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Speaking before the Family Research Council, the Republican nominee for president, Donald Trump, called for a repeal of the “Johnson Amendment.” The Johnson Amendment is part of Section 501(c)(3) of the Internal Revenue Code, and prohibits tax-exempt organizations such as schools, hospitals, and churches from participating in political campaigns. The Republican Party’s 2016 platform echoes Mr. Trump.
Democratic Party platform for 2016 repudiates a major provision of Obamacare – but no one has said this out loud. In particular, the Democratic Party has now officially called for abolition of the “Cadillac tax,” the Obamacare levy designed to control health care costs by taxing expensive employer health plans. Tucked away on page 35 of the Democratic platform is this enigmatic sentence: We will repeal the excise tax on high-cost health insurance and find revenue to offset it because we need to contain the long-term growth of health care costs."
I first met Elie Wiesel in the summer of 1965. Wiesel’s book Night had been translated into English five years earlier. Night was just beginning to be recognized in English-speaking countries. Wiesel was not yet then the impressive speaker he was soon to become. As he addressed the audience that summer about the horrors of the Holocaust, Wiesel was diffident to the point of shyness.
Sometimes it is gratifying to have predicted the future. Sometimes it is not. The recent postponement of the so-called “Cadillac tax” until 2020 falls into the latter category. I predicted this kind of outcome when the Cadillac tax was first enacted as part of the Affordable Care Act, popularly known as “Obamacare.” I am unhappy that events have now proven this prediction correct.
At President Obama’s urging, the US Department of Labor (DOL) has proposed a new regulation condoning state-sponsored private sector retirement programs. The proposed DOL regulation extends to such state-run programs principles already applicable to private employers’ payroll deduction IRA arrangements. If properly structured, payroll deduction IRA arrangements avoid coverage under the Employee Retirement Income Security […]
The Little Sisters of the Poor, an international congregation of Roman Catholic women, are unlikely litigants in the US Supreme Court. Consistent with their strong adherence to traditional Catholic doctrines, the Little Sisters oppose birth control. They are now in the Supreme Court because of that opposition.
S.B. 185, recently signed into law by California Governor Edmund G. (Jerry) Brown, Jr., requires California’s public employee pension plans to divest their investments in publicly-traded companies that derive half or more of their revenue from “the mining of thermal coal.”
Governor Andrew Cuomo says that he no longer wants New York to be “the tax capital of the nation.” The recent experience of Patrick J. Carr demonstrates the long distance New York must still travel to reach the governor’s goal.
John Oliver’s sardonic spoof of televangelists raises important issues that deserve more than comic treatment. Oliver’s satire was aimed both at the televangelists themselves and at the IRS. In Oliver’s narrative, the IRS acquiesces to televangelists’ abuse by granting their churches tax-exempt status and failing to audit these churches.
Medicare recently announced that it will pay for end-of-life counseling as a legitimate medical service. This announcement provoked little controversy. Several groups, including the National Right to Life Committee, expressed concern that such counseling could coerce elderly individuals to terminate medical treatment they want. However, Medicare’s statement was largely treated as uncontroversial—indeed, almost routine in nature.
The recent news about charitable contributions in the United States has been encouraging. The Giving Pledge, sponsored by Warren Buffett and Bill Gates, Jr., recently announced that another group of billionaires committed to leave a majority of their wealth to charity. Among these new Giving Pledgers are Judith Faulkner, founder of Epic Systems; Hamdi Ulukaya, founder of Chobani Yogurt; and Brad Keywell, a co-founder of Groupon. Moreover, Giving USA reported that charitable donations in 2014 reached an all-time high of $358 billion.
In a letter addressed to President Obama, 26 members of the United States Senate expressed their support for the private sector retirement savings laws adopted in Illinois and California, and also being considered in other states. In particular, the senators asked that the United States Treasury and Labor Departments resolve three legal issues clouding the prospects of these adopted and proposed state laws.
The Obamacare “Cadillac tax” is currently scheduled to go into effect in 2018. However, last week, sixty-six members of the House of Representatives, including both Republicans and Democrats, proposed to repeal the Cadillac tax before it becomes effective. The Cadillac tax will be imposed at a 40% rate on the cost of health care insurance, exceeding statutorily-established thresholds. Unions and many of their Democratic stalwarts, otherwise supportive of Obamacare, oppose the Cadillac tax because generous union-sponsored health care plans will trigger the tax.
On one level, I admire the public furor now surrounding Indiana’s Religious Freedom Restoration Act (RFRA). In an important sense, this discussion reflects the Founder’s vision of a republican citizenry robustly debating the meaning of important values like nondiscrimination and religious freedom. On the other hand, this public controversy has, at times, regrettably reflected failure on both sides to respect their fellow citizens and confront the merits of the issue in civil fashion.
Tomorrow night’s appearance before a joint session of Congress by Israeli Prime Minister Benjamin (“Bibi”) Netanyahu raises four important questions. 1. Should Speaker John Boehner have invited the Israeli Prime Minister to speak without first consulting with President Obama? Answer: No. As a matter of law, the Speaker had the authority to extend this invitation to the Israeli Prime Minister without consulting with the President. As a matter of policy, however, this was a bad practice.
