Now that the tax season is now in full session, here are some things you might want to know.
Got Kids? They may have an impact on your tax situation.
Listed below are the top 10 things the IRS wants you to consider if you have children.
Dependents In most cases, a child can be claimed as a dependent in the year they were born. For more information see IRS Publication 501, Exemptions, Standard Deduction, and Filing Information.
Child Tax Credit You may be able to take this credit on your tax return for each of your children under age 17. If you do not benefit from the full amount of the Child Tax Credit, you may be eligible for the Additional Child Tax Credit. The Additional Child Tax Credit is a refundable credit and may give you a refund even if you do not owe any tax. For more information see IRS Publication 972, Child Tax Credit.
Child and Dependent Care Credit You may be able to claim the credit if you pay someone to care for your child under age 13 so that you can work or look for work. For more information see IRS Publication 503, Child and Dependent Care Expenses.
Earned Income Tax Credit The EITC is a benefit for certain people who work and have earned income from wages, self-employment or farming. EITC reduces the amount of tax you owe and may also give you a refund. For more information see IRS Publication 596, Earned Income Credit.
Adoption Credit You may be able to take a tax credit for qualifying expenses paid to adopt an eligible child. For more information see the instructions for IRS Form 8839, Qualified Adoption Expenses.
Children with Earned Income If your child has income earned from working they may be required to file a tax return. For more information see IRS Publication 501.
Children with Investment Income Under certain circumstances a child’s investment income may be taxed at the parent’s tax rate. For more information see IRS Publication 929, Tax Rules for Children and Dependents.
Coverdell Education Savings Account This savings account is used to pay qualified educational expenses at an eligible educational institution. Contributions are not deductible; however, qualified distributions generally are tax-free. For more information see IRS Publication 970, Tax Benefits for Education.
Higher Education Credits Education tax credits can help offset the costs of education. The American Opportunity and the Lifetime Learning Credit are education credits that reduce your federal income tax dollar-for-dollar, unlike a deduction, which reduces your taxable income. For more information see IRS Publication 970.
Student Loan Interest You may be able to deduct interest you pay on a qualified student loan. The deduction is claimed as an adjustment to income so you do not need to itemize your deductions. For more information see IRS Publication 970.
Tuesday, February 9, 2010
Tuesday, July 14, 2009
Ten Tax Planning Ideas for Small Businesses in 2009
If you are a small business owner looking for cost cutting ideas here are ten tax planning ideas that may result in substantial tax savings. The following article highlights planning areas often missed by business owners. You should consult a qualified tax advisor to determine if any of these areas are appropriate for you and your business.
S Corporation: Set up an S Corporation to avoid self-employment tax on profits. If you conduct business as a sole proprietor, a partnership, or a limited liability company the first $106,800 of 2009 profits are subject to a self-employment tax rate of 15.3%. The profits in excess of $106,800 are subject to a Medicare tax rate of 2.9%. These self-employment tax rates are in addition to paying income tax on the profits. An S Corporation is not subject to self-employment tax on the profits earned. But you must take "reasonable" compensation as salary subject to F.I.C.A.
Bad Debt Expense: A reserve for bad debts is not deductible, but you can write off accounts receivable in the year in which they become uncollectible. Be sure to take advantage of writing off all those uncollected accounts at year end.If you used a collection agency, you can deduct a portion of the debt that will go to the collection agency as a fee (around 25%). You can write off that amount at the time you turn over the receivable to the agency.
Medical Expense: For 2009, eligible self-employed individuals can deduct from gross income 100% of the amounts paid for health insurance coverage. The deduction is limited to net earned income from the business, less the deduction for 50% of the self-employment tax. Also, you cannot take the deduction for any month you were qualified to participate in an employer sponsored health plan. If you conduct business as a corporation, set up a corporate medical reimbursement plan. Medical costs are generally personal expenses deductible only to the extent that they exceed 7.5% of your Adjusted Gross Income (AGI). However, medical reimbursement plans set up by C Corporations let you deduct all the medical costs you incur for yourself, your spouse, and dependents. These plans must cover all eligible employees.
Equipment Expense: For 2009, Section 179 of the Tax Code lets companies deduct up to $133,000 of new equipment, subject to certain limits. (This limit is reduced by the amount by which the cost of section 179 property placed in service in the tax year exceeds $530,000.) Passenger vehicles are excluded from the expensing election. A passenger vehicle is defined as having a loaded gross vehicle weight of less than 6,000 pounds. The tax code also allows an accelerated method to depreciate the remaining value of that equipment – it’s faster than the straight-line method of depreciation.
Home Office Expense: Write off home-office expenses. You can take this deduction even if you use the space for administrative purposes, as long as there is no where else you can work. When you use one room in your six room home as an office, you can deduct one-sixth of your costs for utilities, security, homeowner’s insurance, etc. as well as all costs for the room such as carpeting. Although you can also claim the depreciation on your home used for home office, you should consult a qualified tax advisor prior to doing so to understand the impact it will have on the exclusion of gain when you sell your residence.
Travel Expense: Deduct business trips by putting your spouse on the payroll. When spouses are on the payroll, even at low salaries, cost of business trips that include the spouse can be fully deducted. You should also be aware that putting your spouse on the payroll in 2009 will also double the amount of Social Security tax owed up to the first $106,800 of income.
Hiring Children in the Family Business: Put your children on the company payroll. When you employ your children in the business, for 2009 you can pay them up to $5,350 in salary free from Federal tax. The “kiddie” tax doesn’t apply to wages, so children under age 18 get this tax break, too. Have your children put $4,000 into a Roth IRA, where it will compound tax-free over time. When the money is left in the account until they turn 59 ½, they will never have to pay out any tax or penalties on that money or its earnings. If your business is not incorporated, and the children are under age 18, neither you, as employer, nor your children will owe Social Security or Medicare tax on their wages.
Retirement Planning: Put more money away in your company retirement plan for yourself than for your employees. Business owners who are more than 20 years older that other company employees can set up a defined-benefit pension plan instead of a defined-contribution plan. Because they are funding a specific benefit (not putting away a percentage of salary) and have fewer years to do so, owners can contribute more to the plan for themselves than their employees.
Claiming Business Losses: Make the most of business losses. If your company has a net operating loss in 2009, it can be carried back two years or carried forward up to 20 years to offset future profits. To get a refund, file an application on Form 1139 for corporations and Form 1045 for sole proprietorships. Most refunds are sent out by the IRS within two months.
