Federal jobless tax for employers expiring quietly

By STEPHEN OHLEMACHER, Associated Press

Nearly every private employer in the U.S. will get a tax cut on Friday.

It won't affect workers' paychecks. But the expiration of a 35-year-old "temporary" unemployment tax — about $14 a year per worker — will mean real money for some big companies at a time when President Barack Obama is pushing Congress to raise taxes on businesses by closing some loopholes.

Amid a fierce debate over whether higher taxes should be part of a deal to reduce annual deficits — in exchange for letting the government go further into debt — the small cut in federal unemployment taxes has received little attention on Capitol Hill. Most employers probably don't even know they are getting it, especially those who are being hit with bigger increases in state jobless taxes.

But business groups say every little bit helps, whether you're a small employer struggling to make a payroll or a huge company like Wal-Mart, with more than 1.4 million U.S. workers. That's nearly $20 million a year in savings for Wal-Mart.

Some worry that reducing federal unemployment taxes while the jobless rate hovers above 9 percent will add to the system's financial problems. But the tax cut will save businesses nationwide more than $14 billion over the next decade, according to congressional estimates.

"The death of any tax on jobs, no matter how big or small, is a historic moment and one to be celebrated," said Rep. Dave Camp, R-Mich., chairman of the tax-writing House Ways and Means Committee. "The fact that it has taken 35 years for this 'temporary' tax to expire clearly illustrates the dangers of higher taxes — once in place, they are unlikely to ever go away."

The expiring levy was a 0.2 percent surtax on the first $7,000 of a worker's wages. Getting rid of it effectively lowers the federal unemployment tax from 0.8 percent to 0.6 percent for most employers. That's a decrease from $56 a worker to $42 a worker each year — a 25 percent cut.

The tax is paid by nearly all private employers, who also must pay state unemployment taxes. Some services performed by employees of religious or charitable organizations are not subject to federal unemployment taxes. Other workers who are paid by commission also are exempt.

The surtax was first imposed in 1976 to help pay for federal unemployment benefits distributed in the 1970s. The tax was supposed to be temporary, but like a lot of short-term measures in Washington, it endured and was extended at least eight times, under both Republican and Democratic presidents.

President George W. Bush proposed extending it in his 2009 budget, and Obama proposed making it permanent in the 2012 budget he released in February. Both presidents said the additional tax was necessary to help sustain federal unemployment trust funds. But Obama's proposal has been largely ignored by Congress.

"Payroll taxes are always a big problem for small businesses because they are not based on the profitability of the business, like most taxes are," said Bill Rys, tax counsel for the National Federation of Independent Business. "Especially right now, when we have small businesses still really struggling to work their way out of this recession, every little bit has an impact on their bottom line."

The federal unemployment trust funds were drained by the recession in 2008, and federal jobless benefits are currently paid from general fund revenues, adding to the budget deficit.

George Wentworth, senior staff attorney at the National Employment Law Project, said letting the tax expire now is going to make it harder to replenish federal unemployment trust funds.

"For 35 years, that additional 0.2 percent has been critical to stabilizing the system, and certainly there's probably never been a time when the system had a greater need for that," Wentworth said.

The tax cut comes as Obama and GOP leaders are trying to negotiate a deficit reduction package. As part of the package, Obama wants about $400 billion in tax increases paired with more than $1 trillion in spending cuts. Republicans are balking at the tax increases.

At the same time, Obama wants to extend a temporary Social Security payroll tax cut that Congress passed for 2011. The Social Security tax cut, totaling $112 billion a year, goes to workers, while the unemployment tax cut goes to employers.

Employers pay federal unemployment taxes on top of state jobless taxes, which are generally much higher and have been increasing as states cope with high unemployment. State jobless taxes are based in part on rating systems for employers that take into account their recent history of laying off workers. More layoffs mean higher taxes.

In general, state taxes cover unemployment benefits and federal taxes pay to administer the program and provide loans to states when they run out of unemployment funds. Federal taxes also help pay for the federal extension of benefits when unemployment is high.

Copyright © 2011 The Associated Press. All rights reserved.

State legislators go unpaid as California reverts to dysfunctional type

Jun 23rd 2011 | LOS ANGELES | from the The Economist print edition

WHAT a lot of history California has been making this month. For the first time since 1933, the (Democrat-controlled) state legislature has the power to enact a budget with a simple majority, thanks to a ballot measure voters approved last year. So it passed a budget on June 15th, meeting the constitutional deadline—also for the first time in years. But the next day Governor Jerry Brown, himself a Democrat, vetoed that budget—apparently the first such veto in California’s history. The budget was not balanced, he said, and contained “legally questionable manoeuvres”.