In his State of the Union address, President Obama proposed several tax increases aimed at affluent taxpayers. The President did not suggest one such increase that some Republicans might be persuaded to support: limit the estate tax deduction for bequests to private foundations. In light of the significant economic and political power wielded by the families which control such foundations, it is compelling to limit the estate tax charitable deduction for bequests to such foundations.
As I discuss in a recent paper in the Florida Tax Review, the federal estate tax charitable deduction is unlimited. In contrast, the federal income tax charitable deduction includes detailed limitations which restrict the proportion of an individual taxpayer’s income which may be deducted as a charitable contribution. Through these limits, the income tax charitable deduction implements the ethic that everyone – even taxpayers who devote their entire incomes to charity – should pay some federal income tax.
The federal estate tax should be amended to similarly restrict an estate’s charitable deduction to a percentage of the estate. Then, every estate large enough to trigger federal estate liability would pay some estate tax, even if that estate devolves in its entirety upon charitable recipients.
In the current political environment, this change does not seem feasible. However, it might be possible to garner bi-partisan support for a less sweeping reform, namely, an estate tax charitable deduction limit only applicable to bequests to private foundations.
On the one side are the policy of encouraging charitable bequests to maintain a vibrant charitable sector and the recognition that resources transferred to charity do not directly descend to the decedent’s family. On the other hand, the public fisc has legitimate claims for the services it provided during the decedent’s lifetime. The estate tax is the final accounting for the governmental benefits the decedent received while alive. Most importantly, bequests to a private foundation often, in dynastic fashion, perpetuate substantial economic and political power for the decedent’s family which controls that foundation.
Many private foundations are admirable institutions. I am a fan of the Gates Foundation and of the Buffett family’s charitable efforts. These private foundations appear to be well run, genuinely charitable enterprises.
However, other private foundations are considerably less commendable. Such foundations often serve the thinly-disguised political and economic interests of the families controlling them. Even laudable foundations, like the Gates and Buffett foundations, entail considerable political and financial power for the Gates and Buffett families.
William Gates, Sr., is an attorney and a leader of Responsible Wealth, a coalition of wealthy individuals who favor a federal estate tax. Attorney Gates has written eloquently of the need for federal estate taxation. Few, if any, Republicans will join his call for retaining the federal estate tax.
But some Republicans may be concerned about the realities of private foundations. Looking at these realities, Republicans and Democrats might agree that the estate tax charitable deduction should be limited for bequests to private foundations including the Gates and Buffett families’ foundations.
Image Credit: “Tax.” Photo by Alan Cleaver. CC by 2.0 via Flickr.
The “lame duck” session of the 113th Congress managed to avoid a shutdown of the federal government, but did not accomplish much else. Among the unfinished business left for the new, 114th Congress assembling this month is the Marketplace Fairness Act (MFA).
The MFA would permit states to require out-of-state Internet and mail order sellers to collect sales taxes if such sellers have annual gross revenues of $1,000,000 or more. The MFA would thus establish parity between such large out-of-state, online sellers and in-state sellers which must collect taxes on their sales because of their in-state physical presence.
Passage of the Marketplace Fairness Act is long overdue. It is neither fair nor efficient that a traditional brick-and-mortar store must collect sales taxes while an out-of-state Internet firm can ship the same products into the state without collecting sales tax because such Internet firm lacks an in-state physical location. While Internet and mail order purchasers are legally obligated to pay use taxes on their purchases, in practice, it is difficult for states to collect these taxes. The MFA would establish a level playing field by requiring large out-of-state sellers to collect taxes owed just as their in-state competitors must collect such taxes.
An interesting development during the 113th Congress was the growing recognition by many Republican lawmakers that the MFA implements conservative values. In the past, Internet firms have denounced the MFA as imposing a “new” tax, a label that is poison in the current political environment. However, as Rep. Steve Womack of Arkansas has recently observed, the status quo permits Internet shoppers “knowingly and willfully” to flout their obligation to pay use tax when Internet sellers do not collect such tax. Such disregard for legal duties, he states, “has never, never been a conservative value.”
Another important development has been the growing recognition by free market advocates that the status quo effectively constitutes heavy-handed industrial policy as the government effectively hobbles brick-and-mortar retailers in their competition with Internet sellers who do not collect sales tax.
A third interesting development has been the convergence of the business models of many Internet sellers and traditional retailers. Internet firms, most prominently Amazon, have sprouted local distribution centers to provide same day (sometimes one hour) delivery of products ordered online. In those states where Amazon builds distribution centers, Amazon must collect sales tax because of its in-state physical presence.
To compete with same day delivery, some traditional retailers are experimenting with Internet ordering. Under these experiments, customers purchase online with traditional retailers and then pick-up their goods that day at the store or have their goods shipped to them that day from a traditional brick-and-mortar location. Thus, the once bright line is blurring between traditional retailers required to collect sales tax and Internet sellers which need not collect tax because they lack in-state physical presence.
As Amazon and other electronic sellers collect sales tax in additional states, it is all the more anomalous for other Internet and mail order companies to refuse to collect such tax because they lack in-state physical presence.
The Marketplace Fairness Act would excuse from the duty to collect sales tax truly small Internet sellers, defined as those firms selling less than $1,000,000 annually over the Internet or by mail order. The only compelling objection to the MFA is that, if the MFA became law, a single dollar sale into a particular state would compel a covered seller to collect that state’s sales tax.
