Missing In Tax Reform: What About the Gas Tax?

By: David J. Herzig

I, and others, certainly will have plenty of articles about what is wrong and right about the current tax cuts proposals. But, as I read the plan, I became frustrated with a proposal that was missing – fixing the Highway Trust Fund.

Infrastructure spending is a priority of this administration. In the spring President Trump announced his $1 Trillion ($1,000,000,000,000) infrastructure plan. According to the administration, the plan will rebuild the nation’s roads, tunnels and bridges. By September, the administration was contemplating how to pay for this spending from private sector credits to dumping the burden on the states.

The most recent discussion of how to pay for the $1 Trillion spend happened during discussions with the House Ways and Means members. According to the Washington Post, “At the meeting Tuesday, Higgins said Trump indicated the administration instead would seek to pay for infrastructure upgrades through direct federal spending — either by paying for projects with new tax revenue or by taking on debt.”

I was hoping, I know naivety, that another option would be discussed – pay for the infrastructure spending like always via the Highway Trust Fund which generates revenues via the gasoline and diesel tax. Since there would be a budgetary shortfall, maybe we should actually increase or fix the tax.

History of Gas Tax Continue reading “Missing In Tax Reform: What About the Gas Tax?” →

The Johnson Amendment Under GOP Plan

By: David Herzig

Back in May, I continued to track President Trump’s promise to end the Johnson Amendment. At that time he promised during a National Prayer Breakfast that he would “get rid of and totally destroy” the Johnson Amendment and promised to issue an executive order (which he signed May 4).

But, a significant problem with legislating via Executive Order is that executives change and with the change so goes the Executive Orders. What works much better is legislation. Enter, the Tax Cuts and Job Act, where there is a proposal to end the Johnson Amendment.

What is the Johnson Amendment? In 1954, without explanation, Lyndon Johnson Continue reading “The Johnson Amendment Under GOP Plan” →

House Appropriations Bill

By: David Herzig

With all the diversions this week, it was easy to miss that the House Committee on Appropriations posted on June 28th the Appropriations Bill for FY 2018. The bill seems to include a couple items that not many were expecting. So, I thought I would highlight some of the key provisions. Since it is Friday before a Holiday weekend, I’ll keep it short for now. There are four main provisions I will address: (1) IRS Targeting/Johnson Amendment; (2) ACA Penalties; (3) Conservation Easements; and (4) 2704 (Estate/Gift Tax).

I. IRS Targeting/Death of Johnson Amendment

First, is a clear response to the “targeting” of groups from the Lois Lerner Administration. In three separate sections (107, 108 and 116), the bill attempts to regulate the IRS, not Continue reading “House Appropriations Bill” →

Mortgage Interest Deduction

By: David J. Herzig

The Trump and Republican tax plans have circled around the idea of repealing the mortgage interest deduction. Although I’m not convinced it will happen (see e.g., Treasury Secretary Mnuchin’s remarks). The mere threat of the repeal has garnered a fair amount of attention.

For example, the other day this chart was making its rounds on twitter.

I have not verified the methodology of the chart or the data. I interpret that the chart examines (in absolute numbers) how many mortgages exist at $1,000,000. The implicit conclusion of the chart is that homeowners in states like D.C., Hawai’i, California and New York have the most at stake in retaining the deduction.

Why?

Because there seems to be evidence that the mortgage interest deduction contributes to housing inflation. Back in 2011 the Senate held hearings on incentives for homeownership. [1] It has been suggested that the elimination of the deduction will drop home prices between 2 and 13% with significant regional differences. [2] So, if the mortgage interest deduction is eliminated, then the aforementioned states might have numerous problems, including a smaller property tax base.

What exactly is the Mortgage Interest Deduction?

Continue reading “Mortgage Interest Deduction” →

Prognosticating Estate Tax Repeal using State Interests

By: David Herzig

Last week Tax Foundation tweeted about the states that have either a state level estate or inheritance tax.

The map and subsequent conversations I have had reinvigorated my interest in the prospect of an estate tax. Briefly in this post, I wanted to say a couple things about the state level estate or inheritance tax, the map, and the effect of the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRAA“) on the prospects of the elimination of federal estate tax.