Education: Set up a company tuition-reimbursement plan to pay a child’s school cost. Businesses can set up plans that pay up to $5,250 in tuition per employee annually. Business owners’ children must work for the company, be older than age 21, own no company stock and cannot be claimed as a dependent on the owners’ tax returns.
S Corporation: Set up an S Corporation to avoid self-employment tax on profits. If you conduct business as a sole proprietor, a partnership, or a limited liability company the first $106,800 of 2009 profits are subject to a self-employment tax rate of 15.3%. The profits in excess of $106,800 are subject to a Medicare tax rate of 2.9%. These self-employment tax rates are in addition to paying income tax on the profits. An S Corporation is not subject to self-employment tax on the profits earned. But you must take "reasonable" compensation as salary subject to F.I.C.A.
Bad Debt Expense: A reserve for bad debts is not deductible, but you can write off accounts receivable in the year in which they become uncollectible. Be sure to take advantage of writing off all those uncollected accounts at year end.If you used a collection agency, you can deduct a portion of the debt that will go to the collection agency as a fee (around 25%). You can write off that amount at the time you turn over the receivable to the agency.
Medical Expense: For 2009, eligible self-employed individuals can deduct from gross income 100% of the amounts paid for health insurance coverage. The deduction is limited to net earned income from the business, less the deduction for 50% of the self-employment tax. Also, you cannot take the deduction for any month you were qualified to participate in an employer sponsored health plan. If you conduct business as a corporation, set up a corporate medical reimbursement plan. Medical costs are generally personal expenses deductible only to the extent that they exceed 7.5% of your Adjusted Gross Income (AGI). However, medical reimbursement plans set up by C Corporations let you deduct all the medical costs you incur for yourself, your spouse, and dependents. These plans must cover all eligible employees.
Equipment Expense: For 2009, Section 179 of the Tax Code lets companies deduct up to $133,000 of new equipment, subject to certain limits. (This limit is reduced by the amount by which the cost of section 179 property placed in service in the tax year exceeds $530,000.) Passenger vehicles are excluded from the expensing election. A passenger vehicle is defined as having a loaded gross vehicle weight of less than 6,000 pounds. The tax code also allows an accelerated method to depreciate the remaining value of that equipment – it’s faster than the straight-line method of depreciation.
Home Office Expense: Write off home-office expenses. You can take this deduction even if you use the space for administrative purposes, as long as there is no where else you can work. When you use one room in your six room home as an office, you can deduct one-sixth of your costs for utilities, security, homeowner’s insurance, etc. as well as all costs for the room such as carpeting. Although you can also claim the depreciation on your home used for home office, you should consult a qualified tax advisor prior to doing so to understand the impact it will have on the exclusion of gain when you sell your residence.
Travel Expense: Deduct business trips by putting your spouse on the payroll. When spouses are on the payroll, even at low salaries, cost of business trips that include the spouse can be fully deducted. You should also be aware that putting your spouse on the payroll in 2009 will also double the amount of Social Security tax owed up to the first $106,800 of income.
Hiring Children in the Family Business: Put your children on the company payroll. When you employ your children in the business, for 2009 you can pay them up to $5,350 in salary free from Federal tax. The “kiddie” tax doesn’t apply to wages, so children under age 18 get this tax break, too. Have your children put $4,000 into a Roth IRA, where it will compound tax-free over time. When the money is left in the account until they turn 59 ½, they will never have to pay out any tax or penalties on that money or its earnings. If your business is not incorporated, and the children are under age 18, neither you, as employer, nor your children will owe Social Security or Medicare tax on their wages.
Retirement Planning: Put more money away in your company retirement plan for yourself than for your employees. Business owners who are more than 20 years older that other company employees can set up a defined-benefit pension plan instead of a defined-contribution plan. Because they are funding a specific benefit (not putting away a percentage of salary) and have fewer years to do so, owners can contribute more to the plan for themselves than their employees.
Claiming Business Losses: Make the most of business losses. If your company has a net operating loss in 2009, it can be carried back two years or carried forward up to 20 years to offset future profits. To get a refund, file an application on Form 1139 for corporations and Form 1045 for sole proprietorships. Most refunds are sent out by the IRS within two months.
Education: Set up a company tuition-reimbursement plan to pay a child’s school cost. Businesses can set up plans that pay up to $5,250 in tuition per employee annually. Business owners’ children must work for the company, be older than age 21, own no company stock and cannot be claimed as a dependent on the owners’ tax returns.
Monday, June 22, 2009
2009 Gift Tax Guidelines
Source: IRS.govUpdated 1/13/2009
The gift tax law allows a one time transfer from your estate of up to $1 million. Therefore, you can gift $1 million from your estate and your spouse can gift $1 million from her estate without being subject to a gift tax.
In addition to these rules, there is an annual gift tax exclusion of $13,000 that each of you can transfer to others ($26,000 for a married couple). The limitation applies only to gifting to one individual. You can make multiple gifts to multiple individuals and will not pay gift tax as long as each gift does not exceed the exclusion amount.
The following gifts are not taxable gifts:
The gift tax law allows a one time transfer from your estate of up to $1 million. Therefore, you can gift $1 million from your estate and your spouse can gift $1 million from her estate without being subject to a gift tax.
In addition to these rules, there is an annual gift tax exclusion of $13,000 that each of you can transfer to others ($26,000 for a married couple). The limitation applies only to gifting to one individual. You can make multiple gifts to multiple individuals and will not pay gift tax as long as each gift does not exceed the exclusion amount.
The following gifts are not taxable gifts:
- Gifts that are not more than the annual exclusion for the calendar year,
- Tuition or medical expense you pay directly to a medical or educational institution for someone,
- Gifts to your spouse,
- Gifts to a political organization for its use, and
- Gifts to charities.
Annual exclusion. A separate annual exclusion applies to each person to whom you make a gift. For 2009, the annual exclusion is $13,000. Therefore, you generally can give up to $13,000 to any number of people in 2009 and none of the gifts will be taxable.
If you are married, both you and your spouse can separately give up to $13,000 to the same person in 2009 without making a taxable gift. If one of you gives more than $13,000 to a person in 2009, see Gift Splitting, later.
Inflation adjustment. After 2009, the $13,000 annual exclusion may be increased due to a cost-of-living adjustment. See the instructions for Form 709 for the amount of the annual exclusion for the year you make the gift.
Example 1. In 2009, you give your niece a cash gift of $8,000. It is your only gift to her this year. The gift is not a taxable gift because it is not more than the $13,000 annual exclusion.