Infrequent and casual sales into any particular state should not trigger the obligation to collect that state’s sales tax. Hence, Congress should amend the MFA to require that an Internet seller need not collect the taxes of any particular state until that seller’s sales have have met some minimum threshold in that state. I would recommend that an Internet (or mail order) seller with $1,000,000 in aggregate sales be required to collect taxes for each state into which it sells $10,000 or more in any year.
So amended, the 114th Congress should enact the Marketplace Fairness Act.
In Freedom From Religion Foundation, Inc. v. Lew, the US Court of Appeals for the Seventh Circuit recently dismissed a constitutional challenge to the parsonage allowance provisions of the Internal Revenue Code (Code). Under Section 107(2) of the Code, a “minister of the gospel” need not pay income taxes on the housing allowance received by the minister as part of his or her compensation. According to the plaintiffs in this case, the income tax exclusion established by Code Section 107(2) violates the Establishment Clause of the First Amendment because the exclusion is available only to clergy, not to individuals who receive cash housing allowances from their secular employers.
In dismissing the case brought by the Freedom From Religion Foundation (FFRF), the appeals court did not reach the substantive merits of this constitutional claim. Rather, the Seventh Circuit dismissed the case on the basis of standing or, to be precise, the plaintiffs’ lack of standing. In procedural terms, the appeals court ruled, the FFRF plaintiffs never asked the IRS for tax-free treatment for their housing allowances:
[T]he plaintiffs were never denied the parsonage exemption because they never asked for it. Without a request, there can be no denial. And absent any personal denial of a benefit, the plaintiffs’ claim amounts to nothing more than a generalized grievance of about Section 107(2)’s unconstitutionality, which does not support standing. (Emphasis in the court’s original).
The Seventh Circuit’s decision is consistent with the trend, encouraged by the US Supreme Court, to narrow taxpayer standing in the federal courts. As I recently argued in the Hastings Constitutional Law Journal, the corollary of this formalistic trend is that First Amendment lawsuits like FFRF’s challenge to the income tax exclusion for clerical housing allowances will increasingly occur in the state courts which are generally more receptive than the federal courts to claims of taxpayer standing.
FFRF has announced its intention to press its constitutional objections to Section 107. It is thus likely that these objections will be addressed in one or more state courts with more liberal procedural rules for standing.
First Church Parsonage Windsor CT by Grondemar. CC-BY-SA-3.0 via Wikimedia Commons.
The US Constitution empowers federal courts to hear “Cases” and “Controversies.” Over the years, the federal courts have elaborated the Constitution’s “case or controversy” test to require what has become known as “standing.” Among other elements, such standing necessitates that a plaintiff have experienced “personal and individual” injury rather than a generalized grievance shared with others.
In dismissing the FFRF challenge to the parsonage allowance provisions of the Internal Revenue Code, the Court of Appeals for the Seventh Circuit held that the plaintiffs did not meet this exacting standard of personalized injury. As a procedural matter, the plaintiffs had not asked the IRS to exclude from their respective gross incomes the housing allowances paid to them by their secular employer. Hence, in formal terms, the plaintiffs had no individualized injury and thus no standing to pursue their lawsuit.
The FFRF plaintiffs can now ask the IRS to exclude their housing allowances from their gross incomes and, when refused such favorable treatment, can commence their litigation again in the federal courts. Alternatively, FFRF can restart this litigation in the state courts where the tests for standing are generally more liberal than in the federal courts.
FFRF originally began its challenge to the Code’s parsonage allowance provision as a federal case in the US District Court for Eastern District of California. FFRF then refiled its litigation in the US District Court for the Western District of Wisconsin, where the FFRF plaintiffs prevailed on the merits. From there, the case went to the US Court of Appeals for the Seventh Circuit which has now ordered the case dismissed for lack of standing.
In terms of statutory law and case law, the standing rules for California’s state courts are among the most liberal in the nation. The case law of Wisconsin similarly opens the door to that state’s courts in contrast to the less welcoming standing tests of the federal courts.
California’s and Wisconsin’s respective income taxes include benefits for clerical housing allowances identical to Code Section 107. Thus, any constitutional deficiency of the federal exclusion also applies to the equivalent state income tax exclusions of parsonage allowances. So why didn’t FFRF start its litigation against the parsonage allowance in the California or Wisconsin state courts in the first place, rather than resorting to the federal courts located in those states?
Perhaps the FFRF litigants thought that a state court’s constitutional invalidation of that state’s parsonage allowance exclusion would be insufficiently influential. Or perhaps FFRF’s lawyers concluded that elected state court judges would be less receptive to their challenge than life-tenured federal judges.
In any event, FFRF says that its procedural defeat in the Seventh Circuit will not deter additional litigation concerning the alleged unconstitutionality of the favorable tax income treatment extended to parsonage allowances. Whatever the reason the FFRF lawyers chose to proceed in the federal courts, they must now be considering the advisability of litigating their concerns in the state courts, with more generous tests for standing.