His fellow Democrats scolded him. Mr Brown scolded them back, and the Republicans to boot. The Republicans were already scolding everybody, and saw no need to stop. Joining this free for all, the state’s independently elected state controller, John Chiang, decided to stop paying legislators. The new budget rules require withholding salaries from legislators for every day that a budget is late, he said. But our budget was not late, the legislators objected. Your budget had gimmicks and was not even balanced, Mr Chiang told them. He will get sued for his pains, it goes without saying.

Mr Brown’s Republican predecessor, Arnold Schwarzenegger, used to call the ritualised drama that is California’s budget process a “kabuki”. But Japanese kabuki plots only start ridiculous and complicated, before speeding up and resolving themselves with a cathartic bang in the fifth act. California will be lucky if it follows such a script. Indeed, Mr Brown’s second spell of governorship now runs the risk of failing in its first year.

Here is how the year has deteriorated so far. In January, facing what was then a deficit of more than $25 billion, Mr Brown proposed to solve half the problem by cutting spending and the other half by extending some temporary taxes. For the cuts, he expected support from his fellow Democrats. For the revenues, he did not ask for support from hostile Republicans, merely for their consent to put that question before voters in a special election, which requires a two-thirds majority in the legislature. The Democrats duly enacted their part, the cuts. But the Republicans refused to agree to put the revenue question to voters. A handful of them almost broke ranks, but then retreated into the safety of their caucus.

All through this the polls, which at first showed support both for the governor and for his proposed tax extensions, have been turning against Mr Brown. This undermines the strategy of going for a special election, even if he could still get one, since voters would probably reject the revenues anyway. Meanwhile, the economy and tax receipts have grown just enough to make Mr Brown’s argument look weaker and to shrink the remaining budget hole—to about $10 billion—but not nearly enough to solve the problem.

So there they are. The new fiscal year starts on July 1st, and California had no budget as The Economist went to press. Standard & Poor’s, a rating agency, says that California’s credit, at A- already the worst among the 50 states, is “at a crossroad”. Voters are angry. So are legislators. So are the governor and his wife, though presumably not their new dog, Sutter. That, though, is about the only bright spot.

from the The Economist print edition | United States

Merck Can’t Recoup $473 Million in U.S. Taxes, Court Rules

By Chris Dolmetsch and David Voreacos - Jun 20, 2011 1:41 PM PT 

Merck & Co.’s Schering-Plough unit isn’t entitled to a new trial after a judge rejected its claim to $473 million of federal income tax refunds, a U.S. appeals court ruled. 

Schering-Plough, which was acquired by Merck for $51 billion in November 2009, sued the Internal Revenue Service in federal court in Newark, New Jersey, in May 2005 to recoup the taxes, which the IRS assessed in 2004 after an audit.

Schering-Plough argued that funds it received as the result of two interest-rate swap transactions weren’t taxable as proceeds of loans from foreign subsidiaries and that the company was being treated unfairly by the IRS, which hadn’t demanded the same taxes from other companies that were in similar situations.

U.S. District Judge Katharine Hayden ruled after a five-week non-jury trial in 2008 that Schering-Plough failed to prove it deserved a refund, and in April 2010 she denied the company’s request for a new trial. The U.S. Court of Appeals in Philadelphia upheld Hayden’s ruling today, saying the transactions were loans and that the IRS may treat taxpayers differently.

“If taxpayers could routinely challenge tax assessments by pointing to others who had not been compelled to pay under similar circumstances, the IRS would be swamped by collateral litigation of this kind rather than being able to focus on whether the taxpayer actually complied with the law,” Judge Juilo M. Fuentes wrote for a unanimous panel.

Merck, based in Whitehouse Station, New Jersey, said in a statement that it’s “disappointed” by the ruling. The company said it is reviewing the decisions and considering its options.

The case is Merck & Co. vs. U.S., 05-cv-02575, U.S. District Court, District of New Jersey (Newark).

Debunking the Prop. 13 debunkers

Opinion L.A.