Example 2. You pay the $15,000 college tuition of your friend. Because the payment qualifies for the educational exclusion, the gift is not a taxable gift.
Example 3. In 2009, you give $25,000 to your 25-year-old daughter. The first $13,000 of your gift is not subject to the gift tax because of the annual exclusion. The remaining $12,000 is a taxable gift. As explained later under Applying the Unified Credit to Gift Tax, you may not have to pay the gift tax on the remaining $12,000. However, you do have to file a gift tax return unless the gift was made from community property funds and is actually a gift one half from the father and one half from the mother.
Gift Splitting
If you or your spouse make a separate property gift to a third party, the gift can be considered as made one-half by you and one-half by your spouse. This is known as gift splitting. Both of you must consent (agree) to split the gift. If you do, you each can take the annual exclusion for your part of the gift.
In 2009, gift splitting allows married couples to give up to $26,000 to a person without making a taxable gift.
If you split a gift you made, you must file a gift tax return to show that you and your spouse agree to use gift splitting. You must file a Form 709 even if half of the split gift is less than the annual exclusion.
Gifts by married couples from community property funds are not taxable and no reporting is required unless the gift exceeds $26,000.
Example. Harold and his wife, Helen, agree to split the gifts that they made during 2009 from inherited funds. Harold gives his nephew, George, $21,000, and Helen gives her niece, Gina, $18,000. Although each gift is more than the annual exclusion ($12,000), by gift splitting they can make these gifts without making a taxable gift.
Harold's gift to George is treated as one-half ($10,500) from Harold and one-half ($10,500) from Helen. Helen's gift to Gina is also treated as one-half ($9,000) from Helen and one-half ($9,000) from Harold. In each case, because one-half of the split gift is not more than the annual exclusion, it is not a taxable gift. However, each of them must file a gift tax return.
Applying the Unified Credit to Gift Tax
After you determine which of your gifts are taxable, you figure the amount of gift tax on the total taxable gifts and apply your unified credit for the year.
Example. In 2009, you give your niece, Mary, a cash gift of $8,000. It is your only gift to her this year. You pay the $15,000 college tuition of your friend, David. You give your 25-year-old daughter, Lisa, $26,000. You also give your 27-year-old son, Ken, $26,000. Before 2009, you had never given a taxable gift. You apply the exceptions to the gift tax and the unified credit as follows:
- Apply the educational exclusion. Payment of tuition expenses is not subject to the gift tax. Therefore, the gift to David is not a taxable gift and not reported on Form 709.
- Apply the annual exclusion. The first $13,000 you give someone during 2009 is not a taxable gift. Therefore, your $8,000 gift to Mary, the first $13,000 of your gift to Lisa, and the first $13,000 of your gift to Ken are not taxable gifts.
- Apply the unified credit. The gift tax on $26,000 ($13,000 remaining from your gift to Lisa plus $13,000 remaining from your gift to Ken) is $5,120. You subtract the $5,120 from your unified credit of $345,800 for 2009. The unified credit that you can use against the gift tax in a later year is $340,680.
You do not have to pay any gift tax for 2009. However, you do have to file Form 709 for the gifts to David and Lisa.
Filing a Gift Tax Return
Generally, you must file a gift tax return on Form 709 if any of the following apply.
You gave gifts to at least one person (other than your spouse) that are more than the annual exclusion for the year.
- You and your spouse are splitting a gift.
You gave someone (other than your spouse) a gift that he or she cannot actually possess, enjoy, or receive income from until some time in the future. - You gave your spouse an interest in property that will be ended by some future event.
- You do not have to file a gift tax return to report gifts to (or for the use of) political organizations and gifts made by paying someone's tuition or medical expenses.
You also do not need to report the following deductible gifts made to charities:
- Your entire interest in property, if no other interest has been transferred for less than adequate consideration or for other than a charitable use; or
- A qualified conservation contribution that is a restriction (granted forever) on the use of real property.
Saturday, June 20, 2009
State taxes on the rise
There's been talk of late by federal officials and politicians of the "green shoots" of an economic recovery, but at the state level, most economic lawns are still crunchy brown from a serious revenue drought.
State personal income tax collections dropped 26 percent nationwide through the first four months of 2009 compared with a year ago, putting many states' already troubled budgets into deeper holes.
The percentage drop comes to $28.8 billion less than the same period a year earlier, according to an examination of state income tax collections by the Nelson A. Rockefeller Institute of Government, the public policy research arm of the State University of New York.
The report, "April Is the Cruelest Month," tallied state tax collections from January to April for 37 of the 41 states that impose broad-based personal income taxes. April is the month during which states collect the most income tax revenue because most follow the federal April 15 filing deadline.
Of the 37 states reviewed, the Rockefeller Institute found that 34 reported revenue declines. Arizona experienced the steepest drop, a 54.9 percent decrease from last year.
Other states with tax revenue decreases greater than the U.S. average this year, in order of revenue lost percentages, include South Carolina, Michigan, California, Vermont, New York, Rhode Island, New Jersey, Massachusetts, Idaho, Ohio and Oregon.
The Rockefeller Institute news wasn't totally terrible. Three states -- Utah, Alabama and North Dakota -- were able to bring a bit more tax money this year versus last year's collections.
Data were not available in time for the report from Kentucky, Missouri, Mississippi, and New Mexico.
"Given the ominous picture of personal income tax collections, deeper overall revenue shortfalls and further deterioration in states’ fiscal conditions are likely on the way for most states for the April-June quarter of calendar year 2009," said Rockefeller Institute Senior Fellow Donald J. Boyd, who co-authored the report with Senior Policy Analyst Lucy Dadayan.
"It is clear that state income tax revenue in April and May has fallen short of what states expected by many billions of dollars," said Boyd. "Exactly how that will translate into new budget shortfalls is not clear, but budget gaps are likely to have increased by several multiples of the amount by which tax revenue has fallen short. Many states have begun revising their budget forecasts so that elected officials can take the new shortfalls into account as they finalize their budgets."
The answer? Raise rates: Many states are responding to the dire collection numbers by increasing their tax rates. My tax blogging colleague taxgirl has taken a look at state tax increases in New Jersey and several other states.
It's a natural reaction, but it might not help. If people aren't making as much money, either because they've lost their taxable income paying jobs or their investment income evaporated as the stock market crashed, then state treasuries also are out of luck.
Target millionaires: So legislators in several states have taken to targeting those they think (hope) will be more able to pay: their wealthiest residents.
