Wherein I Get Shrill At Murderous Theocrats Click HERE to Bring Up Full Post

Over at Majikthise, where I have the honor of occasional guest-blogging for a little while ueber-blogger Lindsay Beyerstein takes care of other matters professional and personal, I get very shrill about a pastor's call for the deaths of his critics regarding the enforcement of the U.S. Internal Revenue Code and attendant regulations.

Nothing special, just The Crab getting overly opinionated about calls for murder by radical clerics.

Washington Post: Tax Proposals in Maryland Click HERE to Bring Up Full Post

Washington Post, July 18, 2007:

Gov. Martin O'Malley (D) and leading lawmakers say they are giving serious consideration to overhauling the state's tax brackets, which are among the flattest in the nation. Everyone with taxable income of more than $3,000 a year pays the same rate.

O'Malley called the structure "patently unfair" this week, saying at a Democratic breakfast in Frederick that Peter Angelos, the wealthy trial lawyer who owns the Baltimore Orioles, should not pay the same rate as "the woman who cleans his office."

"I'm in favor of progressive taxation, where people who make a lot more pay more," O'Malley told reporters recently.

The article goes on to discuss, in an oversimplified manner, how the state's income tax brackets work in practice. One proposal is to create a 6 percent bracket for earners earning about $150K single, $250K jointly, in taxable income. The article does not go into the state's personal exemptions or mildly odd standard deduction calculation, and also fails to note the deductibility on Form 1040, Schedule A of most state income taxes for most high-income taxpayers, yielding reduced marginal net damage from a state income tax increase due to already high federal income taxation.
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Governor O'Malley mischaracterized what progressive taxation (of income) is. It's not when "those who earn a lot more pay more," it's when those who earn more pay a lot more. I consider O'Malley's characterization disingenuous; it's sloppy beyond mere negligence.

All taxation is an invasion, a taking by force. The fact that cops rarely collect taxes at gunpoint (in the U.S.) does not make taxation anything other than a taking by force with some due process review. Non-compliance results in garnishments, levies, sales in execution and in very rare cases criminal prosecution for non-filers.

The question I have is whether the taxation of the marginal income that buys clothing and the staff of life should occur at a lower rate, directly or indirectly, than the taxation of the marginal income that, in practice, buys marble kitchen remodellings and vacations at Aspen - not because the latter are "bad" or out of some class envy but because the net damage to low-income workers of extracting tax money out of their survival staples bothers me. The current tax code provides for a small state earned income tax credit for many such workers to mitigate those concerns somewhat.

But providing relief to poor people is not what the main Democratic proposals are discussing. They are not talking about making it easy for Martin O'Malley's cleaning lady. They are discussing, instead, increasing the tax screw on the most successful people in every field while leaving the slightly lower tier of middle-high earners untouched. I would respect an across the board increase of the rate much more, even though my family and I would fare worse under a broader taxation than under the Democratic proposal. There's no fundamental reason why we should be exempt from such a proposed increase; my family's basic needs are covered and I would hate for Angelos to have his rates increased more due to Democratic lack of character and fear of taxpayers broadly on this issue. If they cannot raise taxes across the board for everyone above subsistence level, they should not do so at all.

Hong Kong is generally regarded one of the freest economies if not the freest on Earth despite having one of the world's least free economies only 20 minutes away by commuter train. Most Hong Kongers don't pay income tax. In effect, the income tax does not come into effect until around 220,000 HKD per annum, which is about $29,000 USD dollars or so. One of the biggest fears of the business community in Hong Kong is threat of democracy or, more precisely, full home rule and universal suffrage. The fear is that the tax system that allows workers to earn pretty much all of the income that they need for life's basics without taxation would be destroyed if a socialist, pro-tax party got elected. Higher income earners do often complain about the brutality of Hong Kong taxation and the high rate of 15% that they suffer. May such a rate smite us and may we never recover.

In a sense, however, the Hong Kong system is paradoxically both the flattest and the most progressive of all tax systems in the industrialized world. The rate jumps high from zero to the maximum rate in one arguably nasty progressive leap on middle income taxpayers. While such a system probably could not be implemented in Maryland practically, I would like to see a system where low-income workers are outside the tax system up to a subsistence level of income and that the rates stay flat thereafter.

Attila went hard on the proposed rates:

I'll tell you how it can be. Governor O'Malley's argument for progressive tax rates is a phony. It's a way of punishing wealthy people for having created wealth. It's a scheme based on ideology, not economics, and on envy, not fairness.

