What California and Kansas Can Teach Us about the Laffer Curve and Tax Theory

The Real Laffer Curve?
The Real Laffer Curve?

Since the economic collapse that began in 2008, politicians and lawmakers all across the United States have been on the move to enact policy that will stimulate the economy and bring back jobs. Tax policy has inevitably become part of this national discussion. The Laffer Curve, an economics theory that posits that cutting taxes is beneficial for economic stimulation, has been put to the test in two real life scenarios that have played out in Kansas and California. The results provide significant evidence that calls into question the well-worn principle that a higher minimum wage decreases overall employment and income.

Arthur Laffer’s Theory

The Laffer Curve, one of the fundamental tenets of supply-side economics, was popularized by the economist Arthur Laffer in the late 1970s. As a curve, it merely demonstrates the relationship between tax rates and total tax revenues collected by the government. According to this construct, the effect of a lower tax rate is an increase in work, output, and employment whereas a high tax rate penalizes these activities. The curve is often used to explain and justify the pro-growth worldview of supply-side economics. It should be noted, however, the Laffer Curve does not say definitively that a tax cut will raise or lower revenues. For example, a tax rate of 100% wouldn’t collect more money than a rate of 25%, as no one would be willing to work for an after-tax income of $0. The value of the Laffer Curve is its ability to predict economical behavior based on simple arithmetic truths.

Kansas Tax Cuts & California Tax Hikes

In the case of Kansas, after the election of Sen. Sam Brownback as governor in 2010, the state rolled out a new tax policy, a virtual low-tax paradise that was eventually meant to eliminate the state income tax. Brownback’s administration consulted Laffer on tax cuts and enacted these measures in the hopes that, according to the Laffer Curve, they would help to fuel the stagnant economy. The measures, called “the largest tax cut ever” at the time, were enacted in 2012. It quickly became clear that Kansas’ economy was not following the upward trajectory the Laffer Curve predicted it should. As a result, the state’s credit rating was lowered, first by Moody’s Investors Service and later by Standard & Poor’s, who cited “a structurally unbalanced budget.”

Meanwhile in California, tax rates were rising as much as 30 percent, raising the sales tax to the highest in the nation at 7.5 percent. The Laffer Curve indicates that California’s job growth should have slowed to a crawl and brought the state’s economy to a grinding halt. This October Governor Jerry Brown was happy to announce that the measures had quite the opposite effect, stating “California is back.”

Contradictory to what proponents of the Laffer theory may have predicted, it was California that came out the winner. Jobs in the state grew at a rate 3.4 times greater than in Kansas, and non-farm payroll jobs increased 7.2 percent in California compared to just 2.1 percent in Kansas. California’s credit rating also improved, unlike Kansas’, which means that the state can borrow money at much lower rates than Kansas can. So what happened? Do these real-life contradictions mean that the Laffer Curve doesn’t work?

What Real Life Contradictions Mean

No economic model is perfect. If anything, what these real world contradictions tell economists is that their models need more refinement, but it sends a message to politicians as well. The real world will always trump theory, and changes in policy would be better based on actual data about the number of jobs and what they pay rather than projections, ideology and theory.

It could be that raising the minimum wage will, in the fullness of time, lead to different results. California’s economy could still collapse, and Kansas could see the job growth its experts hoped for originally.  Kansas may fall behind yet further with their frozen minimum wage. For now, it would be wise of policymakers to look at the results and take note. No theory, however compelling, should be more persuasive than real-life results.

Tax Breaks for Going Green

How To Save Money "Going Green"
How To Save Money “Going Green”

Going green isn’t just the next big thing—it’s the wave of the future. There is abundant information available about ways in which you can reduce your carbon footprint, save money and feel better about your role in the stewardship of this planet. Both federal and many state governments recognize the importance of energy savings and conservation and have provided tax breaks and incentives to businesses and individuals to encourage energy efficiency and going green.

Knowing what tax benefits may be available to you when you choose to go green may be enough to help you decide to start your own plan for energy conservation. There are certain tax breaks that are available just for businesses and others that individuals may take advantage of. Here is a discussion of green tax benefits and some of the tax breaks you may qualify for, either as an individual or as a business owner.

