Annals of nudge: British company cars

A small change in UK tax may tip large effects.

This post would be wonky if I could be bothered to do a deep dive into the rococo tax rules for company cars in the UK. Try this. But for once the tl;dr is enough.

For reasons I do not, like Cervantes (footnote), care to go into, the British tax code makes it attractive for employers to offer company cars to middle-rank employees as a perk. The company owns or leases the car and lets the employee use it for private travel and work alike. The employee pays tax (Benefit-in-Kind, or BiK) on the imputed value of the benefit for personal use, on a scale.

The typical split looks like this:

  • Company – ownership; book and residual value of the car; depreciation; insurance; breakdowns; maintenance; road tax; choice of the list of available cars, sorted by status.
  • Employee – fuel; BiK tax; choice of car from the restricted list, according to status.
  • Some employers offer fuel too, which is taxed as a separate BiK.

The result is that 35% of new cars are company ones, about 830,000 of them a year. Add to this the true fleets (rental companies, police, etc), and a remarkable 57% of new cars (pdf) are bought by companies, not individuals.

The story is that the shell-shocked British government has found the time to introduce a reform, from April 2020. This will make the BiK use tax more strongly dependent on emissions. It’s a steep progression now, from 9% to 37%. The rate will now fall to nil for BEVs.

Bank of America /Merrill Lynch have done the math and issued a shiny report with lots of pretty graphs (not public, but they sent it to CleanTechnica). The method is confusing, and the analysts do not provide a summary of costs to the company as opposed to the employee. As far as I can see, the takeaways are:

  • For employees, the BiK changes and cheap electric fuel make for very large savings in choosing a BEV or PHEV – up to 22 times less outlays for a Tesla 3 (£659) against a BMW 3 series petrol (£15,137) over three years, a common life of a company car.
  • For employers, the low maintenance costs of EVs are still outweighed by the higher purchase price, so that the total three-year cost of ownership (TCO) of the BEV or PHEV is still somewhat higher than that of a comparable ICEV for 10K miles a year. The significant savings to the employee mean that the total joint TCO is similar. The TCO becomes significantly lower (12% – 32%) for a high-mileage fleet use of 20K miles, including fuel costs.
  • The employer can now in many cases offer a higher-value package to the employee for less outlay with EVs, appropriating (unless they are dumb or unusually altruistic) a large share of the tax break. (My inference, not BoA’s.)

Here’s the cognitive beauty of this setup, which makes it a great nudge: nobody is acting under sticker price illusion. The employee doesn’t pay any part of the purchase price, and has no reason to consider it. For their employer, the analysis is done by professional HR and finance people who are automatically looking at TCO. (By this I understand purchase price plus all running costs and depreciation; Bank of America confusingly exclude the first.) Their decisions have to be justified by the data. Company secretaries and lawyers will start muttering about “fiduciary responsibility” if the Board does not pursue the cost saving. The effect is supercharged if the employer leases rather than buys the vehicles. Car TCO is just a significant side-issue for most employers. For leasing companies, TCO is the heart of the business. They will very soon be offering EV contracts cheaper.

It’s a pretty safe prediction that the company car market in the UK will shift strongly to electric vehicles from next April. That’s before taking account of competitive new models like the VW ID.3, improvements in the charging network, further moves towards ULEZ zones in city centres, and censorious pressure from teenage children inspired by Greta. The new sales will probably stimulate emulation sales to envious neighbours, some with their own Greta fans.

Does this extend to true fleets? Police have their own use requirements and are culturally conservative. Rental car companies are less so. However, they are in a rather similar position to standard company-car employers, in that it’s the renter, not the owner, who gets the benefit of the low fuel costs. The number of renters who ask for an EV is still, I would guess, quite low from lack of familiarity. But this too will change, more slowly.

The incentives here are specific to the UK and the same effect won’t be seen in the USA. But there are still many US fleet operators who are likely to be more receptive to TCO pitches than Joe Average in the dealer’s lot. That’s how electric buses are taking over, in site of the sticker premium.

