New bill

New Bill Would Freeze Internet Taxation

S enator Ron Wyden (D-Ore.) and Congressman Christopher Cox (R-Cal.) introduced legislation that would impose an indefinite moratorium on state and local taxes on the Internet. The Internet Tax Freedom Act (HR 1054; S 442) also recommends that President Clinton bring together local governments, consumers, businesses and others to develop policy recommendations on taxing online commerce.

Business conducted over the Internet-including the sale of software, online newspapers and database services-generated $500 million in total receipts in 1995 and $1.1 billion in 1996. According to the Treasury Department, Internet commerce could grow to $70 billion by 2000. Wyden said that 20 states and the District of Columbia impose one or more taxes on electronic commerce. Many of the states include Internet access and services under existing tax regimes, such as telecommunications or sales and use taxes.

"The Net's decentralized, packet-switched architecture makes every transmission vulnerable to multiple taxation," said Cox. "Thirty thousand state and local tax authorities could potentially tax the Internet to death."

The four-part bill would

  1. Prohibit state and local governments from imposing taxes on online services and access. It would grandfather existing taxes.
  2. Direct the Clinton administration, in consultation with Congress, to study U.S. and international taxation of Internet commerce and make recommendations on how to apply principles of interstate taxation to online commerce.
  3. Bar federal or state regulation of the prices subscribers pay for Internet services.
  4. Direct the administration to seek an international agreement making the Internet a duty-free zone.

"Electronic commerce will grow only if the confusion and complexity of state and local taxation is curtailed," said Kenneth A. Wasch, president of the Software Publishers Association. In a letter of support, Wasch said many of its 1,200 member companies try to reduce distribution costs by delivering software products online. Wasch said these companies are uncertain of their obligations for state and local sales and use taxes and they fear the tax burden could "outweigh the savings experienced by using the Internet as a delivery channel."

In another vote of support, the Information Technology Association of America issued a report that said because states already tax online commerce, additional taxes could stifle the growth of the Internet: If the Internet is going to be a boon, "it also would be a boon to the states." However, the report added that "any new public policy should remove obstacles to achieving the maximum economic growth possible."

CBO Issues Policy Options on Balancing the Budget

T he Congressional Budget Office (CBO) issued its annual analysis of options for balancing the federal budget. Reducing the Deficit: Spending and Revenue Options , prepared for Senate and House budget committees, outlines tax options that could help balance the budget by 2002, including increasing existing taxes and imposing new ones, such as a value-added tax or a broad-based energy tax. It also examines policy options that would control spending in entitlement programs, such as Social Security, Medicare and Medicaid.

According to the CBO, a balanced budget in 2002 would require a deficit reduction of $493 billion over the next five years, or $448 billion in savings from policy changes and $45 billion in savings from lower service payments on the debt. Following are some of the CBO's options to help the federal government raise the necessary revenue and balance the budget by 2002.

Raising rates
Increasing all marginal tax rates by approximately 7% on individual ordinary income could raise about $215 billion from 1998 through 2002, according to the CBO. This option also would increase the top corporate marginal tax rate under the alternative minimum tax. The report also suggests that increasing the top marginal rate for corporations to 36% would raise $18.5 billion by 2002. Out of approximately 1 million corporations that have positive corporate tax liabilities each year, only about 3,500 pay income taxes at the top rate and would be affected by this option.

The report also examines the potential revenue generated from amending or repealing the indexing of individual income tax rates, taxing all corporate income at 35%, taxing capital gains held until death and raising the Medicare payroll taxes.

Limiting credits and deductions
Eliminating the deductions for mortgage interest would increase tax revenues by approximately $225 billion by 2002, according to the report. The CBO also examines simply reducing the principal eligible for deduction, capping the mortgage interest deduction and limiting the deductions for second homes. The report weighs the pros and cons of eliminating or limiting deductions for state and local taxes, which could raise as much as $225 billion by 2002. Other restrictions on credits and deductions include eliminating deductions for charitable gifts and phasing out the dependent care credit. There also are pro and con assessments on taxing employer-based health and life insurance, imposing an excise tax on nonretirement fringe benefits and lowering the limits on contributions to qualified pension and profit-sharing plans.

According to the report, Social Security constitutes the federal government's largest entitlement program. One CBO revenue-raising option would be to eliminate the income tax thresholds on these benefits entirely and require all beneficiaries to include 85% of their benefits in their adjusted gross incomes. The report says that many more, but not all, Social Security recipients would be required to pay income tax on their benefits but that the policy option would raise $116 billion by 2002. The report also considers potential revenue raisers such as lowering annual Medicare payments to providers and increasing the amount beneficiaries must contribute to the program.

Coies of the CBO report are available free of charge by calling the CBO publications office in Washington, D.C., at 202-226-2809.