I don't think it's envy or bad faith when you are dealing with the lower end of the income spectrum. It's envy when you are doing what the Democrats are discussing: soaking the highest producers without helping the poor through relief and without demanding that all of the "non-subsistence poor" meet the same rate.

But O'Malley was smart in the examples he picked. Angelos is at the "bowel obstruction" level of popularity due to his decade of perceived baseball malpractice in Baltimore, and it's hard and cruel not to want to help somebody who earns a modest living holding a mop and toilet brush with her face near somebody's toilet. But perhaps a better example would be: should Ravens coach Brian Billick (after a GOOD year!) or a successful restaurant owner who works 70 hours a week get soaked on their taxes marginally worse than some non-disabled citizen hump who doesn't have steady (i.e, moderate and growing) income because he got fired for screwing off or watching porn on the job or not showing up to the job?

Governor, if you tax Brian Billick, you owe it to all of us to tax all of us the same way, exempting people's subsistence survival money. Tax me right here.

UPDATE: Isaac Smith, unlike Martin O'Malley, puts forth some actual arguments for the creation of the sorts of income tax brackets O'Malley advocates in a well-written counterpoint at FSP.

Baltimore Sun: City Council Proposes Tax Relief to Suffering Millionaire Developer, Investment Bankers Click HERE to Bring Up Full Post

Baltimore Sun, June 2, 2007:

A leading Baltimore developer would receive more than $33 million in city tax breaks to build a landmark headquarters for Legg Mason at an exclusive waterfront address, officials close to the proposed deal confirmed yesterday.

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As (developer) Paterakis developed Harbor East over the past decade, he benefited from tax breaks on nearly every phase of the project. The development transformed what was once an industrial no man's land to one of Baltimore's trendiest areas, with a Whole Foods market, expensive boutiques and exclusive apartments and condos.

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Legg Mason announced in February that it planned to leave its signature skyscraper at 100 Light St., the tallest building in the city, for the new Harbor East digs. Legg expects to move nearly all of its Baltimore-area employees to the new building by 2009, creating a significant vacancy in its former home in downtown's core.

Okay, for out-of-state readers, a geography lesson.

Legg Mason has employees in two buildings: the Legg Mason tower at 100 Light Street and elsewhere in Baltimore. At one point, and I believe (but not been able to verify) now, Legg had 500-odd employees in an office complex about the Gallery at Harborplace, a former property of the Rouse company generally credited with turning the Inner Harbor from a fetid dump into a thriving tourist destination.

Legg had a lease in the Gallery building with Rouse until 1998. I cannot find whether they are still there, and if so in what capacity. You would think in 2007 with Google that you could type in an address and find out whether one of the world's leading financial services companies was still leasing space there for 500 employees. But I cannot confirm that. In any event, the Legg Mason Tower at 100 Light Street and the Gallery at Harborplace at 200 Pratt are across the street from one another.

I lack the patience to mess with Google's API for maps today, but here is a link to the relevant neighborhood. The two building currently (I believe) used by Legg are about a block and a half, maybe two blocks from Baltimore's Metro and 4-5 blocks from the hapless light rail. The move would be over to the discussed new, tax-subsidized/exempted building on Aliceanna Street which faces the harbor on the extreme SE corner of the Harbor. The neighborhood around the office complex is Little Italy - a great neighborhood though with limited parking. No currently built public transit other than buses comes within 6 blocks of this location. It is, however, arguably more convenient to the mouth of the north-south Jones Falls Expressway, and future transit improvements will likely include Harbor East, Fells Point and Little Italy with the proposed East-West Red Line.

Baltimore City has the highest property taxes in the state by a factor of more than 2. DLA Piper Rudnick, formerly the largest law firm in downtown Baltimore, moved out to semi-suburban Mount Washington on the County side of the City-County line that bisects that neighborhood. Downtown City aggravations including taxes were so severe that Piper decided to move most of its operations into a leafy enclave far removed from every other law firm, every courthouse, every law library and every provider of law firm support services to get away, moving about 200 yards north of the City-County line. Baltimore's legal community lives (as opposed to works) disproportionately north and northwest of the City, so cutting the commute out may have been a big factor as well in the decision. (Interestingly, the senior partner at Piper Paul Tiburzi, Esq., represents Legg.)

It's hard for me to be sympathetic to the idea of giving a massive tax break to a large corporation to move 12 blocks around the harbor when every middle-class homeowner gets no such break. It's literally regressive taxation: the poorer you are, the more you pay, and if you are very rich and have "juice" in the City Council, you come closer to taxing them than the other way around, it appears.