I’ll readily admit that it has been a while since I did an estate tax return. So, I needed some refreshing regarding the idiosyncrasies of the interaction between the state and federal taxes. Some recent history is not only necessary but illustrative of the prospects of permanent federal estate tax repeal.

Brief History of Switch From Credit to Deduction

Prior to the enactment of EGTRAA, the federal estate tax provided an tax credit for an amount paid because of a state level estate tax. The mechanics of credit was essentially a revenue sharing agreement for the tax collected between the federal government and the states – essentially, up to 16% of an estate’s value. The credit applied whether or not the state had an independent estate tax. This tax was known as a “pick-up” or “sponge” tax.

Continue reading “Prognosticating Estate Tax Repeal using State Interests” →

What is the Johnson Amendment?

By: David Herzig

As the world braces for the upcoming Executive Order from President Trump,

Screen Shot 2017-05-04 at 8.18.56 AM

I wanted to take a minute and describe the Johnson Amendment. Later today, after the actual Executive Order is made public, Ben Leff will be writing up a more through post.

A couple of months ago President Donald Trump told the audience at the National Prayer Breakfast that he would “get rid of and totally destroy” the Johnson Amendment. Which raises the question: what is the Johnson Amendment. Because he brought it up at the National Prayer Breakfast, it also leads to the question of how does affects churches.

In 1954, without explanation, Lyndon Johnson proposed a small amendment to the tax law governing tax-exempt organizations: forbid them from endorsing or opposing candidates for office. One of the few consistent talking points during president-elect Donald Trump’s campaign was that this so-called “Johnson Amendment” should be repealed; since comprehensive tax reform is part of Trump’s plan for his first 100 days in office, the repeal may happen immediately. Continue reading “What is the Johnson Amendment?” →

We Should be Taking President Trump’s Tax Plan Seriously

By: David J. Herzig

Today President Trump’s top tax advisors laid out the first details of the his tax plan. Chief economic adviser Gary Cohn and Treasury Secretary Steve Mnuchin unveiled the plan which according to Fox News, Cohn called “the most significant tax reform legislation since 1986, and one of the biggest tax cuts in American history.”

Oh, did I mention that the details of the biggest cuts were printed on a single sheet of paper?

There has been plenty of ink (and jokes) already spilled about the plan. For example, you can read Richard Rubin of the WSJ (here) or Alan Rappeport of the NY Times (here). The long and the short of the plan is it seems to very very costly. The Committee for a Responsible Federal Budget guesses it could cost $3 to $7 trillion with their estimate at $5.5 trillion. That is a lot of money!

Continue reading “We Should be Taking President Trump’s Tax Plan Seriously” →

A Libertarian Tip

By: David Herzig

Yesterday on Twitter, Scott Greenberg (@ScottElliotG) posted the following tweet from Matt Bruenig.

Well, David Gamage, Omri Marian, Andy Grewal and I had fun in 120 characters debating the quality of the tax advice provided on both the receipt and the note. Suffice to say: (A) this will be appearing on a number of basic income tax exams shortly;[1] and, (B) neither piece of advice provided by “Mr. Libertarian” seems to be correct. Both David and I pointed out that the “tip” did not seem to meet the old Duberstein detached and disinterested test. Clearly there was a quid-pro-quo; don’t spit on my food and I will give you extra money in addition to the bill.

Joking around about the gift/income distinction made me think that tipping is very tax inefficient. Assuming that what I said is true: tips are not gifts and they are income to the recipient. This means that the payment is not deductible by the payor (just personal consumption) yet income to the recipient, i.e. the server. If it is ordinary income to the recipient, then there should be a corresponding wage deduction, right?

Let’s assume the following counterfactual. The restaurant includes the tip as part of the bill. The restaurant pays the employee salary including the entire tip. Under this structure, the restaurant would receive an entire wage adjustment for the tip paid. The customer is still does not receive a deduction for paying the employee’s wages and the employee still pays the same amount of income tax. But the employer captures the unused deduction for wages by the customer. Theoretically, this deduction could be shared by all the stakeholders to reduce costs to all parties.

Who cares? Well, only economists and tax professors, probably. Back to finals preparation!

[1] Here is David Gamage’s hypo: customer leaves $1K and says, I just won the lottery and want to share some of my winnings as a “gift”.