The latest state to enact a so-called "millionaire tax" is Hawaii. According to the Tax Foundation, the Aloha State is the fifth one to increase its top individual income tax bracket, joining California, Maryland, New Jersey and New York.
Such taxes are unique, say Tax Foundation analysts, in that they impose a top rate near or above 10 percent on a small subset of high-income earners.
But the problem is that it's not just the wealthy who get caught in the increase.
The income level at which the new top rate applies is often a sharp jump from where the previous top rate applies, according to the Tax Foundation, but with each new "millionaire's tax," the tax is kicking in on more and more people who are not millionaires.
The 10 states with the highest rates: Where does you state rank in the overall income tax rate ranking? According to a recent Forbes.com article, the average rate in the states that levy income taxes is 6.5 percent.
Some, as we noted, have much higher rates.
Forbes.com researchers have compiled a slide show of the 10 states with the highest rates. In case you don't have time to view the details now, here's the list, starting with the 10th highest rate, along with the top rate for each state:
Minnesota, 7.85 percent
Maine, 8.5 percent
New Jersey, 8.97 percent
New York, 8.97 percent
Iowa, 8.98 percent
Oregon, 9 percent
Vermont, 9.5 percent
Rhode Island, 9.9 percent
California, 10.55 percent
Hawaii, 11 percent
As you can see, even taxpayers in the Midwest, a region typically thought to be less-inclined to raise taxes, aren't exempt from the high top tax rate trend.
State personal income tax collections dropped 26 percent nationwide through the first four months of 2009 compared with a year ago, putting many states' already troubled budgets into deeper holes.
The percentage drop comes to $28.8 billion less than the same period a year earlier, according to an examination of state income tax collections by the Nelson A. Rockefeller Institute of Government, the public policy research arm of the State University of New York.
The report, "April Is the Cruelest Month," tallied state tax collections from January to April for 37 of the 41 states that impose broad-based personal income taxes. April is the month during which states collect the most income tax revenue because most follow the federal April 15 filing deadline.
Of the 37 states reviewed, the Rockefeller Institute found that 34 reported revenue declines. Arizona experienced the steepest drop, a 54.9 percent decrease from last year.
Other states with tax revenue decreases greater than the U.S. average this year, in order of revenue lost percentages, include South Carolina, Michigan, California, Vermont, New York, Rhode Island, New Jersey, Massachusetts, Idaho, Ohio and Oregon.
The Rockefeller Institute news wasn't totally terrible. Three states -- Utah, Alabama and North Dakota -- were able to bring a bit more tax money this year versus last year's collections.
Data were not available in time for the report from Kentucky, Missouri, Mississippi, and New Mexico.
"Given the ominous picture of personal income tax collections, deeper overall revenue shortfalls and further deterioration in states’ fiscal conditions are likely on the way for most states for the April-June quarter of calendar year 2009," said Rockefeller Institute Senior Fellow Donald J. Boyd, who co-authored the report with Senior Policy Analyst Lucy Dadayan.
"It is clear that state income tax revenue in April and May has fallen short of what states expected by many billions of dollars," said Boyd. "Exactly how that will translate into new budget shortfalls is not clear, but budget gaps are likely to have increased by several multiples of the amount by which tax revenue has fallen short. Many states have begun revising their budget forecasts so that elected officials can take the new shortfalls into account as they finalize their budgets."
The answer? Raise rates: Many states are responding to the dire collection numbers by increasing their tax rates. My tax blogging colleague taxgirl has taken a look at state tax increases in New Jersey and several other states.
It's a natural reaction, but it might not help. If people aren't making as much money, either because they've lost their taxable income paying jobs or their investment income evaporated as the stock market crashed, then state treasuries also are out of luck.
Target millionaires: So legislators in several states have taken to targeting those they think (hope) will be more able to pay: their wealthiest residents.
The latest state to enact a so-called "millionaire tax" is Hawaii. According to the Tax Foundation, the Aloha State is the fifth one to increase its top individual income tax bracket, joining California, Maryland, New Jersey and New York.
Such taxes are unique, say Tax Foundation analysts, in that they impose a top rate near or above 10 percent on a small subset of high-income earners.
But the problem is that it's not just the wealthy who get caught in the increase.
The income level at which the new top rate applies is often a sharp jump from where the previous top rate applies, according to the Tax Foundation, but with each new "millionaire's tax," the tax is kicking in on more and more people who are not millionaires.
The 10 states with the highest rates: Where does you state rank in the overall income tax rate ranking? According to a recent Forbes.com article, the average rate in the states that levy income taxes is 6.5 percent.
Some, as we noted, have much higher rates.
Forbes.com researchers have compiled a slide show of the 10 states with the highest rates. In case you don't have time to view the details now, here's the list, starting with the 10th highest rate, along with the top rate for each state:
Minnesota, 7.85 percent
Maine, 8.5 percent
New Jersey, 8.97 percent
New York, 8.97 percent
Iowa, 8.98 percent
Oregon, 9 percent
Vermont, 9.5 percent
Rhode Island, 9.9 percent
California, 10.55 percent
Hawaii, 11 percent
As you can see, even taxpayers in the Midwest, a region typically thought to be less-inclined to raise taxes, aren't exempt from the high top tax rate trend.
Some forgiven debt remains taxable
Here's a story from the New York Times
Credit Bailout: Issuers Slashing Card Balances
By DAVID STREITFELD
The banks were bailed out last fall, the automobile companies last winter. For Edward McClelland, a writer in Chicago, deliverance finally arrived a few days ago.
Mr. McClelland’s credit card company was calling yet again, wondering when it could expect the next installment on his delinquent account. He proposed paying half of his $5,486 balance and calling the matter even.
It’s a deal, the account representative immediately said, not even bothering to check with a supervisor.
As they confront unprecedented numbers of troubled customers, credit card companies are increasingly doing something they have historically scorned: settling delinquent accounts for substantially less than the amount owed.
The practice started last fall as the economy worsened. But in recent months, with unemployment topping 9 percent and more people having trouble paying their bills, experts say this approach has risen drastically.
They say many credit card issuers have revised internal guidelines to give front-line employees the power to cut deals with consumers. The workers do not even have to wait for customers to call and ask for a break.
“Now it’s the card company calling you and saying, ‘Let’s talk turkey,’ ” said David Robertson, publisher of the credit industry journal The Nilson Report.
Only a few creditors are willing to confirm the practice. Bank of America and American Express say they decide on a case-by-case basis whether to accept less than the full balance. Other card companies refuse to discuss the subject, but their trade group, the American Bankers Association, acknowledges that settlements are becoming more common.