On the substantive merits, I disagree with FFRF that the income tax exclusion for clerical housing allowances violates the First Amendment. As I have discussed in theCardozo Law Review, that exclusion has both secular purpose and secular effect: In constitutional terms, Code Section 107 is a permissible (though not required) attempt to minimize the church-state entanglement which would result from taxing such allowances. While there are strong tax policy arguments against Section 107(2), those arguments don’t make that section unconstitutional.
In light of FFRF’s determination to keep litigating, it is likely a matter of time before this substantive constitutional issue will be addressed in one or more state courts with more liberal procedural rules for standing.
There is a reason that Congress’s post-election meetings are called “lame duck” sessions. They often aren’t pretty. Senators and representatives not returning to Congress (because they retired or were defeated for re-election) may not have strong incentives to legislate responsibly. Senators and representatives who will be part of the new Congress starting in January may feel that the lame duck session is an imposition on them since they will be returning to Washington in the new year.
Nevertheless, it is sometimes possible for “lame duck” convocations of Congress to be productive. Some observers, for example, thought that the legislative session following the 2010 election was constructive. Among other accomplishments, that session of Congress abolished Don’t Ask-Don’t Tell and extended President Bush’s tax cuts – though, of course, opponents of those decisions would have preferred that Congress hadn’t legislated on these matters.
Can the “lame duck” congressional session following the 2014 election be productive? In the hope that it can be, I suggest that the 113th Congress enact in its final days the Multi-State Worker Tax Fairness Act, previously known as the Telecommuter Tax Fairness Act.
The Multi-State Tax Worker Tax Fairness Act has been introduced in the House by Representatives Himes, DeLauro, and Esty as H.R. 4085. In the Senate, the Act has been introduced as S. 2347 by Senators Blumenthal and Murphy.
The Act is aimed at the pernicious tax practice by which New York (and other states) impose income taxes on nonresident telecommuters for days such telecommuters work at their out-of-state homes and never set foot in the Empire State. New York’s extraterritorial taxation results in double taxation of nonresident telecommuters as New York taxes the income earned on these days while the state in which the telecommuter lives and works legitimately taxes this day also since the home state is providing public services to the telecommuter on the day she works at home.
Sunrise at the George Washington Bridge. Photo by Anthony Quintano. CC BY 2.0 via quintanomedia Flickr.
Telecommuting is growing because, in a modern economy, it can entail significant benefits. Telecommuting extends job opportunities to individuals for whom traditional commuting is difficult, for example, the disabled, parents of small children, persons who live far from major employment centers. Telecommuting is also good for the environment, reducing the carbon footprints of employees who spend some of their work days at home and need not physically commute to work on those days.
Our concerns about Ebola reinforce the benefits of telecommuting. In an earlier time, a firm combating contamination simply had to shut its operations. Today, modern technology – the internet, email, cell phones, social media – can instead permit individuals to work and communicate with each other from their homes.
The benefits of interstate telecommuting explain why a diverse coalition supports the Multi-State Tax Worker Fairness Act to avoid double state income taxation of telecommuters on their days they work at home. Among the groups supporting the Act are the American Legion, the Christopher and Dana Reeve Foundation, the National Taxpayers Union, The Small Business & Entrepreneurship Council, the Association for Commuter Transsportion, The Military Spouse JD Network, and the Telework Coalition.
It is, in short, anomalous for New York to double tax the income of nonresident telecommuters on the days such telecommuters work at their out-of-state homes and never enter the Empire State. New York engages in this double taxation throughout the country. In one instructive case, New York taxed Mr. Manohar Kakar of Gilbert, Arizona on the income he earned working at home in the Grand Canyon State. New York engages in such double taxation despite the long-term costs to New York of chasing from its borders firms which embrace interstate telecommuting. Thus, the Multi-State Worker Tax Fairness Act would be good, not just for telecommuting, but for New York itself by encouraging firms which rely on out-of-state telecommuters to stay in the Empire State.
The upcoming “lame duck” session of Congress might fit the dominant pattern of post-election convocations of the House and Senate which accomplish little. But maybe not. If members of the 113th Congress choose to spend their final days in office productively, a productive place to start would be the Multi-State Worker Tax Fairness Act. Passing the Act would be good for the country by making state income tax systems safe for interstate telecommuting.
As President Obama ponders whom he will nominate as Eric Holder’s successor as attorney general, he should consider President Ford’s appointment in 1975 of Edward Levi to head the nation’s Department of Justice.
Four decades ago, the United States was reeling from Watergate. President Nixon’s first attorney general, John Mitchell, was on his way to federal prison while Ford’s pardon of Nixon remained controversial.
In this difficult environment, President Ford reached outside his official and personal circles to appoint as attorney general a preeminent legal scholar, Edward Levi.
Levi was a distinguished law professor, an accomplished dean of the University of Chicago Law School, and the widely-admired president of the University of Chicago. In a contentious political setting, Edward Levi was confirmed as attorney general by a voice vote in the United States Senate. Everyone understood that Ford had gone beyond politics as usual to choose an outstanding attorney general capable of restoring confidence in the Department of the Justice.
Ed Levi didn’t need the job. But the United States needed Ed Levi.
Levi’s tenure as attorney general did not disappoint. When Levi left the Justice Department at the end of the Ford Administration, the department’s reputation had been restored in large measure because of Levi’s integrity, professionalism, and independence.