Making Tax Data Easier to Get

T he Organization for Economic Cooperation and Development (OECD) approved recommendations to improve the exchange of tax data between its member countries. In March, the OECD council agreed to

  • Use tax identification numbers (TINs) to take advantage of technology and improve information exchange while guarding confidentiality.
  • Revise a 1992 standard for automatic information exchange on magnetic tapes and diskettes.

All but five OECD member countries have TINs. The OECD recommends that member countries encourage foreign recipients of income to disclose TINs from their home countries, consider making disclosure mandatory and issue special TINs for taxpayers with foreign sources of income or provide an alternate means of identification if they do not use TINs.

Treasury Has Its Own Solution to IRS Problems

T here have been plenty of public statements on how to improve the way the Internal Revenue Service collects taxes. Some members of Congress have said they want to abolish the IRS altogether and institute a single, postcard-size flat tax form for all businesses and individuals, while others have scheduled committee hearings and commissions, such as the National Commission on Restructuring the IRS, to consider new ways to improve IRS operations. Now the Treasury Department-which oversees the IRS-has made public its own plan to make the IRS more responsive to taxpayers' needs and use technology more effectively.

In March, Lawrence Summers, deputy secretary of the treasury, told members of the Tax Executives Institute in Washington, D.C., that the Treasury had established a framework that would enable the IRS to "get its mission accomplished." To do this, Summers said the Treasury was going to focus on five critical areas-oversight, flexibility, budgeting, simplification and leadership-that will "build an IRS for the 21st century."

Summers said the Treasury would begin by devoting the necessary managerial and financial resources to strengthen its oversight of the IRS. To do this, the department plans to ask President Clinton to make permanent a modernization management board that would oversee the IRS's information technology programs the same way corporate boards oversee companies' major strategic decisions and investments. Summers said the Treasury also planned to establish a blue-ribbon advisory committee that would meet regularly with the treasury secretary and "bring private sector expertise to bear on the management of the IRS."

"Second, we will enhance and strengthen the IRS's ability to manage its operations," said Summers. He said the Treasury would eliminate the multitude of restrictions that hamper the IRS's ability to provide efficient service. For example, Summers said the IRS should have the flexibility to hire highly trained people more quickly, pay them more competitively and give them the necessary training. He also said the Treasury would consider outsourcing more IRS functions. "Where it is cost effective-but only where it is cost effective-we will pursue outsourcing strategies vigorously."

Summers said the Treasury would work with Congress to ensure the IRS receives more stable and predictable funding. The IRS currently operates in a low-trust, short-tether budgeting environment, according to Summers. "This makes rational planning for capital projects very difficult." He said the IRS needed multiyear budgets for its capital expenses, such as systems modernization.

The Treasury also intends to support proposals to simplify the tax code to help reduce the code's administrative burden. Summers said the IRS would have a much easier job if it could streamline the 9,451-page code. However, he stopped short of endorsing a flat tax proposal. "I believe such a proposal would not only unfairly increase the tax burden on the middle class and hamper economic growth," but also it "would not simplify the administration of the code."

Last, the Treasury plans to make changes at the top of the IRS. Summers hinted that the Treasury was looking for an expert manager to replace retired Commissioner Margaret Milner Richardson. "We are committed to appointing a new commissioner who has experience with the challenges of organizational change," said Summers. "While technical excellence in tax matters must be maintained, the greatest challenges facing the IRS in the coming years are managerial." Summers said the Treasury would charge the new commissioner with developing a detailed strategic plan and it would expedite the recruitment of a first-rate management team.

    Deducting Cars
      Taxpayers looking for tax deductions can donate their used cars. The National Kidney Foundation's kidney cars program uses the proceeds from donated cars, buses, trucks and motorcycles to support research, patient services, organ donations and public information and education programs. Each donor receives a letter thanking him or her for the donation, which lists the year, make and model of the vehicle. Interested contributors should call 800-488-2277 for an information packet.

    Overnight On Time
      The Internal Revenue Service issued a notice just five days before the April 15 filing deadline allowing taxpayers to use four private delivery services. Notice 97-26 designated Airborne Express, DHL Worldwide Express, Federal Express and United Parcel Service "official" delivery services taxpayers can use to file their returns on time.

    Pull Over, Sir, It's the IRS!
      House Speaker Newt Gingrich (R-Ga.) has called for reducing the IRS budget by 60% in tandem with tax simplification. He proposed transferring employees who lose their IRS positions to other federal agencies, such as to the Drug Enforcement Administration and the Border Patrol. "We'll spend more time stopping illegal drugs and immigrants and fewer resources auditing small business," said Gingrich.

Where to find January’s flipbook issue

Starting this month, all Association magazines — the Journal of Accountancy, The Tax Adviser, and FM magazine (coming in February) — are completely digital. Read more about the change and get tips on how to access the new flipbook digital issues.


Get your clients ready for tax season

Upon its enactment in March, the American Rescue Plan Act (ARPA) introduced many new tax changes, some of which retroactively affected 2020 returns. Making the right moves now can help you mitigate any surprises heading into 2022.