals broad latitude to define activities that would benefit their communities. These activities ranged from financial assistance to uninsured and underinsured patients to participation in government insurance programs, research, health professions education and training, and other “community health improvement” activities identified by a hospital. Legal services advocates for the poor unsuccessfully sought to halt this basic shift in federal policy; over many decades, the IRS offered no further elaboration on its revised standard and engaged in virtually zero enforcement activities. With some notable exceptions, state laws, which typically parallel federal tax law, remained unenforced.

Several important developments have led to renewed attention on tax-exempt hospitals’ community benefit spending practices….

Lights, Camera, but No Action? Tax and Economic Development Lessons From State Motion Picture Incentive Programs

Source: Michael Thom, The American Review of Public Administration, Published online before print June 5, 2016
(subscription required)

From the abstract:
Despite mixed results, state government use of targeted economic development programs has escalated. This study evaluates the impact of motion picture incentive programs, an array of tax incentives employed by over 40 states to entice film and television productions out of California and New York, on labor and economic conditions from 1998 through 2013. Results suggest that sales and lodging tax waivers had no effect on any of four different economic indicators. Transferable tax credits had a small, sustained effect on motion picture employment levels but no effect on wages. Refundable tax credits had no employment effect and only a temporary wage effect. Neither credit affected gross state product or motion picture industry concentration. Incentive spending also had no influence. These findings demonstrate the heterogeneous impacts of different incentives offered under a single program and should inform future economic development policy design.

How Income Taxes Should Change during Recessions

Source: Zachary D. Liscow, William A Woolston, Yale Law & Economics Research Paper No. 538, March 21, 2016

From the abstract:
This paper offers recommendations for how the design of labor income taxes should change during recessions, based on a simple model of a recessionary economy in which jobs are rationed and some employees value working more than others do. The paper draws two counter-intuitive conclusions for maximizing social welfare. First, subsidize non-employment. This draws marginal workers out of the labor force, creating “space” for those who really need jobs. Second, subsidize employers for hiring, not the employees themselves. The problem during recessions is having too few jobs; subsidizing employers creates more jobs, while subsidizing employees confers benefits on those who already won the job lottery. Tax policy in the recent recession has done a poor job of following these recommendations.

Rhetoric and Reality in the Tax Law of Charity

Source: Linda Sugin, Fordham Law Review, Vol. 84, No. 101, 2016

From the abstract:
The rhetoric of public purposes in charity law has created the mistaken impression that charity is public and fulfills public goals, when the reality is that charity is private and cannot be expected to solve the problems that governments can solve. The rhetoric arises from a combination of charity-law history and tax expenditure analysis. The reality follows the money and control of charitable organizations. On account of the mismatch of rhetoric and reality, the tax law of charity endorses an entitlement to pre-tax income and (ironically) creates a bias against taxation. This article reorients the project of defining public and private in the tax law by starting from a normative theory of government responsibility. It challenges the conventional economic justifications for the charitable deduction and exemption, arguing for a more philosophical approach that makes affirmative demands on government to distribute the returns to social cooperation. Under this approach, the appropriate role of private organizations is residual; they must achieve what governments cannot. The article concludes by arguing that current law’s tax benefits for charity are easily justified in this new understanding.

Is the Philadelphia Wage Tax Unconstitutional? And If It Is, What Can and Should the City Do?

Source: Michael S. Knoll, Ruth Mason, University of Pennsylvania Law Review Online, Vol. 164, 2016

From the abstract:
Philadelphia has a complex and antiquated tax system that has long been criticized for driving employers and jobs away from Philadelphia by making it expensive to conduct business in the City. The centerpiece of the Philadelphia tax system is the Philadelphia wage tax, which raised more than $1.6 billion in 2014. That tax has been challenged as unconstitutional in light of the Supreme Court’s 2015 decision in Wynne v. Comptroller of Maryland, which struck down a structurally similar Maryland tax. This Essay explains the constitutional challenge to the City wage tax, argues that the tax is unconstitutional, describes steps the City could take to save that tax, and raises the question of whether Philadelphia should save or eliminate its wage tax.

U.S. Capital Gains and Estate Taxation: A Status Report and Directions for a Reform

Source: Wojciech Kopczuk, Centre for Economic Policy Research (CEPR), CEPR Discussion Paper No. DP11208, March 2016
(subscription required)

From the abstract:
Recent changes in the U.S. estate taxation significantly reduced its reach and revenue, although the tax continues to contribute to progressivity of the overall tax system and is likely to play a role in influencing the long term concentration of wealth. I discuss recent changes, empirical evidence and theory applying to this form of taxation. I then discuss directions for a reform of the tax. The interaction between estate taxation and other components of the tax system is most important in the context of capital gains, with step up in basis partially compensating for high marginal rates while at the same time creating very strong deferral incentives. Modifying this interaction is long overdue and experience from the temporary repeal of the tax in 2010 is helpful in understanding challenges. I discuss options for modifying this interaction, including implications both for estate tax design and for the great majority of taxpayers who are not subject to the estate tax. Eliminating the step-up in basis would allow for increasing the efficiency of the tax system, while the additional revenue could be used to either mitigate the consequences for the affected taxpayers by reducing the estate tax burden or increasing the overall progressivity. I note that any exemption for capital gains at death does retain deferral incentives for individuals with unrealized capital gains smaller than the exemption and suggest that a lifetime exemption would have better incentive properties. I also note that the treatment of spousal transfers under any capital gains at death approach is critical for the revenue implications.
Number of Pages in PDF File: 44

How Big Pharma Uses Charity Programs to Cover for Drug Price Hikes

Source: Benjamin Elgin, Robert Langreth, Bloomberg Businessweek, no. 4476, May 23-29, 2016

A billion-dollar system in which charitable giving is profitable. …. But this is not a feel-good story. It’s a story about why expensive drugs keep getting more expensive, and how U.S. taxpayers support a billion-dollar system in which charitable giving is, in effect, a very profitable form of investing for drug companies—one that may also be tax-deductible. ….