Photograph of President Gerald R. Ford Presiding Over an Afternoon Cabinet Meeting in the Cabinet Room. Bill Fitz-Patrick, Photographer. 4 June 1975. Gerald R. Ford Presidential Library, US National Archives and Records Administration. Public domain via Wikimedia Commons.
President Obama should strive for an Ed Levi-type appointee for his second attorney general.
Many fine individuals are being mentioned to replace Holder. Most of these individuals are excellent lawyers and, under other circumstances, would be good leaders for the Department of Justice. But the United States today, like the United States in 1975, requires more than a good lawyer as attorney general. It requires someone with Ed Levi’s gravitas.
Some might retort that nothing comparable to Watergate has transpired in recent years. True. But we are a nation badly fractured on political lines. Legitimate concerns have been raised about the recent performance of the Department of Justice. In this difficult atmosphere, it is vital to reaffirm that the Department of Justice is an institution of law, not just another hyper-partisan political arena.
Like President Ford, President Obama should look beyond his official family and his circle of acquaintances to find an attorney general whose prime credentials are professional, not political. Holder’s replacement should be perceived as an independent attorney general who doesn’t need the job.
This heavyweight appointee could, like Ed Levi, come from academia or could come from the private sector. Another potential source for such an attorney general is the judiciary. Among those meeting the Ed Levi-test would be such personages as Justice Sandra O’Connor and Judges Richard Posner, Jon Newman and Jose Cabranes of the U.S. Court of Appeals.
President Ford’s historical reputation improves with each passing year. His pardon of Richard Nixon, widely condemned at the time, is now seen as an act of statesmanship which helped to move the United States beyond Watergate. Ford’s appointment of Edward Levi as attorney general was similarly an act of high statesmanship which reaffirmed America’s commitment to the rule of law. President Obama should make a comparably outstanding appointment for his second attorney general.
Maryland State Comptroller of the Treasury v. Brian Wynne requires the US Supreme Court to decide whether the US Constitution compels a state to grant an income tax credit to its residents for the out-of-state income taxes such residents pay on out-of-state income.
Brian and Karen Wynne live in Howard County, Maryland. As Maryland residents, the Wynnes pay state and county income taxes on their worldwide income. The Maryland income tax statute provides that Maryland residents who pay income taxes to states in which they do not live may credit against their Maryland state income tax liability the taxes paid to those states of nonresidence. However, the Maryland tax law grants no equivalent credit under the county income tax for out-of-state taxes owed by Maryland residents on income earned outside of Maryland.
When the Wynnes complained about the absence of a credit against their Howard County income tax for the out-of-state income taxes the Wynnes paid, Maryland’s Court of Appeals agreed. Maryland’s highest court held that such credits are required by the nondiscrimination principle of the US Constitution’s dormant Commerce Clause. The absence of a credit against the county income tax induces Maryland residents like the Wynnes to invest and work in-state rather than out-of-state. This incentive, the Maryland court held, may impermissibly “affect the interstate market for capital and business investment.”
For two reasons, the US Supreme Court should reverse. First, Wynne highlights the fundamental incoherence of the dormant Commerce Clause test of tax nondiscrimination: any tax provision can be transformed into an economically equivalent direct expenditure. No principled line can be drawn between those tax provisions which are deemed to discriminate against interstate commerce and those which do not. All taxes and government programs can incent residents to invest at home rather than invest out-of-state. It is arbitrary to label only some taxes and public programs as discriminating against interstate commerce.
Suppose, for example, that Howard County seeks to improve its public schools, its police services or its roads. No court or commentator suggests that this kind of routine public improvement violates the dormant Commerce Clause principle of nondiscrimination. However, such direct public expenditures, if successful, have precisely the effect on residents and interstate commerce for which the Court of Appeals condemned the Maryland county income tax as discriminating against interstate commerce: Better public services also “may affect the interstate market for capital and business investment” by encouraging current residents and businesses to stay and by attracting new residents and businesses to come.
There is no principled basis for labeling as discriminatory under the dormant Commerce Clause equivalent tax policies because they affect “the interstate market” of households and businesses. Direct government outlays have the same effects as do taxes on the choice between in-state and out-of-state activity. If taxes discriminate against interstate commerce because they encourage in-state enterprise, so do direct government expenditures which make the state more attractive and thereby stimulate in-state activity.
Snow Clouds Over a Snowy Field, Patuxent Hills, Maryland. Photo by Karol Olson. CC BY 2.0 via olorak Flickr.
Second, the political process concerns advanced both by the Wynne dissenters in Maryland’s Court of Appeals and by the US Solicitor General are persuasive. Mr. and Mrs. Wynne are Maryland residents who, as voters, have a voice in Maryland’s political process. This contrasts with nonresidents and so-called “statutory residents,” individuals who are deemed for state income tax purposes to be residents of a second state in which they do not vote. As nonvoters, nonresidents and statutory residents lack political voice when they are taxed by states in which they do not vote.
Nonresidents and statutory residents require protection under the dormant Commerce Clause since politicians find it irresistible to export tax obligations onto nonvoters. The Wynnes, on the other hand, are residents of a single state and vote for those who impose Maryland’s state and local taxes on them.
