A Different Slant on Tax Reform - Brief Article

As Congress ponders how best to align President Bush's tax plan with their own interests, I'd like to offer my short list for tax reform. Although the measures now before Congress are touted as vital to our economic and fiscal well-being, the ever-elusive goals of fairness, logic and simplicity seem to be off-topic for our legislators.

Phaseouts of All Types Generally Stink: They create a false impression and false hope in most cases. For example, what percentage of taxpayers actually benefit from the Hope Scholarship Credit? With tuition costs ranging from $12,000 to $25,000 or more per year, the potential $1,500 credit hardly makes a dent. Adding insult to injury, the credit starts being phased out at $40,000 and is completely gone at $50,000 of ACI ($80,000 to $100,000 on a joint return). Thus, to qualify for the full credit, you could earn up to $40,000; spend anywhere from 30 percent to 60 percent of your income for tuition; and pay for food, lodging and all other living expenses with the remainder, after paying, of course, $5,727 in income taxes. (Where you find time to earn $40,000 per year is another matter.) That anyone would actually yield the full credit is very unlikely. They should rename this the "False Hope Credit."

AMT Definitely Has To Go: This abomination is an insult to taxpayers' intelligence, and why we have put up with this nonsense is mystifying. The notion that a "side-by-side" tax computation method is necessary, just in case someone doesn't pay enough taxes the regular way, is absurd. The kicker is the added layer of complexity that this body of law adds to the tax computation process. AMT loses on all counts.

Index Everything: There is plenty of uncertainty about our economy and inflation. Since the cumulative effect of even small annual inflationary increases can be significant over time, there is no time like the present to ensure that tomorrow's taxpayers do not pay proportionately more in taxes simply based on inflation.

California NOLs: Give businesses full (not halt) credit for net operating losses. What is the logic for limiting the amount? Is this on the theory that "half a loaf is better than none?"

Eliminate California's Minimum Tax for Corporations: This creates a quagmire of potential interest and penalties for no good reason. If you need a "base" amount on which to run the system, call it a registration fee, but don't tie it to the income tax return.

California Conform: California needs true (and timely) conformity to the federal tax laws. Many states let the federal system drive their system, and they still collect as much money as they need. California seems to be hung up on the notion that, being the world's sixth largest economy, it can justify its own special tax code. I recently filed a Connecticut return--two pages. The California return for the same taxpayer-26 pages.

Health Insurance Deductibility: Health insurance expenses for S-corp owners and Schedule C filers should be fully deductible as a business expense with no limits. It should not be shunted off to Schedule A. There is no logic to punishing someone for being an S corporation or filing Schedule C.

Revisit the Investment Credit: Want to spur the economy? Bring back the investment credit. It was a lot of fun. A guy buys an $80,000 Mercedes and gets an $8,000 credit against his tax. This is better than the wacky notion that a luxury car is anything that costs more than $15,000.

Eliminate Luxury Car Complexities: The luxury car limitations should be deleted or modified. They are totally out of touch with the real world. First, the threshold is way too low. Maybe it's just in Tinsel Town, but around here, a true luxury car runs at least $75,000, arguably higher. Beyond that, where is the logic in these restrictions? Here's one place where we can do away with social engineering as well as eliminate unneeded complexity.

Two-percent Floor No More: Remove the two-percent floor from miscellaneous itemized deductions. This has no rational basis. It was simply created as a way to get more money without raising rates. Similarly, the limitation on casualties is way too harsh (and complex). All considered, you do get less than half a loaf with casualties, and I've got to ask why?

Passive Loss Limitations: Get rid of them. This was yet another way to raise taxes without raising rates. I'll never forget my colleagues' dismayed looks when Ray Bolton tried to make sense of these rules at a CE course. Thank God for computers. If the government wants more money, it needs to have the guts to raise rates and stop with this micro-tinkering that has turned us preparers into technocrats of the worst order.

If Shrub (that's Texan for George W.) really wants to accomplish something meaningful, he'll leave tax rates alone and concentrate instead on tax code simplification and its alignment with the real world. What he is offering now is perpetuation of an illogical messed-up system and continuation of "business as usual" with stifling layers of complexity and social engineering.

Just one CPAs opinion.

John Hoag, CPA, is partner at the Los Angeles-based firm of Hoag and Robi, CPAs. He is a member of CalCPA's state Technology Committee and co-chairs the Los Angeles Chapter's Westside Technology Users Group. He can be reached at (310) 473-6595 or johnhoag@hoagandrobi.com.

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