For the most part, I've devoted most of my analysis of potential changes in the tax code to proposals that are either revenue neutral or revenue increasing. This is for the simple and practical reason that both the State of Colorado and the United States Government are in pretty dire financial straits at the moment, and hence the prospect of meaningful tax cuts in the near future look pretty bleak. But, you never know when opportunity will knock, so I'll take a post to sketch out some sensible ways to make tax cuts, should the opportunity arise.
* Repeal product based alcohol taxes. Unlike tobacco, alcohol has significant health benefits that mitigate its significant health costs. This tax is also highly regressive. Licensing fees on establishments could remain in place to cover the costs of enforcing what remains of federal alcohol regulation in addition to collecting taxes on alcohol sales (e.g. insuring purity in retail alcohol products sold to the public).
* Repeal the federal phone tax on long distance services. This is regressive and serves no obvious positive policy purpose.
* Repeal excise taxes on bows, arrows and fishing equipment. Unless these excise taxes operate as user's fees for a segregated fund that benefits hunters and fishers particularly, there is no reason to single them out for a special tax.
* Reduce the universal access fee on phone bills. This regressive fee pays to both provide lifeline service to low income phone users, which is reasonable, and to provide subsidized land line phone service in rural areas, which is an unnecessary subsidy. A reduction that would reflect an end to subsidies of rural telephone service would be appropriate.
* Repeal residual FUTA (federal unemployment) taxes. This is usually a flat $54 per employee in states that have their own unemployment insurance systems. The amount collected is both purely regressive and not worth the trouble to collect.
* Repeal sales taxes on services provided by regulated public utilities like natural gas, electricity and telephone service. These are regressive, and because utilities are regulated, the public can be assured that the savings will be passed on to consumers.
* Repeal sales taxes on diapers, toilet paper, tampons, sanitary napkins, toothpaste, tooth brushes and other toiletries. This is a particularly regressive part of the sales tax and is just as necessary as grocery store food, which is also sales tax free.
* Repeal sales taxes on fast food. This both poses questions of classification, is regressive, and to the extent that it is more expensive than grocery store food, is more expensive because of the service provided by the establishment and not because of the good content.
* Repeal the documentary tax. This is a very small sales tax in Colorado (IIRC $1 of tax per $10,000 of sales price) on commercial sales of real estate. The complexity involved in calculating the tax and accounting for the proceeds is not justified by the small amounts collected. The cost of recording documents also bears no relationship to the purchase price of the property. If necessary, recording fees can be increased to pay for the change.
* Modify lodging taxes. Often these are a fixed dollar per night amount. A percentage of the cost of lodging would be equitably share the burden of these taxes. Thus, rather than having a $5 a night lodging tax, a 10% tax might be imposed with a $30 a night place collecting $3 in tax, while a $100 a night place collects $10 in tax.
* Repeal Colorado's property tax on motor vehicles. This is regressive and if we are going to tax transportation, gas taxes, which pay for roads and encourage fuel efficiency are a better tax than motor vehicle property taxes which go into the general fund and do little to impact driving or car purchasing decisions.
* Repeal or increase the exclusion amount applicable to the property tax on personal property (like plant and equipment) used in a business. This hurts small businesses and is administratively complex (requiring appraisals, for example) while producing relatively little revenue.
* Consider a modest homestead exemption for property tax purposes. While this change could discourage municipalities from allowing property to be zoned to permit affordable housing, it would transform Colorado's property tax from a slightly regressive to a slightly progressive one. This has been experimented with in the form of a homestead exemption for older Coloradans.
* Establish a deduction for rent paid for a primary residence similar to the mortgatge interest deduction. The economic decision on renting v. owning is best made by the marketplace, and the current system unfairly disadvantages renters in high property value areas.
* Establish a deduction for homeowner's insurance (including flood and earthquake insurance). This creates a tax incentive to do something that could reduce the cost of disaster relief should a disaster occur, which is a far better incentive than the mortgage interest deduction which encourages you not to pay off your mortgage, and would involve little additional record keeping, since insurance is usually paid for in one or two payments a year, by check or credit card or through an escrow account. Of course, it also encourages home ownership.
* Establsh a deduction for private mortgage insurance. This is de facto interest in low down payment loans, and should thus be deductible since it is similar to the mortgage interest deduction. It also affects primarily loans of first time buyers thus being particularly discriminating in encouraging home ownership, if that is what you want to do, without providing unnecessary tax benefits to people who would have been home owners anyway. It also involves little record keeping.
* Establish a deduction for automobile insurance. Unlike interest, automobile insurance is something we generally want to encourage people to obtain. This also has a progressive effect and involves little record keeping. One can also think of it as a cost, not of earning income, but of avoiding casualty losses. Casualty losses are deductible, and both homeowner's insurance and car insurance are basically ways to pay for casualty losses on the installment plan in advance, instead of all at once.
* Establish a deduction for sales taxes on car purchases. Most sales tax collections aren't worth the trouble to keep track of, but a car is a rare major purchase for many people and often comprises a significant share of their overall sales tax paid. There is no good reason to distinguish sales taxes from property taxes for purposes of tax deductibility, except for the record keeping difficulties involved in most cases. Tax on tax is to be avoided.
* Make child support payments tax deductible, just as alimony payments are, although this would probably require child support payments to be treated as income. There is no reasoned justification for treating alimony and child support differently for tax purposes. The alimony approach tends to reduce aggregate federal tax collections, while the child support approach tends to increase them.