Observations and provocations
from The Times' Opinion staff

June 6, 2011 |  7:09 am

Jon Coupal, president of the Howard Jarvis Taxpayers Assn., responds to Steve Lopez’s June 1 column, "Debunking the myth of Prop. 13." If you would like to write a full-length response to a recent Times article, editorial or Op-Ed piece, here are our FAQs and submission policy. 
In his latest attack on Proposition 13, columnist Steve Lopez retreats to the ivory tower for moral support. When a USC demographics professor tells Lopez that support for Prop. 13 is based on myth, and that blocking tax increases is pathetic, dishonest and a long-term disaster, Lopez accepts the professor's words as gospel.
The only "myths" to debunk about Proposition 13 are those promoted by the tax-and-spend lobby and public employees unions, which would like you to believe that the state's landmark 1978 initiative to limit property tax increases has "devastated" California's education system while at the same time not providing any real benefits to homeowners and renters today.
First and foremost, Proposition 13 did not dictate how our government would spend property tax revenues. It simply set a property tax rate of 1% and limited annual tax increases to no more than 2%.
Proposition 13 is not responsible for shifting the responsibility of education funding from the local level to Sacramento. Years before Proposition 13 passed, the California Supreme Court ruled in Serrano vs. Priest, an equal-protection case, that school funding must be equalized for all California students. That meant education funding could not be based on property tax receipts, because wealthy neighborhoods with high property values could spend more per student than poor neighborhoods with lower property values. The funding of our education system based on varying property tax receipts was found unconstitutional, but you never hear the Proposition 13's opponents discuss this ruling or its implications.
You also never hear them talk about the fact that spending per pupil has actually increased 30%, adjusted for inflation, since Proposition 13 passed in 1978, according to research by the Howard Jarvis Taxpayers Assn.
Second, everyone benefits from Proposition 13. The moment California homeowners get the keys to their new home, they benefit from the law's protection -- and not just when the home value soars or if they've lived in their home for decades. Proposition 13 protects Californians from potential annual percentage increases in their tax bills in the double digits or more. For example, just a few months before Proposition 13 passed in 1978, then-Los Angeles County Assessor Alexander Pope announced that many parcels of property would see assessed valuations increase by as much as 100%. 
Proposition 13 saved many homeowners and businesses by simply setting the tax limit to provide stability. It allowed property owners to budget for their future and gave them protection from runaway taxes that would have forced many to sell their homes.
Government also benefits from Proposition 13, protecting it from severe yearly swings in revenue, including when the real estate market crashes and results in huge decreases in property value. The value reserve built into the system lets government predict revenues coming in, although, unfortunately, that doesn't prevent many politicians from spending above and well beyond that amount.
And renters also reap benefits. Without Proposition 13, you can be sure that higher business property taxes on apartment buildings would be passed on, in the form of higher rents, to working families and seniors living on fixed incomes.
The truth is, the system works. Critics such as Lopez say commercial property owners receive more benefits from Proposition 13. But since the measure passed, the assessed value of homeowner property has grown at an average of 8.1% per year, and assessed value of non‐homeowner property subject to Proposition 13 has grown an average of 8.4% per year, according to data from the California State Board of Equalization.
Finally, California property taxes are not among the lowest in the nation. Even with Proposition 13, we still rank higher than 36 other states when it comes to per-capita property taxes, according to the Tax Foundation. Without Proposition 13's protections, California taxpayers would fare far worse and property taxes would be at or near the top, just as we are when it comes to sales, car, gas and personal income taxes.
There is one thing Lopez and I can agree on: California politicians are too busy bickering and tinkering rather than doing their jobs. But instead of blaming California's problems on Proposition 13, it's time to focus on the real issues, such as runaway pension costs and unaccountable politicians refusing to rein in spending, while beleaguered California working families are forced to cut back.
-- Jon Coupal
RELATED:
Editorial: To fix California's budget, we need taxes too
Tim Rutten: It's time to pass California tax hikes legislatively
Editorial: A broken budgeting process
Steve Lopez: It's time to tinker with "untouchable" Prop. 13

April 15, 2011: House to vote today on budget. Hey – didn't they do that yesterday?

House Speaker John Boehner (l.), seen here with President Obama at a bipartisan meeting in the White House on April 13, will call today for a budget vote. Like he did yesterday. 

Pablo Martinez Monsivais / AP

Hold it a second – didn’t they do that yesterday? It was all over the news – lawmakers on Thursday had a big vote on a bill that squeezed $38 billion out of Uncle Sam’s spending plans. It passed, by a vote of 260 to 167.

Are they reenacting the movie “Groundhog Day” in Washington, with everybody doing the same thing over and over until Bill Murray wakes up and sees his shadow? Did the danged bill get lost in traffic on its way to the White House, and now they have to pass it again so President Obama has something to sign?

No, and no again. They’re voting on something different today. It’s all part of a US federal budget process that’s as confusing as a teenager’s excuses and more tangled up than the syntax of Charlie Sheen.

