Sneaking Suspicions

Archives-- August 11-17, 2002

Commentary from a practical perspective

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This page includes posts from August 11-17, 2002 in the usual reverse order. Each week's postings on the home page are perma-linked to these pages.

August 17, 2002

When you can’t avoid it, maybe you’ll do something about it.

The NYT enjoyed a little self-congratulatory moment this morning relating to taxes.

In late July, the newspaper ran a long, complex article detailing a tax avoidance method allegedly used by many of the nation’s wealthiest individuals. It involved insurance premiums, gift tax reporting, and the hope that one would live long enough to pass along the money under the arrangement each year to avoid nearly all of the estate taxes that would otherwise be paid.

On August 16, the government dealt with the scheme:

The Treasury Department banned a technique yesterday that thousands of the wealthiest Americans have used to escape billions of dollars in gift and estate taxes. The technique involves buying expensive life insurance that will be passed on to heirs, but declaring a far lower price on gift-tax returns.

The Times made the direct link between its prior reportage and the new regulations:

The Treasury acted after a copy of the Times article was sent ... by Representative Lloyd Doggett, a Texas Democrat who has for years introduced bills to close tax shelters and loopholes.

If the NYT really is responsible for the new Treasury regulations, then it is also certainly deserving of praise.

Nonetheless, I doubt that the newspaper shares the same goal that I have in urging the elimination of this particular tax dodge.

As best I can tell, the NYT’s goal is to increase the total revenues from the federal estate and gift tax laws, by promoting the eradication of avoidance mechanisms that frustrate the achievement of that objective. Today’s story included a PR quote from Congressman Doggett that probably matches the paper’s philosophy:

"I am encouraged that this particular tax shelter has been shut down, but for every narrow loophole that is closed, there are dozens if not hundreds more tax shelter schemes that remain available to be exploited by those who choose not to pay their fair share for necessities like national security."

He’s right, but raising money by closing loopholes is not the only reason to push for their elimination.

I’m not a big fan of the death tax, for two reasons. First, it doesn’t seem fundamentally fair to tap into accumulated wealth at the point of death. Second, I don’t like the pressure it puts on small business owners and others to engage in non-productive activities such as these tax avoidance schemes, just to escape the clutches of a 50% levy on their estates.

Some argue that without death taxes there will be an inevitable broadening of the wealth gap between those at the top and the rest of us. On the other hand, I have more faith in the prospects for eventual dissolution of such dynasties over a few generations, without using the tax system to speed that process along.

For one thing, the inevitable expansion of family trees from a single source of wealth will take its toll. In addition, as I have seen on several occasions locally and on the national level, the character traits that drove the original creator of the family wealth to be so successful don’t often seem to continue into the next generations.

From my perspective, erasing death tax loopholes will help create the conditions for questioning the tax’s continued existence. The many millionaires in the Senate may be more likely to listen to members of their own economic class who can’t escape the death levy without generally applicable legislation.

In other words, if you can’t avoid paying the tax, maybe you’ll do something about it.

August 16, 2002

An Emily Litella Moment

As soon as I saw the following headline, I was sure I knew the whole story:

Shields Installed on Space Station

It made perfect sense. Mark Shields, the long-time left-leaning pundit on PBS and CNN, was finally being sent to the one place that dovetailed with his political views—Out There.

Way out there, in fact, as yet another celebrity astronaut.

I even expected to read a longish quote from a grinning David Gergen. along the lines of "Looks like a great assignment for Mark, I expect him to keep in touch, will miss him in the studio, I'm really jealous, yadda yadda yadda."

It seems I was wrong, however.

Never mind.

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Mark Shields
Celebrity Astronaut?

While I recover my shattered ego, take a look at this week's golf column, if you'd like.

August 15, 2002

Dipping toes

In the early evening tonight we took my mother-in-law into town and down to the beach near the south end of the Boardwalk. She and my wife continued a long-time Philadelphia tradition of dipping one's feet in the ocean on August 15, the Feast of the Assumption.

As a child, my wife accompanied her parents on a day trip to the Jersey shore every August 15 for just this purpose. In later years, her mother joined a crowd of seniors for a bus ride to a Mass in Ocean City, New Jersey, followed by the toe dip.