Oh, yes, RANGE hiss hiss. The distance from London to Edinburgh is 402 miles: Brits see this as a major two-day expedition calling for a week’s planning with furrowed brows, as historian John Keegan puts it. A 250-mile Tesla 3 Standard meets all reasonable range needs in Britain. Distances in the US West are of course greater – but the population of Wyoming is 577,000, barely more than Sheffield (553,000). It’s absurd to let the needs of a handful of rural Real Western Men determine the framing of transport policy in a country where 80% of the population lives in cities, towns and suburbs and the average commute is 16 miles.

The EV revolution is happening, much faster than most people think. This chart leaves out e-buses, which have 90% of urban sales in China , and e-tuks, which putter below the statistical radar, but are >1.5m in India alone. For cars, the growth in sales in 2018 was a not exceptional 65%. It will be lower in 2019 because of a large hiccup in China, but the trend is unstoppable.


The immortal opening sentence of Don Quixote:

En un lugar de La Mancha, de cuyo nombre no quiero acordarme, no ha mucho tiempo que vivía un hidalgo, de los de lanza en astillero, adarga antigua, rocín flaco y galgo corredor.


One of my pet peeves is that newspapers will publish stories about some court opinion or other public document, but not provide any link to the documents themselves.  As a consequence, readers will walk away with only the reporter’s view of why the document was of significance, which view is likely further circumscribed by an editor who is hard put to limit the amount of information in the story due to space considerations.

Sen. Ron Wyden sent a letter to the NRA.  His letter was prompted by his interest in determining “the possibility that Russian-backed shell companies or intermediaries may have circumvented laws designed to prohibit foreign meddling in our elections by abusing the rules governing 501(c)(4) tax exempt organizations.”  Sen. Wyden asked for material relating to four specific areas of inquiry.  He received from the NRA only  a partial response to the four specific requests.  I have posted, as a single file, Sen. Wyden’s letter and the NRA’s response with my markups.

The response is, at best, an attempt to deflect the inquiry.   For instance, the NRA was asked:

  • To “identify any remuneration, transaction, or contribution that involved any of the 501(c)(4) entities associated with your organization and any entity or individual associated with any Russian official, Russian national, or Russian business interest.”  The NRA simply ignored that request; and
  • To provide “all documents related to any remuneration, transaction, or contribution” and to identify all such documents that “have already been turned over to United States authorities.”  Both requests were ignored.

Without being specific, the NRA assured Wyden that it always complied with federal election laws. Ultimately, it offered this: “As a longstanding policy to comply with federal election law, the NRA and its related entities do not accept funds from foreign persons or entities in connection with United States elections.” (Emphasis supplied.)

In other words, the NRA did not deny that it was, in terms of its lobbying and “educational” efforts, a mouthpiece of the Russians, but merely that Russian cash had not found its way into any direct political contribution fund.

Nothing to see here.

Sales Tax

Last week, the Supreme Court issued cert in the case of South Dakota v. Wayfair, Inc.  The question before the Court is whether it should abrogate its holding in Quill Corp. v. North Dakota which re-affirmed the Court’s holding in Nat’l Bellas Hess, Inc. v. Dep’t of Rev. of Ill. that the dormant commerce clause prohibits a state from requiring retailers to collect sales taxes on sales into a state unless the retailer is “physically present” there. In Quill, the Court held that “Congress is now free to decide whether, when, and to what extent the States may burden interstate mail-order concerns with a duty to collect use taxes.”

Given the massive shift to online purchasing since Quill, it would seem to be sensible to all interstate sales even if the sellers lack a physical presence in the taxing state. Whether this is sufficient to change the Constitutional doctrine set forth in Nat’l Bellas Hess and Quill is a question that I won’t opine on here. However, there would seem to be no question that, without a national framework, there will be practical problems in imposing and collecting sales taxes on interstate sales.

There are about 10,000 different jurisdictions that impose sales taxes.  Thus, sellers are likely to face problems in effecting compliance. As noted by Avalare:

ZIP codes are commonly believed to be the basis of a sales tax jurisdictional boundaries and rates. . . .Sales tax is imposed by local and regional governments and have no direct correlation between ZIP code boundaries and tax jurisdictions.