The shift comes as the financial services industry finds itself losing some of its legendary power. A credit card reform bill that makes it harder to raise rates on existing balances and prevents certain automatic fees flew through Congress and was signed by President Obama in late May.
Borrowers still have a crushing amount of debt to deal with, however.
Revolving credit, a close approximation of credit card debt, totaled $939.6 billion in March. The Federal Reserve reported that 6.5 percent of credit card debt was at least 30 days past due in the first quarter, the highest percentage since it began tracking the number in 1991. The amount being written off was also at peak levels.
After a balance has been delinquent for six months, regulations require the card company to reduce the value of the debt on its books to zero. If a borrower has not paid by this point, chances are he never will.
“The creditors would rather have a piece of something now instead of absolutely nothing down the road,” said Adam K. Levin, the founder of the consumer education Web site Credit.com.
Banks and credit card companies are discussing new programs that would, for the first time, allow credit counselors to invoke reductions of principal as a routine part of their strategy, said Jeffrey S. Tenenbaum, a lawyer for many counseling agencies. In the past, counselors could persuade card issuers to adjust interest rates and modify late fees, but the balance was untouchable.
An example of how quickly the card companies are shifting their approach is in the behavior of HSBC, a major issuer, toward Mr. McClelland.
He was paying fitfully on his card, which was canceled for delinquency. In April, HSBC offered him full settlement at 20 percent off. He declined. A few weeks later, it agreed to let him pay half.
Traditionally, the creditors could play tough with any accounts that became delinquent because the cardholders had assets. The creditors could sue or place a lien on a cardholder’s house.
As the recession grinds on, though, many cardholders have less to lose. Mr. McClelland, 42, is a renter. Since he is self-employed, he has no wages to garnish. But he did not want to feel like a deadbeat.
“Having this over and done with was appealing,” he said. He raised the agreed-upon $2,743 and sent it off electronically last week. He has spared himself the prospect of years of collection calls.
HSBC said it did not comment on individual cardholders and would not discuss its policy toward settlements. “Every customer situation is unique,” said a spokeswoman, Cindy Savio.
The card companies, perhaps understandably, do not want to promote the idea that settlements have become merely a matter of asking nicely. The creditors also point out that a delinquency, like a foreclosure, destroys a credit record.
And there can be a Catch-22: those with the fewest assets are the likeliest to receive a settlement offer, but they are also the least able to come up with the cash for that final negotiated payment. Some creditors, though, are helpfully letting people stretch this out over months.
Still, a line has been crossed, credit experts say.
“Even in the early stages of delinquency, settlements can be dramatic,” said Carmine Dorio, a longtime industry executive who ran collection departments for Citibank, Bank of America and Washington Mutual.
During the boom, nonpayers were treated more harshly because, paradoxically, their debt was more valuable. Collection agencies were eager to buy bundles of old debt from the card companies for as much as 15 cents on the dollar. In a healthy economy, even the hopelessly indebted can pay something.
In this recession, where collection agencies have little hope of collecting from the unemployed, that business model is suffering. Experts say 5 cents on the dollar is now the most a card company can hope to get for its past-due accounts.
Another factor undermining the card companies is the rise of debt settlement firms. These are profit-making companies that charge fees, nearly always in advance, to bargain with creditors on a consumer’s behalf.
Settlement companies are under fire from regulators, who say they promise much and deliver little. But their ubiquitous ads, which make a settlement seem not only easy but also a moral victory over shamelessly gouging card companies, have done much to spread the idea.
Although there are few independent statistics on the settlement industry, there is no doubt that some generous deals are being done.
Consider Bedros Alikcioglu, a gas station owner in Newport Beach, Calif. He owed $112,000 on four cards and was paying $3,000 a month in interest and late fees. “It was so hard to earn that money, and paying it to nowhere didn’t make sense anymore,” said Mr. Alikcioglu, 75.
He signed up with a debt settlement company named Hope Financial, which negotiated deals with his creditors to settle for about 35 percent of his balance. Hope Financial is charging Mr. Alikcioglu about 12 percent of his original debt.
“I did not want to leave the legacy of bankruptcy,” Mr. Alikcioglu said. “I am now at peace.”
What the above story did not mention was the tax liablility that would accompany these debt forgiveness come tax bill time. The IRS considers debt forgiveness as taxable income.
The guy who's the main example in the Times story was able to get his credit card bill cut in half. But going from more than $5,000 owed to paying half that -- $2,743-- means he's liable for the taxes on the forgiven amount.
If he's in the 25 percent tax bracket, that means he'll owe the IRS $685.75.
OK. I'll concede that less than $700 is much better than almost $5,000. But I'll bet he doesn't know that he's going to have a bigger tax bill come next April 15.
Most people aren't aware of this nasty little tax quirk.
Credit Bailout: Issuers Slashing Card Balances
By DAVID STREITFELD
The banks were bailed out last fall, the automobile companies last winter. For Edward McClelland, a writer in Chicago, deliverance finally arrived a few days ago.
Mr. McClelland’s credit card company was calling yet again, wondering when it could expect the next installment on his delinquent account. He proposed paying half of his $5,486 balance and calling the matter even.
It’s a deal, the account representative immediately said, not even bothering to check with a supervisor.
As they confront unprecedented numbers of troubled customers, credit card companies are increasingly doing something they have historically scorned: settling delinquent accounts for substantially less than the amount owed.
The practice started last fall as the economy worsened. But in recent months, with unemployment topping 9 percent and more people having trouble paying their bills, experts say this approach has risen drastically.
They say many credit card issuers have revised internal guidelines to give front-line employees the power to cut deals with consumers. The workers do not even have to wait for customers to call and ask for a break.
“Now it’s the card company calling you and saying, ‘Let’s talk turkey,’ ” said David Robertson, publisher of the credit industry journal The Nilson Report.
Only a few creditors are willing to confirm the practice. Bank of America and American Express say they decide on a case-by-case basis whether to accept less than the full balance. Other card companies refuse to discuss the subject, but their trade group, the American Bankers Association, acknowledges that settlements are becoming more common.
The shift comes as the financial services industry finds itself losing some of its legendary power. A credit card reform bill that makes it harder to raise rates on existing balances and prevents certain automatic fees flew through Congress and was signed by President Obama in late May.
Borrowers still have a crushing amount of debt to deal with, however.