The tide was out, and the wind had smoothed over a sizable segment of the beach sand above the tideline. Hundreds of bird tracks far outnumbered the human footprints.

If anyone knows how this tradition started, and its connection to the Feast of the Assumption, I'd appreciate a note.

August 15, 2002

Thank you, Mr. Chait

Mickey Kaus, Will Vehrs, and William Sulik noted the New Republic’s correction posted at the magazine’s web site concerning Mr. Chait’s cover-story screed against my little state.

I appreciate the gesture. It doesn’t go as far as some might like in noting the effect of the mistakes on the central premise of the piece. Nonetheless, it’s probably as good (and as prominently displayed) an admission of error one is likely to see.

That's commendable.

August 14, 2002

Tax-Exempt Financing for Religious Institutions Upheld

The Sixth Circuit issued an intriguing 2-1 decision today, upholding the use of tax-exempt revenue bond financing for religious institutions.

The plaintiffs in Steele v. Ind. Dev. Bd. of Metropolitan Government Nashville sued to overturn the issuance of $15 million in bonds for the sake of David Lipscomb University, a small college affiliated with the Churches of Christ.

The money was to be used to build or renovate several facilities on the campus. The loan agreement between the University and the Industrial Development Board specifically prohibited the college

from using any bond-financed facilities for religious purposes.

For those without a background in non-Federal, government-issued bonds, here’s a short primer.

  • Most long-term debt issued by state and local governments is in the form of bonds. Under most conditions, the interest paid on these bonds is exempt from federal income tax, as well as the respective state and/or local income taxes.
  • The "full faith and credit" of the issuing government usually provides the payment security for these bonds.
  • The first use of any tax proceeds collected by the government goes toward debt service on the bonds. If the tax revenues are not sufficient, the government must raise taxes or tax rates to make the payments. These instruments are sometimes called "general obligation" bonds.
  • Revenue bonds are another form of long-term financing. These bonds do not rely upon the issuing government’s full faith and credit, but are instead secured by a pledge of specific revenue streams, such as fuel taxes. The trust agreements used for this financing mechanism usually include prohibitions against lowering the tax rates or license fees or other sources pledged to pay these bonds. Debt ratio coverage requirements also provide assurance to bond purchasers that the money will be there to make the payments.
  • Other tax-exempt bonds are formally "issued" by a government, but are not actually debts of the issuer. Instead, the debts are paid by the private entity receiving the proceeds and agreeing to make the payments from their own sources of revenue. Under the IRS and similar state tax codes, these "private activity" or "industrial revenue" bonds nonetheless maintain their tax-free status if they meet certain rules.
  • Tax-exempt organizations qualified for such status under the IRS code’s 501(c)(3) classification can obtain private activity or industrial revenue bond financing, if the issuing government approves.

In this case, the District Court ruled that the plaintiffs in this case had standing to challenge the issuance of these private activity bonds

as municipal taxpayers who have an interest in preventing their local government from subsidizing religious institutions.

They argued that the city’s tax base was diluted by the Lipscomb University bonds’ issuance, in that the city could have collected tax revenues from the issuance of taxable bonds for the same purpose.

Although there have been several state court decisions upholding this method of financing religious institutions, this was apparently the first time any Circuit Court addressed the matter.

Reversing the District Court, the 6th Circuit upheld the issuance of the bonds against the plaintiffs’ Establishment Clause attack.

The first issue dealt with the claim that the school was

pervasively sectarian.

The Circuit Court discussed the Supreme Court precedent using the term, but eventually concluded that the determination was irrelevant,

given the nature of the aid in question.

The appellate court also noted that the Board’s prior pass-through financing benefited a wide variety of applicants, including the Country Music Hall of Fame, the Jewish Community Center, the YMCA, and Nashville Public Radio, as well as traditional private development projects:

Significantly, no claim is made that the Board ever favored or disfavored one religion over another.

The court then discussed the nature of the aid provided. The indirect mechanism certainly conferred a benefit on Libscomb University, but that fact did not answer the Establishment question.

The court concluded that the bond issuance benefits were similar to those upheld in the property tax exemption case of Walz v. Tax Commission, 397 U.S. 664 (1970), the tax deduction for school tuition and books upheld in Mueller v. Allen, 463 U.S. 388 (1983), and the tax deduction for gifts to religious institutions upheld in Hernandez v. Comm’r Internal Revenue, 490 U.S. 680 (1989).

