Via Wikipedia

In its usual last-minute frenzy, the Iowa General Assembly passed a bill (HF 625) to extend the popular School Tuition Organization credit.  The credit is 65% of the amount contributed to organizations that subsidize private elementary and secondary tuition.  When combined with the federal tax deduction for the donation, there is very little out-of-pocket cost for the donations.  The amount of the credit is limited, so it has been oversubscribed in recent years. the bill increases the cap starting in 2013.

The bill has a surprising amendment that passed yesterday: it now creates “affiliate nexus” in Iowa (my emphasis):

   (1) A retailer shall be presumed to be maintaining a place of business in this state, as defined in paragraph “a”, if any person that has substantial nexus in this state, other than a person acting in its capacity as a common carrier, does any of the following:
       (a)  Sells a similar line of products as the retailer and does so under the same or similar business name.
       (b)  Maintains an office, distribution facility, warehouse, storage place, or similar place of business in this state to facilitate the delivery of property or services sold by the retailer to the retailer’s customers.
       (c)  Uses trademarks, service marks, or trade names in this state that are the same or substantially similar to those used by the retailer.
       (d)  Delivers, installs, assembles, or performs maintenance services for the retailer’s customers.
       (e)  Facilitates the retailer’s delivery of property to customers in this state by allowing the retailer’s customers to take delivery of property sold by the retailer at an office, distribution facility, warehouse, storage place, or similar place of business maintained by the person in this state.
       (f)  Conducts any other activities in this state that are significantly associated with the retailer’s ability to establish and maintain a market in this state for the retailer’s sales.
       (2)  The presumption established in this paragraph may be rebutted by a showing of proof that the person’s activities in this state are not significantly associated with the retailer’s ability to establish or maintain a market in this state for the retailer’s sales.

This ratifies the aggressive approach of the Iowa Department of Revenue on intangible nexus, and will likely trigger more audits of out of state companies.  The Supreme Court and Congress really need to either reaffirm the Quill decision or set new rules.

Tax Justice Blog, Tax Credit for Working Poor Survives Iowa Tax Compromise.  Remember, it’s also a thief subsidy.  Just because it’s supposed to go to the “working poor” doesn’t mean it does.

Christopher Bergin, The IRS Is Broken, But That’s the Symptom (Tax.com):

The IRS is broken, that’s for sure. But the IRS is a symptom. The “disease” is the tax code. I think that’s absolutely right. And for me, this latest “scandal” concerning the IRS is going to make it impossible to reform our tax code anytime soon.

More difficult, but more necessary.

TaxProf, The IRS Scandal, Day 15

Kay Bell, IRS places Lois Lerner on administrative leave in latest fallout from Tea Party tax exemption review snafu

Joseph Henchman, Congress Asks Organizations Targeted by the IRS to Come Forward and Tell Their Story

Tax Trials, See You on Tuesday: IRS Furloughs Impact Certain Filing Deadlines & Services

Linda Beale, Does Apple’s Cook Cook the (U.S. tax) Books?

Jack Townsend, IRS Reminders for Foreign Income Reporting

Robert D Flach is Buzzing!

The Critical Question: Could State Taxes Cause Dwight Howard To Flee L.A. For Houston? (Anthony Nitti)

Breaking news from my neighborhood: Woman Allegedly Brandishing Knife ‘Welcomes’ New Neighbor.  How my neighbors are living out the pages of The Onion.

News you can use:  Apparently It Doesn’t Take Much for an Accountant to Get Kidnapped and Beaten These Days… (Going Concern)

Always trust tax advice from rappers. Fat Joe Blames His Tax Evasion Problems On ‘Fancy Guys In Bow Ties’

If you think about it, taxes are really just a form of charitable giving. Our goal is to reach a high level of participation from both American and Irish corporations, and your donation in any amount makes a difference. We also welcome any in-kind donations in the form of iPhones and iPads.  My daughter knows how to use them.

Um, no.  As any tax prof would tell you, a gift requires a donative intent, which in turn requires a voluntary transaction.  There is nothing voluntary about giving the government corporate taxes.

From a tax law standpoint, there are all sorts of problems with this analogy, aside from the lack of a charitable deduction for income tax payments.  Starting with:

- A 501(c)(3) charitable organization is not allowed to conduct overt political activity.  If a charity tried to pull the same sort of stunt IRS agents did with the Tea Parties, they’d lose their exemption.

- A charity can’t allow its activities to inure to the benefit of private individuals.  That’s the biggest single thing the government does anymore.    Taking money from struggling young folks to pay Social Security to wealthy Florida retirees wouldn’t cut it in any real charity.  Giving billions to Warren Buffett wouldn’t either.

