{"id":1228,"date":"2018-10-24T09:49:07","date_gmt":"2018-10-24T14:49:07","guid":{"rendered":"https:\/\/illinoistax.org\/?p=1228"},"modified":"2018-10-24T09:51:06","modified_gmt":"2018-10-24T14:51:06","slug":"scary-tax-things-carol-portman","status":"publish","type":"post","link":"https:\/\/illinoistax.org\/?p=1228","title":{"rendered":"Scary Tax Things – Carol Portman"},"content":{"rendered":"

Scary Tax Things<\/u><\/strong><\/h3>\n

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October 2018 (71.9)<\/b><\/p>\n


\nCarol Portman[1]<\/a>
\nTFI<\/strong>
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Halloween does not necessarily prompt thoughts of bad tax policy, but in honor of the season, we thought we would take a light-hearted (but still serious) look at some potentially frightening developments in the state and local tax world.\u00a0 The State of Illinois and its many units of local governments are almost all struggling financially.\u00a0 Spending has outpaced revenue at nearly every level of government for years (a true horror story), and that mis-match can be a formula for trouble, as politicians and tax administrators are tempted to stray from the fundamentals of sound tax policy in search of an easy fix.<\/p>\n

Here is our list of bad ideas\u2014scary tax things\u2014that keep us up at night.<\/p>\n

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  1. Vigilantes<\/strong>, although not the gun-toting, swashbuckling sort.\u00a0 A new term has crept into conversations about taxes in Illinois recently: \u201cvigilante tax administration.\u201d\u00a0 The phrase has been used to refer to private attorneys misusing the state\u2019s False Claims Act and to bounty-hunter firms hired to audit taxpayers on a contingency fee basis.\u00a0 Both practices interfere with the proper administration of taxes.\u00a0 The Government\u2019s interest, when it is administering tax laws, is to collect the correct amount of tax.\u00a0 No more, and no less.\u00a0 The vigilantes, however, are acting in pursuit of their own financial best interests, which are maximized when the taxes assessed or collected are maximized.\u00a0 In other words, they want taxpayers to pay, and pay a lot, whether they owe tax or not.\u00a0 These private firms also do not have the institutional culture of protecting taxpayer confidentiality that is (or at least should be) part of governmental DNA, so allowing them access to that information raises a whole host of additional concerns.<\/li>\n<\/ol>\n

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    1. Pyramids<\/strong> (with or without creepy mummies). There has been a lot of talk about broadening Illinois\u2019 sales tax base.\u00a0 Generally speaking, a broad-based tax is a good tax, which is why\u2014generally speaking\u2014TFI does not in principle<\/em> oppose imposing sales tax on services.\u00a0 But that\u2019s only true if the base-broadening is done properly.\u00a0 Taxing business inputs leads to layers of taxation on the same end-product (good or service), often called \u201ctax pyramiding.\u201d\u00a0 For example, when a store sells a bag of Halloween candy, tax is due, but to avoid pyramiding there are tax exemptions available when the store buys the candy from the distributor, or the distributor from the factory, or when the various ingredients are purchased on up the line.\u00a0 Without those exemptions, tax added on each step in the chain of transactions would be baked into the cost at the next step, effectively piling tax on top of tax\u2014a pyramid. \u00a0Sales taxes are supposed to be taxes on final, retail-level consumption only, and any expansion of our tax base to services should follow that guiding principle.\u00a0 In fact, our existing sales tax structure should be revised to more completely exempt business inputs from tax, to minimize the pyramiding.<\/li>\n<\/ol>\n

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      1. Candy<\/strong>-haters, or, more accurately, a special tax on candy. Any tax targeting a specific product (like candy or soft drinks) or industry (like banks or other financial organizations) is a bad idea.\u00a0 The tax code should treat all taxpayers (or taxable items) the same, and should not pick winners and losers.\u00a0 \u00a0The resulting economic distortion is the exact opposite of good tax policy.\u00a0 These proposed targeted taxes are often touted as a way to fund a particular program or service; if it\u2019s worth doing, the funding should come from broadly-applicable taxes.<\/li>\n<\/ol>\n

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        1. Giants<\/strong>. Gigantic, monstrously complicated tax codes are costly to comply with, costly to administer, and can lead to a lack of taxpayer confidence in the tax\u2019s fairness.\u00a0 Simplicity is a hallmark of good taxation.\u00a0 For example, one great advantage of Illinois\u2019 income tax is that, by and large and compared to many other states, it is fairly simple.\u00a0 We start with federal taxable income or adjusted gross income and require only a few adjustments.\u00a0 Unnecessary decoupling from the federal tax code takes us closer to a needlessly cumbersome giant of a tax code.\u00a0 On the other hand, our State\u2019s sales tax system\u2014really a whole host of several dozen interrelated state and local taxes\u2014has already become quite the unwieldy giant.\u00a0 Good tax policy suggests we should take a long and hard look at reforming and simplifying and lopping a few heads off this Hydra.<\/li>\n<\/ol>\n