* Allow a charitable deduction for gifts to beggers with "begger vouchers". Usually, a gift to an individual may not receive a charitable deduction. But, giving to the homeless or vagrants clearly serves a charitable purpose. Vouchers would provide the paper trail needed to confirm that the gift was actually made, something that would otherwise be an accounting nightmare.
* Make the charitable deduction an above the line deduction. Now, only taxpayers who itemize can receive the full benefit of the charitable deduction. This change helps both lower income taxpayers and charities.
* Allow health insurance expenses of the non-self-employed, e.g. retirees or employees of firms that don't provide health insurance, to be deducted. The justification is the same as for the self-employed health insurance deduction.
* Reduce the percentage of AGI threshold for medical expenses. While some threshold reduces the record keeping and calculation burden associated with these expenses, the current threshold requires truly crushing expenses before any deduction is allowed.
* Create a deduction for losses on a personal residence or personal property limited to discharge of indebtedness income. The general rule is that a discharge in indebtedness, such as a lenders write off of a mortgage in a non-recourse state like California, is taxable income unless it comes within some exception to the general rule. Steps short of a true foreclosure, like a fire sale of the residence accompanied by a deal with the lender to forgive the balance of the debt, don't always fall within the exceptions, even when the seller takes a loss on the sale. This deduction would end this problem.
* Create an income tax credit for FICA taxes paid up to a certain level (say $5,000 of FICA taxable income) for both employers and employees. This would encourage employees to hire people and would help low income workers from an otherwise regressive tax that affects only earned income. Similar credits already exist for targetted populations (like welfare to work) under the current tax code with elaborate administrative requirements to qualify.
* Create a $50 tax credit for expenses incurred by foreclosing landlords to put a tenant's possession in storage for at least one month. The biggest harm to tenants from an eviction is often stolen or damaged personal property removed from the premises. Putting property in storage at the landlord's expense for a month would greatly reduce this harm and is a more civilized way to dispose of a tenant's personal property. While the credit goes to the landlord, the benefit is primarily the tenant's.
* Allow any two adults who share a household and consent to file jointly to file using the married filing jointly tax status. This disentangles the definition of marriage for other purposes from the tax benefits to people with unequal incomes of filing jointly.
* End the taxation of Social Security benefits. The maximum benefit is modest, and it greatly simplifies financial planning and tax returns for elderly people.
* Exclude unemployment benefits from income. While there is some reason to tax it, since it replaces income, almost everyone who has lost a job is already taking a massive income cut and needs a break. The revenue effects, moreover, are modest.
* Exclude tips up to $25 a day from income and payroll taxes. Most of this income goes unreported anyway, most of the people receiving these small amounts of tips are low income anyway, and the dollar cap prevents abuse by people in industries which are not traditionally tipped, or in industries where all compensation is customarily through tips (like skycaps). The dollar amount represents roughly the difference between minimum wage for non-tipped employees and minimum wage for tipped employees over an eight hour day.
* Allow taxpayers to take a 15% tax credit for up to $500 of Roth IRA savings a year (maximum benefit $75). This encourages savings at a modest tax cost, and once accounts are in place, people fill find it easier to save for retirement in the future.
* Exclude contingent legal fees from income, rather than treating them as an itemizable deduction subject to limitations.
* Allow drug dealers to deduct the actual costs incurred to make drug profits. Current law taxes drug dealers on their revenues without allowance for their expenses as a punitive measure. This has the effect of creating huge tax debts for even small time drug dealers. If one is going to impose a penalty on drug dealing, don't use the tax system to do it. Of course, this doesn't mean that true profits from illegal drug dealing (likely inferred from gains in wealth in most cases) should go untaxed.
* Create income averaging accounts. These accounts would allow taxpayers to spread income from windfall taxable income like lump sum retirement account distributions, capital gains proceeds, lottery winnings, good farm crops or bonuses deposited as cash into the account in the year earned. Contributions would be tax deductible. Total returns earned in the account would have to be distributed each year and would be taxable, as would be withdrawals of principal from the account. This would keep a windfall in one year from being taxed at artifically high rates unless the funds were actually spent in that year.
* Capital improvement tax credits. Normally, when you make a capital improvement to property (like renovating real estate), you can't take that as an expense, but receive an increase in your basis in a capital asset for capital gains tax purposes that will reduce your capital gains tax bill in the future. With this credit, a person rennovating property subject to capital gains taxes (like investment real estate) could foregoe the basis increase in exchange for a tax credit equal to 15% of the cost of the improvement, essentially taking the tax benefit of the basis improvement in advance.
* Create a gift tax exclusion for gifts made to ancestors. The gift and estate tax is designed to tax the passage of wealth to younger generations, not the other way around.
Miscellaneous Taxes and Quasi-Taxes
* End the Medicaid Estate Recovery Program. This program generates little revenue and affects only those who have already been determined to have low incomes and modest assets. Medicaid should be a grant, not a loan.
* Buy out toll road operators' rights to collect tolls on selected roads, converting them into freeways. Once the road has been constructed, a toll is another form of de facto tax on something that is usually free in our society.
* Increase the percentage of lottery ticket revenues that go to prizes. Currently the percentage is usually 50%. But, this basically acts as a tax on the poor and innumerate. If the percentage were increased to say 90%, this de facto regressive tax on lottery players would be reduced, and other forms of gambling, which provide profits to casino or racetrack operators, instead of public revenues or random redistribution of wealth, would likely be greatly suppressed due to their inability to offer similarly favorable odds.
* End head taxes on employees. This often $x per employee tax, typically imposed by employee rich localities, is grossly regressive and discourages employment. A better approach would be to have localities get a share of state income tax revenues (perhaps 0.1% of payrolls) determined through W-2s or some similar method.