Wherein I Opposed a 100% Income Tax Rate Click HERE to Bring Up Full Post

I had a dispute with some commenters over at My Left Wing - upon which community peace generally - in which a commenter proposed the taxation at 100% of all income over $100K per annum.

I opposed. Hilarity ensued.

While I stand a bit to the economic right of MLW editor Maryscott O'Connor (who was not part of this exchange), she has been a most gracious hostess to the likes of me.

Baltimore Sun: Franchot Concerned About "Price Gouging" for Gasoline Click HERE to Bring Up Full Post

Baltimore Sun, May 26, 2007:

State Comptroller Peter Franchot said yesterday that he is launching a probe into high gas prices and wants answers from oil companies - particularly why the price can range 10 or 20 cents a gallon between nearby stations selling the same brand.

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Twenty-one governors, including Maryland's Martin O'Malley, called this week for an inquiry into pricing. The House voted for legislation making gas price gouging a federal offense and also approved a bill to give the federal government the power to sue the Organization of Petroleum Exporting Countries, the major oil cartel.

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Rayola Dougher, a senior economic analyst at the American Petroleum Institute, a trade association for the oil and natural gas industry, said the practice drives prices down, not up.

Refiners, distributors and marketers - sometimes the same entity, sometimes not - can decide to charge a station with stiff competition less than a station that's in a better position elsewhere in the area.

Several issues.

1. I return to my beloved refrain of the imperialist expansion of Comptroller Franchot's bailiwick. Is it the legitimate business of the Comptroller of Maryland - a tax collector - to engage in consumer protection activity? While gasoline is substantially taxed on a per gallon basis, and inaccurate measures of gasoline volume (mentioned in the Sun article also) can provide either an illegal windfall or shortfall to the state's coffers, it's not at all clear how the state's tax collector has a piece of this action. The Office of the Maryland Attorney General, Consumer Protection Division, has a large staff of attorneys, investigators and paralegels. It's like hearing that the IRS has gone into the truth-in-advertising enforcement business for hardware or socks.

2. Lowering one's prices to meet intense hyperlocal demand on three-gas-station intersection is not evidence in itself of an agreement to fix prices. It can be consistent with such an agreement but it is not evidence of one. Agreements between competitors to hold prices high (or low) are illegal under the Sherman Anti-Trust Act (15 USC Sec 5.) However, if there is other evidence of price coordination between competitors, such as sharing information about zones, that would be fairly powerful evidence of an contract, combination or conspiracy in restraint of trade.

3. Franchot once had a commitment to transit issues, having served on multiple committees and fora dealing with such issues. Artificial efforts to keep gasoline cheap postpone the inevitable: the reckoning with both an overburdened transit network and the environmental damage that comes from the one-commuter-per-tailpipe model of commuting. When gasoline rises in price, consumers respond by considering alternatives, such as combining trips, ordering goods online instead of driving to the mall, carpooling/slugging or public transit in the short term, and transit improvements and mixed-use development as is common in many parts of Canada become more attractive. There is a reason why Saudi Arabia wants to sell oil relatively cheaply now: they are afraid of structural reforms in fuel consumption here that would result from expensive gasoline.

Franchot should be more worried about making sure that he gets full enforcement of all taxes including gasoline taxes so that the projected budget deficits either do not materialize or come worse than feared. He should leave nickel-and-dime pricing decisions to other branches of government to address or (ideally) to leave alone in benign neglect.

Baltimore's transit system is a joke, with a reported about half of all buses arriving late. You know who has an award-winning transit system? The city in the country least likely to be considered a transit haven: Sunny, low-density, tailpipe-and-freeway-addicted Los Angeles, the city that infamously ripped up its transit network of streetcars around the same time that Baltimore did. So, Comptroller Franchot, please focus on your day job so that taxes get collected and Baltimore's weak, inefficient transit system doesn't get further damaged bu budget cuts while you are focused on who's charging $3.17 a gallon versus $3.23. This is from a life-long Marylander who commutes 800 miles a month by car (1200 by rail.)

Baltimore Sun: Taxing Issues Click HERE to Bring Up Full Post

Baltimore Sun, May 13, 2007:

"The problem is that the tax code was set up for an economy that no longer exists, a tax code based on a manufacturing economy," Willis says. "We no longer have a manufacturing economy. The result is every time there is a downturn in the economic cycle, revenues do not keep pace with expenditures."