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          1. Costumes<\/strong>. When elected officials believe that a tax increase is necessary, they should be up-front about it and call it a tax increase, rather than placing a crown on its head and disguising it in a princess costume.\u00a0 \u00a0\u00a0Putting a misleading but friendlier label on something, calling it a \u201creform\u201d or worse yet a \u201cloophole-closer,\u201d isn\u2019t fair to the voters and taxpayers when in reality the measure is a poorly-disguised tax increase.\u00a0 Just as disturbing, something labeled as a tax break might not be one at all\u2014yet another disguise.\u00a0 For example, property tax \u201cexemptions\u201d don\u2019t reduce the amount of property tax a government gets\u2014they just shift the tax burden around from one property owner to another, and make everyone\u2019s rates go up. \u00a0[See Examining the Effects of Increased Homestead Exemptions<\/em>, in the April 2017 Tax Facts<\/em>.] \u00a0Masks might be fun at Halloween, but a good tax is transparent\u2014taxpayers know what they\u2019re paying, and understand the real consequences of proposed changes.<\/li>\n<\/ol>\n

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            1. Creepy things<\/strong>. More specifically, creeping split roll property tax.\u00a0 \u201cSplit roll\u201d means different types of properties pay tax under different rules, rates, etc.\u00a0 The Cook County classification system, for example, shifts taxes from homeowners onto businesses without actually decreasing total taxes.\u00a0 Throughout the state, homestead exemptions do the same thing, although to a lesser extent.\u00a0 This breaks the direct connection between property values and taxes paid, and reduces accountability at the local government level.\u00a0 Illinois should resist allowing this particular bad idea from creeping any farther.<\/li>\n<\/ol>\n

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              1. The undead<\/strong>. Like people, laws (including tax laws) have a natural lifespan\u2014a beginning and an end.\u00a0 When a new law or regulation is passed or adopted, or when one is repealed, it should not reach back in time.\u00a0 Tax laws and regulations in place at the time of a particular transaction should govern that transaction (or tax year).\u00a0 [See Retroactivity in State Tax Legislation<\/em>, in the February 2018 Tax Facts<\/em>.] Imposing a change retroactively disrupts the natural order and should be avoided like the plague.\u00a0 And zombies.<\/li>\n<\/ol>\n

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                1. (Copy)Cats<\/strong>. A black cat crossing your path may bring bad luck, but blindly copying a tax proposal from another state can be equally perilous.\u00a0 Each state\u2019s overall tax structure is different, and although uniformity can be a good thing in many state tax contexts, not every trend from Montana, Indiana, or Florida is a good idea in Illinois.\u00a0 Recent examples of this scary thing:\u00a0 tax haven legislation (measures designed to catch federal \u201ctax cheats\u201d through outdated blacklists and which are unnecessary given Illinois\u2019 existing anti-abuse laws) and broad tax return disclosure proposals (which violate taxpayer confidentiality and do little more than feed the vigilantes, above).<\/li>\n<\/ol>\n

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                  1. Hazy Fog<\/b>. If nothing else, horror movies have taught us that, when you can\u2019t see where you\u2019re going, bad stuff happens.\u00a0 Similarly, murky tax rules leave taxpayers wandering in the gloom.\u00a0 A wrong choice might not lead down the path to a haunted house, but it does leave well-intentioned taxpayers at risk of being penalized if they guess wrong.\u00a0 Tax laws should be clear; regulations should be issued promptly and provide more clarity; and when that doesn\u2019t happen, the government should not be able to jump out of the mist shouting \u201cgotcha!\u201d<\/li>\n<\/ol>\n

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                    1. Tricks disguised as Treats<\/strong>. We like Halloween treats as much as anyone else \u2013 our personal favorites are popcorn balls and caramel apples \u2013 but when it comes to tax policy, too often tricks masquerade as treats, particularly in election years.\u00a0 Vague promises of increased spending on favored programs to be funded by a tax somebody else pays are often as hollow as a jack-o-lantern.\u00a0 Similarly, promises to cut taxes without identifying programs where spending will be cut are as stale as last year\u2019s bubble gum.\u00a0 Now a candidate who made specific proposals\u2013 that would be a welcome treat.<\/li>\n<\/ol>\n

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                      [1<\/a>] President of the Taxpayers’ Federation of Illinois since January 2013, Carol Portman has been working in the state and local tax arena for over two decades.<\/p>\n

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                      Scary Tax Things   October 2018 (71.9) Carol Portman[1] TFI Halloween does not necessarily prompt thoughts of bad tax policy, but in honor of the season, we thought we would take a light-hearted (but still serious) look at some potentially frightening developments in the state…<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[4],"tags":[16,19],"class_list":["post-1228","post","type-post","status-publish","format-standard","hentry","category-tax","tag-state-and-local-tax","tag-tax-policy"],"_links":{"self":[{"href":"https:\/\/illinoistax.org\/index.php?rest_route=\/wp\/v2\/posts\/1228","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/illinoistax.org\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/illinoistax.org\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/illinoistax.org\/index.php?rest_route=\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/illinoistax.org\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1228"}],"version-history":[{"count":4,"href":"https:\/\/illinoistax.org\/index.php?rest_route=\/wp\/v2\/posts\/1228\/revisions"}],"predecessor-version":[{"id":1252,"href":"https:\/\/illinoistax.org\/index.php?rest_route=\/wp\/v2\/posts\/1228\/revisions\/1252"}],"wp:attachment":[{"href":"https:\/\/illinoistax.org\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1228"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/illinoistax.org\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1228"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/illinoistax.org\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1228"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}