In reversing Wynne, the Supreme Court should decide narrowly. The Wynnes, as residents of a single state, should not receive constitutional protection for their claim to a county income tax credit for the out-of-state taxes the Wynnes pay. However, the Court’s decision should not foreclose the Court from ruling, down the road, that credits are required to prevent the double income taxation of individuals who, for income tax purposes, are residents of two or more states. Such dual residents lack the vote in one of the states taxing them and thus require constitutional succor which the Wynnes do not.
Dissenting in Cory v. White, Justice Powell (joined by Justices Marshall and Stevens) argued “that multiple taxation on the basis of domicile” is unconstitutional. Since the Wynnes are taxed by only one state, the Supreme Court need not now confront this issue again. However, the Court should decide Wynne in a fashion which allows the Court to revisit this question in the future by holding that credits are constitutionally required to prevent the double taxation of dual residents.
Few recent decisions of the US Supreme Court have engendered as much controversy as Burwell v. Hobby Lobby Stores, Inc. In that case, the Court decided that a closely-held corporation’s employer-sponsored medical plan need not provide contraception if the shareholders of such corporation object to contraception on religious grounds.
Responding to the resulting controversy, Senator Patty Murray, along with many of her Democratic colleagues, has proposed legislation to overturn Hobby Lobby. Senators Kelly Ayotte and Deb Fischer, along with many of their Republican colleagues, have introduced legislation confirming Hobby Lobby. In the current political environment, there is little chance of either bill becoming law any time soon.
However, there is a response to Hobby Lobby which would address the concerns of both contraception advocates and of religious objectors to contraception. In particular, any employer which objects to providing birth control should instead be required to fund for its employees independently-administered health savings accounts (HSAs) or health reimbursement arrangements (HRAs). An HSA or HRA permits the covered employee to spend employer-provided, pre-tax health care dollars on any medical service the employee chooses, from birth control to an MRI, without implicating the employer in the employee’s spending decision.
The HSA/HRA alternative respects the religious rights of sponsoring employers. With conventional insurance or self-insured health plans, the sponsoring employer’s plan provides a menu of choices which frames the employees’ decisions. In contrast, the HSA/HRA approach permits employees to spend health care dollars on whatever medical services employees select including services to which the employer objects – without the employer’s plan framing the employees’ choices. HSAs and HRAs are thus like cash wages which, when spent by the employee, do not entail participation by the employer.
Justice Alito’s Hobby Lobby opinion identifies two other possible ways to provide contraception services without violating the rights of objecting employers. First, HHS might extend to closely-held for-profit firms the regulatory accommodation now limited to religious nonprofit entities other than churches. Under this accommodation, insurers or third-party administrators provide employees with contraception at no cost to the religious employer. Alternatively, the federal government might itself make birth control available to women who lack contraception coverage from their employer-sponsored health plans.
Commentators have expressed reservations about both these approaches. Some women’s health groups argue that a federal program will stigmatize the women who receive their contraception from such a program. Moreover, the problems of the Department of Veterans Affairs suggest the need for skepticism about the federal government as a provider of medical services. A number of religious groups contend that the current regulatory accommodation for religious employers does not go far enough and still makes employers participate in the provision of birth control to which they object.
In light of these concerns, HSAs and HRAs are compelling alternatives. HSAs and HRAs are analogous to cash wages which the employee spends as he chooses. Such accounts can assure women of the ability to obtain contraception which they seek with employer-provided, pre-tax health care dollars without burdening the religious beliefs of employers who object to involvement with contraception.
Suppose, for example, that Hobby Lobby is required to establish for each of its employees an HSA or HRA administered by the company’s bank. A Hobby Lobby employee could submit receipts to the bank for any type of medical care the employee selects. The employee would subsequently receive from the bank a reimbursement check for this care from his or her HSA/HRA account. Alternatively, HSA/HRA debit cards have become popular devices. These cards allow a covered employee to swipe when receiving health care services with the card.
These accounts could be used by each employee to defray any medical expense the employee elects including, but not limited to, the kinds of contraception to which the employer objects. However, the employer would not be complicit in the employee’s medical choices just as the employee does not participate in an employee’s decision to spend her wages on something with which the employer disagrees.
The HSA/HRA approach potentially has political legs. HHS (along with the Departments of the Treasury and Labor) could adopt regulations implementing this approach. Conservatives like HSAs and HRAs since these accounts implement a consumer-driven approach to health care. Liberals want to assure employees of contraception even if employers object to contraception. The HSA/HRA response to Hobby Lobby thus has bi-partisan appeal and is a compelling compromise as a matter of law and public policy.
The sad story of Casey Kasem’s last illness is now over. Casey Kasem was an American pop culture icon. Among his other roles, Mr. Kasen was the disc jockey host on the legendary radio program, American Top 40. He was also the voice of Shaggy Rogers of Scooby-Doo.
Unfortunately, for many Americans Casey Kasem is now known as the subject of a bitter dispute between his widow Jean and his children from his first marriage. In the face of Mr. Kasem’s debilitating dementia, Mrs. Kasem wanted to continue medical care while his three children from his prior marriage had concluded that care was pointless and should be discontinued. Mr. Kasem’s children prevailed in the California courts based on a document Mr. Kasen had signed in 2007. Life support was accordingly withdrawn and Casey Kasem died shortly thereafter.