The Strategic Case Against the Democratic Filibuster of Neil Gorsuch

Photo: Jarrad Henderson, USA TODAY

By: Daniel Hemel and David Herzig

[Note: This post is co-authored with Daniel Hemel, Assistant Professor of Law at The University of Chicago School of Law.]

The strategic case against a Democratic filibuster of Neil Gorsuch is straightforward. The argument is not that the filibuster will prevent President Trump from putting someone like Andrew Napolitano on the Court. The argument is that the filibuster may prevent President Trump from filling a future vacancy with a well-credentialed conservative who is ideologically similar to or right of Judge Gorsuch. To elaborate:

— (a) The filibuster accomplishes no work when there are fewer than 50 Senators who will support a nominee on an up-or-down vote. (Napolitano presumably falls into this category.)

— (b) The filibuster also does no work when there are 50 or more Senators who will support a nominee even if that means going nuclear. (Judge Gorsuch appears to fall into this category.)

— (c) The filibuster matters when (1) there is a nominee who would win 50 or more Senators on an up-or-down vote, but (2) fewer than 50 Senators would support the nuclear option in order to put the nominee on the Court.

Is (c) an empty set?

Continue reading “The Strategic Case Against the Democratic Filibuster of Neil Gorsuch” →

Tax Professors on Twitter

By David J. Herzig

By David Herzig

I am trying to keep this updated quarterly. So, please find the most updated list. There are a number of new names on the updated list as tax professors continue to enter the twitterverse. I did update the list to be in alphabetical order. As always, if I am missing someone, please let me know.

Starting with the SurlySubgroup (@surlysubgroup)

Jennifer Bird-Pollan (@jbirdpollan)

Sam Brunson (@smbrnsn)

Phil Hackney (@EOTaxProf)

David Herzig (@professortax)

Stephanie Hoffer (@Profhoffer)

Leandra Lederman (@leandra2848)

Ben Leff (@benmosesleff)

Francine Lipman (@Narfnampil)

Diane Ring (@ringdi_dr)

Shu-Yi Oei (@shuyioei)

Other United States/Canadian Tax Professor (in alphabetical order):

Continue reading “Tax Professors on Twitter” →

Twitter Tax Feeds for 2017

By David Herzig

I promised I would update the twitter tax feeds in my last post. There are a number of new names on the updated list as tax professors continue to enter the twitterverse. I did update the list to be in alphabetical order. As always, if I am missing someone, please let me know.

Starting with the SurlySubgroup (@surlysubgroup)

Jennifer Bird-Pollan (@jbirdpollan)

Sam Brunson (@smbrnsn)

Phil Hackney (@EOTaxProf)

David Herzig (@professortax)

Stephanie Hoffer (@Profhoffer)

Leandra Lederman (@leandra2848)

Ben Leff (@benmosesleff)

Francine Lipman (@Narfnampil)

Diane Ring (@ringdi_dr)

Shu-Yi Oei (@shuyioei)

Other United States/Canadian Tax Professor (in alphabetical order):

Continue reading “Twitter Tax Feeds for 2017” →

Top 2017 Tax Twitter Follows

By David Herzig

Every year, Kelly Erb (@taxgirl) posts her top tax Twitter follows. This year, I was fortunate to make the list. In addition to my shameless self promotion, I am directing you to her article because it was nice to see that many other academics made the list.

I think the fact that so many academics made this list is very important right now. First, academics tend to get a bad rap for living in ivory towers. Twitter is a great egalitarian platform. Second, in the upcoming months, active engagement by the best and brightest is paramount. Twitter for all its flaws allows for real time interactions. Seriously, you would be amazed how far you can spread your knowledge! Finally, it reminds me to update my old list I posted at Surly. If I am missing your name, please let me know and I will repost later this month.