Revolving credit, a close approximation of credit card debt, totaled $939.6 billion in March. The Federal Reserve reported that 6.5 percent of credit card debt was at least 30 days past due in the first quarter, the highest percentage since it began tracking the number in 1991. The amount being written off was also at peak levels.
After a balance has been delinquent for six months, regulations require the card company to reduce the value of the debt on its books to zero. If a borrower has not paid by this point, chances are he never will.
“The creditors would rather have a piece of something now instead of absolutely nothing down the road,” said Adam K. Levin, the founder of the consumer education Web site Credit.com.
Banks and credit card companies are discussing new programs that would, for the first time, allow credit counselors to invoke reductions of principal as a routine part of their strategy, said Jeffrey S. Tenenbaum, a lawyer for many counseling agencies. In the past, counselors could persuade card issuers to adjust interest rates and modify late fees, but the balance was untouchable.
An example of how quickly the card companies are shifting their approach is in the behavior of HSBC, a major issuer, toward Mr. McClelland.
He was paying fitfully on his card, which was canceled for delinquency. In April, HSBC offered him full settlement at 20 percent off. He declined. A few weeks later, it agreed to let him pay half.
Traditionally, the creditors could play tough with any accounts that became delinquent because the cardholders had assets. The creditors could sue or place a lien on a cardholder’s house.
As the recession grinds on, though, many cardholders have less to lose. Mr. McClelland, 42, is a renter. Since he is self-employed, he has no wages to garnish. But he did not want to feel like a deadbeat.
“Having this over and done with was appealing,” he said. He raised the agreed-upon $2,743 and sent it off electronically last week. He has spared himself the prospect of years of collection calls.
HSBC said it did not comment on individual cardholders and would not discuss its policy toward settlements. “Every customer situation is unique,” said a spokeswoman, Cindy Savio.
The card companies, perhaps understandably, do not want to promote the idea that settlements have become merely a matter of asking nicely. The creditors also point out that a delinquency, like a foreclosure, destroys a credit record.
And there can be a Catch-22: those with the fewest assets are the likeliest to receive a settlement offer, but they are also the least able to come up with the cash for that final negotiated payment. Some creditors, though, are helpfully letting people stretch this out over months.
Still, a line has been crossed, credit experts say.
“Even in the early stages of delinquency, settlements can be dramatic,” said Carmine Dorio, a longtime industry executive who ran collection departments for Citibank, Bank of America and Washington Mutual.
During the boom, nonpayers were treated more harshly because, paradoxically, their debt was more valuable. Collection agencies were eager to buy bundles of old debt from the card companies for as much as 15 cents on the dollar. In a healthy economy, even the hopelessly indebted can pay something.
In this recession, where collection agencies have little hope of collecting from the unemployed, that business model is suffering. Experts say 5 cents on the dollar is now the most a card company can hope to get for its past-due accounts.
Another factor undermining the card companies is the rise of debt settlement firms. These are profit-making companies that charge fees, nearly always in advance, to bargain with creditors on a consumer’s behalf.
Settlement companies are under fire from regulators, who say they promise much and deliver little. But their ubiquitous ads, which make a settlement seem not only easy but also a moral victory over shamelessly gouging card companies, have done much to spread the idea.
Although there are few independent statistics on the settlement industry, there is no doubt that some generous deals are being done.
Consider Bedros Alikcioglu, a gas station owner in Newport Beach, Calif. He owed $112,000 on four cards and was paying $3,000 a month in interest and late fees. “It was so hard to earn that money, and paying it to nowhere didn’t make sense anymore,” said Mr. Alikcioglu, 75.
He signed up with a debt settlement company named Hope Financial, which negotiated deals with his creditors to settle for about 35 percent of his balance. Hope Financial is charging Mr. Alikcioglu about 12 percent of his original debt.
“I did not want to leave the legacy of bankruptcy,” Mr. Alikcioglu said. “I am now at peace.”
What the above story did not mention was the tax liablility that would accompany these debt forgiveness come tax bill time. The IRS considers debt forgiveness as taxable income.
The guy who's the main example in the Times story was able to get his credit card bill cut in half. But going from more than $5,000 owed to paying half that -- $2,743-- means he's liable for the taxes on the forgiven amount.
If he's in the 25 percent tax bracket, that means he'll owe the IRS $685.75.
OK. I'll concede that less than $700 is much better than almost $5,000. But I'll bet he doesn't know that he's going to have a bigger tax bill come next April 15.
Most people aren't aware of this nasty little tax quirk.
Tax professional standards considered
Tax pro regulation on the way?
In downtown Austin, you can get a nice tattoo from one of Diablo Rojo's artists for a couple of hundred bucks.
If you go to an incompetent tax preparer in Texas' capital city, or anywhere else in the Lone Star State for that matter, filing mistakes could end up costing you a lot more in tax penalties and interest.
But Texas officials only regulate the state's tattoo parlors, not its tax pros.
I'm not picking on the state of our last president. It's not alone. In fact, only California and Oregon have any kind of rules to govern tax professionals, whether they fill out state or federal returns.
The Internal Revenue Service is thinking about changing that.
IRS Commissioner Doug Shulman says that by the end of 2009 he plans to propose a comprehensive set of recommendations that will allow his agency to keep tabs on who is getting paid to prepare tax returns and make sure they are doing the job properly.
"When people pay good money, they should not get bad advice," said Shulman at a press conference announcing the initiative.
'Transformational' tax shift: Part of the reason for cracking down on tax pros, says Shulman, is that tax times have changed.
"We've seen a transformational shift in the U.S. tax system. Very few people sit down with pen and paper and fill out their 1040s," he says. "Instead, now more than 80 percent of taxpayers go to a tax professional or use tax preparation software to help them file their returns."
While that might be good for those of us struggling to get our forms into the IRS, Shulman says it poses a big problem: There is no national standard for these tax preparers who are taking care of the majority of today's filings.
Advocate agrees: Shulman's effort is music to National Taxpayer Advocate Nina Olson's ears. Among the 17 legislative recommendations to Congress that Olson included in her latest annual report, Olson once again called for federal oversight of preparers:
The time has come to regulate federal tax return preparers. Tax return preparers are an essential component of taxpayer rights and tax compliance. Despite the vital role return preparers play in effective tax administration, anyone can prepare a tax return for a fee -- with no training, no licensing, and no oversight required. Attorneys, certified public accountants, and enrolled agents are all licensed by state or federal authorities and are subject to censure, suspension, or disbarment from practice before the IRS in the event of wrongdoing. Yet there is virtually no federal oversight over 'unenrolled' preparers, who constitute the majority of tax return preparers today. The National Taxpayer Advocate recommends that Congress enact a registration, examination, certification, and enforcement program for unenrolled tax return preparers. In addition, Congress should direct the Treasury Department and the IRS to conduct a public awareness campaign to inform the public about the registration requirements.