We’ll try to explain. On Thursday, the House passed a bill that funds the US government for fiscal year 2011, the one that’s already occurring. That’s right – only in Washington do they keep fighting past fiscal deadlines and then make adjustments to a budget that government managers are already implementing. It’s a little bit like changing the size of the ice rink after the hockey game has started.

The bill that’s already passed is the one that President Obama and Speaker John Boehner have struggled over for so long. If it hadn’t passed, the government would have shut down because all their temporary funds would have expired. In the end, neither side got everything they wanted.

“Welcome to divided government,” said Speaker Boehner, following Thursday’s vote.

On Friday, the House is voting on something different – the budget for the next fiscal year, 2012.

Only they’re not voting on something that will set spending levels in a hard-and-fast manner. That would be too simple. No, under the rules of the budget process, they are voting on a non-binding resolution – a sort of promise about overall goals they will try and follow, both for 2012 and beyond, in that mythical land known to Washington budgeters as “the out years.”

The resolution isn’t law itself. The President doesn’t get to sign it (or veto it). But it sets the stage for lots of things that might happen later in specific pieces of legislation.

Got that?

Specifically, Friday’s vote is on the GOP’s 2012-and-beyond budget outline drawn up by Budget Committee Chairman Paul Ryan (R) of Wisconsin. It would cut $6 trillion from federal spending over the next decade, compared to the competing outline submitted to Congress by President Obama in February.

Representative Ryan’s plan is the one that would change Medicare from a government entitlement program to a voucher-like system in which the US would help seniors buy private health insurance. To Republicans, it is something that shows they are serious about putting the nation’s fiscal house back in order. 

“The biggest threat to Medicare is the status quo and the people defending it,” said Ryan on Thursday.

To Democrats, it is a drastic program that voters won’t like when they figure out its real effects.

“They force seniors to leave the Medicare program and go into the private insurance market where costs continue to rise day in and day out,” said Rep. Chris Van Hollen (D) of Maryland, the top Democrat on the House budget panel.

To a certain extent, their argument here is moot. Ryan's plan is expected to pass the House easily, but run into a wall in the Democrat-controlled Senate.

2011 Offshore Voluntary Disclosure Initiative (OVDI)

IR-2011-14, Feb. 8, 2011
WASHINGTON — The Internal Revenue Service announced today a special voluntary disclosure initiative designed to bring offshore money back into the U.S. tax system and help people with undisclosed income from hidden offshore accounts get current with their taxes. The new voluntary disclosure initiative will be available through Aug. 31, 2011.

“As we continue to amass more information and pursue more people internationally, the risk to individuals hiding assets offshore is increasing,” said IRS Commissioner Doug Shulman. “This new effort gives those hiding money in foreign accounts a tough, fair way to resolve their tax problems once and for all. And it gives people a chance to come in before we find them.”

The IRS decision to open a second special disclosure initiative follows continuing interest from taxpayers with foreign accounts. The first special voluntary disclosure program closed with 15,000 voluntary disclosures on Oct. 15, 2009. Since that time, more than 3,000 taxpayers have come forward to the IRS with bank accounts from around the world. These taxpayers will also be eligible to take advantage of the special provisions of the new initiative.

“As I’ve said all along, the goal is to get people back into the U.S. tax system,” Shulman said. “Combating international tax evasion is a top priority for the IRS. We have additional cases and banks under review. The situation will just get worse in the months ahead for those hiding assets and income offshore. This new disclosure initiative is the last, best chance for people to get back into the system.”

The new initiative announced today – called the 2011 Offshore Voluntary Disclosure Initiative (OVDI) -- includes several changes from the 2009 Offshore Voluntary Disclosure Program (OVDP). The overall penalty structure for 2011 is higher, meaning that people who did not come in through the 2009 voluntary disclosure program will not be rewarded for waiting. However, the 2011 initiative does add new features.

For the 2011 initiative, there is a new penalty framework that requires individuals to pay a penalty of 25 percent of the amount in the foreign bank accounts in the year with the highest aggregate account balance covering the 2003 to 2010 time period. Some taxpayers will be eligible for 5 or 12.5 percent penalties. Participants also must pay back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.

Taxpayers participating in the new initiative must file all original and amended tax returns and include payment for taxes, interest and accuracy-related penalties by the Aug. 31 deadline.

The IRS is also making other modifications to the 2011 disclosure initiative.

Participants face a 25 percent penalty, but taxpayers in limited situations can qualify for a 5 percent penalty.

The IRS also created a new penalty category of 12.5 percent for treating smaller offshore accounts.  People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the 2011 initiative will qualify for this lower rate.