However, without a national framework, taxing authorities will have to deal with significant enforcement problems:

We can assume that large retailers will do their best to honestly comply with sales taxes imposed by any of those 10,000 jurisdictions. But what about smaller retailers?  Take a look at this story as to how easily one one can become a “drop-ship” entrepreneur.  Absent some uniform system of compliance enforcement, smaller retailers will simply ignore the collection of sales taxes on their sales. (While there are provisions in most sales tax statutes that impose liability for sales taxes on so-called “responsible persons,” the practical ability to collect from responsible persons who are outside of the taxing authorities’ actual location is zero.)

There is no uniformity among sales tax statutes as to what items are taxable and what items are exempt. To cite a fairly trivial example, some states exempt their own state flags, but not the flags from other states.  More significantly, grocery items are sometimes taxed and sometimes exempt.  (At one time, bibles and other religious articles were often exempt, but these exemptions have been successfully challenged on First Amendment grounds.)

The point is that, even if the Supreme Court overturns existing precedent, there will have to be Congressional legislation to relieve sellers from compliance burdens and to give state and local jurisdictions the tools to enforce their tax impositions.


One good aspect of the irresponsible, mean-spirited, and regressive tax bill

Overall, the tax bill is terrible for all the obvious reasons. It does have one redeeming aspect: Reducing the tax system’s bias in favor of owner-occupied housing. The mortgage interest deduction and related provisions in the federal tax code unwisely favor home owners over renters, encouraging families to buy more expensive homes–using larger mortgages–than is wise from any economic perspective.

Reducing this bias by capping the mortgage interest deduction and enlarging the standard deduction is good policy. Maybe this is the only good aspect of this dog’s breakfast of a regressive and irresponsible bill.

Democrats should junk virtually everything in this tax bill if they take over the federal government in January 2021. They should keep these two provisions–even if Republicans enacted them in a mean-spirited effort to hammer wealthy blue states.

Ripple Effects

Tonight, Fox News will undoubtedly be highlighting the report by the CBO and the JCT that the passage of the Dream Act “would increase budget deficits by $25.9 billion over the 2018-2027 period, boosting on-budget deficits by $30.6 billion and decreasing off-budget deficits by $4.7 billion over that period.” At least in part, the calculations are clearly incorrect because the report does not take into account the provisions of the new tax bill.

Here’s the pertinent portion of the report that deals directly with the tax effects (pages 15-16 of the pdf):

Higher revenues, according to JCT’s estimates, would largely stem from increased reporting of employment income by people who would legally be allowed to work under the legislation. That increase in reported wages would cause increases in receipts, mostly in the form of Social Security taxes, which are categorized as off-budget. In addition, CBO and JCT estimate that an increase in the number of people paying penalties associated with not having health insurance would increase revenues by $0.7 billion over the 2018-2027 period.

Those increases in revenues would be mostly offset for two reasons. First, increased reporting of employment income would result in increases in tax deductions by businesses for labor compensation, including those businesses’ contributions to payroll taxes. As a result, corporations would report lower taxable profits and pay less in income taxes. Noncorporate businesses, such as partnerships and sole proprietorships, also would report lower taxable income, which would decrease individual income taxes paid by the partners and owners. The decrease in income tax receipts would total $3.8 billion over 10 years. Second, CBO and JCT estimate that there would be a $1.2 billion decrease in revenues over the 2018-2027 period associated with increases in the nonrefundable portion of the premium assistance tax credit provided through the health insurance marketplaces established under the Affordable Care Act.

The new tax bill would increase the bottom line cost because it does away with the heath insurance penalties (an increase of $0.7 billion), but decrease the bottom line cost because, by lowering the tax rates on businesses, the tax decreases the $3.8 billion that the CBO/JCT estimates will be lost if the Dream Act is past due to increased business tax deductions.

Going one step further, the CBO/JCT estimates that the Dream Act will cost the federal government $11.8 billion in subsidies for health insurance purchased through the marketplaces. (Pages 10-11 of the pdf.) Of course, this assumption is incorrect, since it does not factor in the reduction of the subsidies anticipated as a result of the tax bill.

Finally, the report anticipates that passage of the Dream Act “would increase outlays for the . . . child tax credits, which are refundable, by $5.5 billion over the 2018-2027 period.”  (Page 12 of the pdf.) Of course, this is now incorrect since the tax act first increases the amount of the child tax credit, but then lowers the threshold when it phases out.

