Welcome to the Tax Policy Center’s annual Lump of Coal Award for the year’s biggest tax policy blunders, Build Back Better edition. Even by the usual low standards, 2021 saw more than its share of terrible ideas, and worse execution. Here are the Top Ten:
10. A little help on remote work, Supreme Court? The pandemic forced many Americans to work from home, raising difficult and important questions about states taxing remote workers. New Hampshire took Massachusetts to court to resolve them. But the Supreme Court ... punted. The justices had some legitimate reasons for passing on this particular case, but sooner or later the courts are going to have to sort this one out.
9. Arizona's never-ending tax cut and education fight. In 2018, education advocates put on the ballot a proposal to raise taxes to support increased school spending. Opponents blocked it in court. Then, in 2020, backers got the plan back before the voters. This time, they approved the measure to boost public school funding by increasing the state's 4.5 percent top income tax rate. In 2021, the legislature approved a massive tax bill that ignored the voters, restored the 4.5 percent top rate, and lowered other tax rates. Advocates responded by gathering enough signatures for yet another ballot measure in 2022 to reverse some of the 2021 tax cuts and restore the funding. There has got to be a better way.
8.States reject help for the unemployed for no good reason. Congress increased unemployment benefits at no cost to state governments. Yet two dozen states opted out of the expanded benefits early to, they said, spur job growth. In the end, many Americans missed out on the jobless benefits. And the move did nothing to increase employment in those states.
7. Giving unemployment benefits to people who are fired for refusing a COVID-19 vaccine. Some of those very same states are giving unemployment benefits to workers who lose a job because they refuse a jab (looking at you, Florida, Iowa, and Tennessee). Normally, workers fired for cause are ineligible for UI benefits, but these states made an exception. Their message: We won’t give you expanded benefits if you get laid off due to COVID-19 but will if you choose to endanger your coworkers.
6. The tax cheat caucus. Biden wanted financial institutions to report their customers’ aggregate annual deposits and withdrawals. Most Republicans and many banks opposed the measure, claiming it would invade the privacy of consumers. They apparently forgot the IRS already collects data on wages, interest, and investment income with no harm to honest tax filers. Democrats quickly buckled under the pressure and dropped the plan from the House version of BBB. One can object to flaws in Biden’s original plan, but complaining about violations of privacy is absurd. Besides, we know many types of third-party reporting reduce cheating.
5. Is $400,000 in annual income really middle-class? President Biden’s promise to never raise taxes for those making $400,000 or less may have helped him win the 2020 election but it created a policy mess. Congress had to stand on its head to make sure BBB tax increases didn’t violate the pledge. It complexified some proposals and dropped others. Note to Democrats: About 95 percent of households make less than $400,000, which is six times median household income.
4. The alternative corporate tax on book income. Any alternative tax is an admission of policy defeat. Congress is saying it can’t make the regular tax work so it tries to patch the holes with a back-up. But using financial statement income as a tax base is especially fraught. It likely will result in less accurate disclosure to shareholders and won’t reduce tax gaming. And, in the end, book income could end up looking a lot like the flawed corporate income tax base.
3. Dear IRS: Answer your phone. The IRS did remarkable work distributing 2020-2021 economic impact payments and, on short notice, delivering monthly child tax credit payments. But taxpayer service? Ugh. It still is processing 2020 returns. It often can’t answer the telephone when taxpayers call and frequently hangs up on them while they are on hold. While it wants tax filers to do more business online, the service often makes that impossible. Some blame falls on the pandemic and chronic underfunding but this mess doesn’t make the IRS any friends.
2. Spilling SALT. OK, Democrats want to aid their House members from high-tax districts who are demanding relief from the $10,000 cap on the state and local tax (SALT) deduction. But why would they want to raise the cap to $80,000? That move mostly would benefit households making between $370,000 and $870,000, the top 95-99th percent of household income. There are better ways to provide SALT cap relief and still claim victory.
1. And the winner is, of course, the stalled Build Back Better Bill. It is a case study of dysfunctional government. Republicans opposed the president’s social spending, climate, and tax bill even before they knew what was in it. Democrats spent six months publicly squabbling among themselves over the elements of the package. Progressives insisted on big new programs that never could pass. And moderates opposed various versions but often sent inconsistent messages about alternatives. Democrats burned most of 2021 on the bill. Will they build back anything in 2022?
Despite it all, happy holidays from the TaxVox. May 2022 be better than 2021. And may it be a year when we all can work together to design a better tax system.