In the meantime, here were the academics on the list:

Tim Todd – @lawproftodd – Assoc Dean for Academic Affairs & Law Professor @LibertyLaw;

Andy Grewal – @AndyGrewal – Professor of Law, @uiowa;

Judith Freedman – @JudithFreedman – Oxford University Professor of Taxation Law;

Lily Batchelder – @lilybatch – Professor of Law & Public Policy at @nyulaw;

David Herzig – @professortax – – Professor of Law @ValparaisoLaw;

Allison Christians – @taxpolblog – Stikeman Chair in Tax Law, McGill University; and

Xavier Oberson – @XavierRoberson – Professor of Swiss and International Tax Law at Geneva University

Budget Reconciliation Process and Obamacare

By: David Herzig

Friday the Wall Street Journal published Daniel Hemel and my article on why we think it will be very hard for the Senate to just do away with the ACA (aka Obamacare) via reconciliation. We follow-up our earlier Surlygroup posting (also cross-posted at Yale J. Reg.) which discussed why the Senate norms are hard to break. Since that article, we have developed some fairly interesting models on why we think the Senate norms are rather sticky – more on that to come.

In the Wall Street Journal article we state, “Most significantly, Majority Leader Mitch McConnell and his caucus may be forced to choose between their antipathy toward the ACA, also known as Obamacare, and their allegiance to longstanding institutional norms. In the end, the scope of ACA repeal will likely depend on whether Senate Republicans decide to score political victories in the short term or to maintain the Senate’s unique culture for the long haul.”

The problem for the republicans is the Byrd rule. Repeal of the ACA will have budgetary impact beyond the budget window. A decision will need to be made on the impact. As we stated, “On some reconciliation-related questions, the presiding officer defers to the Budget Committee chairman, currently Senator Mike Enzi. On other questions, including whether a provision produces “merely incidental” effects on the budget, the presiding officer generally follows the advice of the Senate’s nonpartisan parliamentarian, the official adviser to the Senate on the body’s rules.”

Continue reading “Budget Reconciliation Process and Obamacare” →

Rockefellers, Pratts and Private Cemeteries

By: David J. Herzig

The New York Times wrote about the Pratt Family burial plot. As Daniel Hemel pointed out there was also a tax story; apparently, the cemetery qualifies as a 501(c)(13) tax-exempt entity. So, when you combine tax and a Cleveland company, I was fascinated by the story. [1]

Because the cemetery is tax-exempt under section (c)(13), it can only benefit its members. This is contrary to the general rule for tax-exempts that you benefit everyone as opposed to just members. The question that the IRS had to address was how discriminatory could the cemetery be. For example, whether both the Rockefellers and the Pratts could be buried in the cemetery. According to Daniel’s review of the rulings and regulations, “the Pratt family cemetery won’t lose its tax exempt status if it excludes the Rockefellers (or any other non-Pratts) from being buried there. But the family cemetery need not limit membership to Pratts in order to maintain its tax exemption.” All of which is true.

But, I wondered why does the family care so much about maintaining the tax exemption. I started to dig around to find the 990s of the cemetery. What if the tax-exemption were terminated? (As a certain President Elect has come to decide – sometimes the maintenance of tax-exempt entities are more trouble than they are worth).

Continue reading “Rockefellers, Pratts and Private Cemeteries” →

The Amazing Section 1202

By: David Herzig

I was fortunate enough to present to the Chicago Estate Planning Council about a week ago. I rearranged a presentation that I gave at the Notre Dame Tax and Estate Planning Institute. (As an aside, both of these forums are great sources of continuing cutting edge eduction for the practicing bar). I spent the majority of the hour I was allotted describing section 1202 the Qualified Small Business Stock Exemption. To my shock, most of the 300 in attendance either were not familiar with the provision or had not thought about it for a decade. After a quick twitter exchange, I thought I would do a short post explaining the code section as well as why it should be used or at least discussed more.

First, can everyone in Silicon Valley please stop laughing. I get it. You have been using 1202 since the 1990s. Almost every VC agreement requires the target to qualify as 1202. For the rest of us, let me catch you up on why 1202 is maybe one the largest give aways in the tax code today.

The QBSB Election came in existence in 1993. Why was the section so forgettable? Well, if I told you there was a tax credit if you formed a C corp that lowered your rate from 28% to 14% but still had an AMT phase-out – I probably lost you at C Corp. Even if I had your attention, as capital rates lowered to 20%, the QSBS stayed steady at 14% so why set a C Corporation to save 6%? Yes, 6% is a large savings but, not, when the Code required that 7% of the amount excluded from gross income be treated as a “preference” item and subject to AMT.

Continue reading “The Amazing Section 1202” →