Daily Deduction

from the Tax Policy Center

ACA Tax Subsidies Face Risk; IRS Enforcement Is Overtaxed

By :: July 23rd, 2014

Two appeals courts deliver opposing rulings on Affordable Care Act tax subsidies. The DC Circuit Court ruled yesterday that the tax credits can only go to residents in states that run their own  health exchanges. In Richmond, VA, the 4th Circuit Court said the ACA language isn’t clear, so the tax credits are also available in the 36 states with federal exchanges. The case is likely to end up before the Supreme Court. Stakes are high: More than 90 percent of people in federal exchanges got insurance with tax credit support. The average credit was $276 this year, lowering  the average monthly premium to $69.

Inversions: Can’t live with ‘em, can’t retroactively kill ‘em? The Senate Finance Committee met yesterday to discuss international taxation, including the onslaught of corporate inversions. Committee Chair Ron Wyden wants the inversion loophole “plugged now.” Treasury’s Robert Stack repeated the Obama Administration’s call to “prevent companies from effectively renouncing their citizenship to get out of paying taxes.” Top Committee Republican  Orrin Hatch, against retroactive taxes and net tax increases, wants “to reform our tax code” instead.

What happens when “flash boy” math wizards partner with investment banks? They end up under congressional scrutiny. The Senate’s Permanent Subcommittee on Investigations, in its hearing yesterday, pulled back the curtain on the “alchemy of derivatives” used by hedge fund manager Renaissance with Deutsche Bank and Barclays. TPC’s Steve Rosenthal testified that the derivatives owned by the banks but managed by Renaissance “stretched two key elements of the tax law” to convert short-term trading profits into long-term capital gains. He believes “Congress should address the taxation of derivatives comprehensively—to reflect the income from derivatives more clearly.”

What happens when big money allows organizations to game the tax law? TPC’s Howard Gleckman explains how the IRS has the authority to enforce the tax laws stretched by a hedge fund or skirted by well-funded nonprofits. But it has no muscle: Its field audit rates for such entities are below 1 percent. That means wealthy organizations can easily avoid taxes and rarely get caught. With far less money, the average taxpayer can’t do that. If that seems unfair, it’s because it is.

As for state tax receipts: TPC’s Norton Francis reviews why some states badly missed recent revenue forecasts. They expected unusually high 2012 revenue from capital gains to continue but were wrong, so their state  income tax payments came in well below expectations. Some states—like New Jersey—were surprised, with an ugly budgetary aftermath. Others—like California and Arizona—fared better with their planning.

The House Child Tax Credit expansion bill will  likely die in the Senate. The House Rules Committee’s version includes a new provision opposed by Democrats that would require a taxpayer to report a  Social Security number  to claim the refundable portion of the credit. The bill would cost $114.9 billion over 10 years without requiring a Social Security number. With the number, the bill would likely cost less, as fewer people would be eligible to receive the refundable credit. The House is expected to vote later this week.

Also on the Hill this morning: The Senate Finance Committee holds a hearing on “Saving for an Uncertain Future: How the ABLE Act Can Help People with Disabilities and their Families.” The ABLE act would allow families and people with disabilities to set up tax-free savings accounts to cover expenses such as housing, education, and transportation.

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  1. Michael Bindner  ::  6:24 pm on July 23rd, 2014:

    I suspect that the DC Circuit will sit en banc for this and at the end will rule identically to the 4th Circuit, killing SCOTUS review. Even if they did review, they would accept the 4th Circuit ruling and encourage Congress to make changes – which is impossible now but maybe not next year.

    Hatch is right about reforming the Tax Code, but nothing is about to get out of the House on that score – or on inversions. There is a reform that taxes both the labor and the profits of all companies doing business in the US. Its called a Value Added Tax (and a Net Business Receipts Tax). Sadly that is not likely to get out of either house of Congress.

    Sadly, while tax reform should cover derivatives, it is still unlikely to occur. The IRS may be able to enforce existing law to end these practices, which is precisely why they are underfunded and there is a provision to cut some more. (You don’t really think it was about political charities facing hightened scrutiny, did you?) Even if they tried, being rich helps you a lot in facing the IRS. I am doing my dealings with them pro se.

    It is good that the story on the revenue bubble is finally getting out. Sadly, even if it went at least out as far as state governments, many of them, guess which ones, would have ignored it anyway. Did you guess ALEC members? Then you would be right!

    On the expansion of the Child Tax Credit – I am not sure why Social Security numbers would matter at all, since you need them to file and get the basic credit anyway. I suspect someone is using this provision to not address the expansion of the Credit to richer families – which is a mistake. What is needed is to increase the credit by a factor of six or twelve (the latter with state participation). If you want to do that, you need rich families beside you – especially if you throw in ending the child exemption, the home mortgage deduction and the property tax deduction to pay for the federal half. (yes, I am going to keep talking about it – whether it is scored by TPC or not).

    On the ABLE Act – all we need is another savings account for people who probably cannot afford to contribute to it. We already have Trusts for those who can. An ABLE fund would have to not count against disability insurance payments when used – and I am sure THAT will never get out of any Republican committee or House. If people on disability largely don’t have enough money, then the answer is to decouple the benefit from prior income and then greatly increase the benefit level – subsidizing the payment through the general fund.

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