At least one major player in the tax preparation field is for increased oversight.
"For many years, H&R Block has strong(ly) supported efforts to upgrade training, professionalism and ethics among all tax preparers," says H&R Block chairman Richard Breeden. "We believe that all tax assistance providers should be trained and licensed as necessary to insure that tax returns are prepared accurately every time."
Professional pros and cons: Some individual tax pros are for some limits on themselves and their colleagues. Robert D. Flach, a New Jersey accountant, tax preparer and fellow tax blogger, told me that "as it is now, any cafone can put out shingle as 'tax pro.'" (You gotta love that Garden State terminology!)
Others, however, are worried about unnecessary regulation. Joe Kristan, a certified public accountant and partner (and tax blogger) for the Des Moines, Iowa-based Roth & Company accounting firm, believes that the IRS already has severe penalties that it can impose to deter and shut down abusers. "If the current amount of bureaucracy isn't effective, more and bigger bureaucracy probably isn't the solution," says Kristan.
I don't do tax returns for a living. And I don't use a tax pro myself. But I think the IRS does need to track folks who are out there filling out returns for other folks.
Some are simply inept; they need to be located and dealt with before they cause their clients any more costly grief. Others are downright criminals and they definitely need to be put out of business (and into jail) as soon as possible.
If knowing that the IRS is keeping a sharper eye on them will help get these folks out of the tax system, then I say good for you and go for it Mr. Shulman!
Do your tax pro homework: In the meantime, if you hire someone to handle your taxes, do your due diligence.
Pick the proper preparer for your personal tax needs, and be sure to check that person out thoroughly before handing over your tax and financial information.
Freelance writer Kay Bell writes Bankrate's tax stories from her home in Austin, Texas.
In downtown Austin, you can get a nice tattoo from one of Diablo Rojo's artists for a couple of hundred bucks.
If you go to an incompetent tax preparer in Texas' capital city, or anywhere else in the Lone Star State for that matter, filing mistakes could end up costing you a lot more in tax penalties and interest.
But Texas officials only regulate the state's tattoo parlors, not its tax pros.
I'm not picking on the state of our last president. It's not alone. In fact, only California and Oregon have any kind of rules to govern tax professionals, whether they fill out state or federal returns.
The Internal Revenue Service is thinking about changing that.
IRS Commissioner Doug Shulman says that by the end of 2009 he plans to propose a comprehensive set of recommendations that will allow his agency to keep tabs on who is getting paid to prepare tax returns and make sure they are doing the job properly.
"When people pay good money, they should not get bad advice," said Shulman at a press conference announcing the initiative.
'Transformational' tax shift: Part of the reason for cracking down on tax pros, says Shulman, is that tax times have changed.
"We've seen a transformational shift in the U.S. tax system. Very few people sit down with pen and paper and fill out their 1040s," he says. "Instead, now more than 80 percent of taxpayers go to a tax professional or use tax preparation software to help them file their returns."
While that might be good for those of us struggling to get our forms into the IRS, Shulman says it poses a big problem: There is no national standard for these tax preparers who are taking care of the majority of today's filings.
Advocate agrees: Shulman's effort is music to National Taxpayer Advocate Nina Olson's ears. Among the 17 legislative recommendations to Congress that Olson included in her latest annual report, Olson once again called for federal oversight of preparers:
The time has come to regulate federal tax return preparers. Tax return preparers are an essential component of taxpayer rights and tax compliance. Despite the vital role return preparers play in effective tax administration, anyone can prepare a tax return for a fee -- with no training, no licensing, and no oversight required. Attorneys, certified public accountants, and enrolled agents are all licensed by state or federal authorities and are subject to censure, suspension, or disbarment from practice before the IRS in the event of wrongdoing. Yet there is virtually no federal oversight over 'unenrolled' preparers, who constitute the majority of tax return preparers today. The National Taxpayer Advocate recommends that Congress enact a registration, examination, certification, and enforcement program for unenrolled tax return preparers. In addition, Congress should direct the Treasury Department and the IRS to conduct a public awareness campaign to inform the public about the registration requirements.
At least one major player in the tax preparation field is for increased oversight.
"For many years, H&R Block has strong(ly) supported efforts to upgrade training, professionalism and ethics among all tax preparers," says H&R Block chairman Richard Breeden. "We believe that all tax assistance providers should be trained and licensed as necessary to insure that tax returns are prepared accurately every time."
Professional pros and cons: Some individual tax pros are for some limits on themselves and their colleagues. Robert D. Flach, a New Jersey accountant, tax preparer and fellow tax blogger, told me that "as it is now, any cafone can put out shingle as 'tax pro.'" (You gotta love that Garden State terminology!)
Others, however, are worried about unnecessary regulation. Joe Kristan, a certified public accountant and partner (and tax blogger) for the Des Moines, Iowa-based Roth & Company accounting firm, believes that the IRS already has severe penalties that it can impose to deter and shut down abusers. "If the current amount of bureaucracy isn't effective, more and bigger bureaucracy probably isn't the solution," says Kristan.
I don't do tax returns for a living. And I don't use a tax pro myself. But I think the IRS does need to track folks who are out there filling out returns for other folks.
Some are simply inept; they need to be located and dealt with before they cause their clients any more costly grief. Others are downright criminals and they definitely need to be put out of business (and into jail) as soon as possible.
If knowing that the IRS is keeping a sharper eye on them will help get these folks out of the tax system, then I say good for you and go for it Mr. Shulman!
Do your tax pro homework: In the meantime, if you hire someone to handle your taxes, do your due diligence.
Pick the proper preparer for your personal tax needs, and be sure to check that person out thoroughly before handing over your tax and financial information.
Freelance writer Kay Bell writes Bankrate's tax stories from her home in Austin, Texas.
A Flat Tax for California?
The Governator goes back to his roots as a reformer.
'California is so broken that we must look at every bold proposal out there, no matter how daring or radical -- including the idea of a flat tax."
-- Arnold Schwarzenegger, June 11, 2009
Now we're getting somewhere. Having had his grand budget deal repudiated by the voters, and facing a $24.3 billion deficit only six months after raising taxes to close a $40 billion deficit, California's Governor is going back to his roots as a reformer.