The 2011 initiative offers clear benefits to encourage taxpayers to come in now rather than risk IRS detection. Taxpayers hiding assets offshore who do not come forward will face far higher penalty scenarios as well as the possibility of criminal prosecution.

“This is a fair offer for people with offshore accounts who want to get right with the nation’s taxpayers,” Shulman said. “This initiative offers them the chance to get certainty about how their case will be handled. Just as importantly, those who truly come in voluntarily can avoid criminal prosecution as well.”

The IRS is handling processing of the voluntary disclosures in centralized units to more efficiently process the applications.

The IRS has launched a new section on www.IRS.gov that includes the full terms and conditions on the 2011 Offshore Voluntary Disclosure Initiative, including an extensive set of questions and answers to help taxpayers and tax professionals. The web site also includes details on how people can make a voluntary disclosure.

In the first voluntary disclosure program in 2009, taxpayers faced up to a 20 percent penalty covering up to a six-year period. Taxpayers came forward with about 15,000 voluntary disclosures in that effort covering banks in more than 60 countries.

Shulman said IRS efforts in the international arena will only increase as time goes on.

“Tax secrecy continues to erode,” Shulman said. “We are not letting up on international tax issues, and more is in the works. For those hiding cash or assets offshore, the time to come in is now. The risk of being caught will only increase.”

Tax Refunds Move to Debit Cards

Tax Refunds Move to Debit Cards 

By SUDEEP REDDY

WASHINGTON—The U.S. Treasury Department plans to launch a pilot program Thursday to deliver tax refunds through prepaid debit cards, an effort to cut the expense of paper checks and aid lower-income taxpayers who don't have bank accounts.

About 600,000 low- and moderate-income taxpayers nationwide, a slice of those earning about $35,000 or less annually, will receive letters inviting them to activate a debit card that can receive direct deposits.

The Treasury Department's new program will deliver some tax refunds on prepaid debit cards, giving recipients an alternative to check-cashing outlets.

The program will cost the government about $1.5 million and marks the latest federal effort to send fewer payments by mail. The U.S. still issues an estimated 45 million paper checks a year for tax refunds. Each one costs the government about $1, including the cost of processing roughly 600,000 claims a year for missing checks. Each payment by direct deposit costs the U.S. about 10 cents.

"My goal, one that's been talked about for many years, is to get out of the check-payment business," said Richard Gregg, Treasury's Fiscal Assistant Secretary and one of the officials overseeing the program.

At the same time, officials across government have been exploring how to nudge consumers who don't have bank accounts toward lower-cost financial-services providers. An estimated nine million households—about one in every 12—don't have bank accounts, according to a Federal Deposit Insurance Corp. survey.

Some consumers were dropped by their banks while others say they avoid the traditional banking system owing to concerns about fees and overdraft charges. Many rely on higher-cost neighborhood check-cashing outlets and generally don't save much money as a result. The FDIC and Treasury already have separate programs to draw consumers without accounts into the banking system.

The new Treasury pilot program will provide consumers a debit card that has many features of a checking account, such as free bill paying and free ATM withdrawals at select machines. Consumers also can use the card for shopping, without added fees.

"They can use it in an ongoing way to pay bills, save money, get cash and have a real basic, robust, safe and convenient transaction account," said Treasury Financial Access Innovations Director Joshua Wright.

Half the 600,000 offers from Treasury will carry a $4.95 monthly fee, while the rest will be free. The letters will use a mix of messages, including some offering recipients a savings-account feature. Treasury officials said the different approaches will allow them to determine which is most likely to lead consumers to sign up for the card.

The program will be managed by Green Dot Corp., which has about 3.3 million prepaid cards across the U.S. The Monrovia, Calif., firm generally enrolls customers through retail stores or the Internet. "The fact that it's coming as an opportunity from the government directly to take advantage of the product is a different twist," said Steven Streit, the firm's chief executive.

On Green Dot's existing cards, about 40% of the dollar volume is from payroll direct deposit; consumers can also load funds directly. Most customers with direct deposit don't pay a monthly fee for their cards; the maximum monthly fee is $5.95 a month. The firm, which doesn't charge overdraft fees, earns most of its money from "interchange fees"—charges largely incurred by merchants when credit- and debit-card users make purchases.

The Treasury Department said it was also starting a pilot program to encourage some workers who receive wages through payroll cards—roughly 1.7 million people—to receive their 2010 tax refunds on those cards.

Write to Sudeep Reddy at sudeep.reddy@wsj.com