At one level, it is surprising is how rarely we hear today of such stories of conflict over end-of-life care. Cases involving Nancy Cruzan, Karen Ann Quinlan, and Terri Schiavo were once prominent in our public discourse.
An unheralded accomplishment of the American political and legal systems is the largely successful privatization of end-of-life health care decisions. Through documents variously denoted as living wills, health care proxies, medical powers of attorney, and health care instructions, an individual while mentally competent can plan for the end of his life. Central to such planning is the designation a medical decisionmaker and the specification of the criteria to be applied by such decisionmaker if an individual becomes incapable of making medical decisions for him- or herself.
These planning procedures, while not panaceas, have largely ensured that end-of-life decisionmaking will be made, not in courtrooms, but where such decisions belong: by the dying individual’s designated loved ones.
Two important lessons emerge from the Kasem family’s unfortunate experience. First, spouses are not automatically medical decisionmakers for each other. Spouses should formally designate each other as medical decisionmakers, if that is what they want.
Unfortunately, debate over same-sex marriage has confused matters, leading many individuals to erroneously believe that, simply by virtue of marriage, spouses are automatically each other’s medical decisionmakers. They are not. For example, Michael Schiavo’s status as husband did not guarantee him the right to make medical decisions for his wife Terri.
It is sensible to require that spouses must formally designate each other as their end-of-life medical decisionmakers. To take the most obvious case, suppose that spouses are estranged and that a healthy spouse will gain financially through an inheritance on the death of a wealthy, ill spouse. We would not want the healthy spouse in this setting to terminate medical care unless the ill spouse had signaled that that was what he wants. Or, to take a more benign situation, spouses may love each other but still think that other persons, e.g., the children from prior marriages, will be better decisionmakers under the stress of an end-of-life situation.
The bottom line is that spouses should execute the formal instrument of their respective state, however that instrument is designated, if they want each other to be health care decisionmakers. Marriage, by itself, is not legally sufficient to make spouses medical decisionmakers for each other.
The second lesson of the Kasem story is that, even if all of the proper documents have been signed, terminating medical treatment at the end of life is a difficult and painful decision. For example, one commonly used formula specifies that medical treatment should be withdrawn when an individual’s condition is “terminal.” Unfortunately, the physicians advising in end-of-life settings do not always agree when a conditional is “terminal.” If consensus exists, it is still painful to withhold medical care even if an ill individual previously authorized such withholding while he was healthy and competent to decide.
Casey Kasem left Americans with wonderful memories. His parting contribution to the American people was to remind us of the need for proper end-of-life planning and to demonstrate that, even with such planning in place, medical decisions at the end-of-life can be painful and difficult.
Lucio Noto worked for Mobil and ExxonMobil in Virginia and Texas before retiring in 2001. In his retirement, Mr. Noto and his wife Joan maintain homes in Greenwich, Connecticut and in East Hampton, New York. For state income tax purposes, the Notos are residents of both Connecticut where they are domiciled and New York where they spend at least 183 days annually at their second home.
During his employment in the oil industry, Mr. Noto earned stock options and deferred compensation. In 2005 and 2006, he exercised these stock options at considerable gain and also received the deferred compensation he had earned earlier during his employment. Both New York and Connecticut taxed the resulting income in full without providing a credit for the income tax levied by the other. Consequently, the Notos, as dual residents of both the Empire State and the Nutmeg State, paid double state income taxes on their stock option and deferred compensation income.
The New York Supreme Court (the Empire State’s trial court) recently upheld this double state income taxation by holding that New York could tax the Notos’ income in full, even though Connecticut taxed that income as well. The Noto court correctly applied the tax and constitutional law as it today governs dual state residents like the Notos. While double taxation of dual state residents is currently legal, such double taxation is neither fair nor economically efficient.
In a recent article in the Florida Tax Review, I argue that, as a matter of both tax policy and constitutional law, it is time to apportion state personal income taxes to eliminate the double state income taxation of dual residents like the Notos. As to income which two or more states tax only on the basis of residence, such states should apportion, based on the dual resident’s relative presence in each state of residence. This apportioned approach would eliminate the double taxation of dual residents’ incomes and would comport better with modern patterns of residence and mobility.
The Noto decision illustrates the need to eliminate the double state income taxation of dual residents. In a case like the Notos’, New York and Connecticut should each tax only a pro rata share of the Notos’ option-derived and deferred compensation income based on the days the Notos spend in each of these two states of residence.
On days when a dual resident lives in his second state of residence, the first state provides no services which justify taxing the part of the individual’s income properly apportioned to the time in his second state of residence, the state which provides services on those days. Part-year benefits do not justify full-year taxation. The status quo is economically inefficient as the specter of double residence-based taxation causes unproductive tax-motivated behavior to avoid such taxation. Such economically unproductive behavior inhibits individuals from moving across state lines as they would without interference by tax considerations.
So far, the US Supreme Court has been unwilling to declare unconstitutional the kind of double state taxation imposed upon dual state residents like Mr. and Mrs. Noto. Moreover, most states have been unwilling to abate such double taxation by extending a credit for the tax imposed by the taxpayer’s second state of residence. The result is the kind of double taxation imposed on the Notos by New York and Connecticut.