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The structural deficit works like this: The books might be balanced today, but future spending commitments do not match revenue projections. It's as if your home budget is balanced, but you have just bought a new house and have a much larger mortgage payment coming up -- and your paycheck remains the same.

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Examples of services that could be taxed, in [College Park economics Professor Mahlon] Straszheim's view, include landscaping work, fitness facilities, haircuts and the labor -- not just the parts -- when you get your car repaired.

A core concept in tax planning is the elasticity of the tax base to different taxes. In other words, how much and precisely how will businesses, residents, etc., change their behavior in response to a given tax.

Presumably, a smaller tax will usually produce a lower elasticity or "dodge" effect than will a higher tax on the same base. The imposition of a totally new tax may have additional impact "above its weight class" than the mere increase in a small tax. In other words, there may be a LOT more change in behavior between imposing a tax rate on X at a rate of 5%, than bumping such a tax from a preexisting 1% to 5%. This is in part because effects on multiple taxation parties may occur at the very first imposition of a tax, some responses being rational and some perhaps not. A classic example is the parent who drives 120 miles from Baltimore to Reading, Pennsylvania to save 50 dollars in sales taxes on clothing (assuming she is expecting to spend $1,000 retail) but does not check before putting 240 miles on her car whether the prices are actually likely to be lower in PA. Burning Annapolis out of 50 bucks becomes more important than preserving 250 miles on a working automobile, gasoline, some tolls and the time/money value of losing 4 hours minimum in round-trip transit. Maybe prices are lower in Reading but it's the sales tax that gets people motivated.

Merchants likewise may respond to the imposition of a sales tax by trying to shift marketing to softer markets, maybe cutting very low profit items (i.e. if each sale is an extra tax and paperwork burden, maybe a higher average receipt is a better strategy) or attempting to avoid taxes through re-characterizing or re-structuring the transaction (e.g. weighing an untaxed "service" more heavily in pricing than a taxed "good" when both goods and services or a mixed service are sold.)

Another issue is evasion. Presumably, as the rate of taxation increases, the cost-benefit analysis of cheating increases. Income tax cheating in the U.S. is relatively low - present, but low. Most businesses don't skim meaningfully and in the age of electronic transactions even restaurants are getting more compliant at reporting imputed tips for waitstaff. In many European countries, infamously Belgium and Italy, tax evasion is more common than adultery, maybe more common than speeding. In those countries, particularly Belgium, a taxpayer who pays all of his taxes is regarded as the world's biggest idiot and sap by his neighbors. Intimate friends are said to share the details of that new "trust" in Luxembourg, Switzerland, etc. Rates are higher in Belgium and Italy and Germany and Canada than they are in the U.S; all of those countries report more substantial rates of cheating than does the U.S.

Sometimes sales taxes motivate evaders. I was once acquainted with a member of a Native Nation which had reservation property on both sides of the U.S.-Canada border (I don't know whether the term "reservation" is used in Canada.) He made his pocket money smuggling cigarettes in a boat across the border between New York and Ontario, taking evasive advantage of high-tax Ontario and its high-paying customers who would gladly buy untaxed tobacco.

Taxation of income can induce a great variety of responses, from decreasing the marginal propensity to earn (because less valuable profit is left) to increasing the marginal propensity to earn (because a base-line income is crucial, even if earned inefficiently per hour) to moving out of the state to avoid taxes - to outright evasion. Few people will move out of state if their income is taxed at 6% rather than 5%, but it might make the difference for a new, incoming resident working in DC. Or not. Cheaper not to move, not to pay for a real estate agent, transfer taxes, etc. Determining this elasticity of the tax base is a matter for economists and statisticians.

Back to Maryland. Maryland has some rather arbitrary taxes imposed on sales of most goods and the rental of many goods, along with a substantial income tax. Some services are taxed under the sales and use tax, but most are not. A budget shortfall looms. Thoughts?

Baltiimore Sun: Problems with the Transfer Tax Click HERE to Bring Up Full Post

Jeffrey Michael in the Baltimore Sun, March 22, 2007:

Nothing says "Welcome to Maryland" like the real estate transfer tax. Those new to the region experience a moment of disbelief as exorbitant closing costs consume what they thought was a good down payment. Only Delaware, Pennsylvania and Washington, D.C., have transfer and recordation taxes in the 2 percent to 3 percent range found in Maryland. Transfer tax rates in most of the country are a tenth as much, and 12 states have none at all.