You can argue some of that goes to deserving poor folks, but when 25% of the biggest income support program is stolen, even that is tough to swallow as a charitable activity.

Jonah Goldberg puts it well:

The fundamental insight of libertarianism is that the government is the government. It cannot be your mommy, your daddy, your big brother, your nanny, your friend, your buddy, your god, your salvation, your church or your conscience. It is the government. A big bureaucracy charged with certain  responsibilities, some of which it is qualified to carry out, many of which it is not.

The government isn’t a charity.  It’s at best a necessary evil, and is mostly a tool for politicians and their enablers to take money from you to buy votes and pass around to the politicians’ friends.

Related:  Should Apple just write a big check to the IRS?

If Iowa’s income tax were a car, it would look like this.

The Iowa General Assembly nears the end of its annual rampage.  While it finally did something to improve a bad commercial property tax system, it managed to make an already awful income tax a little worse.

The Iowa Senate cleared a property tax plan (SF 295) yesterday to reduce commercial property assessments by 10%, with additional property tax credits for smaller businesses.  Unfortunately, the price was to more than double Iowa’s version of the fraud-plagued Earned Income Tax Credit and, it appears, to clutter up the 1040 with additional petty tax credits — those these provisions are apparently part of a separate bill.

As if that weren’t enough abuse to the income tax, the Senate also increased Iowa’s tax credit corporate welfare budget by $50 million  (HF 620) by increasing the amount of tax credits that the economic development bureacracy can hand out.  They sweetened the corporate welfare pot by enabling the diversion of employee withholding to local crony capitalist slush funds economic development funds.

Another bill, HF 625, increased the popular school tuition credit, a poor substitute for true school choice.

While the politicians will pat themselves vigorously on the back, the net result isn’t very exciting.  Yes, lower rates for commercial property are needed.  But now Iowa’s dysfunctional income tax is larded with even more corrupt special interest favors, which will make it that much harder to ever enact a system that makes sense for taxpayers without lobbyists and connections.

Related:

David Brunori, Soviets Run Mississippi, Planned Economies and All (Tax Analysts Bl0g)

The Quick and Dirty Iowa Tax Reform Plan.

TaxProf, The IRS Scandal, Day 14

Going Concern, Lois Lerner Knows What You People Are Thinking

Andrew Lundeen, Apple’s Appearance before the Senate Clarifies the Need for Comprehensive Tax Reform (Tax Policy Blog):

Our average combined rate of 39.1 percent is the highest in the industrialized world. In an increasingly globalized world, this matters more today than it did the last time we reformed the code in 1986. Today the U.S. has to compete with countries around the globe who are constantly improving their tax codes. When the U.S. fails to do so itself, American consumers, workers, and shareholders lose out.

Kyle Pomerleau, Another Perspective on the Apple Hearing (Tax Policy Blog):

Politicians created the current corporate tax system and the current system is broken. If you are going to set out a menu of options for corporations to reduce their tax burden, don’t be surprised or upset that corporations take advantage of them.

Indeed.

Linda Beale, Citizen for Tax Justice’s Bob McIntyre on Apple’s offshore profit-hoarding.

Robert D. Flach, A KIND OF CATCH-22  On the compliance burden of the fraud-ridden Earned Income Tax Credit.

Tax Trials, See You on Tuesday: IRS Furloughs Impact Certain Filing Deadlines & Services

Kay Bell, IRS offices will be closed Friday, May 24. Plan accordingly

Jack Townsend, Tax Perjury and FBAR Charges Related to Illegal Income Fake Art Case

Cara Griffith, A Missed Opportunity in Texas (Tax Analysts Blog)  An attempt to enact an independent tax court in Texas fails:

“The importance of an independent tax tribunal is well documented in the pages of tax journals and even mainstream media outlets.” 

Iowa has nothing like an independent tax appeals process.

Me, Playing with fire: Using an IRA to finance your business.  My new post at IowaBiz.com, the Des Moines Business Record blog for entrepreneurs.

But some congresscritters believe that’s exactly what CEOs of multinational corporations are supposed to do, based on their behavior yesterday in a hearing called to beat up Apple for not wasting corporate resources paying more taxes than it legally should.  From the Wall Street Journal:

Sen. Carl Levin (D., Mich.), chairman of the investigations panel, on Tuesday accused Apple of employing “alchemy” and “ghost companies” to escape tax collectors in the U.S. and Ireland, the base of the firm’s international operations outside the Americas.

“Apple has sought the Holy Grail of tax avoidance,” said Mr. Levin. “Apple is exploiting an absurdity, one that we have not seen other companies use.”

Mr. Cook countered: “There’s no shifting going on…We pay all the taxes we owe, every single dollar.”