I will update this posting when I can get better numbers from the CBO on the tax bill. Suffice it to say, however, the headline numbers on the CBO/JCT report on the Dream Act are simply wrong.

A Few of My Favorite Things

I suppose that everyone has a favorite provision of the GOP tax bill. From the Joint Committee’s staff macroeconomic analysis of the bill, there’s this gem on the possible effects of the changes to the estate tax (PDF page 6):

[I]t is also possible that individuals subject to the estate tax desire to leave a specific dollar amount to their heirs; in this case, an increased exemption would allow them to reach that target amount more quickly, thus reducing their incentive to work and invest. In addition, to the extent that the increased exemption from this tax increases the amount of income received by heirs, this could reduce the labor supply and savings of the heirs, thus reducing the amount of growth in the economy.

That’s right boys and girls: Donald Junior and Eric will likely spend even more time than their dad on leisure pursuits.

Planning in the Age of Uncertainty

Quite aside from the Robin-Hood-In-Reverse economic effects of the proposed GOP tax bill, the bill already poses practical difficulties in planning. Take for instance, the proposed change in the tax treatment of alimony that I previously discussed .

Imagine that there is, right now, an ongoing negotiation of a divorce separation agreement. The stronger economic party (generally the husband) puts an offer on the table that is less than optimum for the weaker party (generally the wife). Since the effective date of the change in alimony rules applies for separation agreements entered into after December 31, 2017, the stronger party can credibly say: “Look, take this deal now. It will only get worse for you if you wait since the tax benefit will disappear after December 31. At that point, I can’t offer you as much alimony since the effective rate on the entire economic package, including any amount that I pay you in alimony, will go up.” Thus, assuming two well-informed parties, the proposed bill has already affected the bargaining process since the pressure tactic can have real teeth.

Another example is one that I am facing in my practice. Client intends to lease commercial real property and operate his business out of that property. The lease is supposed to give my client an option to purchase the real estate. The preliminary documents provide that the option was to be fully assignable, but the other side has now raised an objection to the free assignability of the option. However, the ability to freely assign the purchase option takes on greater importance in light of proposed changes under the GOP tax bill.

Under current law, “material participation” in a real estate venture is generally a good thing since it allows otherwise passive losses to offset active income from a business. Under the GOP proposal, the value of material participation is turned on its head because the income from pass-thru entities in which owners don’t materially participate is substantially lower than income from businesses in which they do materially participate. (From a tax policy standpoint the rule change may be a disaster. Daniel Shaviro has shown that the Service’s enforcement of this “new” material participation rule will face some significant practical impediments.  Thus, the tax loss from the provision could, over time, be far greater than now anticipated, since the concept of “material participation” cannot be accurately gauged by an examining revenue agent.)

As a consequence, my client cannot be flexible on this point since he really doesn’t know (i) whether the bill will pass, (ii) if it does pass, the precise details of the new material participation rules, and (iii) what sorts of tax planning issues he will face ten years out as the law under the new rule develops.

So much for simplicity.

Too Fast on the Trigger

One of the problems with the GOP tax proposal is that it’s on a track that is maglev fast. As a consequence, the process assures that the final bill, if there is one, will contain a large number of errors both textual and in terms of unexpected policy outcomes.

David Kamin, Mitchell Kane, Daniel Shaviro, and John Steines explore the loophole in the bill  “for pass-through business owners and investors (but not employees) that probably was not taken into account in the revenue and distributional estimates.”

Shaviro offers some extended comments . He suggests two possible reasons for the issues raised by this provision: one charitable (a mere misunderstanding) and one less than charitable:

Because I’m a gentle and charitable soul, I am open to the theory that the mistakenly low revenue estimate – albeit, apparently reflecting a deliberate choice to retain likely state and local income tax deductibility for business owners and passive investors but no one else – arose innocently. But a lot of foot-dragging seems to have been going on towards the end of preventing its being addressed or corrected. And at this point, even if they do correct it, I for one will be inclined to attribute it to their having decided the game was up. A mere misunderstanding could easily have been fixed as early as Tuesday, three days ago, and it wasn’t.