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Before expanding the reach of the transfer tax, the legislators should consider more fundamental questions: Why do we impose this tax? Could there be a good reason why other states avoid it?

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Tax deductions. Unlike most state and local taxes, transfer taxes are not deductible from federal income taxes. IRS rules define them as nondeductible for the same reason they are unfair: Transfer taxes do not apply broadly and are paid by only a small portion of the population in a given year. Transfer taxes were indirectly deductible because they reduced the taxable capital gain from home sales, but that disappeared in 1997 when most home sales became tax-free. Moving from transfer taxes to income and property taxes (without increasing overall taxes) would direct millions in new federal tax refunds to Marylanders.

I would favor getting rid of the transfer taxes on transfer and recordation of property and replacing them with regular property or income taxes. I understand why they are politically popular: long-time residents who are more likely to be registered to vote get spared, while out-of-town investors get skinned. But it's an economically irrational tax, punishing form over substance, allowing massive lawful avoidance for the rich through the use of LLCs while inflicting harm on young homebuyers (who sometimes can get some relief as first-time homebuyers from some of those taxes.)

If Bill owns Billacre and Jane owns Janeacre, and the Maryland properties are worth the same, and they swap them, they are worse off by thousands of dollars in two sets of transfer taxes.

Baltimore Sun: Realty Tax "Loophole" Click HERE to Bring Up Full Post

Baltimore Sun, March 14, 2007:

Most big-ticket developers don't exchange real estate in the same way that homeowners do. Instead of buying property, they acquire ownership of a limited-liability company whose only major asset is property. A deed never changes hands, and the exchange of the deed is what triggers the taxes.

For more than 15 years, some Maryland lawmakers have tried to close this tax loophole and set aside the new revenue for school construction and land preservation. But powerful real estate interests have lined up in opposition to the bill and killed it year after year, said Senate Finance Committee Chairman Thomas M. "Mac" Middleton. But now, the Charles County Democrat said, the loophole might become "low-hanging fruit" in tight fiscal times.

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Kathleen Maloney, executive vice president of the Maryland State Builders Association, said that her group understands the aim of the bill is to go after big corporate malls, factories and warehouses, but that mom-and-pop residential builders also would suffer.

A large percentage of the limited liability companies formed in Maryland are formed for the purpose of holding real estate. The advantages include limited liability, anonymity of equity ownership, avoidance of transfer and recordation taxes.

Two issues are in play here. The first is the ability to sell a company's equity (a "company deal" or "stock deal" when done with a corporation's stock) without paying a transfer or recordation tax on the sale of any real estate that the company "happens" to own. Call it a "no deed" deal. The second issue is the exemption from transfer taxes and recordation taxes of some property transfered from one LLC to another or to its members when the ownership ratios of transferor and transferee are identical. This exemption allows an owner to transfer real property that she owns in her own name into an LLC that she owns, without paying transfer or recordation taxes. Call this one an "exempt deed" transfer.

I think that the Sun article got these two issues confused, or at least failed to delineate them properly. I think that the reporter got quite tangled in her terminology; her use of the term "transfer" to describe a "no deed" equity deal was a poor choice since the term "transfer" is a term of art describing a tax-triggering effect. It's kind of like saying "Bill was allowed to murder Hank because it was legitimate self-defense"; legitimate self-defense makes it not murder, but justified homicide. But this is a tricky area of law that most lawyers get wrong, so I don't blame a Sun reporter who may have engaged in some due diligence (would be less forgiving of a Daily Record reporter.)

Resistance to any change in this law will be massive, and not just for the taxes. Owners don't want their ownership interests in LLCs known (and need not disclose them generally under Maryland law), and a meaningful tax statute designed to tax LLC interest transfers would almost require a registry of such interests of some sort. Foreign (out of state) LLCs that own property here don't even have to register formally with the State Department of Assessments and Taxation unless they also "do business" here (meaning have a permanent regular or income-generating activities.) Even in the case of multi-stage development structures, I see massive resistance from the non-tax side of this issue. And it is fair to ask, particularly given that Maryland's transfer and recordation taxes are so severe: when is it fundamentally fair to allow form and substance to deviate from one another so sharply in the area of real estate transfers and quasi-transfers, either for or against the taxpayer or the public fisc?

Daily Record: Proposed Sales Tax on Services Meets Resistance Click HERE to Bring Up Full Post

Advertising agencies, public relations firms and other businesses offering creative services are leading a drive to mobilize opposition to state legislation that would extend the sales tax to cover these and other services.