Mr. Schwarzenegger has shocked nearly everyone in Sacramento by embracing some seismic policy changes to fix the California budget for the long term. These reforms include a flat-rate income tax, a spending limitation measure with teeth, and deep cuts in wasteful spending. Yesterday he declared that he won't sign another tax increase and he will no longer allow the state to issue new short-term debt to punt its budget problems down the road. He even told the liberal Democrats who run the legislature that if they're not ready to make cuts, get ready for a long hot summer that may end in "a shutdown of all the funding -- a grind to the halt" in government.
Mr. Schwarzenegger has called for cutbacks even in education, Medicaid, prisons and pensions, heretofore the sacred cows of state politics. And why not? That's where three-quarters of the money goes and the dollars are buying far too little in results. The state has the highest teacher salaries in the nation, but the second lowest math and reading test scores, according to U.S. Department of Education data. The state spends $49,000 per prison inmate, or 50% more per criminal than the average state.
"Other states have privately run correctional facilities," notes Mr. Schwarzenegger. "Why not California?" Good question. The Governor also wants to eliminate and consolidate scores of mostly useless boards and panels -- such as the $1.2 million blueberry commission -- that exist mostly for political patronage.
The best idea is his semi-endorsement of a flat tax for California. The state's budget problem has two main causes: The first is runaway spending and the second is a tax structure that smothers businesses and entrepreneurs. California's income tax is the most progressive of all 50 states, with the second highest top rate (10.55%) after New York City's 12.62%. The Governor's revenue office calculates that between 50% and 55% of the income tax in the state comes from Kobe Bryant and the rest of the richest 1% of taxpayers.
This sounds like a liberal's tax paradise, but the "soak the rich" system has imploded on itself. As tax rates keep rising, more Californians move to places like Nevada and Texas where they can pay zero income tax, leaving Sacramento with fewer revenue sources. Moreover, the progressive rate structure means that California experiences more extreme gyrations in its revenues than any other state.
The nearby chart shows how state tax revenues rise and fall more excessively than does state personal income. From 2003 to 2008, state revenues boomed by 40% as the economy expanded. But in the last year, revenues have fallen by more than 20%. Politicians in Sacramento pile on new spending in the boom years, building in new pension and other commitments that are unsustainable in the downturns. The interest groups furiously oppose any spending decline, so the politicians dutifully raise taxes, and the cycle repeats.
Mr. Schwarzenegger has appointed a bipartisan tax reform commission and it is exploring a "uniform tax" with a rate of 6% on individuals and corporations with few deductions. This would raise enough revenue to run the government while reducing the sharp revenue shifts from boom to bust and back. More important, it is the kind of tax overhaul that could start to attract business back to the state.
None of this will be easy to pass, but Mr. Schwarzenegger has everything to gain for his state and his reputation. His term ends in 2010 and he's not running for re-election. The state's economy can't prosper under its current burdens, and voters have resoundingly rejected tax-and-spend-as-usual. Arnold became Governor on the promise of reform, and in his final months he once again has a chance to make good on that promise.
Printed in The Wall Street Journal, page A14
'California is so broken that we must look at every bold proposal out there, no matter how daring or radical -- including the idea of a flat tax."
-- Arnold Schwarzenegger, June 11, 2009
Now we're getting somewhere. Having had his grand budget deal repudiated by the voters, and facing a $24.3 billion deficit only six months after raising taxes to close a $40 billion deficit, California's Governor is going back to his roots as a reformer.
Mr. Schwarzenegger has shocked nearly everyone in Sacramento by embracing some seismic policy changes to fix the California budget for the long term. These reforms include a flat-rate income tax, a spending limitation measure with teeth, and deep cuts in wasteful spending. Yesterday he declared that he won't sign another tax increase and he will no longer allow the state to issue new short-term debt to punt its budget problems down the road. He even told the liberal Democrats who run the legislature that if they're not ready to make cuts, get ready for a long hot summer that may end in "a shutdown of all the funding -- a grind to the halt" in government.
Mr. Schwarzenegger has called for cutbacks even in education, Medicaid, prisons and pensions, heretofore the sacred cows of state politics. And why not? That's where three-quarters of the money goes and the dollars are buying far too little in results. The state has the highest teacher salaries in the nation, but the second lowest math and reading test scores, according to U.S. Department of Education data. The state spends $49,000 per prison inmate, or 50% more per criminal than the average state.
"Other states have privately run correctional facilities," notes Mr. Schwarzenegger. "Why not California?" Good question. The Governor also wants to eliminate and consolidate scores of mostly useless boards and panels -- such as the $1.2 million blueberry commission -- that exist mostly for political patronage.
The best idea is his semi-endorsement of a flat tax for California. The state's budget problem has two main causes: The first is runaway spending and the second is a tax structure that smothers businesses and entrepreneurs. California's income tax is the most progressive of all 50 states, with the second highest top rate (10.55%) after New York City's 12.62%. The Governor's revenue office calculates that between 50% and 55% of the income tax in the state comes from Kobe Bryant and the rest of the richest 1% of taxpayers.
This sounds like a liberal's tax paradise, but the "soak the rich" system has imploded on itself. As tax rates keep rising, more Californians move to places like Nevada and Texas where they can pay zero income tax, leaving Sacramento with fewer revenue sources. Moreover, the progressive rate structure means that California experiences more extreme gyrations in its revenues than any other state.
The nearby chart shows how state tax revenues rise and fall more excessively than does state personal income. From 2003 to 2008, state revenues boomed by 40% as the economy expanded. But in the last year, revenues have fallen by more than 20%. Politicians in Sacramento pile on new spending in the boom years, building in new pension and other commitments that are unsustainable in the downturns. The interest groups furiously oppose any spending decline, so the politicians dutifully raise taxes, and the cycle repeats.
Mr. Schwarzenegger has appointed a bipartisan tax reform commission and it is exploring a "uniform tax" with a rate of 6% on individuals and corporations with few deductions. This would raise enough revenue to run the government while reducing the sharp revenue shifts from boom to bust and back. More important, it is the kind of tax overhaul that could start to attract business back to the state.
None of this will be easy to pass, but Mr. Schwarzenegger has everything to gain for his state and his reputation. His term ends in 2010 and he's not running for re-election. The state's economy can't prosper under its current burdens, and voters have resoundingly rejected tax-and-spend-as-usual. Arnold became Governor on the promise of reform, and in his final months he once again has a chance to make good on that promise.
Printed in The Wall Street Journal, page A14
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