Tax Benefits Associated with Going Green

Tax benefits that are associated with going green can be classified as a tax credit, a rebate or savings in the cost of purchase. Tax credits are a dollar-for-dollar reduction of your overall tax bill—if you qualify for a $1000 tax credit, it means you owe $1000 less in taxes. There are also loan and grant programs that states offer to certain businesses that serve as an incentive to encourage the use of alternative energy and green certified building materials in new building construction and renovations.

If you choose to install an energy efficient solar hot water heater, solar equipment that generates electricity or even a wind turbine before December 31, 2016, you may be eligible for tax credits associated with these installations.

Green Tax Breaks for Individuals

Green tax breaks that are available for individuals come in the form of tax credits, rebates or upfront savings. Depending on your tax situation, you may choose a program that offers a tax credit in order to reduce your tax liability. If you have a need for income upfront, a rebate or savings incentive may be in order. The types of programs that are available vary from state to state, so it is a good idea to find information in your local area about incentives that may be available to you as a resident.

For example, residents (including commercial and industrial sector businesses) of the State of California may qualify for a property tax exclusion of up to 100% of the value of the installation of a solar energy system in a new building construction. Illinois residents may receive a special assessment to reduce their property taxes by registering qualified solar energy equipment on their property.

Green Tax Breaks for Businesses

Just as individuals are provided with breaks for going green, businesses may want to get into the act as well. The Tax Relief and Job Creation Act of 2010 helped to extend certain Federal energy tax benefits for businesses. These include tax credits for home builders, manufacturers and commercial buildings. There are also credits available to businesses that use vehicles that are hybrids, electric powered or use alternative fuels. Access to these green energy tax credits for business can be obtained through filing the appropriate form (such as Form 8908 and 8909).

Going green, either as an individual or as a business owner, isn’t just great for the environment, it’s great for your budget. There are numerous tax breaks and incentives available for using more energy-efficient vehicles, sustainable energy, and recycled building materials. Check with an R&G Brenner tax professional to see which tax breaks you might be entitled to. 

IRS Adopts State Domestic-Partner Property Law

By: Kathleen Pender

In a significant move for same-sex couples, the Internal Revenue Service has decided to recognize California’s community property law and treat the income earned by California registered domestic partners as community property income for federal income tax purposes.

The decision, which was issued in a private-letter ruling on Friday, reverses a position the IRS took in 2006, when it said California’s registered domestic partners should each report on their own federal tax return only the income they personally earned, not one-half of their community income.

The new decision does not require or even allow California’s registered domestic partners to file their federal tax return as married filing jointly or married filing separately, as they must do with their state tax returns. They must each still file a single federal return, but each should now report one-half of their community income.

Suppose one partner earns $100,000 and the other earns $60,000. In the past, each reported only the income he or she earned. In the future, each would report $80,000, which is half their combined income. Each would also be entitled to half of the combined income tax withheld from their paychecks.

Split deductions

Itemized deductions get messy, but in general any deductible expense paid with community property funds should be split between the partners, says Chris Kollaja, a San Francisco CPA.

The new ruling could reduce federal taxes for some domestic partners, especially if one has a very large income and the other has little or none. A couple in this situation could even pay less than a married couple filing a joint return, Kollaja says.

But the ruling could hurt some couples, especially if one partner qualified for federal tax credits or benefits or college financial aid available only to low-income people. With a higher income, this person could potentially lose some benefits, says Pan Haskins, an Oakland CPA.

Private-letter rulings are issued in response to a question from an unidentified taxpayer and can be relied on only by that individual. Although they do not have the same force as a public revenue ruling, “tax preparers all the time look at them to understand the view of the IRS,” says Don Read, a Berkeley tax attorney who requested this private ruling on behalf of a client.

The IRS reiterated its position in a chief counsel advice, a memo that provides guidance to IRS field personnel. The memo says, “For tax years beginning before June 1, 2010, registered domestic partners may, but are not required to, amend their returns to report income in accordance with this” memo.

“This gives registered domestic partners a real advantage for past years,” Read says, because they can pick and choose which years to amend.

However, if a couple pays a tax preparer, the cost of amending a return could exceed the tax savings, Haskins warns.

According to attorneys, the new ruling applies only to domestic partners registered with the California secretary of state. Couples can register only if both partners are the same sex or at least one is 62 or older. It is not clear how the ruling will affect gay couples who married in California when it was legal to do so but did not register as domestic partners.

Same-sex-marriage advocates welcomed the IRS decision. “It is a positive development,” says Jenny Pizer, an attorney with Lambda Legal.