House Bill 448, which, would add 31 new professions to the list of those that must charge the state’s 5 percent sales tax for services rendered, is set for a hearing Wednesday before the House Ways and Means Committee.

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Another opponent of the tax is Robert H. Campbell II, political affairs director of the Auctioneers Association of Maryland and the owner of Robert H. Campbell and Associates LLC in Chestertown.

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"Anywhere you stand in Maryland," he said. "You are 100 miles from another state that doesn’t charge for this."

The list of 31 trades and professions subject to sales tax under this proposed bill can be read here. Out of respect for copyright, I won't copy the list here; out of laziness and exhaustion I won't copy the list from the General Assembly's site.

The problem with taxing services is that they are increasingly mobile. Design services done in Philadelphia for a project in Los Angeles are no less valuable than those done in Baltimore. While some of the services to be taxed are physically tied to services in Maryland for Maryland customers (e.g. extermination services), others (drafting services, lecture bureaus, direct mail, etc.) are easily moved across jurisdictional lines. Others are somewhat in-between; an employment agency serving Maryland cannot easily be moved to North Dakota, but probably can be moved to Arlington and maintain most of its market west of the Patuxent River.

My own policy preference would be for the income tax to be increased and the sales tax scrapped. Another option would be to increase the income tax slightly and lower the sales tax and/or allow a partial or complete credit against state income taxes for the sales taxes on large in-state purchases. This might take some of sting out of the sales tax for both businesses and residents, but administrative hassles might make it not worth the bookkeeping effort. But I have not studied this issue in detail and don't claim to know the econometrics behind the different policy choices. I don't know, for example, how to score dynamically the effects of increasing the sales tax to 6% versus keeping it at 5% but applying it to new services. I don't know which service business can run, will run - or shrink - due to a newly imposed sales tax. I don't know how much auctioneering business, for example, can be done out of state for estate sales, both legally and practically. On the other hand, I am pretty sure that the demand effect on insect extermination services from a 5% tax would be almost zero; roaches and termites don't get more popular when inflicting chemical genocide does up by 5 percent in cost.

P. Kenneth Burns Looks at the Maryland Budget and Hard Choices Ahead Click HERE to Bring Up Full Post

Check out new Maryland Blogger Alliance member P. Kenneth Burns' (welcome aboard!) take on the tough decisions to be made for Maryland's budget in the coming years.

Baltimore Sun: Baltimore City Examining High Property Tax Rates Click HERE to Bring Up Full Post

Baltimore Sun, February 15, 2007:

Baltimore Mayor Sheila Dixon named 20 people to a task force today to look into ways to reduce the city's property tax rate, an effort she hopes will result in a report with recommendations by mid-September.

The city's tax rate is by far the highest in the state, and eye-popping property assessments in recent months have not only increased tax bills but have significantly increased the amount of money the city collects each year in property tax.

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Baltimore's property tax rate is $2.288 per $100 of assessed value. The next highest rate, in Baltimore County, is $1.10 per $100 of value. In the current fiscal year, the city estimated receiving $592.1 million in property taxes, a roughly 6 percent increase from the prior year.

Even if the City reduces the rate by 3 cents per $100 assessed value, the City's property tax rate will still be twice as high as the second highest jurisdiction's rate. (In fairness, residents of some incorporated towns, special taxing districts like Crofton and pseudo-towns like Columbia pay taxes or massive pseudo-tax homeowner association dues on top of county taxes that may exceed the rate in Baltimore County, which has no such additional taxes or massive tax-like HOA dues anywhere in the county.) The fact remains that for many homeowners, the City remains a miserable deal. Services are usually better in Baltimore County, public education is far better except for a few "boutique" City elementary schools and crime is far, far lower in most of Baltimore County. Add the higher costs for vehicle insurance and mortgage payer would have to have an unusual reason to pay the extra charge.

I can understand how professionals and artists will live near their hospitals, downtown courthouses or the arts district. But nobody has a reason to live 3 miles west of downtown Baltimore in the City unless he has no choice. Who lives there? People who have no choice. The Sandtown-Winchester neighborhood in West Baltimore, maybe 25 blocks from downtown, has one of the lowest per capita incomes in the entire State. Public transit means standing outside in the cold and the crime on a street corner near Fulton and Franklin, amidst broken glass and liquor stores. The landlord is getting taxed hard on that property, and is reluctant to invest because it's barely profitable now and will only result in further taxes. Besides, even with investments, how likely is the property to catch a substantial rent in the face of the drug dealing? So what do the landlord do? They act like mega-landlord Stanley Rochkind, buying and selling massive sets of such properties, arms-length.