As Judge Sargus wrote for the majority:

[T]he bonds at issue in this case are analogous to an indirect financial benefit conferred by a religiously neutral tax or deduction.

The court then reviewed the method by which these bonds are issued. It noted the long history of favorable federal tax treatment of local government finance mechanisms, including revenue bonds and private activity bonds:

It is without question that a religious organization may receive "general government benefits" consistent with the Establishment Clause. [citations omitted]. … We conclude that the issuance of tax exempt bonds on a neutral basis is the conference of a generally available governmental benefit.

Finally, the court noted the broad general purposes of the Metro Nashville industrial revenue bond program, with this telling comment:

[T]he objective observer … would reasonably view it as one aspect of a broader undertaking to finance economic development, not as an endorsement of religious schooling in general. Metro no more endorsed Lipscomb University than it did Wal-Mart….

Based on my experience with both First Amendment law and government bond work, including industrial revenue bonds, I didn’t see this decision as a close case. On the other hand, the plaintiffs won below, and there is a lengthy dissent accompanying the Circuit Court’s majority opinion. Maybe I’m missing something.

I simply thought that the connection between the recipients of the benefits conferred by such bonds and the governmental entity "issuing" the bonds was too tenuous to implicate the Establishment Clause.

August 13, 2002

The limits of self-help, continued

I posted a comment recently about a self-help situation in Alexandria, Virginia.

As reported in the Washington Post, a frustrated businesswoman resorted to booting cars illegally parked in her company’s assigned spaces in an office park garage. Her actions were highly unpopular with the folks whose cars she booted.

The police weren’t all that keen on the idea either. They found themselves called to the scene a few too many times to explain that she not only had the right to boot the cars, but also to charge the people for the boot’s removal.

The woman’s employees also experienced others’ anger. Vandals "keyed" their cars when they were parked in the assigned spots. The business owner was eventually forced to rent other spaces for her staff as a result.

I suggested that

there are usually several good reasons to try even harder to avoid the potentially ugly consequences of resorting to self-help.

I also wrote that she might reconsider her actions if her employees quit and became hard to replace.

John "Akatsukami" Braue commented on the post as follows:

I think that he is assuming that, had the police been able and/or willing to enforce Crosby's control of the parking spaces in question, others would have been sufficiently respectful of, or intimidated by, the majesty of the law that they would not have vandalized the cars properly using them. (If I am wrong about my assumption, of course, he is welcome to correct me.) He is almost certainly correct insofar that the amount would have been less than it is.

On the other hand, such vandalism is, well, vandalism. As such, it is against the law. We might contend that the apprehension of the vandals is unlikely, that the resources necessary to do so would be better employed elsewhere. We might even be correct in such arguments. And, of course, the same arguments could be applied to the initial circumstance of usurping Crosby's parking spaces.

Yet, such arguments have been made and accepted, the question remain[s]: what other steps might Crosby take to secure her rights? Schranck seems to me to be arguing that she ought not to take any steps; that the admittedly imperfect self-help scheme, offering less than the official police might, ought not to be tried for that reason.

I can understand why Mr. Braue made his assumption about the intent of my argument. I wasn’t clear enough in stating it.

I recently sent Mr. Braue an e-mail version of the following attempted clarification:

I’m not really arguing that the businesswoman could do nothing herself to alleviate the situation. I think she should have.

Nonetheless, I also think she went a bit overboard, and brought upon her employees the consequences of her own overreaction.

The police should have been called every time, for example. Persistent (daily, even) complaints to the police and, more importantly, to their political superiors about enforcement problems in a given area do tend to produce results. Organized protests with others similarly affected can also help, including in this case meeting with the landlord responsible for providing usable parking spaces.

There were other options. Booting remained among them. Without charging cash for the boot's removal, however, the only thing that she would be doing is cause the miscreant the rough equivalent of inconvenience that taking the parking space caused its owner. Taping a notice to the driver's side window may have also helped produce a bit more respect for her property rights.

My thoughts on this issue are tempered by my long-ago experience as an occasional criminal prosecutor for predominantly minor crimes. A continuing intermittent sore spot within my city was the risk of excessive self-enforcement when frustrated by official unresponsiveness. It tended to lead to disorderly conduct charges and other problems, and not just for the fool that started the mess.