No one should have to wonder whether the staff intended a bad result or merely stubbed its collective toe. There should be sufficient time and effort in the development of any tax bill of this magnitude to assure that it is both well-conceived and well-designed. As a result of the rush, this bill is neither.

The Party of Ignorance

James Wimberly commented that he was looking forward to my analysis of the GOP’s “assaults on higher education.” Well, to some extent, Kevin Drum beat me to the punch.  However, I thought that it would be instructive to go through Drum’s list and attempt to quantify it using the GOP’s JCT numbers. All page references are to the GOP JCT’s tax estimates.  Unless noted, the amounts are calculated over a ten year period.  (I have skipped the doubling of the standard individual tax deduction mentioned by Drum, because it’s somewhat difficult to quantify the effect that this would have on higher education.)

Perhaps the most contentious proposed change, of course, is the 1.4% excise tax on college endowments where the endowments are greater than $100,000 per student.  Interestingly, however, the actual dollars involved in this proposed change are relatively small, only $3.0 Billion according to the GOP JCT estimate. (text page 74, pdf page 80) The GOP JCT explanation is somewhat disingenuous, justifying the tax by reference to the excise tax on private foundations, like, say, the Trump Foundation. Of course, college endowments have a greater similarity to public foundations, like, say, the Clinton Foundation. My sense is that this is an attempt to pitch to the know-nothing base of the GOP by tweaking the nose of those elite, eastern, educated liberals. However, the list of affected institutions compiled by the Chronicle of Higher Education  reveals that a large number of small, lesser-known liberal arts colleges, many in red states, would be subject to this tax.

Update, November 7:  According to the Washington Post, this portion of the bill has already been amended to limit the excise tax to institutions where the endowments are greater than $250,000 per full-time student.  Apparently, this will cut in half the total number of institutions upon which the tax is imposed.  More details as they become known.

Next, the GOP JCT lumps several provisions together for purposes of a single analysis: (i) interest payments on qualified loans, (ii) U.S. Savings Bond interest used to pay higher education expenses, (iii) qualified tuition reductions provided by educational institutions to their employees, spouses, or dependents, and (iv) employer-provided education assistance, all of which, except for the U.S. Savings Bond provision, are mentioned by Drum. The estimate for all of these, together, is that revenue would increase by $45.1 Billion and outlays would be reduced by $2.4 Billion. (text pages 10-12, pdf pages 16-18)

But Wait, There’s More!

There are three existing higher education credit programs, the American Opportunity Tax Credit (AOTC), the Hope Scholarship Credit (HSC) and the Lifetime Learning Credit (LLC). These three programs “would be consolidated into an enhanced AOTC.” This is projected to increase revenues by $17.5 Billion and increase outlays by $0.2 Billion. (text pages 8-9, pdf pages 14-15) I can’t figure out whether the use of the word “enhanced” in this context means that the GOP members of the JCT (i) flunked English, (ii) flunked basic arithmetic, or (iii) don’t realize that Orwell thought that Newspeak was a Bad Thing.

There are also provisions related to Cloverdale educational savings accounts and 529 plans. The provision that has gained the most notice here is the change to 529 plans that “provides that unborn child may be treated as a designated beneficiary or an individual under section 529 plans. An unborn child means a child in utero. A child in utero means a member of the species homo sapiens, at any stage of development, who is carried in the womb.” This, of course, has virtually nothing to do with taxation, but is an ideological nod to the anti-abortion forces. According to the GOP JCT, these changes would reduce revenues by $0.6 Billion. (text pages 9-10, pdf pages 13-14)

Total savings, net, of the above changes: $67.2 Billion or about 3.36% of the cost of the $2 Trillion revenue loss due to corporate tax cuts.  In other words, the corporate tax could still be dramatically reduced without any direct negative affect on higher education.

Analysis of Distributional Effects of GOP Tax Bill

The Institute on Taxation and Economic Policy has an analysis of the distributional effects of the GOP tax bill.  At the bottom of the page, you can click and find a distributional analysis for each of the individual states and the District of Columbia.  Thus, for Maryland, we find that in 2018 the richest 1% get 38% of the total benefit, but that this percentage grows to 93% by 2027.