Perhaps if taxes were lower - REALLY lower, as in 15% more than Baltimore County's, not 110% higher - it would make Baltimore a more attractive option for middle-class families, so that gentrification would be a little more widespread. At current rates, Baltimore is becoming more like Detroit, a corrupt, dying city whose suburbanites avoid at absolutely all costs, and less like DC and New York, successful, exciting cities that draw in massive numbers of enthusiastic residents and visitors with good infrastructure, good cultural life and prosperity.

Baltimore Sun: Property Tax Assessments Hitting City, Suburbs Hard Click HERE to Bring Up Full Post

Baltimore Sun, February 4, 2007:

Baltimore City homeowners saw some of the region's steepest increases in the recent round of property reassessments, a stark change after years of lagging home values - and added ammunition for groups calling for tax relief.

In the city, which has the highest property tax rate in the state, nearly one in five reassessed homes saw values at least double since they were last evaluated three years ago. No other jurisdiction in the Baltimore region had such a high share, according to a Sun analysis of state records for owner-occupied homes.

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But increases were substantial in the suburbs, too. Average assessments rose at least 40 percent in every reassessed ZIP code, even ones heavy with million-dollar homes. Across the region, the gain in assessed values outpaced the rise in sale prices over the same period.

Many homeowners won't feel the full impact for years because increases are capped for all except the newest owner-occupants. But some are enraged by the new values all the same, convinced that the assessments are higher than the amounts they could possibly sell their homes for.

Northern Anne Arundel County underwent property tax assessments last year, leading many to speculate whether local Democratic members of the General Assembly and the County Council would pay the price.

Baltimore Sun: Maryland Lottery Win Tax Free? Click HERE to Bring Up Full Post

Baltimore Sun, December 28, 2006:

Solomon Rexcampbell played the same combination of numbers 15 times Saturday in the nightly Bonus Match 5 game - despite odds of 1 in 191,919 against winning the top prize.

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Lottery officials surmised that one person accounted for 15 of the winners, since all of those tickets had been purchased at the same 7-Eleven store in Bethesda. But who and why were a mystery until the 58-year-old Rexcampbell arrived at lottery headquarters in Southwest Baltimore.

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[The prize] amounted to $429,021 for Rexcampbell, and he'll get to keep every dollar because the game's top prize is awarded tax-free.

I remain respectfully skeptical of the claim that a lottery winning is "tax-free" unless someone can show me how the prize is exempted from section 61 of the Internal Revenue Code, which states: "Except as otherwise provided in this subtitle, gross income means all income from whatever source derived...." While it is possible that there is a "gross-up" by the Lottery essentially to cover most or all of the taxes that might be due by making a separate payment to the IRS, even that payment would itself constitute gross income to the beneficiary. The difference between exclusion and a gross-up is very real, particularly when calculating the Alternative Minimum Tax and most itemized deductions.

Maryland can exempt its own lottery payments from Maryland's definition of gross income for Maryland income tax purposes, but cannot do anything to prevent federal taxation of such prizes without an act of Congress.

Other countries do exempt gambling winnings generally from their income taxes, notably Canada. Big U.S. citizen/resident winners in Canadian casinos must pay U.S. taxes (but not Canadian taxes) on their winnings, since the Internal Revenue Code taxes the world-wide income of citizens and non-citizen permanent residents.

I would be grateful if any reader could identify the provision of law exempting this prize from federal income taxation. My search online revealed nothing, and the Maryland Lottery's own FAQ on taxes just provided links to the federal and state income tax websites, i.e. nothing.

Reuters: Sex Tax Imposed On Prostitutes In Cologne Click HERE to Bring Up Full Post

From Reuters, December 15, 2006:

Cologne will earn a record 828,000 euros ($1.1 million) in "sex tax" revenues this year, a figure well above expectations when the levy was first introduced by Germany's fourth largest city in 2004.

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Cologne, which introduced the tax two years ago to raise money after national reforms left the city woefully short of cash, has been charging prostitutes a flat 150-euro per month tax since 2004, replacing a voluntary reporting scheme.

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Prostitution is legal in Germany and sex workers are required to pay tax on their income and a value-added tax.

Here's how it breaks down.