Mr. Braue was certainly correct that the police owed the businesswoman no special duty of enhanced enforcement of her rights, compared to other demands on their services. On the other hand, while the little red hen may sometimes have trouble finding help among the others in the barnyard, she should nonetheless be wary of trying to do it all herself.

August 12, 2002

Don’t hold back, Mr. Chait.

It appears that Jonathan Chait does not like Delaware.

In an issue of The New Republic sure to fly off the newsstands throughout the Diamond State, Chait takes off after our little bit of paradise with a vengeance rarely applied against other states by magazines specializing in political opinion and the arts.

The apparent triggering source of Chait’s snarky commentary is the homely $2 toll charged for automobiles crossing the Delaware/Maryland border on Interstate 95 (deeply discounted for those using EZPass, BTW).

Delaware's greatest specialty is finding ways to siphon money out of nonresidents. The most irritating of these is its toll system. If a state wants to charge drivers for the cost of maintaining roads, tolls are a dubious way to do it--the traffic congestion they produce can be more costly than the toll itself. (You could reduce this congestion by charging double fare on the southbound turnpike and eliminating the northbound toll, as Maryland does; but Delaware concluded this would prompt motorists to drive around the state altogether.) The more efficient way to maintain roads is by taxing gasoline, which nearly all states do. But Delaware has no gas tax, presumably because if it did it would force Delawareans themselves to pay for most of the upkeep of their roads. Instead, the state uses its tiny stretch of i-95 to make out-of-staters foot the bill.

(Emphasis supplied).

I don’t know which resources Chait drew upon in writing this piece, but on this point at least he’s more than a bit wrong.

Here are a few of the facts about Delaware’s transportation revenues.

The Delaware gasoline tax is $0.23 per gallon, very close to the sum charged by Maryland and Pennsylvania, and far more than New Jersey’s gas tax. The Delaware diesel fuel tax is 22 cents per gallon. See 30 Del.C. Sections 5110 and 5132.

Delaware’s combined motor fuel tax revenues were over $103 million in FY01.

In contrast, the I-95 toll plaza that brought forth Chait’s ire also brought in $61.6 million in the same fiscal year.

To keep matters in complete perspective, the net amount of Delaware’s transportation revenues in FY01 from all sources totaled just under $300 million.

Much of the remainder of these revenues is derived from vehicle license plate charges, drivers' license fees, and similar in-state sources.

Even if one assumed that Delawareans pay absolutely no tolls, therefore, they still contribute the lion's share of the state's total transportation costs.

On the other hand, Delaware also experiences a proportionately stunning amount of pass-through traffic. In addition to I-95 and other east/west routes, the state’s north/south routes comprise a large part of the Delmarva Peninsula. Hundreds of thousands of vehicles per day need not ever stop by a Delaware gasoline station to fill up their tanks as they traverse the state. These non-local cars and trucks nonetheless do create increased maintenance and other costs for transportation within Delaware, which is one of the primary reasons why tolls are charged on I-95 and State Route 1.

Mr. Chait also slammed the separate toll charged to cross the Delaware Memorial Bridge. He combined the revenues from that impressive facility with other funds, and made a separate, equally wrong statement about the extent to which tolls make up Delaware’s total budget.

There’s just one problem—the Memorial Bridge is operated by a bi-state compact entity, the Delaware River & Bay Authority. This Congressionally approved agency’s revenues do not end up in the State of Delaware’s coffers. While there have been some interesting recent expenditures by the DRBA (with some of those payments now under federal investigation, in fact), Chait simply screwed up in making this argument.

I know I’m not neutral on this issue, in that I represent DelDOT.

Nonetheless, if someone wants to knock my native state, they certainly can. We Delawareans do it ourselves frequently, and it’s often great sport.

Keeping to the facts would make the arguments far more convincing, however.

After all, successfully shooting particular fish requires not only the right gun, but also the right barrel.

Contact Information:

Fritz Schranck
P.O. Box 88
Nassau, DE  19969


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Official small print disclaimer: This is, after all, a personal web site. Any opinions or comments I express here are my own, and don't necessarily reflect the official position of my work as a government attorney or any of my clients.

That fact may become obvious later on, but it needs to be said here anyway.

Frederick H. Schranck 2002