State property law

But it does not mean the IRS or the federal government recognizes same-sex marriages. It means the IRS is recognizing state property laws, as it usually does.

“All they are doing is reconfirming law that exists,” says Jean Johnston, a San Francisco tax attorney.

That law says that in California, any income earned or assets acquired during a marriage, except for gifts and inheritances, is generally considered community property and equally owned by each spouse.

A state law that took effect in 2005 gave registered domestic partners most of the same community property rights as married couples. But it said earned income could not be treated as community property for state income taxes.

California later amended that law, and starting in 2007, it treated such income as community property for state income tax purposes. Since then, registered domestic partners have had to file their state tax returns like married couples.

The private-letter ruling asked whether the taxpayer must report on his individual federal return one-half of the combined income that he and his partner earned from both their jobs and their community property assets. The answer, essentially, was yes. It also stated that “the vesting of half of taxpayer’s earnings in his partner” would not result in federal gift tax.

In another chief counsel advice, the IRS said it would consider the assets of a California taxpayer’s registered domestic partner when determining the “reasonable collection potential of a taxpayer’s Offer In Compromise.” That could make it harder for one partner who is trying to settle a federal tax debt to pay less than the full amount because the IRS, when determining his or her ability to pay, would look at the other partner’s resources.

Source: San Francisco Chronicle

NJ & NY Ranked Worst Tax Climates For Business

According to the Tax Foundation–a Washington D.C. based research firm–New Jersey & New York Sates were ranked the worst climates in the United States for business.

The Tax Foundation’s “State Business Tax Climate Index” compares the 50 states in five areas of taxation that impact business: corporate taxes; individual income taxes; sales taxes; unemployment insurance taxes; and taxes on property, including residential and commercial property.

New Jersey took the last place among 50 states in terms of business friendliness. New Jersey scored at the bottom by having the third-worst individual income tax, the fifth-worst sales tax, the 13th-worst corporate tax, and the second-worst property tax. The report said New Jersey’s and local tax burden percentage has consistently ranked among the nation’s highest, currently estimated at 12.2 percent of income (first nationally), above the current national average of 9.8 percent.

The report also said New Jersey taxpayers receive less federal funding per dollar of federal taxes paid than any other state, making the Garden State the nation’s biggest “donor state.” Per dollar of federal tax paid in 2005, New Jersey citizens received $0.61 in the way of federal spending.

New York was ranked at No. 49, beating only New Jersey. New York had the second-worst individual income tax, fifth-worst unemployment insurance tax and sixth-worst property tax.

During the past three decades, New York’s state and local tax burden percentage has ranked among the nation’s highest, currently estimated at 12.1 percent of income (second nationally), above the current national average of 9.8 percent.

The 10 lowest ranked, or worst, states in the 2012 Index are Iowa (No. 41), Maryland (No. 42), Wisconsin (No. 43), North Carolina (No. 44), Minnesota (No. 45), Rhode Island (No. 46), Vermont (No. 47), California (No. 48), New York (No. 49), and New Jersey (No. 50).

On the other hand, the 10 best states are Wyoming (No. 1), South Dakota (No. 2), Nevada (No. 3), Alaska (No. 4), Florida (No. 5), New Hampshire (No. 6), Washington (No. 7), Montana (No. 8), Texas (No. 9), and Utah (No. 10).

 Source: Insurance Journal

California Wants To Repay I.O.U.’s

The state of California has announced that they would like to make good on over $50 Millon in uncashed I.O.U.’s–also known as Registered Warrants–to some 59,000 residents and businesses as a result of last years budget crisis; almost half of which are due to Los Angeles County residents.

John Chiang, the state controller, promised Thursday to contact every one of the nonredeemers in an effort to “close an ugly chapter in California fiscal history.” Mr. Chiang practically begged them to drain the treasury.

“We have your money,” he said. “Ask for it. We want to give it back to you.”

California issued about 450,000 I.O.U’s totaling approximately $2.6 Billion, and starting redeeming them–with interest–this past September.  However, not everyone has cashed in yet.

With unemployment hovering around 12%, this money is desperately needed…but some may not even realize they have money coming to them.

If you would like to redeem your I.O.U., California residents & businesses must do so BEFORE September, 2010.  In the event that you don’t want to wait for CA to contact you, There are a few ways you can collect your well deserved refund:

Continue reading “California Wants To Repay I.O.U.’s”