The prostitutes must pay a value added tax based on the increase of value of their goods and services that provide. Arguably this is a more rational form of tax than the typical state sales tax in the U.S., in that a business cannot recover the costs of inputs into manufacturing here. Example: you make steel, you need iron and coal. If you have to pay sales tax on the iron and coal, you don't get to subtract that tax from future taxes that you will have to collect and remit on your steel. (If you buy and resell iron or coal, you can usually get that initial purchase exempted from sales tax, but not if the purchase is for industrial inputs rather than for resale.) So presumably, a prostitute could recover the value added tax that she paid for, say, condoms, and subtract that from what she would actually have to remit to the German tax authorities for the value added for the sexual services provided.

Prostitutes must and do pay income taxes in Germany, same as any other independent contractor.

Now these businesswomen are being subjected to a about a $2400/year licensing fee for tricking in Cologne, a large, liberal and heavily Roman Catholic city on the Rhine. It is the home of the annual Fasching (Mardi Gras) festival; sort of like New Orleans in a lot of ways.

Here's my question. Does the imposition of a monthly levy, rather than a surcharge to the value added tax, distort the market for prostitution in inefficient ways? Does it discourage the marginal producer, allowing the more famous madams in the spirit of Lulu White to reap the benefit of reduced competition and charge oligopolistic rent? What about non-compliance and evasion; is the infamously picky German customer equally picky about paperwork in this area, and will heavy-handed German bureaucrats inflict their obsessive-compulsive Kantian ethic of the categorical imperative to prosecute the non-compliant? How would Borat's sister - the 4th most famous prostitute in Kazakhstan - adjust to these market conditions?

I think we need to get the Maryland liberal bloggers who are public policy grad students - Isaac? Matthew? - to weigh in on these policy matters - how well would Borat's sister be likely to produce in this market?

Baltimore Sun: IRS Busts, Shuts Havre de Grace Restaurant for Alleged Cash Skimming Click HERE to Bring Up Full Post

From the Baltimore Sun, December 12, 2006:

When Harford County Executive David R. Craig decided to throw a bash for his volunteers after a successful campaign, he chose Macgregor's Restaurant and Tavern, the two-story seafood restaurant where every table offers a view of Chesapeake Bay headwaters.

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The owner, believing that he was speaking to a potential buyer of the business this year, is alleged to have told an undercover investigator that he had skimmed proceeds to avoid paying taxes, according to an affidavit filed in federal court by investigators seeking a search warrant.

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Overall, Lee estimated that he made $80,000 to $100,000 per year in unreported cash, though his reported income usually showed a loss or small gain, he allegedly told the agent.

"I always try to make it close," he said, according to court records.

It is commonplace for a business tax return to be used as a point of discussion in the negotiation of a privately-held business. The theory is that almost no business owner would overreport income or overpay federal taxes in order just to con a potential buyer into overpaying for a business. General rule: if a closely-held business tells the IRS that it grossed $400K and netted $110K in taxable and pays (directly or through pass-through treatment) income tax to Washington and its state capital on $110K, you can very safely assume that the business is not grossing only 290K and netting $5K. That's not the lie that people tell the IRS, especially since most business owners are not thinking about a sale when they file their taxes, they are thinking about screwing the IRS out of as much as possible, one hopes lawfully and with appropriate professional assistance to help evade avoid minimize taxes. (Of late, the Internal Revenue Service has taken a new dislike to the word "avoid" with respect to taxes, confusing it with the criminal conduct of evasion, a topic for another day.)

No, the lies that people tell the IRS are underreporting gross income and, to a lesser extent, faking deductions and underreporting wages paid to employees for withholding and FICA matching evasion/defalcation.

It is quite possible that the restaurant owner is innocent of a tax crime, or at least of the classic tax crimes of evasion, false return, etc. It's possible that the listener misunderstood or misreported the statements of the owner. It's possible that he meant those statements in jest. It's also possible that the owner reported his taxable income and other tax attributes substantially accurately, but was lying to his prospective buyer with the false lure of unreported income or at least a cash stream to be reported or not at the leisure of the new buyer.

I don't know whether it is a tax crime to take a copy of a tax return and falsely accuse yourself of perjury on it to sweeten a business sale to a prospective buyer. Doing so would be fraud, of course, but I don't know that it violates the tax code as such, which is what the IRS has jurisdiction to investigate. Of course admitting to a tax crime will catch the attention of the IRS and it certainly did in this case. Whether it can prove that the owner lied to the IRS, rather than hypothetically to a prospective buyer, remains to be seen.

At this point, the owner needs a criminal defense attorney who knows tax, more than a tax attorney who knows some criminal law.