It’s rich for a congresscritter to beat on a taxpayer for “exploiting an absurdity,” when every year Congress writes new absurdities into the law.  A few that leap to mind:

The Section 199 deduction, to artificially divide a modern economy into favored classes, like manufacturers, farmers and architects.

The First-time homebuyer credit, A fraud-ridden boondoggle that cost billions while failing to affect home prices.

Cash for clunkers, helping the economy by destroying perfectly good used cars.

Tax credits for wind, ethanol and biodiesel, to help struggling entrepreneurs like Warren Buffett prove that old and inefficient technologies can make money with enough government subsidies.

Congress writes the tax laws, making them a horrendously-complicated mess.  It’s rich for Congress to complain that other people understand it better than they do.

Other coverage:

Tax Policy Blog, Kyle Pomerleau on Apple’s Tax Hearing in the Senate and Scott Hodge on Apple’s Tax Hearing in the Senate

Megan McArdle, Congress to Grill Apple CEO About Taxes

Going Concern, Tim Cook Is Sorry He’s Not Sorry

Ed Krayewski, Tim Cook Tells Senate Apple Pays All The Taxes It Owes

Matthew Feeney, Rand Paul Slams Colleagues for Criticizing Apple’s Tax Strategy:

“I’m offended by the spectacle of dragging in executives from an American company that is not doing anything illegal,” he added. “If anyone should be on trial, it should be Congress.”

I’ll give Howard Gleckman of TaxVox the last word:

What’s the problem with all this? There is the revenue loss to the U.S., of course. But perhaps worse is  the incredible inefficiency driven by the tax code. The price of high corporate rates is the raft of deductions and credits that encourage corporations to lower their taxes rather than produce great new products.

 

Just imagine if Apple could replace all those tax lawyers with creative new software geeks or industrial designers. It might win back some of the market share it has been losing to Android in recent years.

Former IRS Commissioner Shulman, showing how bad he feels about politcal harassment under his watch.

The Worst Commissioner Ever returned to Washington yesterday to testify before a Senate committee on the IRS scandal.  He bravely took responsibility for the targeting of disfavored political groups and apologized to the victims.

Well, not exactly:

 I certainly am not personally responsible for creating a list that had inappropriate criteria on it. And what I know, with the full facts that are out, is from the inspector general’s report, which doesn’t say that I’m responsible for that. With that said, this happened on my watch. And I very much regret that it happened on my watch.

In other words, I was just the boss, and you can’t blame me for what those crazy kids in Cincinnati do.

Just exercising the right they encouraged the Tea Partiers to use – silence.  The IRS functionary who announced the scandal in response to a planted question isn’t going to answer real ones.  From the Wall Street Journal:

Lois Lerner, the head of the Internal Revenue Service office that targeted conservative groups, intends to invoke her constitutional right against self-incrimination and decline to answer questions about the matter when questioned by a congressional committee Wednesday.

Ms. Lerner, director of the tax-exempt-organizations division at the IRS, notified the House Committee on Oversight and Government Reform through her attorney that she wouldn’t answer questions on the matter, according to a committee spokesman.

When it comes to the Bill of Rights, better late than never.

Is Washington a suburb of Cincinnati?  Oversight from Washington, All Along    (Eliana Johnson)

TaxProf, The IRS Scandal, Day 13

Watchdog.org, Top 10 quotes about Obama’s #scandalpalooza

Via Don Boudreaux, The Real Lesson of the IRS Scandal (Richard Epstein) and The Autocrat Accountants    (Mark Steyn)

Patrick Temple-West,  White House knew of IRS scandal in April, and more (Tax Break)

Clint Stretch, Targeting tax-exempts and tax reform (Tax Analysts Blog)

Joseph Thorndike, A World Without 501(c)(4)s (Tax Analysts Blog)

Russ Fox, Ms. Lerner Knows the Fifth (IRS Scandal Update)

In other news:

Kay Bell, Tornado-ravaged areas of Oklahoma declared major disasters, leading to special tax relief from IRS

Trish McIntire,  Oklahoma DIsaster- Tax Relief.

TaxGrrrl, IRS Announces Tax Relief For Oklahoma Tornado Victims

Paul Neiffer, Will Excess Farm Loss Rules Apply With New Farm Bill?

Jason Dinesen, How to Allocate the Deduction for Federal Estimated Tax Payments on Your Iowa Tax Return

Robert D. Flach, TRUE TAX TIME TALES – IRA WITHDRAWALS

Brian Strahle,  MARYLAND:  WYNNE CASE UPDATE

On Friday, May 17, 2013, the Maryland Court of Appeals denied the comptroller’s motion for reconsideration in Comptroller v. Wynne,  which struck down the state’s application of credits against pass through income from S corporations; however, the court stayed implementation of the ruling to allow the comptroller to petition the U.S. Supreme Court for certiorari.