It is easy to dismiss this type of double state income taxation as a quandary of the proverbial one percent. However, the problem of double residence-based personal income taxation, once limited to the very rich, is moving down the income scale as more individuals maintain second residences in different states, e.g., the Baby Boomer retiree who establishes a winter home in a warm climate; the dual career couple that balances the demands of work and family by maintaining two homes in different states.
In this environment, the traditional acquiescence to double state income taxation of dual residents is no longer acceptable. Congress could eliminate this double taxation through a federal law requiring states to apportion income when taxpayers are residents of two or more states. The US Supreme Court could reach the same result by requiring under the Constitution’s Commerce and Due Process Clauses that states apportion the income of dual residents. The states could, on their own, move toward such apportionment, either by unilateral adoption of rules of apportionment (including tax credits) or by mutual agreement.
The kind of double state income taxation imposed upon dual state residents like the Notos is an anomaly in the 21st century. In the interests of fairness and economic efficiency, this anomaly should be eliminated by requiring states to apportion the income of dual residents.
As the American public debated the legislation ultimately enacted into law as the American Taxpayer Relief Act of 2012, no person was more influential than the Oracle of Omaha, Warren Buffett. Much attention was given to billionaire Buffett’s complaint that his federal income tax bracket was lower than his secretary’s tax rate. President Obama invoked “the Buffett Rule” to bolster the President’s successful effort for the Act to raise income tax brackets for high income taxpayers.
In his most recent letter to the shareholders of Berkshire Hathaway, Buffett issued another oracular pronouncement about America’s fiscal health. Buffett warned that many public pension plans are dangerously underfunded:
Local and state financial problems are accelerating, in large part because public entities promised pensions they couldn’t afford….[A] gigantic financial tapeworm…was born when promises were made that conflicted with a willingness to fund them….During the next decade, you will read a lot of news –- bad news – about public pension plans.
Many of those who heeded Buffett’s call for higher tax brackets for the wealthy ignore his current warning about the parlous financial condition of public pension plans. One of the problems of being an oracle is that your listeners will pick and choose which prophecies to follow.
Attached to Buffett’s most recent shareholders’ letter was a 1975 memo on pensions Buffett sent to Katharine Graham, then chair of The Washington Post Company. Buffett’s observations in this now released memo are as compelling today as they were forty years ago. It is easy to grant pension benefits payable in the future while failing to fund that pension promise today as “making promises never quite triggers the visceral response evoked by writing a check.” Typical defined benefit formulas, which gear pensions to an employee’s final salary before retirement, are particularly expensive for the employer to finance since higher final salaries will, at the end of an employee’s career, escalate his pension entitlement. It is tempting, but futile, to assume that the underfunding of defined benefit plans can be remedied by every plan continuously earning above average returns on pension assets: “yes, Virginia, maybe every football team can have a winning season this year.”
All of this explains why many of the nation’s public pension plans are today seriously underfunded: Elected officials promise pension benefits without properly funding them and rely on unrealistic assumptions about future rates of return to deny the reality of underfunding.
Buffett’s observations resonate with particular force in Connecticut where I live. Connecticut competes with Illinois for the distinction of being ground zero in the public pensions crisis. In this election year, neither the Governor nor the legislature will acknowledge that the Nutmeg State’s public pensions are seriously underfunded.
Consider in this context Buffett’s warning that pension plans should not assume that they will earn superior investment returns. Connecticut contends that its pension plans will earn 8% annually. Most other states make similarly optimistic assumptions. The National Association of State Retirement Administrators has recently determined that the average state public pension plan currently assumes that its investments will earn an annual rate of return of 7.72%.
More realistic assumptions about rates of return would expose the underfunding of public pensions described by Buffett. Under the Internal Revenue Code, private sector pensions this month must calculate their obligations to pay retirement benefits using interest rates ranging from 1.19% (for pension benefits payable soon) to 6.76% (for pension benefits payable furthest down the road). If Connecticut or any other state with similarly underfunded pensions assumed these more sobering rates of return (as they should), Buffett’s dire assessment of pension underfunding would be dramatically confirmed.
Equally instructive is the recent contract settlement brokered by New York Governor Andrew Cuomo between the Metropolitan Transportation Authority (MTA) and Local 100 of the Transport Workers Union (TWU). With much fanfare, Governor Cuomo announced that TWU workers will receive increased wages but that the MTA will not elevate fares to cover these increased wages. Only after the cheering stopped did we learn how this alchemy is to be accomplished: by reducing the MTA’s scheduled contributions for pensions and retiree health care costs. Governor Cuomo, the MTA, and the TWU have decided to underfund pensions for MTA workers. No doubt, they will justify this underfunding by predicting superior investment returns on the pension’s investments.
The Oracle of Omaha is, unfortunately, right. Many states and localities will soon have to choose whether to pay pensions promised to retired workers, or whether to put police on the streets and teachers into classrooms, or whether to increase taxes significantly to pay pensions and maintain public services.
It is regrettable that many who marched under Buffett’s banner when he favored higher taxes on the rich ignore his message about the troubled state of public pensions.
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Image credit: Pension pension or retirement concept with word on business office folder index. Photo by gunnar3000, iStockphoto.
Edward A. Zelinsky is the Morris and Annie Trachman Professor of Law at the 