Peter Reilly,  RVania Resident Taxed By New Mexico.  State tax problems of folks who live on the road.

Kaye Thomas,  Self-Directed IRA Implodes.  The same case I discussed here.

 Jack Townsend, Tax Perjury and FBAR Charges Related to Illegal Income Fake Art Case

Jim Maule, Taxation is Not Theft.  It’s not theft when the government does it.

It’s too bad that the cost of a sensible property tax is a big increase in a program that is a poverty trap for honest taxpayers and a pinata for thieves.  The phase-outs of the EITC result in shockingly-high marginal tax rates on each additional dollar earned by relatively low-income taxpayers.

The EITC  is refundable, which means it is really a welfare program run through tax returns.  About 25% of the EITC is claimed “improperly,” which is a nice way to say it’s stolen.  The annual cost of the Iowa EITC boost is estimated at $35 million, so the price of fixing a broken commercial property tax regime is an $8 million annual thief subsidy.  So while the politicians celebrate their great compromise, Iowa’s petty thieves also have occasion to raise a glass, filled by you.

TaxProf,  Supreme Court Unanimously Reverses Third Circuit, Says PPL Can Claim Foreign Tax Credit for U.K. Windfall Tax and Avi-Yonah and Christians on Yesterday’s PPL Decision.

Jeremy Scott, Rand Paul’s Claim of “Written Policy” Seems Like GOP Overreach. 

It is unlikely that Republicans will find Paul’s smoking gun, but the IRS scandal is almost certainly the result of political bias on some level.  It is hard to believe that a group of officials would innocently pick terms like “Tea Party,” “patriot,” and “9/12” to single out organizations for additional scrutiny.  It would be incredible to find such disinterested tone-deafness even in the most politically insulated of civil servants (and the IRS is far from insulated).

I doubt the White House left fingerprints on IRS efforts to harass political opponents (though it didn’t lift a finger to stop it).   That leads to an even more depressing possibility: that the IRS went out its way to beat up on the President’s opponents on its own.  Nobody blew the whistle.  That means IRS management is so corrupt and political that it would go after the administration’s political opponents with only a wink and a nudge.  And anybody who doesn’t think this was politically-motivated is kidding themselves.

James Taranto puts it well:

And the IRS scandal was a subversion of democracy on a massive scale. The most fearsome and coercive arm of the administrative state embarked on a systematic effort to suppress citizen dissent against the party in power. Thomas Friedman is famous for musing that he wishes America could  be China for a day. It turns out we’ve been China for a while.

No-longer-Acting IRS Commissioner Steven Miller

Megan McArdle, Yes, What Happened at the IRS is a Scandal

Russ Fox, The IRS Scandal Reaches the White House

TaxGrrrl, IRS Hearing Marks End Of Their Worst.Week.Ever But Congress Signals More Hearings Are On The Way

Kay Bell, House and Senate committee hearings on IRS screening of Tea Party tax-exempt applications set for May 21 & 22

ViralRead, Report: Head of IRS Employees Union Met With President Obama the Day Before Tea Party Targeting Began

The Other McCain, Portrait of a Thug: IRS Union Boss

Peter Reilly, Bank Cannot Issue 1099-C And Subsequently Try To Collect

Jason Dinesen, Same-Sex Marriage, Community Property, And Multi-State Income — Part 3

Fiduciary Income Tax Blog, Passive Income: Good or Bad?

Paul Neiffer,  A Farmland REIT is Now Publicly Traded

Stephanie Fitch, 5 Questions Congress Should Ask Obama Commerce Nominee Penny Pritzker

William Perez,  IRS Offices to be Closed on May 24

Linda Beale, How Apple avoids US taxes with shell games

Going Concern,  Last Year Was a Very Unfortunate One to Be Wealthy and French, Even By French Standards.  When marginal rates exceed 100%, you know a country is off the rails.

Robert D. Flach has a new Tuesday Buzz up!

The Critical Question: NFL Linebacker James Harrison Spends More On Massage Than You Did On Your House. But Can He Deduct It?  (Tony Nitti)

-Short Term (demand loans and loans with terms of up to 3 years): 0.18%

-Mid-Term (loans from 3-9 years): 0.95%

-Long-Term (over 9 years): 2.47%

The Long-term tax-exempt rate for Section 382 ownership changes in June 2013 is 2.70%.

Historical AFRs may be found here or from prior Tax Update posts.

Update, 5/17: Services will be Monday, May 20 at New Life Lutheran Church, Norwalk IA, at 11:00 a.m.  Visitation will be Sunday at Hamilton on Westown Parkway, West Des Moines, 3:00-7:00 p.m.   Complete information here.